2018 (9) TMI 212 - AT - Income Tax

Arm s length price adjustment in respect of consideration for sale of shares in an Indian company - assessee company to another non-resident entity, is unsustainable in law - Held that - On a technical note, a price decided, even if that be so, between the associated enterprises-as the assessee and the buyer of shares are, can never be a valid CUP input for the simple reason that it is only the transaction value for transactions between the independent enterprises that the transaction value can be considered as a comparable uncontrolled price. - In an intra AE situation, the transaction value cannot be said to be an uncontrolled price at all. Nothing, therefore, turns on the original agreement terms and it has no relevance in determination of arm s length price. The very approach of the TPO is thus vitiated in law. In the present case, the company in which shares were transferred was not in the winding up nor was there any reasonable prospect of its going into liquidation. In these circumstances, the adoption of Net Asset Value or book value was not really warranted. We reject the same. Given the fact that it was treating as a going concern, the valuation on the basis of future earnings was quite justified. To this extent, we disapprove the stand of the authorities below. However, since the TPO has not examined that aspect of the matter at all and simply proceeded on the basis of net asset value, we also deem it fit and proper to remit the matter at the assessment stage in the light of fresh determination of arm s length price in the light of our directions above. TPO shall discard the computations based on Net Asset Value and adopt an appropriate method of determining the ALP of shares sold by the assessee to its AE, and if such an ALP is found to be more than the transaction value of US 35,08,000, the ALP adjustments will be required. The matter is thus required to be adjudicated afresh in a fair and reasonable and legally sustainable manner. While doing so, he will decide the matter in accordance with the law, by way of a speaking order and after giving a fair and reasonable opportunity of hearing to the assessee.

Summary

Issues Involved:
1. Arm’s Length Price (ALP) adjustment for the sale of shares.
2. Correct conversion rate for foreign currency.
3. Method of valuation for unquoted shares.
4. Role of Transfer Pricing Officer (TPO) versus Assessing Officer (AO).

Detailed Analysis:

1. Arm’s Length Price (ALP) Adjustment for Sale of Shares:
The primary grievance of the assessee was regarding the ALP adjustment of ?1,28,39,903 for the sale of shares in an Indian company to a non-resident entity. The assessee, a Singapore-based company, sold shares of Topcon Sokkia India Pvt Ltd (TSIPL) to Topcon Corporation, Japan (TC-J) based on a 'Stock Purchase Agreement'. The sale price was US $35,08,000, which was higher than the fair market value determined by an independent valuer using the discounted cash flow (DCF) method but lower than the Net Asset Value (NAV) method. The TPO, however, determined the ALP based on the NAV method, concluding that the shares should have been sold for US $37,98,298.50, leading to an addition of ?1,39,16,235 in capital gains. The Tribunal found the TPO's approach flawed, emphasizing that the TPO's role is limited to determining the ALP and not extending to the AO's domain of determining taxable income.

2. Correct Conversion Rate for Foreign Currency:
The TPO noted discrepancies in the conversion rates used by the assessee for converting the sale consideration from USD to INR. The assessee used a conversion rate of 44.23, whereas the TPO argued that the correct rate should be 45.21, based on the date of receiving the first and major amount. This adjustment was made as per Section 48 read with Rule 115A of the Income Tax Act, 1961, which mandates using the conversion rate on the date of receipt of the consideration.

3. Method of Valuation for Unquoted Shares:
The Tribunal discussed the appropriate method for valuing unquoted shares, referencing the Supreme Court judgment in CGT Vs Kusumben D Mahadevia. The Court emphasized that for a going concern, the profit-earning method is generally applicable, while the NAV method is suitable only in exceptional circumstances or when the company is ripe for liquidation. The Tribunal rejected the TPO's reliance on the NAV method, directing that the ALP should be determined using a method that considers the price charged or paid in similar transactions between non-associated enterprises.

4. Role of Transfer Pricing Officer (TPO) versus Assessing Officer (AO):
The Tribunal reiterated that the TPO's role is confined to determining the ALP and should not extend to determining the taxable income, a domain exclusive to the AO. Citing the jurisdictional High Court's decision in Cushman & Wakefield India Ltd Vs CIT, the Tribunal emphasized that the TPO should not intrude into areas earmarked for the AO, such as determining whether a service benefits the assessee.

Conclusion:
The Tribunal allowed the appeal for statistical purposes, remitting the matter back to the assessment stage for fresh determination of the ALP in accordance with the law and the Tribunal's directions. The TPO was instructed to discard the NAV-based computations and adopt an appropriate method for determining the ALP. The related appeal concerning rectification of mistakes was dismissed as infructuous since the main assessment was remitted back.

Orders:
- ITA No. 2/Del/2017: Allowed for statistical purposes.
- ITA No. 5030/Del/17: Dismissed as infructuous.

Pronounced in the open court on the 23rd day of August, 2018.