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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 ..... and in law, the Ld. DRP erred in upholding the action of Ld. TPO / Ld. AO of determining the arm's length price (ALP) of the international transaction of purchase of equity shares of SIPL and QNPL at INR 2,155,06 and INR 10,013.45 respectively. In doing so, the Ld. TPO/Ld. AO/Ld, DRP erred in: a) Ignoring the existence of comparable transactions of purchase of equity shares from third parties which are akin to the transaction of the Appellant for determination of ALP b) Disregarding the valuation report issued by independent valuation expert for valuation of equity shares of SIPL and QNPL without providing cogent reasons; c) Adopting actual financial results for valuation of shares by replacing the projected financial values in original valuation, completely disregarding the fact that Discounted Cash Flow ('DCF") method of valuation takes into account future projections and also disregarding that such action tantamount to 'impossibility of the performance' to use actual results, were not available at the time of preparation of the valuation report, d) Disregarding the submission of the Appellant of non- applicability of TP provisions for purchase of shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PL by considering the sale consideration as Rs. 5,60,00,82,800 instead of Rs. 5,20,69,94,250 as rectified by the Ld. TPO. 4 Ground No. 4: In respect of Appellant's subscription in the equity shares SIPL, in lieu of sale consideration as a consequence 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. TPO / Ld. AO in considering Appellant's subscription in 1,19,65,193 shares of SIPL towards consideration of sale of 5,20,000 shares of QNPL. In doing so, the Ld. TPO/L.d. AO/Ld. DRP erred in: a) Ignoring the existence of comparable transactions of purchase of equity shares by third parties from SIPL which are akin to the transaction of the Appellant for determination of ALP b) Disregarding the valuation report issued by independent valuation expert for valuation of equity. shares of SIPL without providing cogent reasons; c) Adopting actual financial results for valuation of shares results by replacing the projected financial values in original valuation, completely disregarding the fact that DCF method of valuation takes into account future projections and also disregarding that su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Appellant for purchase of SIPL. Treating the excess payment as loan granted to AE, TPO proposed addition of notional interest thereon 4,78,60,011 394,98,584 2 On the issue of purchase of QNPL Shares from AE: TPO concluded that the Appellant has received shares for consideration less than the fair market value. The difference in the value determined by the TPO and the purchase consideration was treated as income chargeable to tax under the head 'Income from Other Sources' in terms of Section 56(2)(viia) of the Act. 83,60,61,408 53,73,14,110 3 On the issue of sale of Shares of QNPL to SIPL: TPO concluded that the sale consideration charged from the AE was less than the arm's length price of shares sold. TPO recomputed capital gains after taking into account the arm's length price of shares determined by the TPO. 110,95,81,200 71,64,92,560 4 On subscription of shares of SIPL by Appellant, as consideration for sale of share of QNPL to SIPL TPO concluded that share subscription value was more than the arm's length price of shares of SIPL and the same had resulted in excess payment to SIPL. Treating the excess payment as loan granted to AE, TPO proposed addition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsideration as INR 5,60,00,82,800/- 4 On subscription of shares of SIPL by Appellant, as consideration for sale of share of QNPL to SIPL TPO proposed charging of notional interest on the excess subscription amount over the arm's length price of shares of SIPL DRP deleted the adjustment in relation to notional interest. Assessing Officer allowed the relief on the notional interest following DRP Directions. 7. Not being satisfied with the partial relief granted by the DRP and the Final Assessment Order, dated 28/04/2022, the Appellant has preferred the present appeal on the grounds reproduced in paragraph 2 above which are taken up hereinafter. 8. We have heard the Ld. Authorised Representative for the Appellant and the Ld. Departmental Representative and 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hare assuming no share split INR 8,058.2/-) (i) Mr. LG Chandrasekar [for Short 'Promoter1'] for acquiring 1,35,315/- shares for consideration of INR 21,80,78,485/- (ii) Ms. Geeta Chandrasekhar [for Short 'Promoter2']for acquiring 1,81,055/shares for consideration of INR 29,17,94,702/- (iii) Mr. S Subramanian [for Short 'Promoter3'] for acquiring 108,910/- Shares for consideration of INR 17,55,23,244/- 9.7 On 29/03/2017, Bonus issue of shareholder of SIPL was made in the ratio of 3 bonus equity shares for every 1 equity share held. Thus, 2,55,95,115 equity shares having face value of INR 2 each were issued as follows (i) 12,10,695 equity shares to L.G. Chandrasekhar, (ii) 17,60,415 equity shares to Geetha Chandrasekhar, (iii) 9,40,875 equity 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kground common to all the issues raised in appeal. 11 The transfer pricing provisions were introduced by way of insertion of Section 92 to Section 92F in Chapter X of the Act containing special provisions relating to avoidance of tax in the year 2001. Section 92(1) of the Act provides that income arising from 'International Transaction' shall be computed having regard to the arm's length price. Section 92B of the Act deals with the meaning of expression 'International Transaction'. Section 92B(1) of the Act 'International Transaction' to mean transaction between two or more AEs (either or both of whom are non-residents) in the nature of purchase, sale, or lease of any tangible or intangible property, or provision of services, 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 sto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmined having regard to the APL of the benefit, service or facility provided or to be provided. 15 Further, in a case where the chargeability of income under the provisions of the Act itself depends upon the computation of income and the income so computed meeting a specified threshold, the applicability of provisions of contained in Chapter X of the Act for determination of ALP would apply or not apply depending upon the specific provision contained in the Act for example in the case of Section 56(2)(vii)/(viia)/(viib) of the Act. 16 Section 92C of the Act provides for computation of arm's length price or ALP. It provides that the ALP shall be determined by applying the Most Appropriate Method out of the following 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 M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Terms'); (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. (For Short 'Market Conditions); 23 CUP Method required high level of comparability as to property or goods involved, FAR Analysis, Market Conditions and Contractual Terms. Further, CUP Method also requires the Adjustment to the Price in case there are differences that materially affecting the price of the product/service 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 transact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er pricing addition of INR 4,78,60,001/- on account of notional interest. 26.2. In the Objections filed by the Appellant before DRP against the Draft Assessment Order, dated 15/06/2021 wherein the above transfer pricing addition of INR 4,78,60,001/- was incorporated, the DRP granted relief to the Appellant as it directed deletion the aforesaid addition. In the Final Assessment Order, 28/04/2022, the Assessing Officer implemented the aforesaid directions of DRP and no transfer pricing addition was made on account of notional interest. 26.3. The grievance of the Appellant is that the Final Assessment Order passed by the Assessing Officer is silent on the proposed 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly accepted. 8.4 Ld. AR referred to the decision of the ITAT, Bangalore in the case of In Tally Solutions (P.) Ltd. v. Dy. CIT [2011] 14 taxmann.com 19/48 SOT 110 wherein the Hon'ble Bangalore Tribunal held as under: "The excess earning method is the method that is adopted by the TPO. We see no infirmity in adoption of this method for the simple reason that the relevant data is available with reasonable accuracy, closing in on real valuation of a software product. This valuation is upheld by the US courts while arriving at the sale value of a software product. Further, the valuation under the method mainly revolves around discounted 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dependent valuation from two valuers and arrived at the sale consideration. No doubt the projections were submitted by assessee for such valuation. Now, the revenue has no problem with the valuation but they are replacing the projected values with actual values. The question arises, whether the action of the revenue was justified for replacing the projection with actuals after three years down the line ? Ld. AR submitted two case laws before us. The first being the valuation submitted by the independent valuers has to be adopted without any modification as held in Social Media India Ltd.'s case (supra). The coordinate 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 Benc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other than what the taxpayer may present, is at the heart of the reason for HTVI guidance in Section D.4 of Chapter VI of the Guidelines. When a HTVI is transferred, each of the parties involved in the transaction are likely to prepare a valuation at the time of the transaction using assumptions based on its specialised knowledge, expertise and insight into the business environment in which the intangible is developed or exploited. The problem for the tax administration is that the valuation is extremely difficult to objectively evaluate since such evaluation may be wholly based on the information provided 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 pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction shall be, the data relating to the current year ; or the data relating to the financial year immediately preceding the current year, if the data relating to the current year is not available at the time of furnishing the return of income by the assessee, for the assessment year relevant to the current year Provided that where the data relating to the current year is subsequently available at the time of determination of arm's length price of an international transaction or a specified domestic transaction during the course of any assessment proceeding for the assessment 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 e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the actual purchase consideration paid by the Appellant to its AE (i.e. TPG SF). 27.1. As was the case in relation to transaction of purchase of share of SIPL, TPO rejected the valuation report from independent valuer furnished by the Appellant; replaced the projected figured in the DCF valuation report with the actual financial results and arrived at the value of INR 10,769.39/- per share of QNPL as against INR 8,653.85/- determined in the valuation report of the independent valuer relied upon by the Appellant. Thus, the TPO concluded that the Appellant had received 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quity shares from the individual resident promoters (i.e. Mr. Mahadevan Narayanamoni) to become 100% shareholder of QNPL. 31 The Appellant benchmarked the transaction of sale of 5,20,000 equity shares of QNPL to its AE (i.e. SIPL) by using Comparable Uncontrolled Price (CUP) Method. The Appellant relied upon the following transactions to justify that the transaction of sale of shares was at arm's length. (a) Purchase of 3,95,200 equity shares (constituting 76% of the shareholding) of QNPL by the Appellant from its AE (i.e TGP SF) at a value 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 abou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l financial results for determining cash flows for different financial years. We have, while adjudicating Ground No. 1, already rejected the identical approach/methodology adopted by the TPO. Therefore, in view of paragraph 26.6 to 26.13 above, we reject the approach adopted by the TPO for the purpose of determining the value of shares of QNPL sold by the Appellant to its AE (i.e. SIPL). 36 Now, as regards the Appellants benchmarking of the transaction using CUP is concerned, the Learned Authorised Representative for Appellant had 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 Te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 7 thereto, dealing with Determination of Fair Market Value, supports the aforesaid view as it provides that the valuation determined by the independent valuer shall be binding on the parties. Further, we also find merit in the contention advanced by the Ld. Departmental Representative that the promoters looking for exit option to earn return on the investments made over the years could be placed differently as compared with investor acquire 100% shareholding in terms of expectations of risk and return calling for comparability 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 aforesa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer implemented the aforesaid directions of DRP and no transfer pricing addition was made on account of notional interest. 43 While adjudicating Ground No.1 & 2 we have rejected the valuation approach/methodology adopted by the TPO for the purpose of determining the value of shares by substituting actual financial results for the projected results in the DCF valuation furnished by the Appellant. Further, the Revenue has accepted the directions issued by DRP and no addition has been made in relation to income arising from the international transaction of issuance/allotment of shares of SIPL in the Final Assessment Order. Further, the Final Assessment Order also does not provide for downward adjustment in the cost of share of SIPL. Therefore, in the facts and circumstances of the case we hold that no adjustment can be made in the cost of purchase of shares of SIPL. As regards, contentions of the Appellant that the TPO had ignored the comparable uncontrolled transactions, the same are disposed off as being academic or infructuous. Accordingly, Ground No. 4 raised by the Appellant is partly allowed. 44 In result, the present appeal preferred by the Appellant is partly a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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