Introduction:
Recently the Chennai Bench of the Income Tax Appellate Tribunal (the “Tribunal”) ruled its acceptance of the Discounted Cash Flow (“DCF”) methodology over the Controller of Capital Issues (“CCI”) Guidelines for determining the arm’s length price (“ALP”) for sale of shares. The Tribunal held that the valuation of shares based on erstwhile CCI Guidelines were for a different purpose and could not be used for determining the ALP of shares for transfer pricing purposes.
Facts of the case:
Ascendas India Pvt. Ltd. (“Ascendas India/ taxpayer”) is engaged in the business of building and leasing out techno-parks and software parks. During the year under consideration, Ascendas India sold investments in two of its group companies, L&T Infocity Ascendas Ltd. (“LTIAL”) and Ascendas (India) IT Park Ltd. (“AITPL”). LTIAL was a 50:50 joint venture between the taxpayer and L&T Infocity Limited (“LTIL”), whereas in AITPL the taxpayer and its group companies held more than 85% shares. These investments were sold to an overseas associated enterprise Ascendas Property Fund India (“APFI”).
With regards to the sale of LTIAL shares, the taxpayer used the Comparable Uncontrolled Price (“CUP”) method to benchmark the transaction. The taxpayer contended that LTIL, an independent party, sold its shares to APFI at the same price as the taxpayer (Rs. 11,848/share). Regarding the sale of AITPL shares, the pricing was supported by the taxpayer with a valuation certificate (at Rs. 3.07/share) prepared by a Chartered Accountant in accordance with the erstwhile CCI Guidelines.
TPO & DRP Observations
According to the Transfer Pricing Officer (TPO), the transfer of LTIAL shares by LTIL to APFI could not be considered an uncontrolled comparable transaction. The TPO held that the relationship of the taxpayer with LTIL, through common participation in LTIAL, automatically resulted in LTIL and taxpayer being associated enterprises. Thus sales of shares by LTIL and taxpayer to APFI were intimately connected transactions.
Regarding the sale of AITPL shares, the TPO remarked that the valuation based on CCI Guidelines was not relevant for the purpose of ascertaining the arm’s length price under the transfer pricing rules. Further the TPO observed that the FEMA Guidelines had been amended to replace CCI Guidelines with DCF methodology for valuation of unlisted shares, effective April 2010. Thus for both share transactions, the TPO proposed the DCF methodology. Accordingly, the TPO determined the arm’s length price for LTIAL shares at Rs. 26,655/share and that of AITPL shares at Rs. 70.52/share (as against Rs. 11,848/share and Rs. 3.07/share respectively, determined by the taxpayer). Consequently, an adjustment of Rs. 2.4 billion (USD 48 million approx.) was proposed by the TPO. |