Section 92C(1) provides that ALP of international transaction and SDT shall be determined by adopting “MAM”. Sub-section (2) provides that most appropriate method shall be applied, for determination of ALP, in the manner prescribed. Rule 10B lays down the methodology for computation of ALP for each of the method. The selection of one method as MAM and computation of ALP as per the Rules is mandatory. One cannot deviate from prescribed methodology and devise a new methodology to compute ALP. However, in the following decisions, deviations made from prescribed methodology were accepted by the Tribunal.
Intel Asia Electronics Inc v ADIT [2011] 9 taxmann.com 197 (Bang.), [2011] 140 TTJ (Bang.) 513 – In the context of sale of the taxpayer’s PE as a ‘going concern’ to the AE and where no similar transactions in an uncontrolled situation to compare are available, The ITAT observed that the valuation determined by the registered valuer could be the most appropriate means under the CUP method. However, the ITAT finally directed to apply the depreciation rates as provided by the Income-Tax Act on the ground that they are more dynamic and registered valuer report was arbitrary.
M/s Tally Solutions Private Ltd. v DCIT [2011] 14 taxmann.com 19 (Bang.), [2011] 48 SOT 110 (Bang.) – In this case of the tax department used Excess Earning Method for computing ALP of intangible property sold to AE. The taxpayer contended that the TPO has followed Excess Earning Method and not CUP Method as there were no comparables available with reference to the IPR sold by the taxpayer. The taxpayer contended that as per s 92C of the Act, the ALP in relation to an international transaction has to be determined only with reference to the prescribed method.
The ITAT observed that the sale of IPR is not a routine transaction involving regular purchase and sale. The ITAT observed that the taxpayer itself admits that there was no comparable and the taxpayer had arrived at the sale consideration based on its own valuation. The ITAT observed that the TPO had used an established method (Excess Earning Method) and this kind of valuation was upheld by the U.S Courts. The ITAT held that Excess Earning Method is used only to arrive at the CUP price, the price at which the taxpayer would have sold in an uncontrolled condition. Therefore, the issue raised by the taxpayer that the TPO had adopted a method of valuation of IPR which is not a method prescribed under the Act or Rules was dismissed.
Ascendas (India) (P.)Ltd. v DCIT [2013] 33 taxmann.com 295 (Chennai-Trib.) – In this case, the taxpayer had sold shares to its AE. The tax department computed the ALP using DCF. The issue before the ITAT was whether DCF can be adopted for computing ALP. Referring to r 10B, the ITAT observed that none of the methods can be applied for the given transaction. Referring to s 92C, the ITAT observed that following one of the methods is mandatory. The ITAT observed the purpose of enactment of Chapter X, is to benchmark an international transaction with the Fair Market Value of such transaction, so as to ensure that there are no profit transferred between parties in different jurisdictions effectually circumventing taxes. Thus, purpose of transfer pricing rules is to verify whether the prices at which an international transaction has been carried out is comparable with the market value of the underlying asset or commodity or service. The ITAT held that this might require some subtle adjustments in the methodology prescribed for evaluation of an international transaction. The ITAT held that 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. The ITAT observed that the interpretation of the word ‘shall’ (used in s 92C(1)) need not always be mandatory and could also be read as ‘may’. The ITAT held that while finding the most appropriate method it is not that modern valuation method 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 is only to arrive at a value which would give a comparable uncontrolled price for the shares sold. The ITAT observed that viewed from this angle it cannot be said that the discounted cash flow method adopted by the TPO was not in accordance with s 92C(1).
The ITAT further observed that Discounted Cash Flow for valuation is an accepted international methodology for valuing an enterprise and for determining the value of the holding of an investor. Investors are interested in ascertaining the present value of their investments. In ITAT’s opinion, ascertaining net present value of future earnings is more appropriate where market value of an investment is not readily ascertainable by conventional methods. In taxpayer’s case both the companies whose shares were sold were private limited companies which had no ready market for its equity shares due to various constraints for transfer of its shares. The ITAT observed that the sale of shares were effected to its own AE, and for verifying the fairness of the prices, value of such shares which discloses its true market potentials has to be considered. Accordingly, adoption of DCF for computing ALP was upheld.