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2023 (3) TMI 191 - AT - Income TaxTP Adjustment - TPO/DRP has adopted DCF Method for determining the ALP of the transaction of sale of shares of ECL to ECHL, Mauritius - HELD THAT - TPO/DRP has adopted the actual published results of the Appellant instead of projected future cash flows as on the date of the transactions. Reliance on behalf of the Appellant was placed on the decision of the Hyderabad Bench of the Tribunal in the case of DQ (International) Ltd. 2022 (12) TMI 379 - ITAT HYDERABAD wherein it was held by the Tribunal that while computing value of intangible asset by using DCF Method the future projections cannot be substituted with the actual figures. We accept the contention of the Appellant that for the purpose of arriving at the valuation using DCF method actual figures cannot be substituted for future projections. Fair market value of share of ECL representing the ALP - HELD THAT - We concluded that the DCF Method could not be adopted in the facts and circumstances of the present case as the Appellant is an investment company incorporated on 30.01.2007 with unpredictable income/cash flows. This takes us to the method adopted by the Appellant for determining the value of shares of ECL. We note that the shares of ECL were sold by the Appellant on 23.06.2008. However, the valuation report is based upon the audited financial statements of ECL as on 31.03.2008. In the synopsis of arguments filed before the Tribunal, the Appellant had, without prejudice basis, stated that the value of shares determined on 23.06.2008 by following the method prescribed in Rule 11UA of the Income Tax Rules, 1962 was INR 112/- this was accompanied by unaudited financial statements as on 23.06.2008. Rule 11UA is also based on Net Asset Value Approach adopted in the valuation report relied upon by the Appellant to support the valuation of shares of ECL. Therefore, accepting the without prejudice submission of the Appellant, we adopt the value of INR 112/- as the fair market value of share of ECL representing the ALP. TP Adjustment - debt as equity (such as general/specific anti-avoidance rules) - HELD THAT - In the case of Besix Kier Dabhol SA 2012 (10) TMI 817 - BOMBAY HIGH COURT it was held in absence of specific provision in the Act incorporating thin capitalization rules, the TPO was not permitted to re-characterize debt as equity for making transfer pricing adjustments. It is admitted position that for the relevant assessment year there were no provisions in the Act providing for secondary transfer pricing adjustment and/or for making transfer pricing adjustment by treating debt as equity (such as general/specific anti-avoidance rules). The amount of receivable outstanding has arisen on account of transfer pricing adjustment made by the TPO/AO. In our view, the transfer pricing adjustment made by the TPO/AO (by treating the aforesaid amount as interest on outstanding receivables) is clearly in the nature of secondary adjustment and cannot be sustained in the absence of specific provision in the Act providing for the same. Disallowance u/s 14A r.w.r.8D - HELD THAT - We note that in the case of Pr.CIT, Patiala Vs State Bank of Patiala 2018 (11) TMI 1565 - SC ORDER had held that that amount of disallowance under Section 14A of the Act cannot exceed the amount of exempt income. It is admitted position that the Appellant had earned exempt income of INR 9,136/- only. Accordingly, following the aforesaid judgment of the Hon‟ble Supreme Court, we restrict the addition under Section 14A of the Act to INR 9,136/-. Accordingly, Additional Ground No. 1 to 3 raised by the Appellant are partly allowed.
Issues Involved:
1. Assessment of total income and loss. 2. Addition on account of arm's length price of shares and interest on deemed loan/receivable. 3. Determination of arm's length price using different valuation methods. 4. Adoption and rejection of valuation methods by TPO and DRP. 5. Disallowance under Section 14A of the Income Tax Act. Detailed Analysis: Issue 1: Assessment of Total Income and Loss The Appellant contested the Assessing Officer's (AO) decision to assess the total income at a loss of Rs.27,88,16,988/- against the returned loss of Rs.87,10,07,508/-. This issue was general and did not require adjudication. Issue 2: Addition on Account of Arm's Length Price of Shares and Interest on Deemed Loan/Receivable The AO made an addition of Rs.46,69,44,000/- for the arm's length price of shares transferred and Rs.5,41,14,332/- for interest on the deemed loan/receivable to the Associated Enterprise (AE). The Transfer Pricing Officer (TPO) determined the arm's length price (ALP) of the shares at Rs.7,635/- per share, which was enhanced by the Dispute Resolution Panel (DRP) to Rs.9,338.88 per share. The Appellant argued that the valuation report filed by them valued the shares at Rs.4.79 per share based on the method prescribed by the erstwhile Controller of Capital Issues (CCI) as per the RBI regulations at the time of transfer. Issue 3: Determination of Arm's Length Price Using Different Valuation Methods The TPO adopted the Discounted Cash Flow (DCF) method for determining the ALP, which the Appellant contested, arguing that the Net Asset Value (NAV) method was more appropriate. The Appellant contended that the TPO erred in using actual profits instead of projected profits and in other aspects of the DCF method application. Issue 4: Adoption and Rejection of Valuation Methods by TPO and DRP The Tribunal noted that the TPO rejected the external Comparable Uncontrolled Price (CUP) method adopted by the Appellant without pointing out any infirmity in the data or method used. The Tribunal accepted the Appellant's contention that for the purpose of arriving at the valuation using DCF method, actual figures cannot be substituted for future projections. The Tribunal also noted that ECL, being an investment company, had inconsistent revenue streams, making the DCF method inappropriate. The Tribunal referred to Indian Valuation Standard 2018, which recommended using other valuation approaches in cases of significant uncertainty about future cash flows. Issue 5: Disallowance Under Section 14A of the Income Tax Act The Tribunal addressed the disallowance of Rs.7,11,32,189/- made by the AO under Section 14A of the Act. The Tribunal admitted the additional grounds raised by the Appellant and noted that the disallowance under Section 14A cannot exceed the amount of exempt income. Since the Appellant had earned exempt income of Rs.9,136/-, the Tribunal restricted the disallowance to that amount, following the judgment of the Hon'ble Supreme Court in the case of Pr.CIT, Patiala Vs State Bank of Patiala. Conclusion: The Tribunal partly allowed the appeal, rejecting the DCF method adopted by the TPO/DRP and accepting the NAV method with a fair market value of Rs.112/- per share as the ALP. The Tribunal also deleted the transfer pricing addition of Rs.4,57,88,125/- as it was in the nature of secondary adjustment, which was not permissible in the absence of specific provisions in the Act. The disallowance under Section 14A was restricted to the amount of exempt income earned by the Appellant.
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