TMI Blog2013 (8) TMI 281X X X X Extracts X X X X X X X X Extracts X X X X ..... future 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 - Suitable directions have been issued in respect of revenues only and not for the costs. The TPO had, thus, erred in mentioning that there were no specific directions given with respect to the costs of the previous years - The TPO has also erred in mentioning that current year data has to be considered for the projection of future earnings. In fact, specific direction was given, as can be seen from the earlier order that revenues for the current year i.e., 2006-07 has to be considered and is to be taken as the base year for future projections - Decided in favour of assessee. TPO has erred in mentioning that the Marketing Division was non-existence on the date of valuation. The TPO has failed, perhaps, to properly understand that TSPL transferred intangible properties TSFL, Dubai and its marketing division to Tally India Pvt. Ltd and whole subject matter of this valuation is this transfer and the marketing division was in existence before the date of transfer. The transfer of assets and the marketing division is done simultaneou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e by the TPO u/s 92CA r.w.s. 254 of the Act. The TPO's order u/s 92C r.w.s. 254 of the Act dated 7.11.2012 is an order giving effect to the Tribunal's order in assessee's case in ITA No.1235/B/2010 dated 26.9.2011. The relevant assessment year is 2006-07. 2. To a query from the Bench as to the maintainability of this appeal before us, both the learned A.R. and the learned D.R relied on the judgment of the Hon'ble Punjab Haryana High Court in the case of Paras Rice Mill v. CIT Another reported in (2009) 18 DTR (P H) 149 dated 19.9.2008 and submitted that as per the ratio laid down by the Hon'ble High Court (supra), this appeal lies before the Tribunal. 2.1. We have, with due regards, perused the ruling of the Hon'ble Court (supra) wherein the Hon'ble Court had categorically ruled that: "6.............We are of the opinion that the reasoning of the learned Tribunal that since the AO had merely given effect to the order of the Tribunal, an appeal against the said order would lie only before the Tribunal and not before the CIT (A) is correct....." 2.2. In view of the judgment of the Hon'ble P H High Court (supra) and the submissions of both the parties, we proceed to di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which took place in the intervening period is as under: 4.2. Aggrieved by the stand of the AO in his initial order u/s 143(3) r.w.s 144C of the Act dated 20.10.2010 in making an adjustment of Rs.222.13 crores [Rs.260-63 crores - ALP of Rs.38.5 crores) on the basis of the directions of the DRP dated 30.9.2010 in respect of sale of IPR to the assessee's AE at Dubai, the assessee company had approached the earlier Bench of this Tribunal for relief. After due consideration of the rival submissions and for the elaborate reasons recorded in its findings, the earlier Bench in its order dated 26.9.2011(supra) had directed the TPO to recalculate the ALP, keeping in view, the specific directions contained in its findings. 4.3. The TPO had, vide her order u/s 92A r.w.s. 254 of the Act dated 7.11.2012, worked out the revised adjustment, consequent to the directions of the earlier Bench, at Rs.167.57,38,965/- for the reasons recorded in the said order. Based on the TPO's conclusion of the revised adjustment u/s 92CA of the Act, the AO, in his order u/s 143(3) r.w.s. 92CA r.w.s. 254 of the Act dated 11.1.2013, revised the assessee's total income at Rs.167.87 crores as against the assessed in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2) 425.78 Cumulative effect of mistakes committed in step Nos.2 and 4 6 Estimation of return on fixed assets 27.25 72.13 (44.88) (i) original method has been abandoned; (ii) sales return of Rs.111.04 crores has not been reduced from the turnover of FY 04-05 for the reasons stated in 4 above 7 Estimation of return on working capital 59.58 250.50 (190.92) (i) sales return of Rs.111.04 crores has not been reduced from the turnover of FY 04-05 for the reasons stated in 4 above; (ii) Inter-corporate deposits and dues receivable from subsidiary company have not been included in current assets despite the direction of ITAT. 8 Estimation of return on capital 05.05 06.88 (1.83) (i) sales return of Rs.111.04 crores has not been reduced from the turnover of FY 2004-05 for the reasons stated in 4 above - that the above chart would reveal the following: (a) the sale consideration received by the assessee on the transfer of IPR was Rs.38.5 crores; (b) the final assessment order of the TPO dated 23.9.2010 pursuant to the directions of the DRP enhanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y Tally Dubai. Thus, after restructuring - (i) TIPL purchased licenses from Tally Dubai and sold them to customer. TIPL also did marketing to promote its sale of Tally Licenses for customers; (ii)TSPL only provided software services to Tally Dubai and other functions were performed either by Tally Dubai or TIPL; (iii)Tally Dubai legally owned the IPRs which are purchased from TSPL. It sold software licenses to TIPL; - that when restructuring took place, TSPL transferred IPRs to Tally Dubai. TSPL also transferred 'Marketing Division' to TIPL. Therefore, while making projection of future cash flows on the basis of historical data in the case of TSPL, we cannot make projections making necessary adjustment in this regard. Adjustment is required due to very important event that took place on 30.1.2006 that has its bearing on future cash flow. This event is transfer of marketing division by TSPL to TIPL. Due to this transfer on 30.1.2006, in projected cash flows, there should be no expenditure on account of marketing which was existing up-to 30.1.2006 when marketing was the Division of TSPL and marketing expenditure was appearing as part of costs in historical data. Therefore, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the net cash flow generated by various assets including the IPRs at first stage and net cash flow generated by IPRs calculated by deducting cash flow due to other assets at second stage; - that the TPO had followed all the directions given by the Hon. Tribunal and had not overstepped in any manner as alleged by the assessee while giving effect to the order of the Hon'ble Tribunal; - that the allegation of the assessee that the TPO had adopted other method in her order dated 7.11.2012 by abandoning the method adopted in the original order is total wrong. The TPO had made GAGR of revenues and CAGR of costs and difference of two represents Compounded Annual Growth of net cash flow. This is not a new concept. Separate consideration of GAGR of revenue and cost had become necessary to give effect to the directions of the Tribunal. Marketing expenses have not been ignored. As discussed in detail, marketing expenses did not exist after 31.1.2006 as marketing division had been demerged and transferred by TSPL to TIPL. The TPO has not considered marketing expenditure after 31.1.2006 as they do not exist and not simply due to reliance placed on draft guidelines issued by ISC. - that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... performance: (i) With reference to the actual operating revenue from the AY 1999-2000 to 2006-07, the sale return of Rs.111.04 crores for the AY 2005-06 has to be reduced from the operating revenue and only the net has to be taken as this is the correct accounting standard to be followed for arriving at CAGR. As can be seen from the records, the revenue for the AY 2005-06 looks abnormal compared to other AYs and there was also revenue to the extent of Rs.111.04 crores which did not materialize due to distributors being not able to sell the stocks which was forced on them in a greater quantity with an anticipation of good revenues due to introduction of VAT. In the same calculation, the revenue for the year 2006-07 has to be adopted. As the date of valuation of IPR was on 31.1.2006, the actual revenues upto January, 2006 has to be taken and the next two months will have to be projected based on the performance of the previous ten months. As the assessee had sold only IPR and the calculation of revenues are from Tally Licenses which were sold to third parties, the sale of IPR to a related party transaction has no relevance for this sale of Tally license. Hence, the current year da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gher than the total actual consideration (Rs.38.50 crores) received, the TPO should adopt the higher price arrived at." 4.5.2. However, on a careful perusal of the order of the TPO giving effect to the directions contained in the earlier order of this Bench, as rightly highlighted by the learned AR, it is observed that there were variations and total inconsistencies while implementing the directions of the earlier Bench. To illustrate further, for instance, the following inconsistencies are observed: (1) Estimation of future cash flows: (i) the method adopted in the original order has since been abandoned; instead, a new method called 'CAGR of Cost' has been adopted to estimate the future expenses; (ii) marketing expenses which constitute a significant portion of total expenses have been ignored while computing 'CAGR of Cost' which contributed in increasing estimated cash flows; (iii) while calculating CAGR of Cost, the TPO had considered the cost of FY 2005-06 only for ten months without appreciating that for other years, the cost of twelve months was taken. For uniformity for FY 2005-06 costs of twelve months should have been adopted. It appears that the TPO had switche ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... produce step 2 in our order dated 26-09-2011 that "(On page 59) (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(1)]" This clearly vindicates that the earlier Bench, had, in fact, in its original order considered the issue wherein calculation of costs for the previous years,the marketing costs have been included and did accept the working of TPO for calculation of costs. Suitable directions have been issued in respect of revenues only and not for the costs. The TPO had, thus, erred in mentioning that there were no specific directions given with respect to the costs of the previous years. In the earlier order, the Bench was in agreement with the TPO that the total cost has to be taken while arriving at CAGR for the previous years. The TPO has also erred in mentioning that current year data has to be considered for the projection of future earnings. In fact, specific direction was given, as can be seen from the earlier order that revenues for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -05 relates to AY 2005-06. As per Step 1, the turnover for the FY 2004-05 relating to FY 2005-06 is Rs 72,20,84,213/- whereas the TPO has arrived at the turnover at Rs 198,15,17,988/- which is totally wrong. In the original order passed by TPO, the turnover arrived at Step 1 has been taken in Step 4 also and no specific directions were given by the earlier Bench for arriving at these revenues in this step. The TPO has to reduce sales returns against sales in all the steps and cannot arbitrarily include in some steps. In the earlier order, we had not given specific directions as we found that in the original TP order the revenue are same in Step I and Step 4. In other words, the revenue is arrived in Step 1 has to remains constant in all other steps because revenue determination is only in Step 1. STEP 5: Discounted cash flows: The TPO is directed to rework the calculations in this step after rectifying the mistakes committed in Step 2 and Step 4 of the order STEP 6: Return on fixed assets: The TPO has again erred in taking the revenues which is different from the revenues arrived at Step 1 and again we would like to reiterate that in the original order the revenues were the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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