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TMI Blog2023 (3) TMI 468X X X X Extracts X X X X X X X X Extracts X X X X ..... ejected and we hold that the impugned transaction has been rightly put through the test of benchmarking. Therefore the contentions raised in ground Nos. 3 4 are rejected. Benchmarking of share transfer in the impugned transaction - There has to be a same or similar uncontrolled transaction with or between non associated enterprises under similar circumstances considering all the relevant facts. In the present case, the share purchase agreement was entered into for transfer of 25.1% of shares of USL. If non associated enterprises had entered into similar agreement, they would not have agreed for the transfer of shares at the stock exchange price as it involves transfer of control. Transfer of shares in stock exchange cannot be equated with transfer of shares involving transfer of control. Therefore, the price determined by the TPO is upheld for the above reasons and the grounds No. 5 to 10 raised by the Assessee are accordingly dismissed. Method and computation mechanism adopted by the learned TPO - DCF method is statutorily as well as internationally accepted method for valuation of shares. We therefore are of the opinion that the TPO has not erred in adopting such meth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act. The assessment was selected for scrutiny and notice under Section 143(2) of the Act was issued on 28.08.2015. During the course of assessment proceedings the assessee's case was referred to Transfer Pricing Officer (TPO) under Section 92CA of the Act. The TPO passed order under Section 92CA of the Act on 31.10.2017 proposing an upward transfer pricing adjustment in respect of the shares sold by the assessee. On receipt of the TPO's order the Assessing Officer (AO) passed the draft assessment order dated 26.12.2017 incorporating the TP adjustments proposed by the TPO and also applying the rate of 20% to the capital gains he brought to tax (the assessee adopted the rate of 10%). 3. Aggrieved by the draft assessment order the assessee filed objections before the Dispute Resolution Panel (DRP). The DRP vide its directions dated 20.07.2018 disposed off the objections of the assessee. Pursuant to the DPR directions the impugned final assessment order was passed on 27.08.2018 wherein the AO had made the following additions:- Sl. No. Nature of disallowance Amount (in Rs.) 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the learned TPO and the Hon'ble DRP, in concluding that the Appellant had transferred controlling stake in United Spirits Limited to Relay B.V., erroneously made assumptions and commented upon the necessity of certain clauses of the Share Purchase Agreement dated 9 November 2012, without appreciating that such arrangement was in essence agreed between two third parties and thus, is at arm's length. 7. The learned AO, the learned TPO, and the Hon'ble DRP have erred in not considering the weighted average market price i.e., INR 1,376 of USL's shares as on the date of entering into the Share Purchase Agreement dated 9 November 2012 for determining the arm's length nature of the price at which USL's shares were transferred by the Appellant to Relay B.V. 8. The learned AO and the Hon'ble DRP have erred in disregarding the comparable uncontrolled transaction of sale of shares of United Spirits Limited by unrelated individual shareholders at the same price of INR 1440 per share by erroneously assuming that there existed separate compensation to such unrelated individual shareholders without there being any evidence to support this claim and purely b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... axes (CBDT') which clarified that the beneficial rate of 10 per cent on LTCG from sale of listed securities is available to 'all assessees'. 15.3 The learned AO erred in violating the law that Circulars issued by the CBDT are binding on the Revenue as held by the Hon'ble Supreme Court in plethora of decisions including- K.P. Varghese v. ITO (1981) 131 ITR 597 CIT v. Hero Cycles Private Limited (1998) 228 ITR 463 Catholic Syrian Bank Limited v. CIT (2012) 3 SCC 784 UCO Bank v. CIT (1999) 307 ITR 324 15.4 The learned AO erred in not following the decision of the Hon'ble High Court of Delhi in Cairn UK Holdings Ltd. v. DIT [2013] 38 taxmann.com 179 and CIT v. Mitsubishi Motors Corporation (in ITA No. 741/2016) upholding levy of tax at beneficial rate of 10 per cent. 16. The learned AO has erred in levying interest under section 234B of the Act. 5. The above grounds relate to two issues, namely re-computation of arm's length price of share sold by the assessee amounting to Rs. 262,27,80,021/- and differential tax on account of difference in rate of tax on capital gains (based on the assessed income) of Rs. 96,52,74 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s entered into between two independent parties and therefore the transfer pricing provisions are not applicable. The learned Sr. Counsel referring to the provisions of the Act submitted that the assessee is not an associated enterprise of Relay BV as on the date of entering into SPA and even after acquisition of shares from the assessee. It was stated that only on 28.11.2013 Relay BV further acquired 19,67,940 shares from unrelated shareholders on the stock market and consequent to such acquisition the controlling stake in USL by Relay BV exceeded 26%. The learned Sr. Counsel submitted that it is settled position that where literal interpretation of a statutory provisions leads to unjust/absurd result, the court may modify the language used by the Legislature, so as to achieve the intention of the legislature and produce a rational construction. In this context the learned Sr. Counsel relied on the following judicial pronouncements:- i) CIT vs. J.H. Gotla (1985) 23 taxman 14 (SC) ii) ACIT and Anr. Vs. Surat Art Sil Cotton Manufacturers Association (1979) 2 Taxman 501 (SC) iii) K.P. Varghese vs. ITO (1981) 7 Taxman 13 (SC) 10. The learned Sr. Counsel further submit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B.V. on a preferential allotment basis. A screenshot of the movement of the price of USL's shares is produced at page 249 of the paperbook. This can be adopted as comparable uncontrolled price in terms of Rule 10B of the Income-tax Rules, 1962. The CA Certificate (average of weekly high and low of the closing process of the USL's share quoted on NSE during the 26 weeks preceding the relevant date) is produced at page 253 of the paperbook, as per which, the average price is Rs. 917.27. Moreover, the price at which the Appellant had sold the shares is the same price at which the other group companies sold their shares to Relay. Since the price charged by the other group companies is accepted, upon application of the 'CUP' method, the price charged by the Appellant also ought to be accepted. The learned A.R. had also attacked the basis of valuation undertaken by the TPO by stating that the data obtained from Bloombery database does not satisfy Rule 10AB of the Income Tax Rules, 1962. 11. The learned D.R., on the other side, has also filed a written submission running into 16 pages basically elaborating the reasoning of the TPO and the DRP. 12. W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ime during the previous year we find no merit in the contention of the learned Sr. Counsel. The literal reading of Section does not give rise to any absurdity or unjust result. Hence the contention that the literal interpretation should not adopted is rejected and we hold that the impugned transaction has been rightly put through the test of benchmarking. Therefore the contentions raised in ground Nos. 3 4 are rejected. 14. Ground Nos. 5 to 10 deal with the aspect of benchmarking of share transfer in the impugned transaction. The assessee, in its TP documentation used other method to determine the ALP of the shares on the basis of market price prevailing at the time of entering into transaction. The market price per share was Rs. 1,376/- as on 09.11.2012 being the date entering into the SPA. Considering the same and coupled with the fact that the Relay BV purchased shares of USL from public through open offer at Rs. 1,440/- per share, the assessee reported that the transaction undertaken at Rs. 1,440/- per share is at arm's length. The dispute primarily hinges on the aspect of whether there has been a transfer of controlling stake under the SPA entered into by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is an interest arising from holding a particular number of shares and the same cannot be separately acquired or transferred. Each share represents a vote in the management of the company and such a vote can be utilized to control the company. Controlling interest, therefore, is not an identifiable or distinct capital asset independent of holding of shares and the nature of the transaction has to be ascertained from the terms of the contract and the surrounding circumstances. Controlling interest is inherently contractual right and not property right and cannot be considered as transfer of property and hence a capital asset unless the Statute stipulates otherwise. Acquisition of shares may carry the acquisition of controlling interest, which is purely a commercial concept and tax is levied on the transaction, not on its effect. 15. The Hon'ble Supreme Court has thus held that each share represents a vote in the management of the company and such a vote can be utilized to control the company. Further, the Hon'ble Supreme Court has held that controlling interest is not a distinct capital asset independent of holding of shares and the nature of the transaction has to be as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r rights, other powers of influence and control and otherwise using reasonable endeavours to cause the relevant members of the Company 's Group to provide to the Purchaser such general assistance and information as may reasonably be required by the Purchaser in connection with conducting the Open Offer, including: (i) compliance by each member of the Company's Group with sub-clause 4.5(D): and (ii) providing the Purchaser with information reasonably available to it and necessary for the preparation of the Open Offer Documents; and (H).... 4.8 The UB Group Sellers undertake to exercise their shareholder rights, other powers of influence and control (subject to the fiduciary duties of the UB Group Sellers' officers) and otherwise use their respective reasonable endeavours to fulfil or procure the fulfillment of the conditions set out in paragraphs I, 3.1, 5, 6. II, 12, 14 and 17 of Schedule I (Conditions to Completion) of the Preferential Allotment Agreement (the Preferential Allotment Conditions ). UB shall co-operate with the Company and the purchaser in good faith in order to satisfy the Preferential Allotment Conditions and facilitate the actions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Seller Group undertakes to transfer rights or trademarks held by them to the Purchaser Group. Similarly vide clause 12.2. 12.3 and 12.6 the Seller group covenants to transfer and cause registration of ownership or right to any intellectual property, business information or domain name used in conduct of the business of USL to the Purchaser group. Vide clause 12. 4, the UB group Sellers undertakes that no member of the Seller's group shall use the Business Names or Brands or similar names or mark which could compete etc with the business of the company USL. Schedule 1 and 2 list out several conditions to completion of Share Purchase Agreement and Schedule 2 also talks of delivery of any title deeds and all ancillary documentation by the Sellers to the Purchasers. These clauses clearly indicate that the company has been purchased as a Going Concern and if is not a mere equity investment as claimed. What is bought is not mere stocks but the underlying business. In such circumstances, the valuation of the company as a Going Concern has to be made to fix the value to be paid by the purchaser for the shares in the company. This is what has been done by the T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of Maruti etc. only to emphasize the point that substantial amounts are required to be paid on account of control over the market price, in case of Maruti, the Government had received Rs. 1000 crore only towards control premium. However for estimating the control premium in case of the assessee with respect to other un-related parties the TPO has referred the Phillip Sounders Jr. PHD report who gave a finding that mean average premium varied from 30% to 50% of the public quoted price. AO/TPO have, therefore, estimated the control premium at 25% of share price as the share price received by the assessee has been considered as the price only towards sale of shares without taking into account the control premium. Though AO/TPO have not specifically mentioned, they have indirectly compared to price of Rs. 201 per share paid to RA Group who held only 18.83% share which was not a controlling stake, which is clear from the fact that control premium has been computed by them with respect to the negotiated price. The RA Group in our view is a good internal CUP as both the assessee and RA Group have sold the shares of the same company and buyer was also the same. Therefore the transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing well. The Article by Phillip Sounders Jr. PHD has clearly mentioned that payment of control premium largely depends upon the potential buyer believing that he or she could enhance the value of the company. It is the potential for increasing the value that makes the buyers willing to pay the premium for control. The learned CIT(DR) has placed before us the report dated 29.6.2007 taken from INEOS ABS site as per which the Chairman of INEOS had stated that the joint venture with Lanxess provided INEOS strong market position in a new portfolio of product that complemented their Styrenic. Polyethylene, Polypropylene and PV Plastic activities which was a good fit in their existing business. The report also mentioned that Lustron Polymers was currently the world's third largest and Europe's leading supplier of ABS plastics with sales amounting to almost Euro 900 Million. Thus it is the perception and the capacity of the buyer to make the value addition decides the control premium. In this case the material placed before us as mentioned above clearly shows that the buyer saw tremendous potential in purchasing the business of the assessee and, therefore, there is a justification ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 5.9 In view of the foregoing discussion and for the reasons given earlier, we do not see any infirmity in the order of AO making adjustment on account of control premium. The order of the AO is, therefore, upheld on this point. 20. The Bench in the above decision has held that the report by Phillip Sounders Jr. PHD which is based on research undertaken in respect of several public quoted companies can be used as reliable material. Applying the average premium as identified in the said report of 30% to 50% to reported price of Rs. 1,440, the price range in the present case would vary from rupees 1800 to 2100 per share. Considering the above, the price determined by the TPO by adopting the discounted cash flow method at Rs. 2,039.25 per share, which is within the aforementioned range, appears to be reasonable. 21. Looked at from another angle, the argument of the Assessee that the share prices quoted on the stock exchange would factor in all the conditions and would ultimately represent the true value of the underlying business as a whole, may be considered at the relevant time when the fact of transfer of control was in public domain. In the present case, as reported i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also to be taken into account. We have perused the said regulation. The SEBI regulations do not regulate the price to be negotiated between the buyer and seller of shares. It only provides that in case of transfer of stake exceeding 15% of share holding, the general public is also required to be offered to the extent of 20% of share holding which has to be the highest of the four factors i.e. negotiated price; the share price paid by the acquirer for any acquisition during the 26 week period prior to the date of public announcement; the average daily high and low on the stock exchange during the 26 week period preceding the date of public accouchement; and average daily high and low of share price on the stock exchange during the two week period preceding the date of public announcement. This is only a formula to safeguard the interest of general share holders. It does not in any way state that price negotiated by the assessee with the buyer is at arm's length price and the TPO is bound by the same. We find an identical argument was raised in case of Lanxess India (P) Ltd. (supra) and the said contention was rejected by the Mumbai Tribunal in para 5.8 reproduced above. 23. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held by them in LTIAL to APFI. Had these been independent transactions entered into by two different parties, the sale would not have been ordinarily effected through one agreement. APFI was interested in purchasing the shares of LTIAL. only if both Assessee and LTIL sold their respective holdings at a single price. Every clause in the said agreement applies to both Assessee and LTIL. Even the consideration of Rs. 79 crores mentioned at clause No. 3 of the said agreement is a consolidated one. Thus, the price for which shares of LTIAL were transferred was based on a single agreement and, therefore, to say that one part of that agreement would be an uncontrolled transaction, for comparing it with the other part, would, in our opinion, be unacceptable. The agreement has to be taken as a whole and it is clear that the transactions between Assessee and LTIL with regard to the sale of shares of LTIAL, was not an independently entered one. But a joint effort. In such circumstances, Assessee's contention that the sale of shares of LTIAL by LTIL to APFI has to be taken as an comparable uncontrolled transaction, falls flat. 24. The definition of 'arms length price' as per s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The DR relies on the findings of the DRP in this regard which has held that use of DCF method is appropriate considering the unique facts of the present case. 27. The DCF method is statutorily as well as internationally accepted method for valuation of shares. We therefore are of the opinion that the TPO has not erred in adopting such method. The data considered for computing the value using such method is also questioned particularly on the aspect of substantial variations in projected cash flows vis-a-vis the actual cash flows. In the context of section 56(2)(viib) read with rule 11UA, this Tribunal in Flutura Business Solutions (P) Ltd. v. ITO (2020) 117 taxmann.com 567 (Bang-Trib) and other similar cases, has held that the valuation under DCF method can be based only on estimated future projections and actual figures available subsequently cannot be replaced. Applying the same, the estimated cash flows considered by the TPO using date available in Bloomberg database for the relevant period, is justified. Accordingly, these grounds raised by the Assessee are dismissed. CORPORATE TAX ISSUES (Differential tax on account of rate of tax on capital gains of Rs. 96,52,74, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... record. This issue is covered in favour of the Assessee by the judgment of the Hon'ble Delhi High Court in Cairn UK Holdings Ltd. case (supra). The relevant portions from the said judgment are as follows: 20. Language of proviso to Section 112(1) syntactically and grammatically mandates one interpretation. If one squarely focuses and orates the words used in the proviso and interprets them without extracting or subtracting any phrase or word, a nonresident assessee is entitled to benefit of the said provision. The proviso to Section 112(1) of the Act does not state that an assessee, who avails benefits of the first proviso to Section 48, is not entitled to benefit of lower rate of tax @ 10%. The said benefit cannot be denied because the second proviso to Section 48 is not applicable. The stipulation for taking advantage of the proviso to Section 112(1) is that the aggregate of long-term capital gains to the extent it exceeds 10% of the amount of capital gains, should be before giving effect to the provisions of second proviso to Section 48. Inflation indexation shall be ignored. In case the Legislature wanted to deny the said advantage/benefit where the assessee had taken b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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