DLF MIDTOWN P. LTD,NEW DELHI V. ACIT,CIRCLE-7(2), NEW DELHI

MA 385/DEL/2024

AI Insights

The case involves DLF Midtown Pvt. Ltd., the appellant, and the ACIT, Circle 7(2), Delhi, the respondent, concerning the assessment year 2016-17. The core issue was the transfer pricing adjustments made by the Transfer Pricing Officer (TPO) and the valuation of land for development rights. The Tribunal examined the methods used for valuation, particularly the Discounted Cash Flow (DCF) method and the Comparable Uncontrolled Price (CUP) method, and compared these with the circle rates used by the TPO. The Tribunal found that the circle rates were not a suitable benchmark for the transaction and that the DCF method, as applied by the appellant, was appropriate. The Tribunal's decision emphasized the need for a detailed and methodical approach in valuing real estate transactions, particularly in the context of transfer pricing.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 102864 (ITAT-DELHI)
• Appeal Type: Miscellaneous Application
• Pronouncement Date: 17-04-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Assessment Year: 2016-2017
• Other Referred Cases: Lal Chand V. UOI (2009) 15 SCC 769, UOI V. Savitri Devi 2017 SCC Online 1400, Viluben Jhalejar Contractor v. State of Gujarat (2005) 4 SCC 789
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AAHISH TRIPATHI
• Keywords: Transfer pricing; Fair market value; Valuation report
• Section: 13; 92CA

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI BENCH: ‘I’ NEW DELHI BEFORE SHRI M. BALAGANESH, ACCOUNTANT MEMBER AND SHRI VIMAL KUMAR, JUDICIAL MEMBER Miscellaneous Application No. 385/Del/2024 Arising out of ITA No. 1963/Del/2022 Assessment Year: 2016-17 DLF Midtown Pvt. Ltd., 15, Shivaji Marg, New Delhi-1100 15 Vs. ACIT, Circle 7(2), Delhi PAN :AAFCD3015Q (Applicant) (Respondent) ORDER PER VIMAL KUMAR, JUDICIAL MEMBER: The miscellaneous application is for expressly delineating the ground-wise adjudication of the cross appeals decided vide order dated 06.09.2024. 2. Learned Authorized Representative for the Appellant/Assessee submitted that the findings of ground no.3 with reference to para nos. 36.2 to 39 and the findings on ground nos. 1 to 5 of Revenue’s appeal regarding T.P. adjustment in Applicant by S/Shri R.S. Singhvi & Satyajeet Goel, CAs Respondent by Shri Aahish Tripathi, Sr. DR Date of hearing 11.04.2025 Date of pronouncement 17.04.2025 2 MA No.385/Del./2024 respect of interest on CCD required reference to para nos. 42.2 and 42.3 in para 13 of the order. 3. Learned Authorized Representative for Department submitted that the order dated 06.09.2024 does not require any changes. 4. From examination of record in light of aforesaid rival submissions, it is evident that para no.13 of order dated 06.09.2024 contains reference to ITA No.2078/Del/2022 and para nos. 27 to 31.The appellant/assessee wants addition of para nos. 36.2 to 39 and 42.2 as well as 42.3 for expressly delineating ground-wise adjudication of the cross-appeals. Para nos. 36.2 to 39 and 42.2 as well as 42.3 are as under: “36.2 We do not agree with the observation of Ld. CIT(A) to hold ‘sales comparable method is akin to comparable uncontrolled price (CUP)’. The sales comparison method is a real estate centric approach that compares one property to comparables or other recently sold properties in the area with similar characteristics. This method accounts for the effect that individual features of parties or property, have on the overall value. In other words, the total value of a property is the sum of the values of all of its features. On the other hand, the comparable uncontrolled price (CUP) method establishes a price based on the pricing of similar transactions that have taken place between third parties. The individual features of the transaction are generally not relevant. The CUP method makes a comparison between the price charged for a specific product/service for a specific quantity at a specific moment with comparable terms and conditions and quantities. When comparable uncontrolled prices exist, then only this method is applicable. However, in case of transaction like we are dealing of Development rights, there is very less possibility of comparable uncontrolled prices being in existence. Infact TPO himself had fallen on circle rate only, and could not give any other comparable uncontrolled price/value. 36.3 It is for this reason we are of opinion that the principles applicable to land acquisition matters where market value is determined on the 3 MA No.385/Del./2024 bases of certain parameters peculiar to the parties and property, is more appropriate method of valuation of market price, than the circle rates. Infact it comes up that before the Ld. CIT(A), on behalf of assessee, on the basis of the judgement Lal Chand V. UOI (2009) 15 SCC 769 and UOI V. Savitri Devi 2017 SCC Online 1400 it was submitted that circle rate is not suitable parameter or comparable for making any adjustment of a transaction involving land. The Ld. CIT(A) has distinguished them by observing that these observations of Hon’ble Supreme Court are in regard award of compensation in land acquisition cases. On the contrary we are of the view that where the question involved is about the valuation of any land which becomes a merchantable commodity, then the market value of the land needs to be determined on certain established principles which help in arriving a fair market value of the land. In Viluben Jhalejar Contractor v. State of Gujarat (2005) 4 SCC 789 p 797, Hon’ble Supreme Court has held :- “(19) Market value is ordinarily the price the property may fetch in the open market if sold by a willing seller unaffected by the special needs of a particular purchase. Where definite material is not forthcoming either in the shape of sales of similar lands in the neighbourhood at or about the date of notification Under Section 4(1) or otherwise, other sale instances as well as other evidences have to be considered. (20) The amount of compensation cannot be ascertained with mathematical accuracy. A comparable instance has to be identified having regard to the proximity from time angle as well as proximity from situation angle. For determining the market value of the land under acquisition, suitable adjustment has to be made having regard to various positive and negative factors vis-a- vis the land under acquisition by placing the two in juxtaposition....” 36.4 Here we will like to consider the argument of Ld. DR that in several cases for transfer pricing analysis, various courts have taken the prices /rates taken by the custom authority/Govt. agency for benchmarking /determining ALP in Income Tax. We are of considered view that the levy of rates of excise or customs, is generic for the class of product, to earn Revenue. The purpose is to have uniformity of levy. However, circle rates are not fixed to levy uniform stamp duty, but to ensure there is no undervaluation of particular property. The principles and methods of arriving at the rates or prices of merchantable products, as determined by the Custom authority cannot be equated with the circle prices for land. 36.5 Thus, we find no fault in valuation arrived using the relevant parameters and adding premium or discounting, the value, on those parameters. The Valuer’s Report is quite in conformity with the principles and method by which market value of a real estate property should generally be arrived at. 4 MA No.385/Del./2024 37. Then coming to the valuation calculation on DCF method, the Valuer has primarily calculated the saleable area of 1.43 million sq. feet on the basis of effective FAR of 4.0. Then having taken into consideration the fact that the subject property would be extension of residential township of DLF Green. Further taking into account the cost assumptions, the value of cash inflow at Rs. 15,500/- per sq.ft as an appropriate selling rate for subject property is calculated. Certainly the benchmarking has been done on basis of sale rate of apartments of other residential projects, but then the development rights are acquired for apartments proposed at the subject property. It is also coming up that in benchmarking with other property the range is kept between Rs. 13,000/- per sq. feet to Rs. 19,500/- per sq feet. Excluding the high end Queen and King Court projects of Rs. 40,000/ and 45,000/- per sq. feet. 37.1 Ld. CIT(A) has however, discredited this method and held, “Further, at the time of transaction, the property under consideration was simply a piece of land which did not have any intangibles. Admittedly, DCF method is suitable for the valuation of running business which has tangibles as well as intangibles. The valuation using DCF method in this case is based on various assumptions and projections. The DCF method applied here is not on a sound basis. Therefore, DCF method is also not an appropriate method for valuation of land in this case.” 37.2 In our understanding the Discounted cash flow (DCF) refers to a valuation method that estimates the value of an investment using its expected future cash flows. DCF analysis attempts to determine the value of an investment today, based on projections of how much money that investment will generate in the future. In case of real estate project, initial cost, annual cost, estimated income, and holding period of a property are some of the variables used in a DCF analysis. We are of considered view that more than to determine the profitability, but to at least ensure the viability, of an investment, DCF method is often used in real estate sector. DCF method is not only applicable where the assets- based approach is applied and the value of a business is derived from the FMV of the assets (tangible and intangible) less the liabilities. But in case of real estate development projects the income-based approach of the DCF method, is more appropriate method, as rightly applied by the valuer. Thus absence of tangibles could not have been basis to discard the DCF method. 38. Now coming to the wisdom of TPO to apply circle rates to make adjustment we are in agreement with Ld. AR that certainly the circle rates never are correct reflection of the market rates. Circle rates are merely fair market value of the land for fiscal purposes but cannot be considered to be market value. When a transaction involving land is to be benchmarked, then the market value is more realistic parameter for making the adjustment and not the circle rates. Thus at one end, the Ld. CIT(A) and Ld. TPO have fallen in error in invoking the provisions of 5 MA No.385/Del./2024 Section 92CA of the Act and on the other hand in discarding the valuation report and to substitute it with circle rate. 39. Resultantly, the ground nos.1 and 3 with their sub grounds are decided in favour of appellant and as a consequence to same, the ground nos. 2, 4 and 5 have become academic and are left open. x x x x x x 42.2 Giving our thoughtful consideration to the issue, regarding transfer pricing adjustment u/s 92CA of Rs. 6,29,72,610/- in respect of interest paid to AE on CCD/OCD. It comes up that the assessee company has benchmarked the transaction based on CUP method and the ALP of interest was determined at 15% based on 47 comparables. The Ld. TPO rejected the comparables so selected by the assessee company and coupon rate of 10.25% was treated as ALP based on 2 separate comparables thus resulting in the transfer pricing adjustment. The Ld. CIT(A) has decided the issue with following finding: “24.18 It is observed that the TPO conducted fresh search on the Bloomberg database; however, the parameters such as year of issue, tenure of the instrument etc. which need to be considered while performing the search have not been considered by the TPO. It is also observed that the two comparables considered by the TPO were the companies which were not similar to the appellant company. The companies identified by the TPO operate in different industry i.e. Rubber products (Suja Shoei Industries Private Limited) and Energy sector (Celestial Solar Solutions Private Limited). Thus, TPO did not apply the industry filter for determining the ALP which is critical as the rates of interest may differ from industry to industry based on the circumstances prevailing in each industry. Further, in a high-risk industry like the real estate sector, the rate of interest is likely to be more vis-a- vis a low-risk industry. It is also observed that the instruments selected by the TPO are bonds/loans instead of CCDs (as issued by the appellant). 24.19 Thus, the TPO was not justified in rejecting the comparables of the appellant which are third-party debentures similar to the nature of the inter-company debentures issued by the appellant. The TPO is directed to consider the 47 comparables selected by the appellant for the purpose of benchmarking. Further, though the two comparables considered by the TPO are not entirely comparable as they pertain to different industry. However, in order to further broad base the list of comparables, the TPO is directed to add the two comparables chosen by the TPO to the list of 47 comparables. 6 MA No.385/Del./2024 24.20 The average rate of interest on such 49 comparables comes to 15.34%. After adding the two comparables selected by the TPO, the 35th percentile comes to 15.00% and the 65th percentile comes to 18.00% with a median of 16.00% which is higher than the 15% coupon rate of interest paid by the appellant company. Therefore, the adjustment made by the TPO is not justified and warranted. Thus, addition made by the AO/TPO of Rs 6.29 crores on account of disallowance of interest on CCDs/OCDs is deleted. The ground of appeal 3(2) is allowed. ” 42.3 We are of considered view that Ld. CIT(A) has thoughtfully taken into consideration the facts in wholesome manner and has adopted a judicious approach by considering median @16% based on 49 comparables i.e. 47 comparables selected by assessee company as well as 2 by TPO. Even if the 2 comparables were not of same industry but as the assessee does not object to their inclusion, the order of Ld. CIT(A) cannot be faulted. There is no apparent infirmity requiring our indulgence. Accordingly, the grounds so raised have no substance. 43. In the result, the appeal of assessee is allowed with consequential effects as per the determination of grounds and appeal of Revenue is dismissed.” 5. The addition of aforesaid para nos. 36.2 to 39, 42.2 and 42.3 in para 13 of order dated 06.09.2024 shall expressly delineate the ground-wise adjudication of cross-appeals. Hence, para nos. 36.2 to 39, 42.2 and 42.3 shall form part of para 13 of the order dated 06.09.2024. All other contents shall remain unchanged. 6. In the result, the miscellaneous application is allowed. Order pronounced in the open court on 17th April, 2025. Sd/- Sd/- (M. BALAGANESH) ACCOUNTANT MEMBER (VIMAL KUMAR) JUDICIAL MEMBER Dated: 17 April, 2025. Mohan Lal 7 MA No.385/Del./2024 Copy forwarded to: 1. Applicant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi "