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TMI Blog2018 (9) TMI 212X X X X Extracts X X X X X X X X Extracts X X X X ..... t Value or book value was not really warranted. We reject the same. Given the fact that it was treating as a going concern, the valuation on the basis of future earnings was quite justified. To this extent, we disapprove the stand of the authorities below. However, since the TPO has not examined that aspect of the matter at all and simply proceeded on the basis of net asset value, we also deem it fit and proper to remit the matter at the assessment stage in the light of fresh determination of arm’s length price in the light of our directions above. TPO shall discard the computations based on Net Asset Value and adopt an appropriate method of determining the ALP of shares sold by the assessee to its AE, and if such an ALP is found to be more than the transaction value of US $ 35,08,000, the ALP adjustments will be required. The matter is thus required to be adjudicated afresh in a fair and reasonable and legally sustainable manner. While doing so, he will decide the matter in accordance with the law, by way of a speaking order and after giving a fair and reasonable opportunity of hearing to the assessee. - ITA Nos. 2 and 5030/Del/2017 - - - Dated:- 23-8-2018 - Pramod Kumar AM ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r on discounted cash flow method. When the assessee filed its return of income disclosing the capital gains on sale of these shares, the Assessing Officer referred the matter to the Transfer Pricing Officer for determination of arm s length price of the shares sold by the assessee. The TPO noted that based on the NAV of the shares, the shares ought to have been sold for US $ 37,98,298.50, whereas the actual sale consideration of shares is only US $ 35,08,000. The plea of the assessee that DCF (discounted cash flow) valuation of these shares, which is a judicially accepted method of valuation of shares in the cases of unquoted shares, is much below the actual sale consideration was rejected by the TPO. The TPO thus concluded that arm s length price for transfer of shares is US $ 37,98,298.50, and proceeded to compute capital gains on sale of the shares at ₹ 4,96,54,075- as against capital gains of ₹ 3,57,37,7840 disclosed by the assessee. As he did so, he discussed various aspects of the valuation of shares but, for the reasons we will set out in a short while, it is not really necessary to deal with his line of reasoning in detail. The observations made by the TPO, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with rule 115A. As per Section 48 of the Income Tax Act, 1961, the income chargeable under the head Capital Gains shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely:- ( i) expenditure incurred wholly and exclusively in connection with such transfer; ( ii) the cost of acquisition of the asset and the cost of any improvement thereto; Provided that in the case of an assessee, who is a non-resident, capital gains arising from the transfer of a capital asset being shares in, or debentures of, an Indian company shall be computed by converting the cost of acquisition, expenditure incurred whoIIy and exclusively in connection with such transfer and the full value of the consideration received or accruing as a result of the transfer of the capital asset into the same foreign currency as was initially utilised in the purchase of the shares or debentures, and the capital gains so computed in such foreign currency shall be reconverted into Indian currency , so, however, that the aforesaid manner of computation of capital gains shall be applicab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt are called for. The role of the TPO must remain confined within these parameters. It is not open to the TPO to go beyond this role of determining the ALP and intrude in the exclusive domain of the Assessing Officer to determine the income taxable in the hands of the assessee. In the case of Cushman Wakefield India Ltd Vs CIT [(2014) 367 ITR 730 (Del), Hon ble jurisdictional High Court had an occasion to examine the role of the Transfer Pricing Officer, though in a slightly different context, and Their Lordships were pleased to observe that the authority of the TPO is to conduct a transfer pricing analysis to determine the ALP and it does not extend to the areas earmarked for the Assessing Officer, such as, to determine whether there is a service or not from which the assessee benefits . That aspect of the exercise , as noted by Their Lordships, is left to the AO . While observing so, Their Lordships referred to, with approval, the decision of a coordinate bench in the case of Dresser-Rand India (P.) Ltd. v. Addl. CIT [(2011) 47 SOT 423 (Bom)]. The views so expressed by Hon ble jurisdictional High Court fortifies our understanding that the role played by the TPO must remai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d this method to be retrospective in effect right from the time the transfer pricing provisions have been introduced, and this coordinate bench decision has been upheld by Hon ble Delhi High Court in the case of PCIT Vs Toll Global Forwarding India Pvt Ltd [(2016) 381 ITR 38 (Del)]. The question, therefore, that we need to consider is as to on what basis the price which would have been charged for sale of these shares can be ascertained. On this aspect, we find guidance from Hon ble Supreme Court s judgment in the case of CGT Vs Kusumben D Mahadevia [(1980) 122 ITR 38 (SC)] wherein Their Lordships have, inter alia, observed as follows: 4. It is clear that where the shares in a public limited company are quoted on the stock exchange and there are dealings in them, the price prevailing on the valuation date would represent the value of the shares. But where the shares in a public limited company are not quoted on the stock exchange or the shares are in a private limited company the proper method of valuation to be adopted would be the profit earning method. This method may be applied by taking the dividends as reflecting the profit earning capacity of the company on a reasonab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the factors which govern the consideration of the buyer and the seller where the one desires to purchase and the other wishes to sell, the factor or break-up value of a share as on liquidation hardly enters into consideration where the shares are of a going concern . It is only where a company is ripe for winding up or the situation is such that the fluctuations of profits and uncertainty of conditions at the date of valuation prevent any reasonable estimation of the profit earning capacity of the company, that the valuation by the break-up method would be justified. The Revenue leaned heavily on the observation in Mahadeo Jalan's case (supra) that the factors likely to determine the valuation of a share include in special cases such as investment companies, the asset-backing and urged on the strength of this observation that in the case of an investment company, the asset-backing was a relevant consideration and the break-up method could not, therefore, be considered as totally irrelevant. This contention, we are afraid, is based on a wrong reading of the observation of the Court. When the Court said that in the case of an investment company, the asset-backing is a relevan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... servation made by the Court that in setting out these principles, the Court had not tried to lay down any hard and fast rule because ultimately the facts and circumstances of each case, the nature of the business, the prospects of profitability and such other considerations will have to be taken into account as will be applicable to the facts of each case . Now it is true, as observed by the Court, that there cannot be any hard and fast rule in the matter of valuation of shares in a limited company and ultimately the valuation must depend upon the facts and circumstances of each case, but that does not mean that there are no well settled principles of valuation applicable in specific fact-situations and whenever a question of valuation of shares arises, the taxing authority is in an uncharted sea and it has to innovate new methods of valuation according to the facts and circumstances of each case. The principles of valuation as formulated by the Court are clear and well-defined and it is only in deciding which particular principle must be applied in a given situation that the facts and circumstances of the case become material. It is significant to note that immediately after maki ..... X X X X Extracts X X X X X X X X Extracts X X X X
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