TaxTMI 
TaxTMI 
2023 (3) TMI 191
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....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 regulations prevailing at the time of the transfer of shares. 7. The DRP erred in n....
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....ve 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 which are connected are taken up together. Ground No. 1 4. Ground No. 1 is general in nature and does not require any adjudication. Ground No. 2 to 9 5. The facts, in brief, relevant to the adjudication of groun....
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....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 used and/or the method employed for valuation of the shares. TPO simply concluded that DCF Method is the correct method to be employed in the facts and circumstances of the case without specifying that NAV method is incorre....
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....t 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.com 19/48 SOT 110 wherein the Hon'ble Bangalore Tribunal held as under: "The excess earning method is the method that is adopted by the TPO. We see no infirmity in adoption of this method for the simple reason that the relevant dat....
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....ill 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 submitted by assessee for such valuation. Now, the revenue has no problem with the valuation but they are replacing the projected values with actual values. The question arises, whether the action of the revenue was justified for replacing the projection with actuals after three years ....
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....roperties (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 decision of the Tribunal which read as under: "18. Now coming to the argument of the Authorised Representative that TPO was bound by the value fixed by the Chartered Accountant in accordance with CCI guidelines. This in our view cannot be accepted for the simple reason that CCI ....
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....n 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 under: FY 2007-08 FY 2008-09 FY 2009-10 FY 2010-11 FY 2011-12 (2.60) Lakhs 4394.60 Lakhs (66.42) Lakhs 8.67 Lakhs 168.30 Lakhs 12. ECL was incorporated on 30.01.2007. The above figures support the contention advanced on behalf of the Appellant that ECL, being an investment company, ha....
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....t 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 to arrive at the ALP for the transaction of sale of shares. 14. At this juncture, it would be pertinent to refer to the following observations made by Chennai Bench of the Tribunal in the case of Ascendas (India) Pvt. Ltd. (supra). "17. Now, the second question as to whether it would be possible to apply any one of the methods, out of those prescribed in sec.92C(1) of the Act. .........
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....n 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 note that the shares of ECL were sold by the Appellant on 23.06.2008. However, the valuation report is based upon the audited financial statements of ECL as on 31.03.2008. In the synopsis of arguments filed before the Tribunal, the Appellant had, without prejudice basis, stated that the value of shares determined on 23.06.2008 by following the method prescribed in Rule 11UA of the Income Tax Rule....
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....e 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 for making transfer pricing adjustment by treating debt as equity (such as general/specific anti-avoidance rules). The amount of receivable outstanding has arisen on account of transfer pricing adjustment made by the TPO/Assessing Officer. In our view, the transfer pricing adjustment of INR 4,57,88,125/- made by the TPO/Assessing Officer (by treating the aforesaid amount as interest on outstanding receivables) is clearly in t....