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TMI Blog2018 (1) TMI 789X X X X Extracts X X X X X X X X Extracts X X X X ..... ons address recruiting, applicant-tracking, screening and assessment, on boarding, hiring tax credit and re-screening. Assessee is one of the entity of the Group. It filed its return of income on 29/12/ 2012, declaring total income of Rs. 86. 44 crores. The AO completed the assessment u/s. 143(3) r. w. s. 144C of the Act, determining its income at Rs. 130. 77 crores. 2. During the course of hearing before us the Authorised Representative (AR) stated that out of the 13 Grounds of appeal, effective Ground of appeal was Ground No. 3 read with Ground No. 6, that rest of the grounds were not to be adjudicated. Therefore, we would not decide other Grounds of appeal raised by the assessee. 3. Ground No. 3 is about determining the price of shares of First Advantage Pvt. Ltd. (FAPL)at Rs. 12, 285. 92 as against Rs. 8, 158. 01, as shown by the assessee. During the assessment proceed -ings, the AO found that the assessee had entered into International Transaction with its Associated Enterprise(AE). He made a reference to Transfer Pricing Officer(TPO)to determine the Arm's Length Price (ALP)of the transaction. 3.1. During the transfer pricing(TP)proceedings, the TPO found that the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lier years (from the date of filing of valuation report)to the year under consideration. As per the DRP the same were not furnished. The DRP further held that FAPL was engaged in providing pre employment background screening services in India, that business segments of FAPL included screening, HR outsourcing, verification, litigation, that assessee had filed valuation reports , that the reports mentioned that the real GDP growth of India during 2009-10 was 8%, that during 2010-11 it was 8. 5%, that long term compounded annual growth of GDP was expected at 5. 2% for the period 2040-50, that long term inflation was expected to 4. 5% to 4. 9% for the period 2015-2041, that long term GDP growth rate for India could be safely taken at 10%, that as per the report of the NASSCOM near term growth in IT and BPO Export sector was expected to be between 11 to 14%, that the domestic sector it was expected to be 13-16%, that long term GDP rate was expected to be 3% in real term, that in the valuation report submitted by the assessee it has been mentioned that revenue of the assessee had been declined from INR 469. 5 million to INR 406. 2 million for the period FY. 2007-2010, that it was also me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... greater than or equal to 1, that majority of clients were from IT and Financial sectors, that most of the companies from IT sector were dependent on US for business, that Beta of most of IT companies were near to 0. 6, that it did not show much co-relation with Indian economy that substantial portion of revenue was coming from Singapore based clients, that share price of FAPL, if listed on Indian Stock exchange, would be linked to the factors of those geographies, that share prices of most of companies registered on Indian stock exchanges would be affected by development in Indian economy, that Beta of FAPL should necessarily be less than 1. The DRP accordingly directed to adopt beta 0. 61 in respect of FAPL. It further held that Shrenik & Associates had taken a specific company risk premium (CSRP) at 3% for arriving at Weighted Average Cost of Capital (WACC) of assessee company, that D&P had adopted risk premium at 0. 5%. The DRP held that specific company risk premium should be taken at 0. 5%, that assessee was always starting from low base due to sub-prime prices. Finally, the DRP confirmed the order of the AO/TPO. 3.3. . Before us, the AR argued that the TPO had erroneously t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee though the same was specifically raised, that there was no justification to compare the service sector company FAPL to generic report of PWC. Referring to the finding of IBIS World, an independent third party researcher, he stated that the annual industry growth rate of companies operating in the backgroundservice- industry in the US was 2. 2%, that PGR shown by the assessee was reasonable and was in line with how industry was expected to grow in long term period, that TPO had not provided any reason for not accepting the reason for finding the IBIS World report, that CRISIL had considered the PGR in one of the reports prepared for an IT company and that the assessee had filed that report, that during the year under appeal two transactions of sale of shares of Indian subsidiaries within the group had taken place, that the first transaction was of sale of shares by assessee to the parent company and the second transaction was about sale of shares of First Advantage Offshore Services Ltd. (FAOSL)by First Advantage India Holding LLC to the Singapore parent company, that the business activities undertaken by FAPL and FAOSL were not similar in nature, that the FAPL was engaged in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was considered by PWC, that there was only one transaction of share transfer and not two, as claimed by the assessee, that the TPO had given discount of 15%, that the discount had taken care of all possible adjustments. In his rejoinder, the AR stated that Global economy crashed in 2011, that hiring of personnel started one year later, that resulted in abnormal growth, that if the period of 5-10 years was taken a clear picture would emerge, that the discount argument was not relevant for determin -ing the ALP of the shares sold. 3.4. We have heard the rival submissions and perused the material on record. We find that the assessee had sold 1, 07, 290 shares of FAPL to its AE, that it had obtained a valuation report from Shrenik Associates to prove that price paid by the AE to it was at arm's length, that the TPO did not agree with the valuation made by the assessee, that adopting PGR of 4%, he suggested upward adjustment to the value of shares sold by the assessee, that before the DRP it filed another valuation report and certain other documents, that a remand report was called for by the DRP, that the TPO relied upon a report of PWC and adopted PGR of 7%, that the assessee, in i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Ceylon v. Mackie [1952] 2 All ER 775 (PC) a valuation by reference to the assets would be justified whereas in that case the fluctuations of profits and uncertainty of the conditions at the date of the valuation prevented any reasonable estimation of prospective profits and dividends. " 3.4. 2. We would also like to refer to the case of Swadeshi Mining & Manufacturing Co. Ltd. , (116 ITR 259), decided by the Hon'ble Calcutta High Court. In that matter the assessee sold a lot of 7, 500 ordinary shares of Jaipuria Kajora Collieries Ltd. to one Swadeshi Cotton Mills Ltd. at the rate of Rs. 9. 50 per share, the face value thereof being Rs. 10 per share. During the assessment proceedings, the AO proceeded to compute capital gains arising out of the said transaction. He was of the view that said shares had been sold at an unusually low price to a great advantage to the vendee and, therefore, he proceeded to ascertain the break-up value of the said shares which worked out to Rs. 23. 85 per share. The surplus was sought to be taxed as capital gains. Being aggrieved by the order of assessment, the assessee went up in appeal before the FAA, who held that neither the break-up value nor th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... king or, in other words, the profit-earning capacity of the company would ordinarily determine the value of its shares. The break-up value will not be appropriate for valuation of shares of such a company. Similarly, in the matter of Shardaben B Mafatlal(177 ITR 463), the Hon'ble Bombay has held that, in the case of a company shares of which were not quoted at any stock exchange, the shares were not required to be valued on the break-up method and that the profit-earning method was the only method which could be properly applied for arriving at the valuation of shares in such a case. 3.5. From the above, it is clear that for fair valuation of unquoted shares of a corporate entity only one factors should not be considered. In other words share price depends upon many a factors. It is said that the mere capitalization of actual past earnings would not produce a reasonable result in such cases and that the emphasis has to be on prospective earning capacity rather than actual past earnings-although naturally the latter has to be used as a starting point to calculate the former. 3.5.1. The purpose behind introducing the TP provisions in the Act was to ensure that goods/ services purch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h a general report to determine the ALP of the shares sold. 3.7. It is true that only historical performances cannot be guiding factor for deciding the valuation of shares, but, the PGR should have some base. It was specifically brought to the notice of the DRP that the CAGR of the earning and free cash flow of FAPL for the immediately preceding 5 years was (-)16% and that the other companies-considered as comparable-had shown CAGR of (-)8. 4%. It is found that the DRP did not deal with this basic and fundamental objection. Considering these facts we hold that it was not reasonable to assume that such a company would suddenly grow at the estimated growth rate of the economy in perpetuity. 3.8. If PGR was to be adopted at 7% then something, other than allowing a 15% adjustment, more had to be brought on record. Against the proposed adjustment, the assessee had furnished four reports. Shernik and Associates, for valuation purposes, used the method suggested in FEMA Rules. Whether such a valuation can be considered a perfect valuation for Income tax purposes or not is a separate issue. But, at least the valuation was based on some recognised method. It was definitely better than a g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is one of the recognised principle of valuation that a high PGR would require a proportionate higher cost of equity. If the said theory is applied to the facts of the case under consideration, the cost of equity will have to be taken at minimum of 17.57% (for 7% PGR). Therefore, we agree with the argument advanced by the assessee that if cost of equity was taken at 17.57%, then the value of a share of FAPL would be lower than value determined by the independent valuer. In short the transaction i. e. valuation of shares of FAPL, was at Arm's length. Considering the peculiar facts and circumstances of the case and the above discussion we decide Gs. AO 3 and six in favour of the assessee. ITA/1547/Mum/2017: 4. Facts and circumstances of the instant case are similar to the fact of earlier case-the only difference is of valuation of the shares sold. During the year under appeal the assessee sold shares of FASOL to a group entity located in Singapore. Shrenik and Associates valued the fare market price of the shares of at Rs. 54.1 per share. The TPO first determined the share price at Rs. 68.9 per share and after considering the PWC report he estimated the shares price of one share at ..... X X X X Extracts X X X X X X X X Extracts X X X X
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