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TMI Blog2013 (8) TMI 281X X X X Extracts X X X X X X X X Extracts X X X X ..... rt 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 dispose of the appeal on merits. 3. The assessee has raised seven grounds in its Memorandum of appeal. The relevant issues agitated by the assessee are listed out as below: (1) The lower authorities have erred in - (a) adopting flawed methodology in computing the value of the IP; (b) adopting a method of valuation different from that followed in the original order while computing future cash flows; (c) estimating future expenses by introduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsideration 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 income of Rs.222.43 crores as per the original assessment order dated 20.10.2010. 4.4. Aggrieved with the stand of the AO, the assessee company has come up before us with its present appeal. 4.4.1. During the course of hearing, the submissions made by the learned A R are summarized as under: - that in pursuance of the directions of the earlier Bench, the assessee was called upon by the TPO's letter dated 1.10.2012 to furnish objection(s), if any, to the propose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 enhanced the value of IPR to Rs.260.64 crores; (c) the direction of the ITAT, if implemented, would result in a value which is far less than the consideration actually received by the assessee; (d) that the present order of the TPO has enhanced the value of Rs.38.5 crores to Rs.206.08 crores; and that this enhancement was because of failure to give deductions of the sales return of Rs.111.04 crores at every step, abandoning the methodology originally resorted to and upheld by the Tribunal and resorting to an entirely a new methodology, introducing a new concept called 'CAGR of cost' unilaterally excluding marketing expenses, thus artificially increasing the estimated cash flows, exclusion of inter-corporate deposi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, the TPO on page 8 of TP draft order dated 7.9.2012 has written that since the marketing division has been transferred to TIPL, in projection of future cash flows marketing division has not been taken into consideration as it has been transferred to TIPL and this expenditure does not exist on the date of valuation. The reading of the relevant paragraphs of the order would make it clear that once marketing division is out on its transfer to TIPL, projected cash flow would increase as compared to historical cash flow. In this process, directions of the Tribunal have been followed properly and also there is no violation and it has been mentioned in the order on page 9 that excess earning method (EEM) has been applied by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 with regard to the assessee's objection for exclusion of inter-corporate loan from current assets while calculating contribution of net working capital in cash flow, it was the case of the Revenue that though working capital contributes to the growth of business and contributes in cash flow, but, inter-corporate loan to related party as they do not contribute to grow of business and cash flow of the assessee; and that using excess earning method, the TPO had reduced the contribution made by different assets owned by the assessee in overall cash flow and find out the residual cash flow attributed to IPRs. It was the opinion of the Revenue that the inter-corporate loans do not fall in this category and, hence, excluded. 4.5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted. 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 data i.e., AY 2006-07 has to be included as they relate to third party transactions and the projections have to be made for the future years based on the revenues of AY 2006-07 which is also in accordance with the provisions of rule 10B(iv) which mandate the use of current year data. The projection has to be made for next six years which has rightly been adopted by the TPO. Further, the assessee's contention to adopt the actual revenues for the future years which are available now cannot be accepted now for a simple reason that the ALP was calculated on the date of sale which was in January, 2006 itself and also under EEM future revenues will be projected based on the previous year data keeping the current year's data as the base whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ute 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 switched over to the new concept by taking cue from exposure draft of the International Valuation Standards Council placed in the public domain in January, 2009 for inviting public suggestion on valuation of intangible assets instead of final guidelines which was issued only in 2010. (2) Estimating cost of improvement: The sales return of Rs.111.04 crores has not been reduced from the turnover of FY 2004-05, apparently, the TPO was in presumption that the earlier Bench had directed to reduce sale return only while calculating CAGR and debtors without appreciating the fact that the earlier Bench had categorically held that those sales did not materialize and, thus, should be reduced from sales. (3) Estimation of discounted cash flow:- Cumulative ef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ific 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 the current year i.e., 2006-07 has to be considered and is to be taken as the base year for future projections. The Bench was in agreement with the method adopted by TPO in the earlier order dated 30-10-2009 wherein the total costs were considered for arriving at CAGR and, thus, the TPO was incorrect, while giving effect to the findings of the earlier Bench, in changing the method of calculation after considering the facts in the original order. (ii) Further 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 same in all the steps and the TPO's contention was accepted about the revenues and, hence, agreed with the original order of TPO. Now in the revised order, the TPO cannot take a different view on the revenues which is totally incorrect as the sales returns has to be reduced in all the steps not restricting to only in Step 1. STEP 7: RETURN ON WORKING CAPITAL: (i) Sales return of Rs.111.04 crores has to be reduced from the turnover (i) for AY 2005-06 for the reasons stated in Step 4. STEP 8: Return on Human Capital: Sales returns for the AY 2005-06 has to be reduced for the reasons stated in Step 4. 4.5.4. In substance, the AO is directed to adopt the revised/modified transfer pricing adjustment which will be worked out by the TPO based on the above directions. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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