Ascendas (India) Private Limited, CHENNAI V. DCIT, CHENNAI

ITA 1460/CHNY/2012

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 1107 (ITAT-CHENNAI)
• Duration Of Justice: 8 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-03-2013
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 28-02-2013
• Assessment Year: 2008-2009
• Appeal Filed On: 10-07-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PATHLAVATH PEEYA
• Assessee Lawyers: KUNJ VAIDYA
• Keywords: Transfer pricing; International transaction; Fair market value
• Section: 92C; 143(3); 10B; 56

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, CHENNAI BEFORE SHRI ABRAHAM P.GEORGE , ACCOUNTANT MEMBER AND SHRI VIKAS AWASTHY, JUDICIAL MEMBER ITA NO.1460/MDS/2012 (ASSESSMENT YEAR : 2008-09) M/S. ASCENDAS (INDIA) PVT.LTD. INTERNATIONAL TECHPARK, PINNACLE # 01- 7 & 8, TARAMANI ROAD, CHENNAI-600 113. PAN: AAACJ9055H VS. DEPUTY COMMISSIONER OF INCOME TAX, COMPANY CIRCLE-I(1), 611, NEW BLOCK, AAYAKAR BHAVAN, NUNGAMBAKKAM, CHENNAI-34. (APPELLANT) (RESPONDENT) APPELLANT BY : MR. KUNJ VAIDYA & MR. ABHISHEK JAIN, ADVOCATE RESPONDENT BY : MR . PATHLAVATH PEEYA, CIT DR DATE OF HEARING : 28 TH FEBRUARY, 2013 DATE OF PRONOUNCEMENT : 12 TH MARCH, 2013 O R D E R PER VIKAS AWASTHY, JM: THE APPEAL HAS BEEN FILED BY THE ASSESSEE IMPUGNIN G THE ORDER OF THE ASSESSING OFFICER DATED 22.06.2012 UNDER SECTION 143(3) READ WITH SECTION 92CA AND 144C(5) O F THE INCOME TAX ACT, 1961 PASED ON THE BASIS OF THE DIRE CTIONS OF THE DISPUTE RESOLUTION PANEL DATED 4.6.2012. ITA NO.1460/MDS/2012 2 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E IS A FULLY OWNED SUBSIDIARY OF M/S. ASCENDAS LAND INTERN ATIONAL PTE LTD., SINGAPORE. THE SAID COMPANY IN TURN IS W HOLLY OWNED SUBSIDIARY OF ASCENDAS PTE SINGAPORE. THE ASS ESSEE IS ENGAGED IN THE BUSINESS OF BUILDING AND LEASING OF TECHNOLOGY PARKS, HIGH TECH BUILDINGS, BIO-TECHNOLO GY PARKS ETC. ANOTHER COMPANY M/S. ASCENDAS IT PARK (CHENNA I) PVT. LTD. (HEREINAFTER REFERRED TO AS AITPCL) WAS INC ORPORATED ON 3 RD NOVEMBER, 2003 WITH THE OBJECT OF DEVELOPING, OWNI NG AND LEASING IT PARKS AND HI-TECH BUILDINGS AND BUI LT TO SUIT AND READY BUILT FACILITIES IN INDIA. THE ASSESSEE H AD 84.97% SHAREHOLDING OF THE SAID COMPANY. THE REMAINING SHAREHOLDERS OF THE COMPANY ARE AS FOLLOWS:- I) M/S. ASCENDAS PROPERTY MANAGEMENT SERVICES INDIA PVT.LTD. : 4.02% II) TAMIL NADU INDUSTRIAL DEVELOPMENT CORPORATION L TD. 11% III) BALANCE 0.01% SHARES WERE HELD BY INDIVIDUAL INVESTORS. THE ASSESSEE ON 30.03.2007 ENTERED INTO A CONTRACT WITH M/S. ASCENDAS PROPERTY FUND (INDIA) PTE LTD. ANOTHER ASS OCIATED ITA NO.1460/MDS/2012 3 ENTERPRISES (WITH 29.82% SHAREHOLDING BY ASCENDAS GROUP) INCORPORATED IN SINGAPORE AND REGISTERED AS A FORE IGN VENTURE CAPITAL INVESTMENT COMPANY UNDER SEBI REGU LATIONS, 2000 FOR THE SALE OF SHARES OF AITPCL. AS PER THE AGREEMENT BETWEEN THE PARTIES THE ASSESSEE WAS TO SELL ITS EN TIRE STAKE OF 84.97% IN AITPCL IN TWO STAGES. DURING THE FINA NCIAL YEAR 2006-07 I.E. ASSESSMENT YEAR 2007-08 THE ASSESSEE S OLD 46.79% STAKE @ ` 26.07 PER SHARE. THE TOTAL CONSIDERATION AMOUNTED TO ` 53,06,51,674/- . DURING THE FINANCIAL YEAR 2007- 08 RELEVANT TO THE ASSESSMENT YEAR 2008-09, THE ASS ESSEE SOLD THE REMAINING STAKE OF 38.19% @ ` 26.07 PER SHARE. THE TOTAL CONSIDERATION AMOUNTED TO ` 43,31,85,054/-. DURING THE ASSESSMENT YEAR 2007-08, THE TPO DETERMINED THE VAL UE OF SHARES AT ` 306,76,90,000/- AS AGAINST ` 53,06,51,674/- USING DISCOUNTED CASH FLOW METHOD. THE DRP UPHELD THE ME THOD OF CALCULATION OF TPO. SIMILARLY, FOR THE PRESENT A SSESSMENT YEAR THE TOP ADOPTED THE SAME METHOD AND DETERMINED THE VALUE OF SHARES AT ` 73,83,97,767/- AS AGAINST ` 43,31,85,054/- DETERMINED BY THE ASSESSEE. THE ASSE SSEE FILED OBJECTIONS TO THE METHOD ADOPTED BY THE TPO. THE TPO ITA NO.1460/MDS/2012 4 REJECTED THE SAME AND PROCEEDED TO DETERMINE THE VA LUE OF SHARES BY MAKING ADJUSTMENT OF ` 73,83,97,767/-. AGGRIEVED AGAINST THE METHOD ADOPTED BY THE TPO TH E ASSESSEE FILED OBJECTION BEFORE THE DRP. THE DRP RE JECTED THE OBJECTIONS RAISED BY THE ASSESSEE AND UPHELD TH E ADJUSTMENTS MADE BY THE TPO VIDE ORDER DATED 4.6.20 12. ON THE BASIS OF THE DIRECTIONS OF THE DRP THE ASSESSIN G OFFICER PASSED THE IMPUGNED ASSESSMENT ORDER THEREBY MAKING ADDITION OF ` 73,83,97,767/- IN THE INCOME RETURNED BY THE ASSESSEE. AGGRIEVED AGAINST THE ASSESSMENT ORDER PASSED BY DRP, THE ASSESSEE HAS COME IN APPEAL BEFORE THE TRIBUNAL. 3. AT THE OUTSET, THE AR APPEARING ON BEHALF OF THE ASSESSEE SUBMITTED THAT THE PRESENT TRANSACTION IS THE SECOND LEG OF TRANSACTION WHICH WAS DONE BY THE ASSESSEE I N THE ASSESSMENT YEAR 2007-08 WHEREIN THE ASSESSEE HAD SO LD 46.79% STAKE IN AITCPL. THE TPO HAD MADE SIMILAR ADDITIONS/ADJUSTMENTS FOR THE SAID TRANSACTION IN T HE FIRST PHASE OF THE TRANSACTION WHICH WAS UPHELD BY THE DR P. THE ASSESSEE HAD FILED AN APPEAL BEFORE THE TRIBUNAL I. E. ITA ITA NO.1460/MDS/2012 5 NO.1736/MDS/2011. THE TRIBUNAL VIDE ORDER DATED 2 ND JANUARY, 2013 HAD REMITTED THE FILE BACK TO THE ASS ESSING OFFICER WITH A DIRECTION TO REWORK THE VALUE AFRESH IN ACCORDANCE WITH THE DIRECTIONS AND OBSERVATIONS MAD E IN THE SAID ORDER. THE A.R. PLACED ON RECORD A COPY OF THE ORDER OF THE TRIBUNAL IN THE AFORESAID APPEAL. 4. WHEN CONFRONTED WITH THE SITUATION, THE DR SUBMI TTED THAT THE ISSUE HAS ALREADY BEEN ADJUDICATED BY THE TRIBUNAL IN THE SAID APPEAL OF THE ASSESSEE. 5. WE HAVE HEARD BOTH THE PARTIES AND HAVE GONE THR OUGH THE ORDERS OF THE AUTHORITIES BELOW AND THE ORDER OF THE TRIBUNAL DATED 2.1.2013 IN ITA NO.1736/MDS/2011 FOR THE ASSESSMENT YEAR 2007-08. WE FIND THAT THE ISSUE IN DISPUTE IS IDENTICAL TO THE ONE ALREADY DECIDED BY THE TRIB UNAL IN THE AFOREMENTIONED APPEAL. IN FACT, THE GROUND OF APPEA L IN THE PRESENT CASE IS THE CONTINUATION OF THE TRANSACTION , WHICH HAD TAKEN PLACE IN THE ASSESSMENT YEAR 2007-08. THE TRI BUNAL WHILE ADJUDICATING THE APPEAL OF THE ASSESSEE FOR THE ASSESSMENT YEAR 2007-08 HAS HELD AS UNDER:- ITA NO.1460/MDS/2012 6 15. WE HAVE HEARD RIVAL CONTENTIONS AND PERUSED THE ORDERS CAREFULLY. BEFORE SETTING OUT THE QUESTIONS THAT ARE TO BE ANSWERED, IT HAS TO BE NOTED THAT THE TRANSACTIONS WHICH HAVE BEEN SUBJECTED TO THE TRANSFER PRICING ANALYSIS ARE A BIT UNUSUAL, WHEN COMPARED TO THE NORMAL TRADING AND SERVICE TRANSACTIONS. HERE, WHAT HAS BEEN SOLD WERE EQUITY SHARES HELD BY ASSESSEE IN TWO COMPANIES AND THE SALE WAS TO ITS ASSOCIATED ENTERPRISE. THE SHARES HAVING BEEN SOLD TO ASSOCIATED ENTERPRISE, THE TRANSACTIONS AUTOMATICALLY CAME WITHIN THE PURVIEW OF CHAPTER X OF THE ACT. FOR APPLICATION OF CHAPTER X AND DETERMINATION OF ALP, A SEPARATE SET OF PROVISIONS AND RULES HAVE BEEN PRESCRIBED. SEC. 92C OF THE ACT SAYS THAT ALP IN RELATION TO AN INTERNATIONAL TRANSACTION HAS TO BE DETERMINED BY FOLLOWING ONE OF THE SIX METHODS MENTIONED THEREIN. THESE ARE CUP, RE-SALE PRICE, COST PLUS METHOD, PROFIT SPLIT METHOD, TRANSACTIONAL NET MARGINAL METHOD AND SUCH OTHER METHOD PRESCRIBED BY THE BOARD. THOUGH RULE 10B HAS BEEN BROUGHT INTO THE INCOME-TAX RULES, OSTENSIBLY FOR THIS PURPOSE, SUCH RULE DOES NOT PRESCRIBE ANY METHOD OTHER THAN ONES MENTIONED ABOVE. BY THE VERY NATURE OF THE TRANSACTIONS HERE, NONE OF THESE METHODS APPEAR AT THE FIRST BLUSH APPROPRIATE FOR A TP ANALYSIS. RE-SALE PRICE METHOD CANNOT BE APPLIED SINCE THE SHARES SOLD BY THE ASSESSEE WERE IN TURN NOT SOLD TO NOBODY ELSE. COST PLUS METHOD CANNOT BE APPLIED SINCE ASSESSEE HAD MADE NO VALUE ADDITION TO ANY ITEM. ORIGINAL ITA NO.1460/MDS/2012 7 COST PER SHARE WAS ONLY ITS FACE VALUE AND THE COST INCURRED, WHICH RESULTED IN INCREASE OF ITS INTRINSIC VALUE CANNOT BE CORRECTLY ASCERTAINED. NEITHER PROFIT SPLIT METHOD NOR TRANSACTIONAL NET MARGINAL METHOD CAN BE USED. SIMILARLY PLACED COMPANIES DOING SIMILAR SHARE TRANSACTIONS ARE HARD TO FIND. 16. EVEN IF WE ACCEPT THE STAND OF ASSESSEE, CUP METHOD COULD AT THE BEST BE ADOPTED, FOR THE SALE OF SHARES IN LTIAL ONLY AND NOT FOR THAT OF AITPL. NO DOUBT IN LTIAL, ASSESSEE AND LTIL WERE HOLDING EQUAL SHARES. ARGUMENT OF ASSESSEE THAT LTIAL WAS NOT AN ASSOCIATED ENTERPRISE OF ASSESSEE IS WITHOUT DOUBT TECHNICALLY TRUE. HENCE, ITS CONTENTION THAT THE PRICE AT WHICH LTIL SOLD THE SHARES TO APFI IS A PERFECTLY COMPARABLE UNCONTROLLED PRICE, DOES APPEAR AT THE FIRST LOOK VERY ATTRACTIVE. HOWEVER, IT IS, IN FACT, NOT SO. SUB SEC.(2) OF SEC.92C OF THE ACT MANDATES APPLICATION OF AN APPROPRIATE METHOD FOR DETERMINING ALP FROM THOSE PRESCRIBED IN SUB SEC.(1). ALL THESE METHODS ARE PRESCRIBED WITH THE INTENTION OF ARRIVING AT THE POSSIBLE TRANSACTION VALUE, HAD THE PARTIES BEEN UNRELATED OR AT ARMS LENGTH. THE QUESTION HERE IS WHETHER WE CAN CONSIDER THE SALE OF SHARES BY LTIL TO APFI TO BE UNCONTROLLED. FOR ANSWERING THIS, WE HAVE TO LOOK AT THE AGREEMENT ENTERED BETWEEN THE ASSESSEE, LTIL, LTIAL & APFI PLACED AT P.34 TO 91 OF THE PAPER BOOK. AT ONE END OF THIS AGREEMENT IS LTIL AND ASSESSEE TOGETHER, AND ON THE OTHER END APFI. THE SELLERS ARE ITA NO.1460/MDS/2012 8 ASSESSEE AND LTIL. SELLERS JOINED TOGETHER AND SOLD THE SHARES HELD BY THEM IN LTIAL TO APFI. HAD THESE BEEN INDEPENDENT TRANSACTIONS ENTERED INTO BY TWO DIFFERENT PARTIES, THE SALE WOULD NOT HAVE BEEN ORDINARILY EFFECTED THROUGH ONE AGREEMENT. APFI WAS INTERESTED IN PURCHASING THE SHARES OF LTIAL, ONLY IF BOTH ASSESSEE AND LTIL SOLD THEIR RESPECTIVE HOLDINGS AT A SINGLE PRICE. EVERY CLAUSE IN THE SAID AGREEMENT APPLIES TO BOTH ASSESSEE AND LTIL. EVEN THE CONSIDERATION OF =. 79 CRORES MENTIONED AT CLAUSE NO.3 OF THE SAID AGREEMENT IS A CONSOLIDATED ONE. THUS, THE PRICE FOR WHICH SHARES OF LTIAL WERE TRANSFERRED WAS BASED ON A SINGLE AGREEMENT AND, THEREFORE, TO SAY THAT ONE PART OF THAT AGREEMENT WOULD BE AN UNCONTROLLED TRANSACTION, FOR COMPARING IT WITH THE OTHER PART, WOULD, IN OUR OPINION, BE UNACCEPTABLE. THE AGREEMENT HAS TO BE TAKEN AS A WHOLE AND IT IS CLEAR THAT THE TRANSACTIONS BETWEEN ASSESSEE AND LTIL WITH REGARD TO THE SALE OF SHARES OF LTIAL, WAS NOT AN INDEPENDENTLY ENTERED ONE BUT A JOINT EFFORT. IN SUCH CIRCUMSTANCES, ASSESSEES CONTENTION THAT THE SALE OF SHARES OF LTIAL BY LTIL TO APFI HAS TO BE TAKEN AS AN COMPARABLE UNCONTROLLED TRANSACTION, FALLS FLAT. 17. NOW, THE SECOND QUESTION AS TO WHETHER IT WOULD BE POSSIBLE TO APPLY ANY ONE OF THE METHODS, OUT OF THOSE PRESCRIBED IN SEC.92C(1) OF THE ACT. NO DOUBT THE SAID SECTION USES THE TERM SHALL . SAID SECTION IS REPRODUCED BELOW :- ITA NO.1460/MDS/2012 9 92C. (1) THE ARMS LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION SHALL BE DETERMINED BY AN Y OF THE FOLLOWING METHODS, BEING THE MOST APPROPRIATE METHO D, HAVING REGARD TO THE NATURE OF TRANSACTION OR CLASS OF TRANSACTION OR CLASS OF ASSOCIATED PERSONS OR FUNCT IONS PERFORMED BY SUCH PERSONS OR SUCH OTHER RELEVANT FA CTORS AS THE BOARD MAY PRESCRIBE, NAMELY : (A) COMPARABLE UNCONTROLLED PRICE METHOD; (B) RESALE PRICE METHOD; (C) COST PLUS METHOD; (D) PROFIT SPLIT METHOD; (E) TRANSACTIONAL NET MARGIN METHOD; (F) SUCH OTHER METHOD AS MAY BE PRESCRIBED BY THE BOARD. IT THUS APPEARS THAT FOLLOWING ONE OF THE METHODS M ENTIONED IN (A) TO (F) ABOVE ARE MANDATORY. HOWEVER, IN OUR OPINION, THE PURPOSE OF ENACTMENT OF CHAPTER X, IS TO BENCHM ARK AN INTERNATIONAL TRANSACTION WITH THE FAIR MARKET VALU E OF SUCH TRANSACTION, SO AS TO ENSURE THAT THERE ARE NO PROF IT TRANSFERS BETWEEN PARTIES IN DIFFERENT JURISDICTIONS EFFECTUA LLY CIRCUMVENTING TAXES. THUS, PURPOSE OF TRANSFER PRI CING RULES, IS TO VERIFY WHETHER THE PRICES AT WHICH AN INTERNA TIONAL TRANSACTION HAS BEEN CARRIED OUT IS COMPARABLE WITH THE MARKET VALUE OF THE UNDERLYING ASSET OR COMMODITY O R SERVICE. IT MAY BE TRUE THAT DIFFICULTIES MIGHT ARISE IN ASC ERTAINING THE FAIR MARKET VALUE, BUT SUCH DIFFICULTIES SHOULD NOT BE A REASON FOR NOT ADAPTING THE RULES AND METHODS PRESCRIBED I N THIS REGARD. THIS MIGHT REQUIRE SOME SUBTLE ADJUSTMENTS IN THE METHODOLOGY PRESCRIBED FOR EVALUATION OF AN INTERNA TIONAL TRANSACTION. A WATER-TIGHT ATTITUDE OF INTERPRETAT ION 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. THAT INTERPRETATION OF THE WORD SHALL NEED NOT ITA NO.1460/MDS/2012 10 ALWAYS BE MANDATORY AND COULD ALSO BE READ AS MAY , IS A RULE LAID DOWN BY THE HON'BLE GUJARAT HIGH COURT IN THE CASE OF CIT V. GUJARAT OIL & ALLIED INDUSTRIES (201 ITR 325). THIS IS MORE OR LESS THE SAME VIEW TAKEN BY THE HON'BLE APEX COURT IN THE CASE OF DIRECTOR OF INSPECTION OF INC OME TAX (INVESTIGATION) V. POORAN MAL & SONS (96 ITR 390) A ND IN THE CASE OF SAINIK MOTORS V. STATE OF RAJASTHAN (AIR 19 61 SC 1480). HENCE, WHILE FINDING THE MOST APPROPRIATE M ETHOD IT IS NOT THAT MODERN VALUATION METHODS FITTING THE T YPE OF UNDERLYING SERVICE OR COMMODITIES HAVE TO BE IGNORE D. FIXING ENTERPRISE VALUE BASED ON DISCOUNTED VALUE OF FUTUR E PROFITS OR CASH FLOW, IS A METHOD USED WORLDWIDE. ENDEAV OUR IS ONLY TO ARRIVE AT A VALUE WHICH WOULD GIVE A COMPAR ABLE UNCONTROLLED PRICE FOR THE SHARES SOLD. IF VIEWED FROM THIS ANGLE, WE CANNOT SAY THAT THE DISCOUNTED CASH FLOW METHOD ADOPTED BY THE TPO WAS NOT IN ACCORDANCE WITH SEC.9 2C(1). 18. NOW COMING TO THE ARGUMENT OF THE AUTHORISED REPRESENTATIVE THAT TPO WAS BOUND BY THE VALUE FIXE D BY THE CHARTERED ACCOUNTANT IN ACCORDANCE WITH CCI GUIDELI NES. THIS IN OUR VIEW CANNOT BE ACCEPTED FOR THE SIMPLE REASO N THAT CCI GUIDELINES WERE FOR A TOTALLY DIFFERENT PURPOSE AND COULD NOT BE TRANSPORTED INTO A PRICING METHODOLOGY PRESCRIBE D FOR FIXING ALP. IN FACT, IN THE CASE OF COCOCOLA INDIA INC. (SUPRA), HONBLE PUNJAB & HARYANA HIGH COURT, SPECIFICALLY H ELD THAT PRICE FIXED BY RBI UNDER FERA CANNOT APPLY TO PRO VISIONS OF THE ACT WHICH PROVIDE FOR A PARTICULAR METHODOLOGY FOR COMPUTATION OF INCOME WITH REGARD TO ALP OF INTERN ATIONAL TRANSACTION . NO DOUBT, RULE 11 U AND 11UA PRESC RIBE A METHOD FOR DETERMINATION OF FAIR MARKET VALUE OF A PROPERTY OTHER THAN IMMOVABLE PROPERTY FOR THE PURPOSE OF SE C.56 OF THE ACT. BUT THESE RULES HAVE BEEN INSERTED BY IT( SECOND AMENDMENT) RULES, 2010 WITH EFFECT FROM 01.10.2009 AND ITA NO.1460/MDS/2012 11 CANNOT BE TAKEN AS A BASIS FOR VALUATION IN A TRANS FER PRICING MATTER. SUCH RULES WERE ONLY INTENDED FOR APPLICAT ION OF SECTION 56 AND NEVER INTENDED FOR ARRIVING AT A FAI R MARKET VALUE FOR COMPARING AN INTERNATIONAL TRANSACTION. 19. IT IS TO BE NOTED THAT LD.COUNSEL FOR THE ASSE SSEE, DID SUBMIT THAT IF THE CUP METHOD AND CCI GUIDELINE S METHOD SUGGESTED BY THE ASSESSEE WERE NOT ACCEPTABLE, DCF METHOD COULD BE ADOPTED BUT WITH CERTAIN RIDERS. HIS OBJE CTIONS WERE WITH REGARD TO THE FACTORS CONSIDERED BY THE TPO FO R THE DCF ANALYSIS. DISCOUNTED CASH FLOW FOR VALUATION IS AN ACCEPTED INTERNATIONAL METHODOLOGY FOR VALUING AN ENTERPRISE S AND FOR DETERMINING THE VALUE OF THE HOLDING OF AN INVESTOR . INVESTORS ARE INTERESTED IN ASCERTAINING THE PRESENT VALUE OF THEIR INVESTMENTS, CONSIDERING THE FUTURE EARNING POTENTI AL OF THE UNDERLYING ASSET. IN OUR OPINION, ASCERTAINING NET PRESENT VALUE OF FUTURE EARNINGS IS ALL THE MORE APPROPRIAT E WHERE MARKET VALUE OF AN INVESTMENT IS NOT READILY ASCE RTAINABLE BY CONVENTIONAL METHODS. IN ASSESSEES CASE BOTH THE COMPANIES WHOSE SHARES WERE SOLD WERE PRIVATE LIMIT ED COMPANIES WHICH HAD NO READY MARKET FOR ITS EQUITY SHARES DUE TO VARIOUS CONSTRAINTS FOR TRANSFER OF ITS SHAR ES. HOWEVER, 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 CONS IDERED. THE VALUE OF AN EQUITY CAN BE OBTAINED IN TWO METHODS E VEN UNDER THE DISCOUNTED CASH FLOW METHOD. FIRST ONE I S TO DISCOUNT THE CASH FLOW EXPECTED FROM THE EQUITY INV ESTMENT AND THE SECOND IS TO ASCERTAIN THE VALUE OF THE ENT ERPRISE BY APPLYING DCF ON ITS FUTURE EARNINGS AND THEN DIVIDI NG IT WITH THE NUMBER OF SHARES. BOTH THE TPO AND ASSESSEE IN ITS REPLY TO THE TPO, HAD USED THE SECOND METHOD WHEREBY THE COMPANIES CONCERNED WERE VALUED BY DISCOUNTING THEI R FUTURE ITA NO.1460/MDS/2012 12 CASH FLOWS OVER A PERIOD OF 20 YEARS AND THEREAFTER DIVIDING SUCH VALUE BY THE TOTAL NUMBER OF SHARES. 20. MOST IMPORTANT ASPECT IN THE APPLICATION OF DCF IS THE DISCOUNTING FACTOR USED FOR WORKING OUT THE NET PRE SENT VALUE (NPV). THE DISCOUNTING FACTOR GENERALLY USED IS TH E WEIGHTED AVERAGE COST OF CAPITAL. WIDELY USED METHOD OF VA LUATION BASED ON DISCOUNTED CASH FLOW SEEMS TO BE AS UNDER :- COST OF EQUITY I COST OF DE B T W EIGHTS , (RISKFREE RATE BASED ON MARKET VALUE , + DEFAULT SP R EAD ) ( 1- T) -- R I S KF RE E R ATE - NO DEFAULT RISK R I SK PR EM I U M - N O R EI N VES TM E NT RI S K BETA - P R EM I UM F O R AVE R AGE - I N SAME CUR R ENCY AND + - MEAS UR ES MARKET R ISK X I RI SK I NVESTMEN T IN S AME TE R MS (R EAL O R N O MIN AL AS C AS H F LOWS 1 1 !TYPE OF O PERATION ! FIN A NC L A L ! I I CO UNTRY R ISK 1 P R E MIUM B USIN ESS L E VE R AAE L EVE R AG E ~~ CASH FLOW PROJECTED OVER CASHFLOW TO CONCERN EBIT ( 1-T ) NYEARS BASED ON EXPECTED ~ - ~ ,--- --. - ( CAP E X - DEPR ) GROWTH F -- - CHANGE IN WC . -- . -- .'' ...' _. - ....... - = FCFF I I APPLY DI SCO UNT A T WACC= COST OF EQUITY ( EQU I TY/(DEBT + EQU I TY)) + COST OF DEB T ( DEBT/ ( DEBT+ EQU I TY ))=VALUE OF OPERATING ASSET FCFF1 TERMINAL VALUE= FCFF N+1 / (R- GN ) FCFF5 FCFF N FCFF4 FCFF2 FCFF3 ITA NO.1460/MDS/2012 13 VALUE OF OPERATING ASSET + NON-OPERATING ASSET = VALUE THE ENTERPRISE VALUE OF ENTERPRISE VALUE OF DEBT = VALE OF EQU ITY 21. IT IS OBVIOUS THAT DIFFICULT PARTS ARE (I) DETERMINING THE FUTURE CASH FLOWS, (II) DETERMININ G THE COST OF EQUITY, (III) DETERMINING THE COST OF DEBT AND (IV) DETERMINING THE PERIOD OF DISCOUNTING. HERE BOTH P ARTIES HAVE AGREED THAT 20 YEARS IS AN APPROPRIATE ONE AND HENCE LAST MENTIONED DIFFICULTY IS NOT THERE. FUTURE CA SH IN-FLOW ALSO CAN BE REASONABLY ASCERTAINED SINCE MAJOR PART OF THE EARNINGS OF THE ASSESSEE ARE RENTAL OR LEASE INCOME AND THESE ARE PREDICTABLE WITH REASONABLE ACCURACY. SIMILARLY , CASH OUT- FLOW ALSO CAN BE REASONABLY ASCERTAINED BY VIRTUE O F THE VERY NATURE OF THE BUSINESS OF ASSESSEE. PROBLEM IS WIT H REGARD TO DETERMINATION OF COST OF EQUITY AND DEBT. TPO HAD ADOPTED 7.5% AS THE COST OF DEBT WHEREAS AS PER ASSESSEE IT WAS 11.5%. TPO HAD DETERMINED THE COST OF EQUITY AT 11 .5% ON AITPL AND 10% ON LTIAL, FOR WHICH HE HAS TAKEN CUE FROM AGREEMENT THAT ASSESSEE HAD WITH M/S TIDCO. BUT I N OUR OPINION COST OF EQUITY WILL ALWAYS BE HIGHER THAN T HE RISK FREE INTEREST RATE IN THE MARKET. WHEN RISK FREE INTERE ST RATE IS ADJUSTED WITH THE RISK PREMIUM THE RESULTING FIGURE WILL BE COST OF EQUITY. IT IS A BASIC PRINCIPLE OF ECONOMI CS THAT RISK AND RETURNS GO TOGETHER. GREATER THE RISK, THE HIG HER IS THE POSSIBILITY OF RETURN AND VICE-VERSA. A PERSON WHO PLACES HIS MONEY IN A FIXED DEPOSIT WITH A BANK WILL BE SATISF IED WITH A LOWER RATE OF INTEREST THAN THE RETURNS HE WOULD EX PECT, HAD HE PLACED HIS MONEY IN EQUITY SHARES. RISK OF INV ESTMENT IN EQUITY SHARES IS HIGHER SINCE RETURNS ARE NOT ASSUR ED. THEREFORE, COST OF EQUITY WILL ALWAYS BE HIGHER THA N THE COST OF DEBT. 22. WEIGHTED AVERAGE COST OF CAPITAL OF AITPL WORK ED OUT BY THE TPO IS AS UNDER :- ITA NO.1460/MDS/2012 14 PARTICULARS NUMERATOR DENOMINATOR DISCOUNT RATE WACC EQUITY 435,000,000 2,264,156,235 11.50% 2.21% DEBT 913,620,707 2,264,156,235 7.50% 3.03% TOTAL 1,348,620,707 5.24% AGAINST THIS, ASSESSEES CONTENTION IS THAT WACC O F AITPLWILL BE AS UNDER:- PARTICULARS NUMERATOR DENOMINATOR DISCOUNT RATE WACC EQUITY 680,000,000 2,264,156,235 11.50% 3.45% DEBT 1,584,156,235 2,264,156,235 7.50% 5.25% TOTAL 2,264,156,235 8.70% EQUITY AND DEBT OF AITPL AS AT THE END OF THE RELE VANT PREVIOUS YEAR STOOD AS UNDER :- PARTICULARS AMOUNT AS IN THE BALANCE SHEET (IN =) NATURE EQUITY 43,50,00,000 EQUITY SHARE APPLICATION MONEY 24,50,00,000 EQUITY TOTAL EQUITY 68,00,00,000 EQUITY DEBT PHASE I 91,36,20,707 DEBT DEBT PHASE 2 67,05,35,528 DEBT ITA NO.1460/MDS/2012 15 TOTAL DEBT 1,58,41,56,235 DEBT TOTAL DEBT & EQUITY 2,264,156,235 THUS, IN WORKING OUT THE WACC THE ASSESSING OFFICER CONSIDERED ONLY EQUITY AND DEBT OF PHASE 1. NEVERT HELESS IN THE DENOMINATOR HE TOOK THE AGGREGATE OF EQUITY SHA RE APPLICATION MONEY, DEBT OF PHASE 1 AND DEBT OF PHAS E 2. THIS IS AN OBVIOUS MISTAKE IN THE WORKING OUT DONE BY TH E TPO. AS POINTED OUT BY ASSESSEE, PV FACTOR ALSO IS TO BE SPREAD STARTING WITH THE YEAR IN WHICH THE TRANSACTION TOO K PLACE. FOR A VALUATION TO HAVE SOME AMOUNT OF OBJECTIVITY IT IS IMPERATIVE THAT ERRORS IN CALCULATIONS ARE AVOIDED AND VARIABLES ARE CONSIDERED WITHIN A REASONABLE LIMIT SO THAT ACCEPTABLE VALUES CAN BE ARRIVED AT. EVEN A SLIGHT CHANGE IN THE DISCOUNTING RATIO WILL RESULT IN SUBSTANTIAL CH ANGE IN THE VALUATION OF THE COMPANY. IF THE ALP OF THE SHARES ARE WORKED OUT WITHOUT CONSIDERING A REASONABLE VALUE F OR THE ENTERPRISE, IT WILL RESULT IN INJUSTICE. AS ALREA DY NOTED BY US HERE, THERE IS NO DISPUTE WITH REGARD TO CASH INFLO WS AND CASH OUT-FLOWS. ONLY DISPUTE IS ONLY WITH REGARD TO WEI GHTED AVERAGE COST OF CAPITAL AND THE FIGURES ADOPTED FOR WORKING OUT THE SAME. MIGHT BE IT IS TRUE THAT THERE WERE OTHER MISTAKES ALSO IN THE WORKING OUT OF THE TPO. WE AR E, THEREFORE, OF THE OPINION THAT THE ISSUE OF WORKING OUT OF VALUE OF THE COMPANIES SO AS TO ASCERTAIN THE ALP O F THE SHARES REQUIRES A RE-LOOK BY THE ASSESSING OFFICER AND TPO. 6. IN THE PRESENT CASE, WE FIND THAT THE TRANSACTIO N RELATES TO THE SALE OF REMAINING STAKE OF 38.19% (16613483 EQUITY SHARES) OF AITPCL TO M/S. ASCENDAS PROPERTY FUND (I NDIA) ITA NO.1460/MDS/2012 16 PTE LTD. SINCE THE FIRST LEG OF THE TRANSACTION HAS BEEN REMITTED BACK BY THE TRIBUNAL TO THE ASSESSING OFF ICER FOR REWORKING THE VALUE AFRESH, THE SECOND LEG OF THE T RANSACTION WHICH IS PART AND PARCEL OF THE COMPOSITE AGREEMENT DATED 30.03.2007 HAS TO GO BACK TO ASSESSING OFFICER . HE NCE, WE REMIT THIS FILE BACK TO THE ASSESSING OFFICER TO D ECIDE THE ISSUE IN ACCORDANCE WITH THE DIRECTIONS GIVEN BY TH E TRIBUNAL IN ITS ORDER DATED 2.1.2013. IT IS MADE CLEAR THAT THE ASSESSING OFFICER/ TPO SHALL GRANT SUFFICIENT OPPORTUNITY OF HEARING TO THE ASSESSEE AT THE TIME OF DECIDING THIS ISSUE AFRESH. 7. IN VIEW OF THE ABOVE, THE ORDER OF THE DRP/ASSES SING OFFICER IS SET ASIDE AND THE MATTER IS REMITTED BAC K TO THE ASSESSING OFFICER IN THE AFORESAID TERMS. THE APPE AL OF THE ASSESSEE IS ALLOWED ACCORDINGLY. ORDER PRONOUNCED IN THE OPEN COURT ON TUESDAY , THE 12 TH DAY OF MARCH, 2013 AT CHENNAI. SD/- SD/- (ABRAHAM P.GEORGE ) (VIKAS AWASTHY) ACCOUNTANT MEMBER JUDICIAL MEMBER CHENNAI, DATED THE 12 TH MARCH, 2013. SOMU COPY TO: (1) APPELLANT (4) CIT(A) (2) RESPONDENT (5) D.R. (3) CIT (6) G.F.