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TMI Blog2023 (9) TMI 204X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luation 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. - SHRI B.R. BASKARAN, ACCOUNTANT MEMBER AND SHRI RAHUL CHAUDHARY, JUDICIAL MEMBER For the Appellant : Shri Dinesh Bafna, Shri Hardik Nirmal, Shri Yogesh Malpani For the Respondent : Dr. Samuel Pitta ORDER Per Rahul Chaudhary, Judicial Member: 1. The present appeal is dir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns of section 5 read with section 9 of the Income-tax Act, 1961 ('the Act') g) Determining the ALP of the international transaction of purchase of equity shares without cognizance to the provisions of Section 92C(3) of the Act. 2. Ground No. 2: TP adjustment in respect of Sale of Shares of QNPL to SIPL On the facts and circumstances of the case and in law, Ld. DRP erred in upholding the action of Ld. AO of determining the ALP for the international transaction of sale of equity shares of QNPL to SIPL and determining the ALP of QNPL per share at INR 10,013.45 and thereby making a TP adjustment to INR 71,64,92,650. In doing so, the Ld. TPO/Ld. AO/Ld. DRP erred in: a) Disregarding CUP method as adopted by the Assessee for determination of ALP of sale of shares of QNPL, thereby ignoring the third-party transactions entered into by SIPL on the same day and same terms; b) Disregarding the valuation report issued by independent valuation expert for valuation of equity shares of QNPL without providing cogent reasons; c) Adopting actual financial results for valuation of shares results by replacing the projected financial values in original valua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e no income arises on purchase of shares thus, ignoring the basic principles for applicability of Chapter X 5. Ground No. 5: Initiating penalty proceedings under section 270A of the Act On the facts and in the circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings under section 270A of the Act. 3. The relevant facts in brief are that the Appellant, a foreign company, filed its return of income for the Assessment Year 2017-18 on 30/11/2017 declaring total loss of INR 72,18,784/-. The case of the Assessee was selected for scrutiny. During the assessment proceedings, the Assessing Officer noted that the Assessee had entered into International Transactions with Associated Enterprises (AEs) and therefore, made a reference to the Transfer Pricing Officer (TPO) for computation of Arm s Length Price (ALP) under Section 92CA(1) of the Act. The details of International Transactions identified for determination of ALP are as under: (a) Purchase of equity shares of Sutures India Pvt. Ltd. (SIPL) from its AE (i.e. TPG Growth II SF Pte. Ltd.) (b) Purchase of equity shares of Quality Needles Pvt. Ltd. (QNPL) from its AE (i.e. TPG Gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,29,38,26,665 5. However, prior to the passing of the Rectification Order, dated 06/08/2021, by the TPO, the Assessing Officer passed the Draft Assessment Order, dated 15/06/2021, under Section 144C of the Act at the proposed assessed income of INR 115,07,88,560/- and therefore, transfer pricing adjustment as revised by the TPO could not be incorporated in the Draft Assessment Order. 6. Aggrieved by the adjustment made in the Draft Assessment Order, dated 15/06/2021, the Assessee filed Objections before the DRP on 31/08/2021. The DRP vide order dated 31/03/2022 partly allowed the aforesaid Objections. Pursuant to the directions given by the DRP, the Assessing Officer passed Final Assessment Order, dated 28/04/2022 granting partial relief to the Appellant by assessing the total income of the Appellant at INR 110,23,62,420/- as against the proposed assessed income of INR 115,07,88,560/- in the Draft Assessment Order, dated 15/06/2021. The position after the relief granted in the Final Assessment Order can be summarized as under: Sr. No. Nature of TP adjustment Adjustment proposed by TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taken into consideration the material on record on which reliance was placed by the parties during the course of hearing. 9. The brief facts and the chronology of events as culled out from the material on record and after taking into consideration the submissions advanced by both the sides are as follows: 9.1 The Appellant/TPG Growth II Markets Pte. Ltd. (for Short TPG ), TPG Growth II Market Holdings Pte. Ltd. and TPG Growth II SF Pte. Ltd. are private limited companies incorporated under the Singapore Laws and engaged in investment activities. 9.2 The Appellant is a wholly and subsidiary of TPG Growth II Market Holdings Pte. Ltd. (for Short the Holding Company ) which in turn is a subsidiary of TPG Growth II SF Pte. Ltd. (for Short TPG SF ). Thus, the TPG SF is the ultimate holding company of the Appellant. 9.3 The TPG SF held 53.37% share capital of SIPL (now known as Healthium Meditech Pvt. Ltd.) and 76% share capital of QNPL. 9.4 On 09/12/2016, the Appellant entered into Agreement for the transfer of the Shares of Sutures India Private Limited and Quality Needles Private Limited [for Short the Agreement ] with the TPG SF. As per the Agreement, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uity shares to S. Subramanian, (iv) 765 equity shares to S.V. Nene, (v) 85,431 equity shares to AAJV Investment Trust, (vi) 41,86,209 equity shares to Ambrose Private Limited, (vii) 1,62,95,955 equity shares to TPG SF, (viii) 4,78,500 equity shares to Ajay Patel, (ix) 5,53,845 equity shares to Hemang Badiani, (x) 69,360 equity shares from Christopher Portis, (xi) 13,065 equity shares from Mahadevan Narayannamoni (Draft Red Herring Prospectus placed at page 1607 to 1611 of the paper-book) 9.8 On 29/03/2017 the Appellant exercised call option and acquired 1,24,800/- shares of QNPL representing 23.949% shareholding for consideration of 107,77,20,384/- at a value of INR 8,635.58/- per share from Mr. Viney Sagar Sehgal 9.9 On 30/03/2017, the Appellant sold to SIPL, 5,20,000/- equity shares of QNPL for consideration of INR 4,49,05,01,600/- at a value of INR 8635.58/- per share. In order to discharge consideration, on 31/03/2017 SIPL issued to the Appellant 1,19,65,193 equity shares of SIPL for of INR 375.29 per share (post stock-split and bonus issue) by way of preferential allotment. 9.10 Therefore, during the assessment proceedings for the Assessment Year 2017-18, the Assessin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, or lending/borrowing of money, or any other transaction having bearing on the profits, income, losses or assets of such enterprises. Thus, the definition of International Transaction includes in its ambit any transaction having bearing on the profit, income, losses or assets the enterprises involved. A transaction of issuance, purchase or sale of shares would have bearing on the assets, being cash, cash equivalents, receivables, payables, investments or stock-in-trade, of the enterprises involved. In case of issue of shares the assets of the issuer would increase by the subscription amount paid/payable, while the assets of the subscriber in the form of cash, investment, or stock-in-trade also see variation on subscription of shares. Similar is the impact on the assets of the enterprises involved in case of purchase/sale of shares. 12 However, for triggering the provision contained in Chapter X relating to determination of APL it is not sufficient that there must be International Transaction . The aforesaid International Transaction should also necessitate computation of income. Section 92(1) of the Act provides that any income arising from international transaction shal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing six methods: (a) Comparable Uncontrolled Price Method (For short CUP Method ) (b) Resale Price Method (RPM) (c) Cost Plus Method (CPM) (d) Profit Split Method (PSM) (e) Transactional Net Margin Method (TNMM) (f) Such other method as may be prescribed by the Board (For short Other Method ) 17 Rule 10B deals with the manner of determination of ALP using the different methods. In the present appeal we are concerned with application of CUP Method and Other Method. 18 As regards OM, Rule 10B(1)(f) read with Rule 10AB provides that OM shall be any method which takes into account the price which has been charged/paid, or would have been charged/paid, for the same or similar uncontrolled transaction, with or between non- associated enterprises, under similar circumstances, considering all the relevant facts. For example a valuation of shares obtained from an independent expert determining the value/price of shares that would have been charged in case of purchase/sale of such shares by two independent third-parties. 19 As regards CUP Method, Rule 10B(1)(a) provides that ALP shall be determined by using CUP Method, being the most appropriate method, and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in open market. The Adjustment could be required in respect of differences either in the international transaction and comparable uncontrolled transaction or in the enterprises undertaking the same. As per Rule 10B(3) an uncontrolled transaction shall be comparable with International Transaction in case there are no differences having material affect, or the impact of differences having material effect has been reasonably accurately adjusted by way of the Adjustment. CUP can be Internal CUP being a transaction by an associated enterprise/tested party with a third party or an External CUP being a transaction between two third parties (not being associated enterprises). The onus to show that the transaction used for benchmarking is comparable uncontrolled transaction is on the person applying CUP Method for benchmarking the transaction. 24 Keeping in view the above legal background common to the grounds raised, we proceed to adjudicate the grounds raised in appeal. Ground No. 1 25 Ground No. 1 pertain to the transaction of purchase of shares of SIPL and QNPL by the Appellant from its AE (i.e. TPG SF) 26 We would first take up the transfer pricing adjustment in re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... posed downward adjustment in relation to the cost of acquisition of shares in the subsequent years. 26.4. During the course of hearing, the Learned Authorised Representative for the Appellant had vehemently contended that the TPO/DRP fell in error in arriving at the value of the share of SIPL by replacing the projected figures in DCF valuation with actual financial results for determining cash flows for different financial years. In this regard, he place reliance on the following judicial precedents: - DQ (International) Ltd. Vs. ACIT: [ITA No. 151/Hyd/2015 (Hyderabad ITAT) - Aaradhana Realties Limited Vs. DCTT: [ITA No. 2195/MUM/2014 (Mumbai) - PCIT Vs. Cinestaan Entertainment Pvt. Ltd: [ITA 1007/2019 (Delhi High Court) - Planet Gogo Pvt. Ltd. Vs. ITO: [ITA No. 1526/Del/2022 (Delhi ITAT) 26.5. Per contra, the Learned Departmental Representative supported the order passed by the TPO on this issue, and relied upon Rule 10B(5) of the Income Tax Rules, 1962 (hereinafter referred to as the Rules ). He submitted that the TPO was correct in determining the value of shares of SIPL on the basis of actual financial results. He also placed reliance on BEPS: Action 8 dealin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iscounted cash flow DCF analysis which is known to economists for the times immemorial. Thus, the TPO used a reasonable well accepted method of valuation of in tangibles including software products and accepted by courts in the countries like in USA, where the TP regime is well developed. Further, the assessee's contention to adopt the actual revenues for the future years which are available now cannot be accepted now for a simple reason that the ALP was calculated on the date of sale which was in January, 2006 itself and also under EEM future revenues will be projected based on the previous year data keeping the current year's data as the base which has got no relevance on the actual revenues during the future years. We also make it clear that the actual CAGR shall be adopted by the TPO without any discount. 8.5 Finally ld. AR submitted that TPO's contentions of replacing the projections with actuals are legally unsustainable and technically incorrect. 9. Ld. DR submitted that the TPO with a view to determine the fair price replaced the projected figures in the DCF with the actual figures from the audited financial statements. In this regard, the TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te bench of this Tribunal held that the assessee's valuation has to be accepted as it was supported by an independent valuer. We are in agreement with the above decision. But now the question before us is, whether the actual result can be adopted in the valuation of IP . The ld. AR has also brought to our knowledge the decision of ITAT, Bangalore in the case of Tally Solutions (P.) Ltd. (supra). In the above case, the assessee attempted to adopt the actual revenues for the future years which were available then, which was rightly declined by the Bangalore Bench. We are in agreement with the above findings of the Bangalore Bench that the valuation method adopted for determining the future years cannot be replaced with actuals down the line, the valuation will go either way. When it goes to north, the revenue may adopt the same time, when it goes to south, the assessee may adopt, there won't be any consistency. What is important is the value available at the time of making business decision . It should be left to the wisdom of the businessman, he knows what is good for the organization. No doubt, 'IP was sold to AE . The method adopted should be consistent and shou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the taxpayer. Such information asymmetry restricts the ability of tax administrations to establish or verify, at an early stage, the developments or events that might be considered relevant for the pricing of a transaction involving the transfer of intangibles or rights in intangibles, as well as the extent to which the occurrence of such developments or events, or the direction they take, might have been foreseen or reasonably foreseeable at the time the transaction was entered into . 6. The HTVI guidance aims at providing a tool for tax administrations to address this problem. In the case of intangibles which fall within the definition of HTVI found in paragraph 6.189, and under certain conditions, tax administrations are entitled to consider ex post outcomes as presumptive evidence about the appropriateness of the ex ante pricing arrangements. Where, the actual income or cash flows are significantly higher or lower than the anticipated income or cash flows on which the pricing was based, then there is presumptive evidence (from the perspective of the tax administration) that the projected income or cash flows used in the original valuation should have been higher or lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sment year relevant to the current year, then, such data shall be used for such determination irrespective of the fact that the data was not available at the time of furnishing the return of income of the relevant assessment year (Emphasis Supplied) 26.11. 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. 26.12. 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed shares of QNPL for a consideration of INR 2,115.54 per share of QNPL less than the fair market value and therefore, proposed transfer pricing adjustment of INR 83,60,61,408/-. In the Draft Assessment Order, dated 15/06/2021, the Assessing Officer proposed an addition of INR 83,60,61,408/- under Section 56(2)(viia) of the Act. 27.2. In the Objections filed by the Appellant before DRP against the Draft Assessment Order, dated 15/06/2021, the DRP granted relief to the Appellant holding as under: 6.3.10 The assessee has next contended that the TPO has acted without Jurisdiction in determining income chargeable to tax under section 56(2)(viia) of the Act and further that the provisions of section 56(2)(vila) of the Act are attracted where a company receives any shares of another company for a consideration which is less than its fair market value and Rule 11UA read with Rule 11U of the Income-tax Rules 1962 (the Rules') prescribes the methodology for determining the fair market value of shares and securities for the purposes of section 56(2)(viia) of the Act, in the instant case the value of shares of QNPL as per section 56(2)(viia) of the Act read with Rules 11UA of Rule ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of INR 8,635.85 per equity share on 12/12/2016 (b) Purchase of 1,24,800 equity shares (constituting around 23.94% shareholding) of QNPL by the Appellant from the promoter (i.e Mr. Viney Sagar Sehgal) at a value of INR 8,635.58 per equity share on 29/03/2017 (c) Purchase of 1,100 equity shares by SIPL from individual resident promoter (i.e. Mr. Mahadevan Narayanamoni) of QNPL 32 During the course of hearing, the Ld. Authorised Representative for the Appellant had submitted that the sale consideration received by the Appellant from its AE (i.e. SIPL) was supported by the consideration received by the other shareholder of QNPL (holding about 26% equity shares) on sale of shares of QNPL. Accordingly, the CUP Method was considered to be the Most Appropriate Method. Further, the sale consideration was supported by an independent valuation report wherein the value of share of QNPL was determined at INR 8,635.58/- per share by following DCF method. Accordingly, Other Method has also been used on a corroborative basis. He further submitted that at the time the Appellant had sold equity shares of QNPL to its AE (i.e. SIPL) at a price of INR 8,635.58/- per share, SIPL had also purc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d contended that there were comparable uncontrolled transactions which were ignored by the TPO. In the present case the Appellant has relied upon the transactions undertaken by the promoter/shareholders within the same requirement of comparability as regards same product/service discussed in paragraph 22(a) above stands fulfilled. However, as regards requirement of comparability discussed in paragraph 22(b)/(c)/(d) above, as flowing from Rule 10B(2), the TPO has expressed doubts about the comparability of transaction of sale of share of QNPL by the individual promoters (i.e Mr. Viney Sagar Sehgal and Mr. Mahadevan Narayanamoni) on account of Contractual Terms and Market Conditions. The relevant extract of the order of TPO reads as under: t) As regards subsequent purchases from third parties are concerned, the same is also found to be not comparable for the reason that, the assessee purchased on 12.12 2016 and the third party purchases are on 29.03.2017. There is a time gap of more than 3 months There may have occurred many significant changes/events during this period which might have impacted the share prices which is not taken into consideration by the assessee. For comparab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bility analysis of the contractual rights and obligations before accepting the transactions as comparable. 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. Ground No. 3 38 Ground No.3 pertains to the computation of Short Term Capital Gains arising from sale of shares of QNPL. In view of adjudication of Ground No. 2 above, Ground No. 3 is disposed off as being consequential in nature. Ground No. 4 39 G ..... X X X X Extracts X X X X X X X X Extracts X X X X
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