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TMI Blog2019 (3) TMI 677X X X X Extracts X X X X X X X X Extracts X X X X ..... hich 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 ref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee relate to: (i) Transfer Pricing adjustment; (ii) Valuation of shares; and, (iii) Rectification of mistakes in respect of application of correct rate of Income tax. 3. Vide application dated 19.01.2018, the appellant raised the following additional ground: That on the facts and circumstances of the case, the transfer pricing adjustment made qua capital gains arising on sale of shares by the appellant foreign company to another non resident associated enterprise, being violative of the non discrimination clause under Article 25(1) of the India-Italy Tax Treaty [ the Treaty ] calls for being deleted. 4. The representatives of both the sides were heard at length, the case records carefully perused and with the assistance of the ld. Counsel, we have considered the documentary evidences brought on record in the form of Paper Book in light of Rule 18(6) of ITAT Rules. Judicial decisions relied upon were carefully perused. 5. The appellant company is a company incorporated under the laws of Italy and is engaged in the business of construction, design and engineering and implementation services to Oil Gas, Power, Pharmaceuticals and Infrastructure ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... endent valuer 19,36,33,000 Adjustment on account of goodwill 61,74,00,000 Adjustment on account of difference in exchange rate 46,02,772 Total 81,56,35,772 13. A draft assessment order was made on 18.11.2016 proposing addition of ₹ 81,56,35,772/-. The assessee raised objections before the DRP but the DRP, vide order dated 07.08.2017, confirmed the addition proposed by the Assessing Officer. 14. Pursuant to the directions of the DRP, the AO framed final assessment order on 12.09.2017, wherein the income was assessed at ₹ 1,25,27,58,292/- as under: Adjustment proposed Amount Returned income of the appellant 43,71,22,520 Additions made by the AO in relation to the sale of shares of Technip India to Technip France 81,56,35,772 Total assessed income 1,25,27,58,292 15. Aggrieved by this, the assessee is before us. 16. We will first address to the additio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances and under the same conditions are or may be subjected. 2. The taxation on a permanent establishment which an enterprise of a Contracting State has in the other Contracting State shall not be less favourably levied in that other State than the taxation levied on enterprises of that other State carrying on the same activities in the same circumstances or under the same conditions. 3. Nothing contained in this Article shall be construed as obliging a Contracting State to grant to persons not resident in that State any personal allowances, reliefs and reductions for taxation purposes which are by law available only to persons who are so resident. 4. Enterprises of a Contracting State, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State, shall not be subjected in the first-mentioned Contracting State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which other similar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion to the provisions of section 45(1) of the Act and pointed out that section 48 prescribes the mode of computation of capital gains. It is the say of the ld. counsel for the assessee that as per provisions of section 48 of the Act, capital gains is required to be computed on the basis of full value of consideration received or accruing on transfer of the asset. The ld. counsel for the assessee further pointed out that the Courts have unanimously and unambiguously held that the expression full value of consideration used in section 48 of the Act refers to the actual consideration received by an assessee from transfer of capital asset and there is no power with the assessing officer to substitute such actual consideration with any notional consideration or fair market value of the asset transferred. In support of this contention, reliance was placed on several judicial decisions of the Hon'ble Supreme Court and the Hon'ble Delhi High Court. 26. In our considered opinion, 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 Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ors Ltd., which has also applied discounted cash flow method, determined the fair value as per share at ₹ 371.10. The relevant part of the report is as under: 32. Thus, it can be seen that the assessee s valuation is supported by the valuation report of two independent valuers. The share valuation as per the appellant and share valuation as per the TPO can be understood from the following charts: Particulars 2012 2013 2014 2015 2016 Perpetuity PAT 125.44 154.49 165.23 168.51 171.47 171.47 Add: Depreciation 48.69 45.68 40.50 36.78 34.07 34.07 Add: Deferred Tax adjustment 1.19 1.68 -1.49 0.00 0.00 Add: (Increase)/ Decrease in WC 16.25 -27.38 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Fair Value per share (INR) 396.42 Particulars Remarks Risk Free Rate of Return 8.54 Based on performance of the sensex over past 32 years i.e. from 1979 to 2011 Specific Company Risk . Based on reported beta of selected listed companies providing engineering, procurement and construction services to Oil and gas, refinery industries Free Cash Flow to Firm Model Particulars 2011-12 2012-13 2013-14 2014-15 2015-16 Free Cash Flow to Firm 150,470,000 150,110,000 175,170,000 177,280,000 177,610,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing features are vivid from the aforesaid share valuation charts. Firstly, share valuation as per the assessee is ₹ 396.42 whereas that of the TPO is 463.19 and, secondly, the market risk premium adopted by the assessee is 8.09, whereas the same has been taken by the TPO at 4.63. 34. In so far as afore said valuation per share is concerned, we find that the shares of the appellant company are highly ill-liquid and, therefore, independent valuers have allowed illiquidity discount @ 15%, which comes to 202.88. However, the TPO has not deducted any ill-liquidity discount. In our considered view, the TPO should have allowed rebate for illiquidity since the shares of the appellant company do not have any liquidity in the open market. If the illiquidity discount alone is considered, then the fair value as per the share of the assessee would be more than the fair value per share determined by the TPO. 35. Further, the TPO has considered the financial data on financial year basis whereas the appellant s accounting year is the calendar year. Moreover, the TPO has taken the market risk premium of performance of sensex since the year of incorporation of the company i.e. 1998 where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed Goodwill of 9.8 million Euros, equivalent to ₹ 61.74 crores. Taking a leaf out of this, the TPO has alleged that goodwill amounting to 9.8 million Euros equivalent to ₹ 617,400,000 has been recognized by Technip SA, France, and, therefore, on sale of 100% of paid up share capital of Technip India by Technip Italy to Technip France, only goodwill of 50% shares has been considered in the share valuation. Accordingly, addition of ₹ 61.74 crores was made by the TPO to amount of sale consideration received by the assessee. 41. 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. 42. In our considered opinion, 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 C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8377; 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. 47. Last quarrel relates to adjustment on account of difference in exchange rate of ₹ 46,02,772/-. 48. As per the share purchase agreement placed at pages 217 to 218 of the paper book, 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. 49. Considering the facts of the case in totality, from all possible angles, we are of the considered opinion that the adjustment as mentioned elsewhere, made by the Assessing Officer/TPO deserves to be deleted. Ground No. 2 and 3 with all its sub grounds are allowed and Ground No. 4 is also allowed. 50. In so far as levy of interest u/s 234B of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsequences delineated in that provision will visit the payer. The appeal of the Revenue is accordingly dismissed without any order as to costs. It may be pointed out that the Finance Act, 2012, w.e.f. 1.4.2012 added proviso below section 209(1)(d) of the Act. But the said proviso is applicable from assessment year 2013-14 and, therefore, prospective in operation. 28. In our understanding, the insertion of the proviso cannot be considered to have retrospective effect so as to expose a non-resident company to levy of interest u/s 234B of the Act for the assessment years prior to assessment year 2013-14. In the light of the above, we direct the Assessing Officer to not charge interest u/s 234B of the Act. 51. 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 the co-ordinate bench, we hold that no interest is leviable u/s 234B of the Act. 52. In the result, the appeal of the assessee in ITA No. 7171/DEL/2017 is partly allowed. The order is pronounced in the open court on 28.02.2019. - - TaxTMI - TMITax - Inc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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