Wednesday, May 29, 2013

Method of discounted cash flow can be used for share valuation if other methods of sec. 92C are not applicable

Where assessee-company sold its stake in an Indian company to its foreign associate company, discounted cash flow method could be used for valuation of shares sold, due to non-applicability of other methods prescribed under section 92C(1)

In the instant case, the assessee-company owning 84.97% of shareholding of AITPCL India, entered into a contract with its AE for sale of its stake in AITPCL. The TPO valued the shares using discounted cash flow method and made Transfer Pricing adjustment. The objections filed by the assessee were rejected by the Dispute Resolution Panel. Aggrieved assessee filed instant appeal.

The Tribunal held as under:

1) As per Section 92C, ALP in relation to an international transaction has to be determined by one of the six methods mentioned therein;

2) Re-sale price Method couldn’t be applied in the instant case because the shares sold by the assessee were, in turn, not sold to anybody else. Cost Plus Method couldn’t be applied since assessee had made no value addition to any item. Original cost per share was only its face value, and the cost incurred which resulted in increase of its intrinsic value couldn’t be correctly ascertained. Neither Profit Split Method nor TNM Method could be used. Further, similar companies doing similar share transactions were hard to find;

3) Purpose of transfer pricing rules is to verify whether the prices at which an international transactions have been carried out is comparable with the market value of the underlying asset or commodity or service. This might require some subtle adjustments in the methodology prescribed for evaluation of an international transaction;

4) A water-tight attitude of interpretation of the prescribed methods will defeat the very purpose of enactment of transfer pricing rules and regulations and also detrimentally affect the effective and fair administration of an international tax regime;

5) Interpretation of the word 'shall' need not always be mandatory and could also be read as 'may', is a rule laid down by the Gujarat High Court in the case of CIT v.Gujarat Oil & Allied Industries [1993] 201 ITR 325;

6) Hence, while finding the most appropriate method, it is not that modern valuation methods fitting the type of underlying service or commodities have to be ignored. Fixing enterprise value based on discounted value of future profits or cash flow is a method used worldwide.

Endeavour was only at arriving at a value which would give a comparable uncontrolled price for the shares sold. If viewed from this angle, it couldn’t be said that the discounted cash flow method adopted by the TPO was not in accordance with section 92C(1) - Ascendas (India) (P. )Ltd. v. Dy.CIT [2013] 33 295 (Chennai - Trib.)

No comments: