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2023 (9) TMI 204
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.... On the facts and in the circumstances of the case and in law, the Ld. DRP erred in upholding the action of Ld. TPO / Ld. AO of determining the arm's length price (ALP) of the international transaction of purchase of equity shares of SIPL and QNPL at INR 2,155,06 and INR 10,013.45 respectively. In doing so, the Ld. TPO/Ld. AO/Ld, DRP erred in: a) Ignoring the existence of comparable transactions of purchase of equity shares from third parties which are akin to the transaction of the Appellant for determination of ALP b) Disregarding the valuation report issued by independent valuation expert for valuation of equity shares of SIPL and QNPL without providing cogent reasons; c) Adopting actual financial results for valuation of shares by replacing the projected financial values in original valuation, completely disregarding the fact that Discounted Cash Flow ('DCF") method of valuation takes into account future projections and also disregarding that such action tantamount to 'impossibility of the performance' to use actual results, were not available at the time of preparation of the valuation report, d) Disregarding the submiss....
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....eration On the facts and circumstances of the case and in law, the Ld. AO has erred in computing the capital gain on sale of shares of QNPL by considering the sale consideration as Rs. 5,60,00,82,800 instead of Rs. 5,20,69,94,250 as rectified by the Ld. TPO. 4 Ground No. 4: In respect of Appellant's subscription in the equity shares SIPL, in lieu of sale consideration as a consequence of sale of shares of QNPL to SIPL On the facts and circumstances of the case and in law, Ld. DRP erred in upholding the action of Ld. TPO / Ld. AO in considering Appellant's subscription in 1,19,65,193 shares of SIPL towards consideration of sale of 5,20,000 shares of QNPL. In doing so, the Ld. TPO/L.d. AO/Ld. DRP erred in: a) Ignoring the existence of comparable transactions of purchase of equity shares by third parties from SIPL which are akin to the transaction of the Appellant for determination of ALP b) Disregarding the valuation report issued by independent valuation expert for valuation of equity. shares of SIPL without providing cogent reasons; c) Adopting actual financial results for valuation of shares results by replacing the pro....
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.... of TP adjustment TP Adjustment as per TPO Order, dated 30/01/2021 (INR) TP Adjustment as per Rectification Order, dated 06/08/2021 (INR) 1 On the issue of purchase of SIPL shares from AE TPO concluded that excess payment was made by the Appellant for purchase of SIPL. Treating the excess payment as loan granted to AE, TPO proposed addition of notional interest thereon 4,78,60,011 394,98,584 2 On the issue of purchase of QNPL Shares from AE: TPO concluded that the Appellant has received shares for consideration less than the fair market value. The difference in the value determined by the TPO and the purchase consideration was treated as income chargeable to tax under the head 'Income from Other Sources' in terms of Section 56(2)(viia) of the Act. 83,60,61,408 53,73,14,110 3 On the issue of sale of Shares of QNPL to SIPL: TPO concluded that the sale consideration charged from the AE was less than the arm's length price of shares sold. TPO recomputed capital gains after taking into account the arm's length price of shares determined by the TPO. 110,95,81,200 71,64,92,560 4 On subscription of shares of SIPL by Appel....
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....ions 3 On the issue of sale of Shares of QNPL to SIPL TPO proposed upward adjustment of INR 71,64,92,650/- impacting the sale consideration DRP confirmed the action of the TPO Assessing Officer made the addition by computing capital after taking into account transfer pricing adjustment of INR 71,64,92,650/- and taking sale consideration as INR 5,60,00,82,800/- 4 On subscription of shares of SIPL by Appellant, as consideration for sale of share of QNPL to SIPL TPO proposed charging of notional interest on the excess subscription amount over the arm's length price of shares of SIPL DRP deleted the adjustment in relation to notional interest. Assessing Officer allowed the relief on the notional interest following DRP Directions. 7. Not being satisfied with the partial relief granted by the DRP and the Final Assessment Order, dated 28/04/2022, the Appellant has preferred the present appeal on the grounds reproduced in paragraph 2 above which are taken up hereinafter. 8. We have heard the Ld. Authorised Representative for the Appellant and the Ld. Departmental Representative and taken into consideratio....
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....t INR 8,058.2/-) (b) Share Purchase Agreement with AAJV Investment Trust (For short 'AAJA') for acquiring 8,558 shares for consideration of INR 1,37,92,378/- at a value of INR 1,611.64/- per share (equivalent price per share assuming no share split INR 8,058.2/-) (c) Share Purchase Agreement with three individual/promoter for acquiring 4,25,280/- equity shares at a value of INR 1,611.64 per share (equivalent price per share assuming no share split INR 8,058.2/-) (i) Mr. LG Chandrasekar [for Short 'Promoter1'] for acquiring 1,35,315/- shares for consideration of INR 21,80,78,485/- (ii) Ms. Geeta Chandrasekhar [for Short 'Promoter2']for acquiring 1,81,055/shares for consideration of INR 29,17,94,702/- (iii) Mr. S Subramanian [for Short 'Promoter3'] for acquiring 108,910/- Shares for consideration of INR 17,55,23,244/- 9.7 On 29/03/2017, Bonus issue of shareholder of SIPL was made in the ratio of 3 bonus equity shares for every 1 equity share held. Thus, 2,55,95,115 equity shares having face value of INR 2 each were issued as follows (i) 12,10,695 equity shares to L.G. Chandrasekhar, (ii) 17,60,415 equity shares to Geetha Chandrasekhar, ....
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....n the Draft Assessment Order dated 15/06/2021. In the Objections filed by the Appellant against the Draft Assessment Order, the DRP granted partial relief vide order dated 31/03/2022. 9.13 The Assessing Officer passed the Final Assessment Order, dated 28/04/2022, as per the directions issued by the DRP which has been impugned by way of present appeal on the grounds reproduced in paragraph 2 above. 10 Before adjudicating the specific grounds raised, it would be pertinent to refer to the legal background common to all the issues raised in appeal. 11 The transfer pricing provisions were introduced by way of insertion of Section 92 to Section 92F in Chapter X of the Act containing special provisions relating to avoidance of tax in the year 2001. Section 92(1) of the Act provides that income arising from 'International Transaction' shall be computed having regard to the arm's length price. Section 92B of the Act deals with the meaning of expression 'International Transaction'. Section 92B(1) of the Act 'International Transaction' to mean transaction between two or more AEs (either or both of whom are non-residents) in the nature of purchase, sale, or lease of any tangible or in....
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....Section 92B(2) of the Act which provide exception to the aforesaid rule. Explanation to Section 92B(1) of the Act provides that allowance of expense or interest arising from an 'International Transaction' shall also have to be determined having regard to the ALP. While, Section 92B(2) of the Act, cost/expenses allocated, apportioned or contributed by AEs under a mutual agreement or arrangement in relation to a benefit, service or facility provided or to be provided by one of the AEs shall also have to be determined having regard to the APL of the benefit, service or facility provided or to be provided. 15 Further, in a case where the chargeability of income under the provisions of the Act itself depends upon the computation of income and the income so computed meeting a specified threshold, the applicability of provisions of contained in Chapter X of the Act for determination of ALP would apply or not apply depending upon the specific provision contained in the Act for example in the case of Section 56(2)(vii)/(viia)/(viib) of the Act. 16 Section 92C of the Act provides for computation of arm's length price or ALP. It provides that the ALP shall be determined by applying the ....
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....erence to the following: (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions (For Short 'FAR Analysis'); (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions (For Short 'Contractual Terms'); (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. (For Short 'Market Conditions); 23 CUP Method required high level of comparability as to property or goods involved, FAR Analysis, Market Conditions and Contractual Terms. Further, CUP Method also requires the Adju....
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....by the Appellant. Thus, the TPO concluded that the Appellant had made excess payment of INR 5,814.91/- per share for purchase of 9,15,762/- equity shares of SIPL. Accordingly, the TPO concluded that excess payment of INR 532,50,73,612/- was made by the Appellant to its AE (i.e. TPG SF) and therefore, the TPO proposed downward adjustment of INR 532,50,73,612/- in the cost of purchase of shares in subsequent years. Further, TPO treated the excess payment as loan to the AE and charged notional interest on the same at the rate of LIBOR + 2.43% per annum for a period of 135 days (from 17/11/2016 to 31/03/2017) and proposed transfer pricing addition of INR 4,78,60,001/- on account of notional interest. 26.2. In the Objections filed by the Appellant before DRP against the Draft Assessment Order, dated 15/06/2021 wherein the above transfer pricing addition of INR 4,78,60,001/- was incorporated, the DRP granted relief to the Appellant as it directed deletion the aforesaid addition. In the Final Assessment Order, 28/04/2022, the Assessing Officer implemented the aforesaid directions of DRP and no transfer pricing addition was made on account of notional interest. 26.3. The grievance of....
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....pellant. 26.7. We note that in the case of DQ Entertainment (International) Ltd. (supra) 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 data is available with reasonable accuracy, closing in on real valuation of a software product. This valuation is upheld by t....
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....ontrolled 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 down the line ? Ld. AR submitted two case laws before us. The first being the valuation....
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....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." (Emphasis Supplied) 26.8. We have also perused the BEPS: Action 8 dealing with OECD Guidance for Tax Administrations on the Application of the Approach to HTVI on which reliance was placed by the Learned Departmental Representative and the relevant extract of the same reads as under: "5. Tackling information asymmetry between the extensive information available to and the absence of information available to the tax administration, other than what the taxpayer may present, is at the heart of the reason for HTVI guidance in Section D.4 of Chapter VI of the Guidelines. When a HTVI is transferred, each of the parties involved in the transaction are likely to prepare a valuation at the time of the transaction using assumptions based on its specialised knowledge, expertise and insight into the business environment in which the intangible is developed or exploited. The problem for the tax administra....
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....y the Learned Departmental Representative does not come to the aid of the Revenue. 26.10. Further, in our view, reliance by the Revenue on Rule 10B(5) of the Rule is also misplaced. Rule 10B(5) reads as under: "(5) In a case where the most appropriate method for determination of the arm's length price of an international transaction or a specified domestic transaction, entered into on or after the 1st day of April, 2014, is the method specified in clause (b), clause (c) or clause (e) of sub-section (1) of section 92C, then, notwithstanding anything contained in sub-rule (4), the data to be used for analysing the comparability of an uncontrolled transaction with an international transaction or a specified domestic transaction shall be, the data relating to the current year ; or the data relating to the financial year immediately preceding the current year, if the data relating to the current year is not available at the time of furnishing the return of income by the assessee, for the assessment year relevant to the current year Provided that where the data relating to the current year is subsequently available at the time of determination of arm'....
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....cumstances of the case we hold that no adjustment can be made in the cost of purchase of shares of SIPL. As regards, contentions of the Appellant that the TPO had ignored the comparable uncontrolled transactions, the same are dismissed as being infructuous. 27 Now we would take up the transaction relating to the purchase of 3,95,200/- equity shares of QNPL by the Appellant for a consideration of INR 3,42,00,00,000/- at a value of INR 8,653.85 per share. The Appellant had selected Other Method as the most appropriate method and benchmark the transaction on the basis of valuation report, dated 17/11/2016, wherein the value of shares of QNPL was determined by an independent valuer by following Discounted Cash Flow Method at INR 8,653.85/- which was same as the actual purchase consideration paid by the Appellant to its AE (i.e. TPG SF). 27.1. As was the case in relation to transaction of purchase of share of SIPL, TPO rejected the valuation report from independent valuer furnished by the Appellant; replaced the projected figured in the DCF valuation report with the actual financial results and arrived at the value of INR 10,769.39/- per share of QNPL as against INR 8,653.85/- det....
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....3 Ground No. 1 raised by the Appellant is partly allowed. Ground No. 2 29 Ground No. 2 pertaining to transaction of Sale of Shares of QNPL by the Appellant to SIPL. 30 As mentioned in paragraph 9.4 and 9.8 above, during the relevant previous year the Appellant had purchased 3,95,200 equity shares (constituting 76% of shareholding) of QNPL from TPG SF on in December 2016 and thereafter, on 29/03/2017 acquired additional 124,800 equity shares (constituting 23.949% of shareholding) of QNPL from the promoter (i.e. Mr. Viney Sagar Sehgal). Hence, the Appellant acquired 5,20,000 equity shares (constituting around 99.949% shareholding) of QNPL which were subsequently sold to SIPL on 30/03/2017 at INR 8,635.58/- per equity share. Thereafter, SIPL also acquired the balance 1,100 equity shares from the individual resident promoters (i.e. Mr. Mahadevan Narayanamoni) to become 100% shareholder of QNPL. 31 The Appellant benchmarked the transaction of sale of 5,20,000 equity shares of QNPL to its AE (i.e. SIPL) by using Comparable Uncontrolled Price (CUP) Method. The Appellant relied upon the following transactions to justify that the transaction of sale of shares was at arm's length....
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....200/- which was rectified to INR 71,64,92,650/- (INR 2,115.54 per share x 3,95,200) by the TPO vide rectification order, dated 06/08/2021. 34 The above transfer pricing adjustment of INR 71,64,92,650/- in the sale consideration proposed by the TPO was taken into consideration by the Assessing Officer while determining the capital gains arising from sale of shares of QNPL in the Final Assessment Order, dated 28/04/2022. In objections filed by the Appellant on this issue, the DRP declined to grant any relief and dismissed the objection filed by the Appellant. 35 During the course of hearing the Learned Authorised Representative for the Appellant had vehemently contended that the TPO/DRP fell in error in arriving at the value of the share of QNPL by replacing the projected figures in DCF valuation with actual financial results for determining cash flows for different financial years. We have, while adjudicating Ground No. 1, already rejected the identical approach/methodology adopted by the TPO. Therefore, in view of paragraph 26.6 to 26.13 above, we reject the approach adopted by the TPO for the purpose of determining the value of shares of QNPL sold by the Appellant to its AE ....
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....onths between the International Transaction and project comparable uncontrolled transactions would make the said transactions incomparable is a general averment not supported by factual analysis. Having said as aforesaid, we do find merit in the submission of the Learned Departmental Representative to the limited extent that where under shareholders agreement the parties thereto undertake to purchase/sell shares at value determined by independent expert, the transaction undertaken are more reflective of the valuation agreed upon rather than a price determined by market forces. The shareholder agreement executed by the shareholders of QNPL is not on record. However, Amended and Restated Shareholder Agreement, dated 26/03/2017, executed amongst the shareholders of SIPL is placed at page 1182 to 1270 of the paper-book and Schedule 7 thereto, dealing with Determination of Fair Market Value, supports the aforesaid view as it provides that the valuation determined by the independent valuer shall be binding on the parties. Further, we also find merit in the contention advanced by the Ld. Departmental Representative that the promoters looking for exit option to earn return on the investmen....