9911796707
|
Home
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2023 (9) TMI 204 - AT - Income TaxTP Adjustment - ALP of the international transaction of purchase of equity shares - Transaction of purchase of shares of SIPL and QNPL by the Appellant from its AE - Grievance of the Appellant is that the Final Assessment Order passed by the Assessing Officer is silent on the proposed downward adjustment in relation to the cost of acquisition of shares in the subsequent years - HELD THAT - We find merit in the contention advanced by the Appellant that the TPO could not have substituted the actual figures for projected figures in DCF valuation for the purpose of determining the value of shares of QNPL. The decision in the case of DQ (International) Ltd. 2016 (8) TMI 727 - ITAT HYDERABAD , which was followed by the Mumbai Bench of the Tribunal in the case of Aaradhana Realties Limited ( 2023 (3) TMI 191 - ITAT MUMBAI ) supports the aforesaid contention advanced on behalf of the Appellant. Guidance for Tax Administrations clearly provides that where the actual cash flows are significantly higher than the projected cash flows, there is a presumption that projected cash flows should have been higher requiring scrutiny for the probability- weighing of such outcome. However, the Guidance goes on to provide that it would be incorrect to base revised valuation on actual cash flows without taking into account the said probability. We note that no such scrutiny or probability-weighing was done by the TPO. Therefore, the above OECD Guidance on which reliance was placed by the Learned Departmental Representative does not come to the aid of the Revenue. Rule 10B(5) of the Rules provides for use of current year data or data pertaining to financial year immediately preceding current year. The proviso to Rule 10B(5) deals with the availability of data of current year subsequent to the determination of arm s length price and permits use of the same for determination of ALP during assessment proceedings even though the data was not available at the time of furnishing of the return of income. Thus, Rule 10(5) does not provide for or deal with the data pertaining to future/subsequent years. The data used by the TPO pertains to years subsequent to the current year. Thus, Rule 10B(5) also does not further the case of the Revenue. A perusal of Rule 10D(1)(j) of the Rules would show that a person undertaking an International Transaction is required to maintain a record of the actual working carried out for determining the ALP, including details of the comparable data and financial information used in applying the Most Appropriate Method, and adjustments, if any, which were made to account for differences between the international transaction and the comparable uncontrolled transactions. This also shows that the data which is required to be used and maintained by the Appellant has to be data available at the time of determining the ALP with proviso to Rule 10B(5) providing exception to the aforesaid general rule . We reject the approach adopted by the TPO for the purpose of determining the value of shares of SIPL by substituting actual financial results for the projected results in the DCF valuation furnished by the Appellant. Revenue has accepted the directions issued by DRP and no addition has been made in relation to income arising from the international transaction of purchase of shares of SIPL. Further, admittedly even the Final Assessment Order does not provide for downward adjustment in the cost of acquisition of share of SIPL. Therefore, in the facts and circumstances of the case we hold that no adjustment can be made in the cost of purchase of shares of SIPL. Transaction of purchase equity shares of QNPL for a consideration - Appellant had selected Other Method as the most appropriate method and benchmark the transaction on the basis of valuation report - difference of 3 months between the International Transaction and transactions projected as comparable uncontrolled transactions by the Appellant - HELD THAT - The contention of the Revenue that the gap of 3 months between the International Transaction and project comparable uncontrolled transactions would make the said transactions incomparable is a general averment not supported by factual analysis. Having said as aforesaid, we do find merit in the submission of the Learned Departmental Representative to the limited extent that where under shareholders agreement the parties thereto undertake to purchase/sell shares at value determined by independent expert, the transaction undertaken are more reflective of the valuation agreed upon rather than a price determined by market forces. The Appellant had acquired shares from the promoter (i.e. Viney Sagar Sahgal) by triggering call option in terms of Shareholders Agreement. There is nothing on record to show that the exercise of call option had no impact on the determination of sale price. Therefore, in the facts and circumstances of the present case we hold that Other Method be adopted as the most appropriate method for computation of ALP of transaction of sale of shares of QNPL by the Appellant to SIPL. Accordingly, we direct the Assessing Officer/TPO to re-compute the ALP of the aforesaid international transaction and the consequent transfer pricing adjustment, if any, on the basis of DFC valuation report furnished by the Appellant after verifying the same. In terms of the aforesaid, Ground No. 2 raised by the Appellant is partly allowed.
Issues Involved:
1. Transfer Pricing (TP) adjustment in respect of purchase of equity shares of Sutures India Private Limited (SIPL) and Quality Needles Private Limited (QNPL). 2. TP adjustment in respect of Sale of Shares of QNPL to SIPL. 3. Error in calculation of short-term capital gains by wrongly considering the sales consideration. 4. Appellant's subscription in the equity shares SIPL, in lieu of sale consideration as a consequence of sale of shares of QNPL to SIPL. 5. Initiating penalty proceedings under section 270A of the Act. Summary: Issue 1: TP Adjustment in Purchase of Equity Shares of SIPL and QNPL The Appellant contested the TP adjustment for purchasing equity shares of SIPL and QNPL. The TPO had determined the arm's length price (ALP) using actual financial results instead of projected figures, leading to a significant downward adjustment. The DRP provided partial relief by deleting the notional interest addition but did not address the downward adjustment in the cost of acquisition for subsequent years. The Tribunal rejected the TPO's approach of substituting actual figures for projected figures in DCF valuation, citing judicial precedents and OECD guidelines. Consequently, no adjustment was made to the cost of purchase of SIPL shares. Issue 2: TP Adjustment in Sale of Shares of QNPL to SIPL The Appellant used the Comparable Uncontrolled Price (CUP) Method to benchmark the sale of QNPL shares to SIPL. The TPO's approach of using actual financial results for DCF valuation was rejected by the Tribunal. However, the Tribunal found merit in the TPO's doubts regarding the comparability of transactions due to differences in contractual terms and market conditions. The Tribunal directed the TPO to re-compute the ALP using the DCF valuation report furnished by the Appellant after verification. Issue 3: Error in Calculation of Short-term Capital Gains The Tribunal noted that the issue of short-term capital gains computation was consequential to the adjudication of Issue 2. Therefore, this issue was disposed of as being consequential in nature. Issue 4: Appellant's Subscription in Equity Shares of SIPL The Appellant contested the TP adjustment for the subscription of SIPL shares received as consideration for the sale of QNPL shares. The Tribunal rejected the TPO's approach of using actual financial results for DCF valuation, similar to Issue 1. The DRP had already deleted the notional interest addition, and the Tribunal held that no adjustment could be made to the cost of purchase of SIPL shares. The contentions regarding comparable uncontrolled transactions were dismissed as academic or infructuous. Issue 5: Initiating Penalty Proceedings under Section 270A The Tribunal did not specifically address this issue in the summary provided, implying no change in the initiation of penalty proceedings. Conclusion: The appeal was partly allowed, with the Tribunal rejecting the TPO's approach for DCF valuation and directing re-computation of ALP for certain transactions. The Tribunal provided relief on the issue of notional interest and held that no adjustments could be made to the cost of purchase of SIPL shares.
|
