TMI Blog2013 (9) TMI 802X X X X Extracts X X X X X X X X Extracts X X X X ..... se is fixed based on the present value of its future earnings there is no scope for any further allowance for any perceived risk factor - Discounted cash flow method was appropriate to determine the arm's length price of the international transaction, set aside the issue to the file of the Assessing Officer for re-working the value afresh in accordance with standard practices adopted for such valuation – Decided in favor of Assessee. - ITA No. 1736/Mad/2011 - - - Dated:- 2-1-2013 - Order The order of the Bench was delivered by Abraham P. George (Accountant Member).-In this appeal filed by the assessee two issues have been raised. One of this relate to transfer pricing and the other to a disallowance of claim for exchange fluctuation loss. The issue relating transfer pricing is taken up first for disposal. The facts apropos are that the assessee is a subsidiary of an international company called Ascendas Land International Ltd. which in turn is a wholly owned subsidiary of Ascendas Ltd., Singapore. The assessee is engaged in real estate business by way of building and leasing out techno-park and software parks. The assessee had in 2002 entered into a joint venture agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... price at which LTIL sold came to Rs. 11,848 per share and this was the same price at which the assessee also sold its shares in LTIAL to APFI. (iii) The sale price of shares in LTIAL were perfectly comparable and in accordance with rules for determining the arm's length price. (iv) The sale price of 26.07 per share in AITPL was supported by a "valuation certificate" determining the enterprise value of AITPL prepared by a chartered accountant in accordance with Controller of Capital Issues (CCI) valuation guidelines. (v) CCI guidelines were as per the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000. (vi) Such valuation of the enterprise was made considering average of net asset value and yield. (viii) The price at which shares of AITPL was sold to APFI at Rs. 26.07 per share was much higher than the value of Rs. 3.07 per share arrived at by the chartered accountant based on CCI guidelines. It is to be mentioned that the assessee had filed various transfer pricing documents including audit reports along with its return for justifying the price at which it had sold the shares. The Assessing Officer referred to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Asst. CIT [2009] 309 ITR 194 (P H), the Transfer Pricing Officer held that the value computed for M/s. LTIAL based on the alleged comparable uncontrolled price method and for AITPL based on CCI Guidelines were not reliable basis for determining the arm's length price of the share prices. He put the assessee on notice that he was going to adopt discounted cash flow method for determining the arm's length price of the shares sold by the assessee. The methodology proposed for arriving at the value of both companies, using the DCF method was also provided to the assessee. The assessee replied to the Transfer Pricing Officer that it could not accept adoption of DCF for valuing the shares of the companies for determining the prices of the shares. It also pointed out that there were a number of errors in DCF method being proposed by the Transfer Pricing Officer. After correcting some of the mistakes pointed out by the assessee, the Transfer Pricing Officer arrived at an arm's length price of Rs. 70.52 per share for AITPL and Rs. 26,655 per share for LTIAL, based on DCF applied on future cash flows. Accordingly, adjustments were carried out on the value of international transactions, v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hod was the most used and popular method for valuation of shares since it truly reflected the intrinsic value of a company. As for the argument of the assessee that comparable uncontrolled price method was ideal for ascertaining the arm's length price of the shares in LTIAL, opinion of the Dispute Resolution Panel was that both the transactions, were so closely related that these could not be considered as comparably uncontrolled. As per the Dispute Resolution Panel, cost of equity capital considered at 10 per cent. by the Transfer Pricing Officer was reasonable. The assessee having sold the shares to AITPL at Rs. 26.07 per share, the compounded annual return when reckoned from the year of acquisition of the shares came to 32 per cent. per annum and this was almost in line with the cost of equity of 23.68 per cent. worked out by the assessee itself. In any case, as per the Dispute Resolution Panel, the Transfer Pricing Officer had put before the assessee the assumptions taken by him for computing the cost of equity and cost of debt, and such costs were adopted after considering the view of the assessee. Therefore, as per the Dispute Resolution Panel, there was no need to interfere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot cover price the shares which were transferred to non-resident. In any case, according to him, DCF method adopted by the Transfer Pricing Officer was based on a notification dated April 21, 2010 under the FEMA which had no retrospectivity. As per the authorised representative, yield based method adopted by the assessee was an accepted one. Against Rs. 3.70 per share of AITPL valued by the chartered accountant, the assessee had proactively considered Rs. 26.07 per share based on yield method. As per the authorised representative, rule 11UA of the Rules had prescribed a methodology to be followed for determining the fair market value of a property other than immovable property. At clause (c) thereof, a formula prescribed for such valuation and it was nothing but application of the net asset value method. Even if this method was adopted the value per share of AITPL would come to Rs. 15.50 only. As per the authorised representative, the assessee being engaged in real estate business, the net asset value method was most appropriate one for valuation of the enterprise. In any case the DCF method as adopted by the lower authorities suffered from various errors. As per the learned author ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refore the learned authorised representative submitted that the adjustments carried out by the lower authorities were not called for. We have heard rival contentions and perused the orders carefully. Before setting out the questions that are to be answered, it has to be noted that the transactions which have been subjected to the transfer pricing analysis are a bit unusual, when compared to the normal trading and service transactions. Here, what has been sold were equity shares held by the assessee in two companies and the sale was to its associated enterprise. The shares having been sold to associated enterprise, the transactions automatically came within the purview of Chapter X of the Act. For application of Chapter X and determination of the arm's length price, a separate set of provisions and rules have been prescribed. Section 92C of the Act says that the arm's length price in relation to an international transaction has to be determined by following one of the six methods mentioned therein. These are comparable uncontrolled price, resale price, cost plus method, profit split method, transactional net marginal method and such other method prescribed by the Board. Though rule ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd LTIL sold their respective holdings at a single price. Every clause in the said agreement applies to both the assessee and LTIL. Even the consideration of Rs. 79 crores mentioned at clause 3 of the said agreement is a consolidated one. Thus, the price for which shares of LTIAL were transferred was based on a single agreement and, therefore, to say that one part of that agreement would be an uncontrolled transaction, for comparing it with the other part, would, in our opinion, be unacceptable. The agreement has to be taken as a whole and it is clear that the transactions between the assessee and LTIL with regard to the sale of shares of LTIAL, was not an independently entered one but a joint effort. In such circumstances, the assessee's contention that the sale of shares of LTIAL by LTIL to APFI has to be taken as a comparable uncontrolled transaction, falls flat. Now, the second question as to whether it would be possible to apply any one of the methods, out of those prescribed in section 92C(1) of the Act. No doubt the said section uses the term "shall". The said section is reproduced below : "92C. (1) The arm's length price in relation to an international transaction shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re profits or cash flow, is a method used worldwide. Endeavour is only to arrive at a value which would give a comparable uncontrolled price for the shares sold. If viewed from this angle, we cannot say that the discounted cash flow method adopted by the Transfer Pricing Officer was not in accordance with section 92C(1). Now coming to the argument of the authorised representative that the Transfer Pricing Officer 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 guidelines were for a totally different purpose and could not be transported into a pricing methodology prescribed for fixing the arm's length price. In fact, in the case of Coca Cola India Inc. v. Asst. CIT [2009] 309 ITR 194 (P H), the hon'ble Punjab and Haryana High Court, specifically held that "price fixed by RBI under FERA cannot apply to provisions of the Act which provide for a particular methodology for computation of income with regard to the arm's length price of 'international transaction'". No doubt, rules 11U and 11UA prescribe a method for determination of fair market value of a property other than i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out the net present value (NPV). The Discounting factor generally used is the weighted average cost of capital. Widely used method of valuation based on discounted cash flow seems to be as under: Cashflow to concern EBIT (1-t) (Cap Ex-Depr) Change in WC = FCFF Cash flow projected over n years based on expected growth Terminal value =FCFF n+1 /(r gn) FCFF1 FCFF2 FCFF3 FCFF4 FCFF5 FCFFn Apply discount at WACC = Cost of equity (Equity/(Debt + Equity)) + Cost of debt (Debt/(Debt+ Equity)) = Value of operating asset Cost of equity Cost of debt Riskfree rate + default spread) (1-t) Weights Based on market value Riskfree rate - No default risk - No reinvestment risk = In same currency and in same terms (real or nominal as cash flows) + Beta = Measures market risk x Risk premium = Premium for average ri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,56,235 7.50% 3.03% Total 1,34,86,20,707 5.24% Against this, the assessee's contention is that WACC of AITPL will be as under : Particulars Numerator (Rs.) Denominator (Rs.) Discount rate WACC Equity 68,00,00,000 2,26,41,56,235 11.50% 3.45% Debt 1,58,41,56,235 2,26,41,56,235 7.50% 5.25% Total 2,26,41,56,235 8.70% Equity and debt of AITPL as at the end of the relevant previous year stood as under : Particulars Amount as in the balance sheet (in (Rs.) Nature Equity 43,50,00,000 Equity Share application money 24,50,00,000 Equity Total equity 68,00,00,000 Equity Debt - Phase I 91,36,20,707 Debt Debt - Phase 2 67,05,35,528 Debt Total debt 1,58,41,56,235 Debt Total debt and equity 2,26,41,56,235 Thus, in working out the WACC the Assessing Officer considered only equity and debt of Pha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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