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2023 (3) TMI 468 - AT - Income TaxTP Adjustment - related parties / associated enterprise or not - Re-computation of arm's length price of shares sold by the assessee - transaction at the time of entering into SPA were between two unrelated parties and thus transfer pricing provisions are inapplicable - HELD THAT - Section 92A(2) of the Act states that two enterprises shall deemed to be an associated enterprises if, at any time during the previous year one enterprise holds, directly or indirectly, shares carrying not less than 26% of the voting power in the other enterprise. Admittedly, in the instant case Relay BV holds controlling stake in USL of more than 26% i.e. 26, 37% on 28.11.2013 i.e. during the relevant previous year. Therefore in light of the clear provisions of Section 92A(2) of the Act, which uses the expression if at any time during the previous year we find no merit in the contention of the learned Sr. Counsel. The literal reading of Section does not give rise to any absurdity or unjust result. Hence the contention that the literal interpretation should not adopted is rejected and we hold that the impugned transaction has been rightly put through the test of benchmarking. Therefore the contentions raised in ground Nos. 3 4 are rejected. Benchmarking of share transfer in the impugned transaction - There has to be a same or similar uncontrolled transaction with or between non associated enterprises under similar circumstances considering all the relevant facts. In the present case, the share purchase agreement was entered into for transfer of 25.1% of shares of USL. If non associated enterprises had entered into similar agreement, they would not have agreed for the transfer of shares at the stock exchange price as it involves transfer of control. Transfer of shares in stock exchange cannot be equated with transfer of shares involving transfer of control. Therefore, the price determined by the TPO is upheld for the above reasons and the grounds No. 5 to 10 raised by the Assessee are accordingly dismissed. Method and computation mechanism adopted by the learned TPO - DCF method is statutorily as well as internationally accepted method for valuation of shares. We therefore are of the opinion that the TPO has not erred in adopting such method. The data considered for computing the value using such method is also questioned particularly on the aspect of substantial variations in projected cash flows vis-a-vis the actual cash flows. In the context of section 56(2)(viib) read with rule 11UA, this Tribunal in Flutura Business Solutions (P) Ltd. 2020 (7) TMI 71 - ITAT BANGALORE and other similar cases, has held that the valuation under DCF method can be based only on estimated future projections and actual figures available subsequently cannot be replaced. Applying the same, the estimated cash flows considered by the TPO using date available in Bloomberg database for the relevant period, is justified. Accordingly, these grounds raised by the Assessee are dismissed. Differential tax on account of rate of tax on capital gains - rate of tax applied by the AO in computing tax on long term capital gains offered - HELD THAT - We direct the AO to apply the rate of 10% as provided under the proviso to section 112(1) of the Act and compute the tax on long term capital gains on sale of listed shares accordingly. Therefore, the grounds raised by the Assessee are allowed.
Issues Involved:
1. Re-computation of arm's length price of shares sold by the assessee. 2. Differential tax on account of rate of tax on capital gains. Detailed Analysis: 1. Re-computation of Arm's Length Price of Shares Sold by the Assessee: - Facts: The assessee, Palmer Investment Group Ltd., sold 43,76,771 equity shares of United Spirits Ltd. (USL) to Relay BV at Rs. 1,440 per share under a Share Purchase Agreement (SPA) dated 09.11.2012. The Transfer Pricing Officer (TPO) determined the arm's length price (ALP) of these shares to be Rs. 2038.79 per share using the Discounted Cash Flow (DCF) method, which was later revised to Rs. 2039.25 per share by the Dispute Resolution Panel (DRP). - Contentions: The assessee argued that the transaction was between independent parties and thus not subject to transfer pricing provisions. It was also contended that the market price of shares should be considered for ALP determination, and the DCF method was inappropriate. - Tribunal's Findings: The Tribunal rejected the assessee's contention that the transaction was between unrelated parties, citing Section 92A(2) of the Income Tax Act, which deems enterprises to be associated if one holds 26% or more of the voting power in the other at any time during the previous year. The Tribunal also upheld the use of the DCF method by the TPO, noting that the transaction involved the transfer of controlling interest in USL, which justified the valuation method used. The Tribunal referenced the Supreme Court's decision in Vodafone International Holdings B.V. vs. Union of India, which clarified that controlling interest is an inextricable part of shareholding and affects its valuation. The Tribunal also cited the Mumbai Bench's decision in Lanxess India (P.) Ltd. v. ACIT, which supported the inclusion of a control premium in the valuation of shares involving a controlling stake. - Conclusion: The Tribunal upheld the TPO's valuation of Rs. 2039.25 per share, dismissing the assessee's grounds related to the ALP determination. 2. Differential Tax on Account of Rate of Tax on Capital Gains: - Facts: The assessee computed long-term capital gains (LTCG) on the sale of listed shares at a 10% tax rate based on the proviso to Section 112(1) of the Income Tax Act. The Assessing Officer (AO) applied a 20% tax rate, arguing that the benefit of the lower rate did not apply to non-residents. - Contentions: The assessee argued that the lower rate of 10% should apply, citing the Delhi High Court's decision in Cairn UK Holdings Ltd. v. DIT, which set aside a contrary ruling by the AAR. - Tribunal's Findings: The Tribunal agreed with the assessee, relying on the Delhi High Court's judgment in Cairn UK Holdings Ltd., which clarified that the proviso to Section 112(1) applies to non-residents and allows for a 10% tax rate on LTCG from the sale of listed shares. - Conclusion: The Tribunal directed the AO to apply the 10% tax rate on the LTCG, allowing the assessee's grounds on this issue. Conclusion: The appeals filed by the assessees were partly allowed. The Tribunal upheld the TPO's valuation of shares using the DCF method, considering the transfer of controlling interest. However, it directed the AO to apply the 10% tax rate on LTCG from the sale of listed shares, aligning with the Delhi High Court's interpretation of Section 112(1).
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