TaxTMI 
TaxTMI 
2019 (3) TMI 677
X X X X Extracts X X X X
X X X X Extracts X X X X
....ent made qua capital gains arising on sale of shares by the appellant foreign company to another non resident associated enterprise, being violative of the non discrimination clause under Article 25(1) of the India-Italy Tax Treaty ["the Treaty"] calls for being deleted." 4. The representatives of both the sides were heard at length, the case records carefully perused and with the assistance of the ld. Counsel, we have considered the documentary evidences brought on record in the form of Paper Book in light of Rule 18(6) of ITAT Rules. Judicial decisions relied upon were carefully perused. 5. The appellant company is a company incorporated under the laws of Italy and is engaged in the business of construction, design and engineering and implementation services to Oil & Gas, Power, Pharmaceuticals and Infrastructure industries. 6. Technip India Limited is a company incorporated in June 1998 under the Companies Act, 1956, as a joint venture between M/s Southern Petrochemical Industries Corporation Ltd (SPIC) and the appellant. Technip India is engaged in the business of executing lump sum turnkey and lump sum service contracts in the field of refineries, petrochemicals, oil & gas....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... final assessment order on 12.09.2017, wherein the income was assessed at Rs. 1,25,27,58,292/- as under: Adjustment proposed Amount Returned income of the appellant 43,71,22,520 Additions made by the AO in relation to the sale of shares of Technip India to Technip France 81,56,35,772 Total assessed income 1,25,27,58,292 15. Aggrieved by this, the assessee is before us. 16. We will first address to the additional ground mentioned elsewhere. 17. The ld. counsel for the assessee vehemently stated that the transfer pricing provisions under the Act do not apply to a transaction of transfer of shares entered into between two Indian companies. It is the say of the ld. counsel for the assessee that the capital gains arising to an Indian company upon transfer of shares to another Indian company is not subject to the rigors of transfer pricing. In support of his contention, the ld. counsel for the assessee placed reliance on Article 25 of India-Italy DTAA, which contains non-discrimination clause. In support of his contention, strong reliance was placed on the decision of the Hon'ble High Court of Delhi in the case of CIT vs. Herbal Life International P. Ltd.: 384 ITR 276 sup....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 4. Enterprises of a Contracting State, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State, shall not be subjected in the first-mentioned Contracting State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which other similar enterprises of that first-mentioned State are or may be subjected in the same circumstances and under the same conditions. 5. In this Article, the term "taxation" means taxes which are the subject of this Convention." 20. Article 3 contains the general definition and in clause J, the term 'National' means any individual possessing the nationality of a contracting state and any legal person, partnership or association deriving its status from the law in force in the contracting state. 21. In the light of the aforementioned definition, let us now dissect Article 25(1). Nationals of a contracting state [i.e. the appellant company] shall not be subjected in other contracting state [i.e. India] to any taxation or any requirement connected therewith, which is there or more burdensome....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed. In support of this contention, reliance was placed on several judicial decisions of the Hon'ble Supreme Court and the Hon'ble Delhi High Court. 26. In our considered opinion, on finding that there was an international transaction between the AEs, the Assessing Officer referred the matter to the TPO for determination of Arm's length Price. In our considered opinion, the Assessing Officer has not substituted actual consideration with notional consideration but has made adjustment as per the report of the TPO after receiving directions from the DRP. Section 92 of the Act provides that any income arising from an international transaction shall be computed having regard to the arm's length price. 27. Section 92C(4) provides "where an Arm's length price is determined by the Assessing Officer under sub-section (3), the Assessing Officer may compute the total income having regard to the ALP so determined. This means that after determining the ALP, the total income of the assessee is computed having regard to the ALP. Therefore, it is not a case of substitution of actual consideration with notional consideration but adjustment of ALP as determined by the TPO. This objection al....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... trl50.ll i 175.17 / 177.28 177.61 171.47 WACC 18.12% 0.85 0.72 0.61 0.51 ^0.43 0.43 127.90 108.08 106.85 90.41 76.37 Value of Explicit Period (A) 509.57 Value of Perpetuity (B) 471.85 [Free cash flow (1+growth rate) / (WACC - growth rate)] * Pv factor for 5th year) = [171.47 (1+0.02) / (18.12% - 2%)]*0.43 = 471.85. Total Enterprise Value (C = A+B) 981.41 Growth rate is 2 percent Add: Cash & Cash Equivalents (D) 371.08 Equity Value (E=C+D) 1352.50 ,Less: Illiquidity discount at 15% (F) 202.88 Fair Equity value (E-F) 1149.63 Number of shares 2,900,000 Fair Value per share (INR) 396.42 Particulars &....
X X X X Extracts X X X X
X X X X Extracts X X X X
....02.88. However, the TPO has not deducted any ill-liquidity discount. In our considered view, the TPO should have allowed rebate for illiquidity since the shares of the appellant company do not have any liquidity in the open market. If the illiquidity discount alone is considered, then the fair value as per the share of the assessee would be more than the fair value per share determined by the TPO. 35. Further, the TPO has considered the financial data on financial year basis whereas the appellant's accounting year is the calendar year. Moreover, the TPO has taken the market risk premium of performance of sensex since the year of incorporation of the company i.e. 1998 whereas the independent valuers have taken the market risk premium based on performance of the sensex over past 32 years i.e. 1979 to 2011. 36. In our considered opinion, the market risk premium measures the extra return that would be demanded by investors for shifting their money from riskless investments to an average risk investment. This excess return compensates investors for taking higher risk by investing in the market. The amount of the premium will vary as the risk in a particular stock, or in the stock mark....
X X X X Extracts X X X X
X X X X Extracts X X X X
....41. We are of the considered opinion that when the fair value is determined in accordance with the discounted cash flow [DCF] methodology, subsumes values of all kinds of assets of business/ company, whether tangible or intangible, or otherwise, which means that future operating profits of the company are taken into consideration for arriving at a value under the DCF Approach. 42. In our considered opinion, Goodwill is an intangible asset arising as result of name, reputation, customer loyalty, location, products and other similar factors not separately identified. Goodwill is an apparatus that assists in improving the profitability of a Company, being the base for determination of value under the DCF approach. Therefore, Business Value arrived at under DCF approach subsumes the value attributable to Goodwill. Since DCF valuation methodology inherently captures the entire value of business, therefore, based on valuation principles, there cannot be a separate addition of the value of goodwill. 43. The AO / TPO have inappropriately added value of one of the assets i.e. goodwill in the DCF calculation without appreciating the fact that cash flows of business already factor the benef....
X X X X Extracts X X X X
X X X X Extracts X X X X
....96,18,000/- equivalent to 16798439.41 Euros. The TPO has erroneously taken the value of share transaction in Euros whereas the transaction has been done in Indian currency. Therefore, the adjustment on account of exchange rate is uncalled for and deserves to be deleted. 49. Considering the facts of the case in totality, from all possible angles, we are of the considered opinion that the adjustment as mentioned elsewhere, made by the Assessing Officer/TPO deserves to be deleted. Ground No. 2 and 3 with all its sub grounds are allowed and Ground No. 4 is also allowed. 50. In so far as levy of interest u/s 234B of the Act is concerned, the ld. counsel for the assessee submitted that a similar issue was considered by the co-ordinate bench in the case of Technip UK Ltd [supra]. The relevant findings read as under: "25. In our understanding of the law, as per the provisions of section 234B of the Act, the assessee who is liable to pay advance tax u/s 208 of the Act will be liable to interest u/s 234B of the Act if he fails to pay such tax or advance tax paid by him falls short of 90% of the assessed tax. As per provisions of section 208 r.w.s 209(1) of the Act, advance tax payable ha....