TMI Blog2011 (9) TMI 196X X X X Extracts X X X X X X X X Extracts X X X X ..... ce - Estimation of future cash flows - Estimation of discounted future cash flows - present value of improvement - Future cash flows - Return on fixed assets - Return on working capital - Return on human capital - After following the above formulae, the TPO should calculate the ALP accordingly. If the amount so arrived at were to be higher than the total actual consideration [Rs. 38.50 crores] received, the TPO should adopt the higher price arrived at. Value paid by the assessee to AE for subsequent purchase of the same software product cannot be considered as uncontrolled transaction as the said transaction was between two associated enterprises. Further, as there was a long gap of almost three years between the two transactions; we are of the view that the point raised by the assessee for comparison is unreasonable due to the subsequent value additions made to the IPR and discounting factors. - Decided partly in favor of assessee. - 1235 (BANG.) OF 2010 - - - Dated:- 26-9-2011 - N. BARATHVAJA SANKAR, GEORGE GEORGE K., JJ. ORDER George George K, Judicial Member. This appeal instituted by the assessee company - Tally Solutions Pvt. Ltd - is directed against the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. We shall now proceed to deal with the primary issues raised by the assessee company in the following paragraphs: 4. Briefly stated, the assessee company ['the assessee' henceforth] has been engaged in the business of software development, marketing and sales of Tally Brand Financial Accounting and Management Software. The assessee has Associated Enterprises (AE) in UK, Dubai and other countries. In Dubai's AE, the assessee has 40% shareholding. During the year under dispute, the assessee sold intellectual property held by it including patent, copy rights and trade marks to Tally Solutions FZLLC, Dubai (Tally Dubai) on 31-1-2006 for a total consideration of Rs. 38.50 crores. It was claimed that after restructuring, for the first 10 months of FY 2005-06, the assessee continued to carry on its business of sale of license for the right to use of its software products and later two months, it provided software services to Tally Dubai. 4.1 The assessee's case was referred to the TPO for computation of arm's length price u/s 92CA of the Act. After consideration of the details furnished by the assessee, the TPO proposed to adopt various comparables for software segments to determ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion and could reach "a considered opinion" after receipt of the report from the TPO after providing opportunity to the assessee. As per sub-section (4) prior to its amendment, the AO could proceed to compute the total income of the assessee "having regard to the Arms Length Price determined under sub section (3) of the TPO". Thus, it was contended that there was always a scope for the assessee to put forth its objection before the AO concerning the contents of the TPO report and the AO, after considering the objection of the assessee, could either agree with the TPO report or agree with the objection of the assessee and reject or modify the TPO report while passing the assessment order u/s 143 of the I. T Act. - Under the circumstances, it was justified that the AO could make reference to the TPO u/s 92CA (1) merely by arriving at the "prima facie opinion" as he could reach "a considered opinion" after receipt of the TPO's report. This aspect of forming prima facie opinion before a reference to TPO and considered the opinion after receipt of the TPO report. - Relies on the ruling of the Hon'ble Delhi High Court in the case of Sony India P. Ltd. v. CBDT And Another [2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icing Officer. This will have to be understood from the wording of the statute itself. A reading of section 92C and section 92CA does not indicate that the Assessing Officer is required to form a prior considered opinion after considering all the available materials even before making a reference to the Transfer Pricing Officer. For instance, section 92CA(1) can be contrasted with section 55A of the Act where again the Assessing Officer is empowered to refer to the Valuation Officer the question of ascertaining the fair market value of a capital asset. The wording of section 55A is unambiguous that the Assessing Officer has to first form an opinion that the value declared is less than the fair market value before he can refer the question to the Valuation Officer. If he does not, then the reference is itself bad. Turning to section 92CA, the question is whether the reference to the Transfer Pricing Officer by the Assessing Officer has to be made by the Assessing Officer only after he is satisfied by going through the steps enlisted at section 92C (1) to (3) and concluding that the price declared by the assessee is not to be accepted or can he make such a reference at an anterior st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he other hand one were to interpret the provisions to require the Assessing Officer to first form a considered opinion on the ALP before referring the matter to the Transfer Pricing Officer, then the Assessing Officer will thereafter have no option but to accept the report of the Transfer Pricing Officer and to that extent the Assessing Officer's final say on the ALP while computing the total income gets diluted. By preserving the power of the Assessing Officer to determine the ALP even after the determination by the Transfer Pricing Officer, full effect can be given to the words "having regard to" occurring in both section 92C(4) and section 92CA(4). .. "In view of the settled legal position, we are of the view that the expression "having regard to" in section 92C(4) and section 92CA(4) enables the Assessing Officer to consider not only the report of the Transfer Pricing Officer but any other material that may be placed before him by the assessee to arrive at a different conclusion. This also strengthens the position that the report of the Transfer Pricing Officer is not binding on the Assessing Officer". .. The salient points emerging from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... osition in law that AO has the authority to finalize the assessment and his power cannot be usurped by the TPO or any other authority contrary to the Act. The AO can only outsource the exercise of determination of arms length price to the TPO by arriving at a prima facie opinion and can form the considered opinion after receipt of the TPO's order. However, there has been a change in the provisions of the law w.e.f 01.06.2007. The AO has to compute total income of the assessee in conformity with the arms length price determined by the TPO. Under these circumstances mere forming the prima facie opinion before making reference to the TPO is not sufficient as otherwise AO will have no opportunity to form a considered opinion on the issues under reference. AO has to pass the order 'in conformity with" the ALP determined by the TPO and if he has not formed any considered opinion before making reference to the TPO then the powers of AO have been usurped by the TPO. The Hon'ble Delhi High Court has upheld the instruction no. 3 of 2003 and held that prima facie opinion would be sufficient for making reference to TPO as AO will have considered opinion on receipt of the TPO's order. But now a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e IPR declared by the assessee shall be accepted to be the ALP of the International transaction by the AO. - Reliance placed in the case of CA Computer Associates Pvt. Ltd. v. DCIT [2010] 37 SOT 306(Mum)] wherein the Hon'ble Bench has held: "The manner in which the ALP is to be determined by any of the method prescribed in section 92C is provided in rule 10B of the Income Tax Rules, 1962. After examining the parameters prescribed in rule 10B, it can be seen that bad debts written off can not be factor to determine the arm's length price of nay international transaction. In our opinion, the TPO has exceeded his limitation by following the method which is not authorized under the Act or Rules. We therefore, hold that the arm's length price determined by the TPO and adopted by the AO to the extent of royalty payable to the CA Inc Management, USA is not as per the procedure prescribed and same can not be sustained. We therefore direct the AO to adopt the arm's length price of the royalty payable to CA Inc Management, USA as declared by the assessee in both the years". - that in the absence of appropriate method for determination of ALP of IPR, the provision cann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any interference". That in view of the above the sale value declared by the assessee at Rs. 38.50 cr. of IPR transferred to Tally Dubai, shall be directed to be accepted as ALP for computation of income from international transaction. (3) On merits, it was contended that the Order of the TPO suffers from the following infirmities: (i) The TPO has relied on estimates and surmises in projecting the future cash flows while completely disregarding documentary evidence in the form of audited financial statements that were available at the time of framing the order. Such documents emphatically rebut the presumptions made by the TPO (ii) The TPO has erred in excluding license revenues for the period 01-4-2005 to 31-1-2006 in computing the value of the IPRs. Since the IPRs were sold on 31-1-2006, license revenues till the date of sale of IPRs have to be considered in determining the value of the IPRs (iii) The TPO has erred in ignoring sales returns of AY 2005-06 amounting to Rs. 111.,03 crores. Since the basis of the TPO's estimation of future revenues is sales of AY 2005-06, non-consideration of such sales returns grossly inflates the future earnings poten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2004-05 35.27 2005-06 198.15 Total 344.39 Based on the above, the CAGR works out to 90.80% but the learned TPO has taken the CAGR at 20.39%. This growth rate is assumed for future years and accordingly future revenues as estimated by the learned TPO are as below: Table 2 (Rs. in Crores) Assessment Year Total Operating Revenue 2007-08 287.20 2008-09 345.75 2009-10 416.26 2010-11 501.13 2011-12 603.31 2012-13 726.32 Total 2,879.97 with respect to computation of future revenues - The learned TPO has considered the sales of the appellant from A.Y 2000-01 to 2005-06. Based on this data, the TPO has computed CAGR and then estimated the future revenue, that the methodology adopted by the TPO gives absurd results. To demonstrate this, the figures of actual sales are tabulated below. Table -3 COMPARISON OF ACTUAL REVENUES WITH TPO'S ESTIMATED REVENUES ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he law prevailing and not vision or dream of the MD. Accordingly, the appellant submits that the ALP should be computed based on actual sales and not projections. The TPO has considered the sales of the appellant from A.Y. 2000-01 to 2005-06. Based on this data, the TPO has computed CAGR and then estimated the future revenue. The year under consideration is AY 2006-07. The IPR was sold on 31.01.06. The sales (license revenue) for 10 month period (April 05 to Jan 06) is Rs. 60,17,36,844, that since the sale of IPR is on 31.01.06, sales data of the current year should also be included to compute the future revenues. The appellant submits that considering appropriate sales data is vital for correct projections. The current year sales data is critical because it reflects the sales of period immediately preceding the sale of IP and therefore reflects the true earning potential of the IP at the time of sale. - that the TPO in the remand report (page 11 of the remand report) has stated that current year data was not taken since the same involved the related party transactions and the transaction involving IPR took place in this year. In this regard, the appellant submits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll the whole stock. The same were returned by the dealers to the assessee. There was a sales return to the extent of Rs. 111.04 crores in the pertaining to sales made in A. Y. 2005-06. The turnover as reported did not materialize. To assume a growth rate on unrealized figures is bad in law. This is especially so when the CAGR is substantially influenced by the figure of turnover for the A. Y. 2005-06. When the "contributory figure" to the derivation of the rate of growth has not fructified, the very assumption of the TPO is vitiated. The projection of the future turnover on the basis of such vitiated turnover is therefore bad in law and, thus, the sales return must be excluded from the turnover of A. Y. 2005-06. - With respect to this contention of the appellant, the TPO on page 10 of the remand report has contended that sales figures have been taken from annual report of the appellant and therefore sales return have been taken care of. The TPO has further contended that he has been very conservative and taken CAGR at 20.39% instead of 90.80%. The TPO has contended that lower CAGR takes care of all possible adverse effects on future cash flows. - With respect to TPO's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asset. The IPR was originally acquired by the appellant during the previous year relevant to A.Y. 2000-01. Tally is an accounting package which has to be updated year after year to suit the requirements of the market and the customer. Right from A.Y. 2000-01 upto A.Y. 2006-07 during which period the IPR was sold, various versions have been developed and marketed. Each version has been in the market for a very short period and most of the times for a span not exceeding a year. For example Tally version 3 or version 4 released in 1990's does not have any market today. Tabulated below are the release dates of newer versions: Table 4 Version Release Date 7.2 01.03.2005 8.1 07.07.2006 9.0 01.12.2006 As evident from the above Table, newer versions need to be released at regular intervals to suit the market requirements. In case newer versions are not released, the demand for the products will fall. What was transferred is IP of the existing products, i.e Tally 7.2. The market for the existing product is not six years. Its life is much shorter. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r probably one of the very few) in the market. Over a period of time many other players entered the market with their packages. If the inherent flaws were not corrected the appellant would have lost the market share. For example, the existing product did not have security features leading to large scale piracy. The Tally package was amenable to copying as the security system in the product was weak. Many pirated versions came into the market which was available at a far lesser price. (ii) To correct the above flaws intense development inputs of very high magnitude were required on a continuous basis on the product design, technology and security features and other value added modules. The continuous development would necessitate deep study and greater insight into customer and geographical requirements from the market standpoint. The assessee's products targets small and medium businesses. Most of them are run by individuals or small firm. Understanding their individual and multitude requirements and preferences and translating that into product requires deep study. (iii) In the initial years, the Tally product was just an accounting package. To expand the market, various ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed (page 139 of the TP order). Out of these three, only Sankhya Infotech's Beta has been considered. Why the other two companies are not considered is not clear. The appellant submits without prejudice that Beta should be computed after considering all the three companies. The average Beta of three companies would be 1 (computation of Beta on pages 408 to 414 of the paper book). Risk Premium While computing the discount rate, the learned TPO (page 166 of the TP Order) has taken the risk premium at 8.80%. It is stated that risk premium of Bench Mark BSE Index has been considered. In this regard, the appellant submits that it is engaged in the business of software development and comparing return of BSE Index which is composition of companies from various industries is not appropriate. The Risk Premium should be based on return of companies engaged in software industry. Therefore the appellant submits that "Market Return on Capital Employed" from Capitaline Database of software industry (Medium and Small Companies) being 11.61% should be adopted. Rate of Inflation The TPO has considered the average inflation rate at 4%. It is stated that the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iary, and whether it has and actually exercises some influence on the pricing of intra-group transactions" The TPO has not appreciated the business, commercial and economic realities. In the facts and circumstances of the case, the IPR being transferred at WDV is to be considered as at arm's length. To support its contention, the appellant relies on the Bangalore ITAT decision in the case of Intel Asia Electronic Inc v ADIT 2011-TII-14-ITAT-BANG-TP. In this case, the assessee had sold its PE as a going concern to its AE. The Hon'ble ITAT held that the only reasonable approach would be value the assets by applying the depreciation rates as provided by the Income Tax Act. The relevant extracts are as follows: "12. To break the ice in such a situation, the only reasonable approach would be to value the assets by applying the depreciation rates as provided by the Income Tax Act for it is more dynamic and so schemed to bring in a notional charge on the profit and loss account to arrive at the actual income of an assessee keeping in view of the depletion of the assets". Based on the above, the appellant submits that the IPR being transferred at WDV ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orking capital as detailed above made. Discount rate considered at 23.14% after considering changes in Beta, Risk Premium and Inflation rate as detailed above. Working capital changes as detailed above. Based on the above changes, the ALP comes to Rs. (12.64) crores - that under every method the arm's length price is less than Rs. 38.50 crores being the price received (Rs. 11.81 crores being sale price + Rs. 26.69 crores amounts received towards improvement till the date of sale). Therefore, the additions made by the TPO are without basis. 6.2 The Ld. A R came up with various case laws in support of his stand and also furnished a voluminous paper book containing 1 - 414 pages which consist of inter alia copies of (i) extracts of financial statements, (iii) written submissions and correspondences with various authorities etc., 6.3 On the other hand, the Ld. D R argued that the Ld.AO was within his realm to refer the assessee's case to the TPO for computation of ALP u/s 92C of the Act. Also, on his part, the TPO had, after due consideration of the issue at length and also analyzing the issue from various angles, arrived at a conclusion in a judicious ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tes that the AO shall by an order in writing; determine the arm's length price in relation to the international transaction in accordance with sub-section (3) of s.92C. it will be pointless to have a duplication of this exercise at two stages one after the other. On the other hand, the scheme is that after the TPO determines the ALP the matter revives before the ALP at the s.92C (4) stage where in terms of s.92CA(4) the AO will compute the total income having regard to the ALP determined by the TPO". (2) Thus, even as per the decision of Sony India's case, the AO has to make only a prima facie opinion that it is necessary or expedient to refer as case to the TPO. This applies to all case immaterial or aggregate value of international transactions. (3) As per Instruction No.3/2003 the CBDT decided that wherever the aggregate value of international transactions exceeds Rs. 5 crores, the case should be picked up for scrutiny and reference u/s 92CA be made to the TPO. Thus, it is mandatory for the AO to refer all the cases wherever the aggregate value of international transactions is more than Rs.5 crores. These instructions are binding on all the AOs. In these cases, there is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent. This is neither the law of land not there is any justification to accept such an argument. We are, therefore, of the view that assessing officer, in the light of instruction of CBDT, was duty bound to refer the matter to TPO, having regard to the purpose of specialized cell created by the revenue department to deal with complicated and complex issue arising under the transfer pricing mechanism. This case itself is a good example as to how department can be hoodwinked unless case is properly examined by persons having knowledge of principles of transfer pricing..." 8.3 Taking into account the submission of the assessee which was effectively countered by the Revenue we are of the view that the decision to make a reference does not in any manner visit the assessee with any civil consequence. The decision is to be taken by the assessing officer having regard to the question whether it will be proper for the assessing officer himself to determine the arm's length price or it will be expedient to have it determined by the Transfer Pricing Officer. There is the safeguard of seeking prior approval of the Commissioner. Whether computation of the arm's length price is made by one offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no comparables available with reference to the IPR sold by the Assessee. It was submitted that the TPO wrongly relied on an exposure draft of the International Valuation Standard, which is a non-statutory body, and moreover, the draft is dated 2009, after the date of sale of Tally by the assessee in 2006. It is further submitted that the TPO determined the ALP following the Excess Earning Method and made adjustment to the sale value of the IPR. However, as per section 92C of the Act, the ALP in relation to an international transaction has to be determined only with reference to the prescribed method. 8.5 When this was posed before the Revenue, it was explained by the Revenue that - The IVSC is a well-recognised body for valuers, having been in existence for 25 years. It is recognized by several reputed agencies such as the UK Financial Services Authority, the Hongkong Securities and Futures Commission, the SEBI and the European Public Real Estate Association, among others. Moreover, the valuation method adopted is not part of Exposure Draft, but the final Guidance Note No. 34 (Para 4.20) released in February, 2010. Sale of an IPR is not a routine transaction involving regu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bunal upheld that valuation method can be adopted to arrive at the CUP price in the case of Intel Asia Electronics Inc. v. ADIT (2011-TTI-14-ITAT-BANG-TP). 8.6 Rival submissions are carefully considered. It is to be pointed out in this case the sale of IPR is not a routine transaction involving regular purchase and sale. The assessee itself admits that there is no comparable and the assessee has arrived at the sale consideration at Rs.38.50 crores based on its own valuation. The TPO has used an established method (Excess Earning Method) and this kind of valuation is upheld by the U.S Courts. In fact, this method supplements the valuation which in effect done by CUP method, with a final valuation determined being the comparable. The Bangalore Bench of the Tribunal in the case of Intel Asia Electronics Inc. v. ADIT cited supra had upheld that the valuation method can be adopted to arrive at CUP price. The relevant finding of the Tribunal is extracted as under: "11. In the instant case, this is an isolated transaction of sale of then assessee's permanent establishment (PE) as a 'going concern' to the assessee's AE and, therefore, there are no similar transactions in an uncontrolle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter January, 2006, it was pleaded that the Bench be pleased to afford an opportunity to verify the figures submitted by the taxpayer. II. It was contended by the assessee that the TPO had erred in excluding license revenues for the period 1.4.2005 to 31.1.2006 in computing the value of the IPRs. Since the IPRs were sold on 31.1.2006, license revenues till the date of sale of IPRs have to be considered in determining the value of the IPRs. It was countered by the Revenue that all the data considered by the TPO from FY 1999-2000 to 2004-05 is based on uncontrolled transactions between the taxpayer and independent entities. For the same reason, the TPO did not consider the data for the FY 2005-06, as there are substantial related party transactions during FY 2005-06 with its associated enterprises. III. In respect of various alternative calculations suggested by the assessee for the valuation of the intangible, the Revenue submitted that - (i) the taxpayer considered the data from the FY 1999-2000 to FY 2005-06 whereas the TPO considered the data from the FY 1999-2000 to FY 2004-05 as the TPO consciously did not consider the data for the FY 2005-06 as in this year, there ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e above discounting factor (WACC) for each of the future years. The value of intangible assets sold = Net discounted cash flow after considering the cost of improvement (A) - return on fixed assets(B) - return on working capital (C)-return on human capital (D). (A) Rs. 666,92,37,810 Less: Return on fixed assets 100,27,51,104 Return on working capital(C) 57,32,27,882 Return on Human Capital (D) 7,86,25,072 The value of intangible Rs. 501,46,33,752 Price received vis-a-vis the arms Length Price: The consideration received by the taxpayer = Rs. 11,81,03,800/- (sale of intellectual property rights as per the agreement dated 31.3.2006)+Rs.26,69,43,026/- (expenditure incurred by the taxpayer on development of Tally ascent software during the period 1.4.2005to 31.1.2006 reimbursed by the AE). Thus, the total payments by the AE towards the purchase of the IPR were Rs.38,50-,46,826/-. The price charged by the tax payer to its Associated Enterprises is compared to the Arms Length price as under: Arms Length price as arrived at Rs. 501,46,33,752 Price shown in the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the reason for it. For example, a different approach may be appropriate for divorce litigation compared to the price to pay for a targeted company compared to valuation for estate tax purposes. Thus, valuation depends on the purpose at hand. The valuation process is an art and not a science, since everyone's perception is slightly different. In litigation matters, the valuation method selected should be logically consistent, reasonable, cost-effective and simply explained. 10.2 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 the US courts while arriving at the sale value of a software product. Further, the valuation under the method mainly revolves around discounted cash flow (DCF) analysis which is known to economists for the times immemorial. Thus, the TPO used a reasonable well accepted method of valuation of intangibles including software products and accepted by courts in the countries like in USA, where the TP regime is well developed. At the ris ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ating future turnover till 2012 based on the past performance as well as the data available in the public domain. Step 2 : The cash flows (EBIDTA - earning before interest-tax, depreciation and amortization) are estimated in the future years based on the performance of the taxpayer in terms of EBIDTA to sales from F.Y. 1999-2000 to F.Y. 2004-2005. The data for the FY 2005-2006 was not considered as the intangibles is transferred during the year and there are related party transactions during the year which may initiate the reliability of the data. Step 3 : The future cash flow are discounted to the present value by using a constant discounting factor which is WACC WACC = We Ce + Wd Cd Where We = Weight of Equity Ce = Cost of Equity We = Weight of Debt Cd = Cost of Debt The Ce = Rf + BxRf Where Rf = Risk Free Return or Return on long term Government Bonds B = B of the taxpayer As the taxpayer is not a listed company, the B of a similar company, Sankhya Infotech Ltd. has been considered. This company is in development and sale of software products for aviation industry. B has been taken from BSE Index which is 0.58. Rp = Ris ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... man capital is discounted to the present value using the above discounting factor (WACC) for each of the future years. To consider the return on human capital, various article have been read. As for the Annual Report of the Infosys Technology Ltd. for the FY 2005-06, the company earned 5% return on its human capital. The same return has been applied in the case of the tax payer on the above arrived value of human capital. Thus, the value of intangible asset is computed as under: The value of intangible asset = A-B-C-D-E = F The arm's length price of the intangible asset is therefore F as computed above. We agree with the TPO in adopting the above method and having concluded in the preceding paragraph that the excess earning method adopted by the TPO to arrive at the ALP is correct, we reject the assessee's contention that the ALP should be computed based on actual sales and not projection adopted by TPO. The reasons for rejecting the above contention of the assessee are as follows: (i) When an intangible is sold, the risk of future income potential lie with the buyer. (ii) When tally software was sold in 2006, there was no forecast about the global economy recess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ues. There is force in the contention of the assessee that the sale data for the period from April, 2005 to Jan 2006 was vital to arrive at correct projection which reflects the true earning potential of the IPR at the time of sale. Therefore, in the course of this order, we are directing the TPO to include the figure for AY 2006-07 for arriving at the value of ALP. 10.4 In the AY 2005-06, it was the claim of the assessee that there has been a sale return of Rs. 111.04 crores. The sale return has to be reduced while calculating CAGR which is, in our view, reasonable and justifiable. This vital fact has been given a go-by. The TPO had considered the sales for the AY 2005-06 at Rs. 198.15 crores which was termed by the TPO as the base for computing CAGR and future revenues. It was true that there was a substantial upward trend in the turnover during the AY 2005-06, however, in the immediately preceding and succeeding AYs there was plunge in the turnover [source: Figures supplied by the assessee]. This vital fact should have been taken cognizance of while computing CAGR and estimating future revenues by the TPO. During the course of hearing, it was submitted that with the introducti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urrent assets (except inter-corporate deposits) and provisions. Further, it is directed that the sale returns of Rs. 111.04 crores has to be reduced from the sundry debtors while calculating the working capital. We are of the view the same should also be considered while computing working capital ratio. 11. Taking into account the rival submissions, diligent perusal of the relevant records and also the documentary evidences adduced by either party, the TPO is directed to recalculate the ALP keeping in view the following specific directions of this Bench, namely: I. Method of valuation of ALP: (i) Considering the nature of transaction and in the absence of uncontrolled independent comparable companies, we are of the considered view that the Excess Earning Method [EEM] adopted by the TPO in the present circumstance is reasonable and, therefore, he is directed to adopt the same EEM while recalculating the ALP; (ii) The reason for adopting EEM method that it is only an internal CUP method, wherein, it is seen what is the price for which the same product would have been sold by the assessee to an independent entity. This price also reflects the price at which the assessee w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s got no relevance on the actual revenues during the future years. We also make it clear that the actual CAGR shall be adopted by the TPO without any discount. (ii) Estimation of future cash flows: We are in agreement with the method adopted by the TPO in estimating the cash flows except that the revenues for the AY 2006-07 has to be considered and is to be taken as the base year for future projection of revenue for the reasons recorded supra [Para (i)]. (iii) Estimation of discounted future cash flows: We are in total agreement with the TPO in estimating of discounted future cash flows except in calculation of BETA where the TPO, even after having considered three companies as comparable to the assessee's segment of distribution of products, had wrongly took only one company's Beta which, in our considered view, was not reasonable. Therefore, an average of three companies' beta has to be taken for calculation. (iv) present value of improvement: we agree with the TPO on this score. (v) Future cash flows: We agree with the TPO on this point. (vi) Return on fixed assets: We agree with the stand of the TPO on this issue. (vii) Return on working capital: we do agree ..... X X X X Extracts X X X X X X X X Extracts X X X X
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