2019 (3) TMI 677 - AT - Income Tax

Article 25 of India-Italy DTAA - Transfer pricing adjustment - capital gains arising on sale of shares by the appellant foreign company to another non resident associated enterprise - violation of the non discrimination clause under Article 25(1) of the India-Italy Tax Treaty - whether the transfer pricing provisions under the Act do not apply to a transaction of transfer of shares entered into between two Indian companies? - HELD THAT - Nationals of a contracting state i.e. the appellant company shall not be subjected in other contracting state i.e. India to any taxation or any requirement connected therewith, which is there or more burdensome than the taxation and connected requirements to which nationals i.e. Indian national of that other state i.e. India in the same circumstances and under same conditions are or may be subjected. In our understanding, under Article 25 of this India Italy DTAA and an Italian national shall not be subjected to in India to any taxation or any requirement connected therewith to which Indian nationals in the same circumstances and under the same conditions are or may be subjected which is more burdensome to Italian national. This means that if an Indian national legal person , enters into any international transactions with its Associated Enterprises, will it not be subjected to transfer pricing proceedings? The answer is YES . The Indian national will be subjected to transfer pricing proceedings. Therefore, in our considered opinion, the transfer pricing proceedings taken in the case of the appellant company is not at all discriminating and, therefore, do not fall within the purview of Article 25 of the India Italy DTAA as claimed by the appellant. On the given facts and circumstances of the case, we do not find it necessary to discuss the judicial decisions relied upon by the ld. counsel for the assessee as they are totally different from the facts of the case in hand. Thus, the additional ground raised by the assessee is, accordingly, dismissed. AO s no power to substitute actual consideration with notional consideration u/s 45 r.w.s 48 - HELD THAT - On finding that there was an international transaction between the AEs, the Assessing Officer referred the matter to the TPO for determination of Arm s length Price. In our considered opinion, the Assessing Officer has not substituted actual consideration with notional consideration but has made adjustment as per the report of the TPO after receiving directions from the DRP. Section 92 of the Act provides that any income arising from an international transaction shall be computed having regard to the arm s length price. Section 92C(4) provides where an Arm s length price is determined by the Assessing Officer under sub-section (3), the Assessing Officer may compute the total income having regard to the ALP so determined. This means that after determining the ALP, the total income of the assessee is computed having regard to the ALP. Therefore, it is not a case of substitution of actual consideration with notional consideration but adjustment of ALP as determined by the TPO. This objection also fails. TPO rejected the share valuation report furnished by the assessee - HELD THAT - The market risk premium is generally computed as return on market index i.e. SENSEX over a long period of time. We find that market risk premium for various countries is also computed by reputed valuers like Professor Aswath Damodaran. He computes market risk premium from time to time for various countries and posts the same on his website/ in public domain. We find that in the share valuation report, SS Kothari Mehta & Co, Chartered Accountants has considered Market Risk Premium as 8.09%, based on performance of Indian market index over past 32 years, which is largely same as what has been computed and published by Professor Aswath Damodaran on his website is as updated upto January 2012 at 9% and 8.6% as updated up to January 2011. In our considered opinion, considering the market return over a longer time frame would neutralize the impact of any abnormalities on the market risk premium. Considering the facts of the case in totality, we are of the opinion that the market risk premium at 8.09 % as adopted by the valuer is correct, which makes the discounted rate at 18.12% and if the same is taken, then again also, the fair value per share taken by the assessee will be higher than the fair value per share taken by the TPO. Adjustment of goodwill - difference in adoption of valuation approach by suggesting addition of goodwill in a DCF computation discounted cash flow - HELD THAT - We are of the considered opinion that when the fair value is determined in accordance with the discounted cash flow DCF methodology, subsumes values of all kinds of assets of business/ company, whether tangible or intangible, or otherwise, which means that future operating profits of the company are taken into consideration for arriving at a value under the DCF Approach. Goodwill is an intangible asset arising as result of name, reputation, customer loyalty, location, products and other similar factors not separately identified. Goodwill is an apparatus that assists in improving the profitability of a Company, being the base for determination of value under the DCF approach. Therefore, Business Value arrived at under DCF approach subsumes the value attributable to Goodwill. Since DCF valuation methodology inherently captures the entire value of business, therefore, based on valuation principles, there cannot be a separate addition of the value of goodwill. AO / TPO have inappropriately added value of one of the assets i.e. goodwill in the DCF calculation without appreciating the fact that cash flows of business already factor the benefits accruing from a combination of all business assets and, therefore, adding the value of goodwill to the enterprise value arrived using DCF methodology amounts to double counting. AO/ TPO have failed to appreciate the fundamental difference in adoption of valuation approach by suggesting addition of goodwill in a DCF computation. In a DCF computation, the value of incremental profits (reflection of goodwill) is already factored and therefore, the question of adding a separate amount towards goodwill does not arise. Fair valuation of ₹ 396.42 per share of Technip India undertaken by an independent Valuation Expert/ Chartered Accountant subsumes fair value of entire business of Technip India including all intangibles, including goodwill. Hence, there is no need to separately add the value of goodwill to the amount of sales consideration. Adjustment on account of difference in exchange rate - TPO taken the value of share transaction in Euros whereas the transaction has been done in Indian currency - HELD THAT - The aggregate purchase price for all the shares is taken at 1,14,96,18,000/- equivalent to 16798439.41 Euros. The TPO has erroneously taken the value of share transaction in Euros whereas the transaction has been done in Indian currency. Therefore, the adjustment on account of exchange rate is uncalled for and deserves to be deleted. Levy of interest u/s 234B - HELD THAT - Since in the present case the income has been received by the appellant after deduction of tax at source, therefore, the aforesaid provision is not applicable. Respectfully following the findings of M/S TECHNIP UK LTD. C/O 712- 713, TULSIANI CHAMBERS 2018 (12) TMI 1069 - ITAT DELHI we hold that no interest is leviable u/s 234B of the Act.

Summary

Issues Involved:
1. Transfer Pricing Adjustment
2. Valuation of Shares
3. Rectification of Mistakes in Respect of Application of Correct Rate of Income Tax
4. Additional Ground: Non-Discrimination Clause under Article 25(1) of the India-Italy Tax Treaty

Issue-Wise Detailed Analysis:

1. Transfer Pricing Adjustment:
The appellant contested the transfer pricing adjustment of ?81,56,35,772/- made by the TPO. The TPO rejected the share valuation report provided by the assessee and proposed adjustments based on different parameters, such as Weighted Average Cost of Capital (WACC) and goodwill. The Tribunal found that the TPO did not undertake an independent valuation as required by CBDT Instruction No. 5/2011 and failed to consider the illiquidity discount of 15% applied by the independent valuer. The Tribunal concluded that the TPO's adjustments were not justified and should be deleted.

2. Valuation of Shares:
The appellant argued that the valuation of shares should be based on the actual consideration received, not a notional consideration. The Tribunal agreed, stating that the Assessing Officer (AO) has not substituted actual consideration with notional consideration but made adjustments as per the TPO's report. The Tribunal emphasized that the valuation report from independent valuers should be considered, and the TPO's failure to allow an illiquidity discount was incorrect. The Tribunal also noted that the TPO's use of market risk premium based on the performance of the Sensex since the company's incorporation was not appropriate. The Tribunal accepted the market risk premium of 8.09% used by the independent valuers, leading to a discounted rate of 18.12%, which justified the appellant's valuation.

3. Rectification of Mistakes in Respect of Application of Correct Rate of Income Tax:
The Tribunal addressed the appellant's objection that the AO has no power to substitute actual consideration with notional consideration under sections 45 and 48 of the Act. The Tribunal clarified that the AO referred the matter to the TPO for determining the Arm's Length Price (ALP) and made adjustments based on the TPO's report. The Tribunal found that the AO's actions were in line with section 92C(4) of the Act, which allows the AO to compute total income having regard to the ALP determined.

4. Additional Ground: Non-Discrimination Clause under Article 25(1) of the India-Italy Tax Treaty:
The appellant raised an additional ground, arguing that the transfer pricing adjustment violated the non-discrimination clause under Article 25(1) of the India-Italy Tax Treaty. The Tribunal examined Article 25 and concluded that the transfer pricing provisions apply equally to both Indian and foreign companies. The Tribunal found no discrimination against the appellant and dismissed the additional ground.

Separate Judgments:
The Tribunal addressed the levy of interest under section 234B of the Act. The Tribunal referred to the co-ordinate bench's decision in Technip UK Ltd, which held that no interest under section 234B is leviable on the assessee-payee if the payer fails to deduct tax at source. The Tribunal directed the AO not to charge interest under section 234B, following the co-ordinate bench's findings.

Conclusion:
The Tribunal partly allowed the appeal, deleting the transfer pricing adjustments and upholding the appellant's valuation of shares. The additional ground regarding the non-discrimination clause was dismissed, and the Tribunal directed the AO not to levy interest under section 234B. The order was pronounced on 28.02.2019.