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2019 (3) TMI 677 - AT - Income TaxArticle 25 of India-Italy DTAA - Transfer pricing adjustment - capital gains arising on sale of shares by the appellant foreign company to another non resident associated enterprise - violation of the non discrimination clause under Article 25(1) of the India-Italy Tax Treaty - whether the transfer pricing provisions under the Act do not apply to a transaction of transfer of shares entered into between two Indian companies? - HELD THAT:- 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 than the taxation and connected requirements to which nationals [i.e. Indian national] of that other state [i.e. India] in the same circumstances and under same conditions are or may be subjected. In our understanding, under Article 25 of this India Italy DTAA and an Italian national shall not be subjected to in India to any taxation or any requirement connected therewith to which Indian nationals in the same circumstances and under the same conditions are or may be subjected which is more burdensome to Italian national. This means that if an Indian national [legal person], enters into any international transactions with its Associated Enterprises, will it not be subjected to transfer pricing proceedings? The answer is “YES”. The Indian national will be subjected to transfer pricing proceedings. Therefore, in our considered opinion, the transfer pricing proceedings taken in the case of the appellant company is not at all discriminating and, therefore, do not fall within the purview of Article 25 of the India Italy DTAA as claimed by the appellant. On the given facts and circumstances of the case, we do not find it necessary to discuss the judicial decisions relied upon by the ld. counsel for the assessee as they are totally different from the facts of the case in hand. Thus, the additional ground raised by the assessee is, accordingly, dismissed. AO's no power to substitute actual consideration with notional consideration u/s 45 r.w.s 48 - HELD THAT:- 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. 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 also fails. TPO rejected the share valuation report furnished by the assessee - HELD THAT:- The market risk premium is generally computed as return on market index i.e. SENSEX over a long period of time. We find that market risk premium for various countries is also computed by reputed valuers like Professor Aswath Damodaran. He computes market risk premium from time to time for various countries and posts the same on his website/ in public domain. We find that in the share valuation report, SS Kothari Mehta & Co, Chartered Accountants has considered Market Risk Premium as 8.09%, based on performance of Indian market index over past 32 years, which is largely same as what has been computed and published by Professor Aswath Damodaran on his website is as updated upto January 2012 at 9% and 8.6% as updated up to January 2011. In our considered opinion, considering the market return over a longer time frame would neutralize the impact of any abnormalities on the market risk premium. Considering the facts of the case in totality, we are of the opinion that the market risk premium at 8.09 % as adopted by the valuer is correct, which makes the discounted rate at 18.12% and if the same is taken, then again also, the fair value per share taken by the assessee will be higher than the fair value per share taken by the TPO. Adjustment of goodwill - difference in adoption of valuation approach by suggesting addition of goodwill in a DCF computation [discounted cash flow] - HELD THAT:- 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. 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. 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 benefits accruing from a combination of all business assets and, therefore, adding the value of goodwill to the enterprise value arrived using DCF methodology amounts to double counting. AO/ TPO have failed to appreciate the fundamental difference in adoption of valuation approach by suggesting addition of goodwill in a DCF computation. In a DCF computation, the value of incremental profits (reflection of goodwill) is already factored and therefore, the question of adding a separate amount towards goodwill does not arise. Fair valuation of ₹ 396.42 per share of Technip India undertaken by an independent Valuation Expert/ Chartered Accountant subsumes fair value of entire business of Technip India including all intangibles, including goodwill. Hence, there is no need to separately add the value of goodwill to the amount of sales consideration. Adjustment on account of difference in exchange rate - TPO taken the value of share transaction in Euros whereas the transaction has been done in Indian currency - HELD THAT:- The aggregate purchase price for all the shares is taken at 1,14,96,18,000/- 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. Levy of interest u/s 234B - HELD THAT:- Since in the present case the income has been received by the appellant after deduction of tax at source, therefore, the aforesaid provision is not applicable. Respectfully following the findings of M/S TECHNIP UK LTD. C/O 712- 713, TULSIANI CHAMBERS [2018 (12) TMI 1069 - ITAT DELHI] we hold that no interest is leviable u/s 234B of the Act.
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