TaxTMI 
TaxTMI 
2023 (3) TMI 191
X X X X Extracts X X X X
X X X X Extracts X X X X
.... returned loss (as per revised return) of Rs.87,10,07,508/-. 2. The AO erred in making an addition of Rs.46,69,44,000/- on account of the arm's length price of the shares transferred and Rs.5,41,14,332/- on account of the arm's length price of the interest on the deemed loan/receivable to the Associated Enterprise (AE). 3. The Transfer Pricing Officer ("TPO") erred in determining the arm's length price at which the shares ought to have been transferred at Rs.7,635/- per share. 4. The Dispute Resolution Panel ("DRP") erred in enhancing the value at which the shares ought to have been transferred to Rs.9,338.88 per share. 5. The learned TPO and the DRP erred in adopting the Discounted Cash Flow (DCF) method of valuation of shares for determining the arm's length price at which the shares ought to have been transferred. 6. The DRP erred in determining the value of the shares at Rs.9,338.88 per share by disregarding the valuation report filed by the Appellant whereby the shares had been valued at Rs.4.79 per share in accordance with the method prescribed by the erstwhile Controller of Capital Issues (CCI) as per the RBI regul....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he alleged difference in the value of equity shares. 14. The TPO / DRP erred in holding that interest ought to have been received by the Appellant at the rate of 15%. The above grounds are without prejudice to each other. The assessee craves leave to add any other ground(s) and/or modify or delete any of the above grounds before or during the course of hearing before the Hon'ble ITAT." 3. Additional Grounds of appeal raised vide letter dated 03.05.2018: "1. The Dispute Resolution Panel ("DRP") and the Learned Assessing Officer ("AO") erred in making disallowance u/s 14A of the Act amounting to Rs. 7,11,32,189/- under the normal provisions as well as under section 115JB of the Act. 2. Without prejudice to the above, the DRP and the AO erred in making disallowance u/s 14A of the Act in excess of exempt income i.e. dividend received during the year under appeal. 3. Without prejudice to the above, the DRP and the Assessing Officer erred in considering the investments from which no dividend income was earned for computing disallowance under Rule 8D." The grounds raised in the appeal are taken up in seriatim hereinafter. Grounds whic....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he Learned Authorised Representative for the Appellant appearing before us submitted that during the relevant previous year the Appellant had sold 50,000 shares of ECL to its AE (i.e., ECHL, Mauritius) at the rate of INR 10 per share. The aforesaid value of INR 10 per share was more than the value determined by applying external Comparable Uncontrolled Price (CUP) Method. As per the valuation report obtained by the Appellant from an independent valuer, the value of one share of ECL was determined at INR 4.97 following Net Asset Value (NAV) Method. The independent valuer had also determined value of the share by using Profit Earning Capacity Value (PECV) Method, however, since same was coming as „Nil‟, it was ignored. During the assessment proceedings, the TPO rejected the external CUP Method adopted by the Appellant by giving incorrect reasoning. The Learned Authorised Representative for the Appellant vehemently contended that the TPO does not have the right to change the method adopted by the Appellant unless the TPO satisfied that the data or the information used are not reliable or incorrect. The TPO has failed to point out any infirmity in the data or information us....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of the Appellant is that the TPO/DRP has adopted DCF Method for determining the ALP of the transaction of sale of shares of ECL to ECHL, Mauritius. Further, the TPO/DRP has adopted the actual published results of the Appellant instead of projected future cash flows as on the date of the transactions. Reliance on behalf of the Appellant was placed on the decision of the Hyderabad Bench of the Tribunal in the case of DQ (International) Ltd. [supra] wherein it was held by the Tribunal that while computing value of intangible asset by using DCF Method the future projections cannot be substituted with the actual figures. The relevant extract of the aforesaid decisions of the Tribunal read as under: "8.3 The ld. AR submitted that the valuation by applying DCF method or any other method is always applied by considering projections of revenues (which were based on the detailed market expectation on that particular date) which cannot be tinkered at a later point of time by substituting actuals. Nowhere such an approach is technically accepted. 8.4 Ld. AR referred to the decision of the ITAT, Bangalore in the case of In Tally Solutions (P.) Ltd. v. Dy. CIT [2011] 14 taxmann....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... resulted in the value of IP of Jungle Book at a relatively higher amount. The TPO could not arrive at the figures of "Value till patent IP expiry" of RS.2.70 lakhs and "TAB" of RS.1.21 crores as adopted by the valuer. If such figures are known then the value of the IP will further increase. Since the difference in the valuation was so fundamental, that in an uncontrolled circumstances independent parties' would have entered into a renegotiation or an adjustment to the negotiated price. Ld. DR submitted that in such a case of wide variation in the price, the TPO is justified in concluding that the transaction is not at arm's length. The TPO is well within his powers as provided in para 9.87 & 9.88 of QECD Transfer Pricing Guidelines and substituted his own prices for the actual transaction undertaken as the difference in valuation was substantial. 10. Considered the submissions of both the parties and perused the material facts on record as well as the orders of revenue authorities. The assessee had sold 'IP' to its "AE" after considering the independent valuation from two valuers and arrived at the sale consideration. No doubt the projections were submitte....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ey are revenues generated out of the "IP" or not. They simply adopted the revenues of AE without giving proper findings that the revenues of AE are all generated only out of this "IP" (Jungle Book). The assessee submitted that these revenues are generated by "AE" out of other properties (IPs) as well. We are of the view that the revenue cannot adopt such values without proper verification. In our considered view, for valuation of an intangible asset, only the future projections alone can be adopted and such valuation cannot be reviewed with actuals after 3 or 4 years down the line. Accordingly, the grounds raised by assessee are allowed." 9. In view of the above decision of the Tribunal, we accept the contention of the Appellant that for the purpose of arriving at the valuation using DCF method actual figures cannot be substituted for future projections. 10. We note that the TPO/DRP had relied upon the decision of Chennai Bench of the Tribunal in the case of Ascendas (India) Private Ltd. (supra) while rejecting the valuation adopted by the Appellant. During the course of argument, the Ld. Departmental Representative had placed reliance on paragraph 18 and 19 of the aforesaid ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... true market potentials has to be considered. The value of an equity can be obtained in two methods even under the Discounted Cash Flow method. First one is to discount the cash flow expected from the equity investment and the second is to ascertain the value of the enterprise by applying DCF on its future earnings and then dividing it with the number of shares. Both the TPO and assessee in its reply to the TPO, had used the second method whereby the companies concerned were valued by discounting their future cash flows over a period of 20 years and thereafter dividing such value by the total number of shares." (Emphasis Supplied) 11. On perusal of the above decision of the Tribunal, it followed that the Tribunal had preferred use of DCF Method over the use of CCI Guidelines for arriving at the value of shares for the purpose of determining ALP. During the course of hearing, it was contended by the Ld. Authorised Representative for the Appellant that given the fact of the present case DCF Method cannot be adopted since ECL was an investment company with inconsistent and unpredictable stream of revenues. We note that the TPO had computed Earning Before Interest and Tax (EBIT) as ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... future amounts (cash flows/income/cost savings) to a single present value. 51. The following are some of the instances where a valuer may apply the income approach: (a) where the asset does not have any market comparable or comparable transaction; (b) where the asset has fewer relevant market comparables; (c) where the asset is an income producing asset for which the future cash flows are available and can reasonably be projected. 52. In some instances, a valuer may consider using other valuation approaches instead of income approach or in combination with income approach, such as, where - (a) the asset has not yet started generating income or cash flows, e.g., projects under development; (b) there is significant uncertainty on the amount and timing of income/future cash flows, e.g., start-up companies; or (c) the client does not have access to the information relating to the asset being valued, e.g., minority shareholder may not have access to projections/budgets or growth expectations specific to the business." (Emphasis Supplied) 13. In view of the above, we reject the DCF Method adopted by the TPO/DRP t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ontrolled price for the shares sold. If viewed from this angle, we cannot say that the discounted cash flow method adopted by the TPO was not in accordance with sec.92C(1)." (Emphasis Supplied) 15. On perusal of the above it can be seen that Tribunal had clearly stated that the purpose of the transfer pricing rules is to verify whether the prices at which an international transaction has been carried out is comparable with the market value of the underlying asset or commodity or service and this might require some subtle adjustments in the methodology prescribed for evaluation of an international transaction. Endeavour is only to arrive at a value which would give a comparable uncontrolled price for the shares sold. In view of the aforesaid, the Tribunal concluded that the TPO was not bound by the method of value fixed in accordance with the CCI Guidelines. We have already concluded that the DCF Method could not be adopted in the facts and circumstances of the present case as the Appellant is an investment company incorporated on 30.01.2007 with unpredictable income/cash flows. This takes us to the method adopted by the Appellant for determining the value of shares of ECL. We no....
X X X X Extracts X X X X
X X X X Extracts X X X X
.....com 169 (Bom), he submitted in the absence of any specific provisions in the Act the aforesaid transfer pricing adjustment could not have been made. 20. Per contra, the Ld. Departmental Representative relied upon the order passed by the TPO and submitted that the TPO has neither made secondary adjustment nor treated equity as debt. Since the amount receivable by the Appellant from its AE interest has been charged on the same. The provision whereby the transaction of capital financing was recognized as international transaction came into effect from 01.04.2002 and therefore, the TPO was justified in making the transfer pricing adjustment of INR 4,57,88,125/-. 21. We have considered the rival submissions and perused the material on record. In the case of Besix Kier Dabhol SA (supra), it was held by the Hon‟ble Bombay High Court that in absence of specific provision in the Act incorporating thin capitalization rules, the TPO was not permitted to re-characterize debt as equity for making transfer pricing adjustments. It is admitted position that for the relevant assessment year there were no provisions in the Act providing for secondary transfer pricing adjustment and/or f....