ESSAR INVESTMENTS LTD, MUMBAI V. DCIT 5(1), MUMBAI

ITA 2195/MUM/2014

AI Insights

The case involves M/s Aaradhana Realties Limited, which appealed against the assessment order for the Assessment Year 2009-10 concerning transfer pricing adjustments made by the TPO and confirmed by the Dispute Resolution Panel (DRP). The primary contention was the method used for valuing shares sold to an Associated Enterprise (AE) and the subsequent adjustments made. The TPO had adopted the DCF method, which the Appellant contested, advocating for the NAV method. The Tribunal's decision favored the NAV method, rejecting the DCF approach due to the lack of reliable future cash flow projections for an investment company like ECL. Furthermore, the Tribunal found the TPO's treatment of the transfer pricing adjustment as interest on receivables to be a secondary adjustment, which was not permissible under the existing legal framework at the time.

• Counselvise Citation: [2022] 140 COUNSELVISE.COM (IT) 113551 (ITAT-MUMBAI)
• Duration Of Justice: 8 year(s) 8 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-12-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: K
• Next Hearing Date: 29-09-2022
• Assessment Year: 2009-2010
• Appeal Filed On: 31-03-2014
• Other Referred Cases: DQ International Ltd. vs. Deputy Commissioner of Income Tax, Ascendas India Private Ltd. Vs. Deputy Commissioner of Income Tax, Circle 11, Chennai, Director of Inspection of Income Tax (Investigation) vs. Pooran Mal & Sons, Sainik Motors vs. State of Rajasthan, CIT vs. Gujarat Oil & Allied Industries, Director of Income Tax, International Taxation, Mumbai-II vs. Besix Kier Dabhol SA, Pr.CIT, Patiala Vs State Bank of Patiala, National Thermal Power Co. Ltd. vs. CIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction; Earning of tax free income; Fair market value; Valuation report; Rule 8D
• Section: 56; 143(3); 14A; 115JB; 144C

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL "K" BENCH, MUMBAI SHRI B.R. BASKARAN, ACCOUNTANT MEMBER SHRI RAHUL CHAUDHARY, JUDICIAL MEMBER ITA No. 2195/MUM/2014 (ASSESSMENT YEAR: 2009-10) M/s Aaradhana Realties Limited (earlier known as Essar Investment Limited), 202, United Business Park, Wagle Industrial Estate, Thane [PAN:AABCE0686Q] Deputy Commissioner of Income Tax, 6(1)(1), Mumbai, Room No. 563B, Aaykar Bhavan, M.K. Road, Mumbai - 400020 .................. Vs ................ Appellant Respondent Appearances For the Appellant/Assessee For the Respondent/Department : : Shri Vijay Mehta Ms. Samruddhi D Hande Ms. Sonia Kumar Date of conclusion of hearing Date of pronouncement of order : : 30.09.2022 28.12.2022 O R D E R Per Rahul Chaudhary, Judicial Member: 1. The present appeal is directed against Assessment Order dated, 29.01.2014 passed under Section 143(3) read with Section 144C of the Income Tax Act, 1961 [hereinafter referred to as „the Act‟] for the Assessment Year 2009-10, as per directions issued by Dispute Resolution Panel-I, Mumbai (hereinafter referred to as „the DRP‟) under Section 144C(5) of the Act pertaining to the Assessment Year 2009-10. 2. The Appellant has raised the following grounds of appeal: ITA. No. 2195/Mum/2014 Assessment Year: 2009-10 2 “1. The Assessing Officer ("AO") erred in assessing the Appellant's total income at a loss of Rs.27,88,16,988/- as against the returned loss (as per revised return) of Rs.87,10,07,508/-. 2. The AO erred in making an addition of Rs.46,69,44,000/- on account of the arm's length price of the shares transferred and Rs.5,41,14,332/- on account of the arm's length price of the interest on the deemed loan/receivable to the Associated Enterprise (AE). 3. The Transfer Pricing Officer ("TPO") erred in determining the arm's length price at which the shares ought to have been transferred at Rs.7,635/- per share. 4. The Dispute Resolution Panel ("DRP") erred in enhancing the value at which the shares ought to have been transferred to Rs.9,338.88 per share. 5. The learned TPO and the DRP erred in adopting the Discounted Cash Flow (DCF) method of valuation of shares for determining the arm's length price at which the shares ought to have been transferred. 6. The DRP erred in determining the value of the shares at Rs.9,338.88 per share by disregarding the valuation report filed by the Appellant whereby the shares had been valued at Rs.4.79 per share in accordance with the method prescribed by the erstwhile Controller of Capital Issues (CCI) as per the RBI regulations prevailing at the time of the transfer of shares. 7. The DRP erred in not appreciating that the same shares were subsequently purchased from the AE during the same financial year by the Appellant at the same price at which they were sold to the AE 8. The TPO and the DRP erred in disregarding market realities which would help to determine the arm's length price under Transfer Pricing rules and in determining a price that is totally out of range from facts and events relating to the value of shares. 9. The DRP erred in the following, whilst determining the valuation of the shares as per the DCF method: (a) considering the actual profits instead of projected profits; ITA. No. 2195/Mum/2014 Assessment Year: 2009-10 3 (b) considering the terminal growth rate on a perpetuity basis at the rate of 6% per annum; (c) not considering the net investment while computing the free cash flows, (d) not adjusting the interest payment against the revenue (e) considering the proportionate amount of tax on interest instead of tax on interest at the marginal rate of taxation; (f) making a mid-year adjustment to the present value of the free cash flows for the explicit period and the Terminal Value; (g) considering the present value of gross cash flow as against the net free cash flow ("FCF") for the purpose of arriving at the Terminal value; (h) not considering the normalized value of investments in future to compute the net free cash flow for the purpose of arriving at the Terminal Value; (i) not allowing the illiquidity discount applicable to the value of shares sold by the Appellant in a company which is not a public listed company. 10. The DRP erred in enhancing the value of the transfer pricing adjustment without issuing any notice of enhancement as contemplated under section 144C of the Act. 11. The TPO and the DRP erred in considering the alleged difference in the value of equity shares as loan/receivable of Rs.46,69,44,000/-. 12. The TPO and the DRP ought to have held that the transfer pricing regulations provided for in Chapter X of the Act do not contemplate a secondary adjustment being made as a consequence of a primary adjustment of the arm's length price. 13. The TPO and the DRP have erred in making an addition towards imputed interest of Rs.5,41,14,332/- on the alleged difference in the value of equity shares. ITA. No. 2195/Mum/2014 Assessment Year: 2009-10 4 14. The TPO / DRP erred in holding that interest ought to have been received by the Appellant at the rate of 15%. The above grounds are without prejudice to each other. The assessee craves leave to add any other ground(s) and/or modify or delete any of the above grounds before or during the course of hearing before the Hon'ble ITAT.” 3. Additional Grounds of appeal raised vide letter dated 03.05.2018: “1. The Dispute Resolution Panel (“DRP”) and the Learned Assessing Officer (“AO") erred in making disallowance u/s 14A of the Act amounting to Rs. 7,11,32,189/- under the normal provisions as well as under section 115JB of the Act. 2. Without prejudice to the above, the DRP and the AO erred in making disallowance u/s 14A of the Act in excess of exempt income i.e. dividend received during the year under appeal. 3. Without prejudice to the above, the DRP and the Assessing Officer erred in considering the investments from which no dividend income was earned for computing disallowance under Rule 8D.” The grounds raised in the appeal are taken up in seriatim hereinafter. Grounds which are connected are taken up together. Ground No. 1 4. Ground No. 1 is general in nature and does not require any adjudication. Ground No. 2 to 9 5. The facts, in brief, relevant to the adjudication of grounds before us are that the Appellant undertook International Transaction of sale of equity share Essar Capital Limited (ECL) to its AE, i.e., Essar Capital Holdings Limited, Mauritius (ECHL, Mauritius). The Transfer Pricing Officer (TPO) noticed that the Appellant has benchmarked the aforesaid International Transaction by applying CUP methodology based upon the ITA. No. 2195/Mum/2014 Assessment Year: 2009-10 5 valuation certificate obtained by the Appellant from an external valuer which determined the value of equity share of ECL at INR 4.797/- each. Since the Appellant had sold shares of ECL to its AE at INR 10/- each, it was contended by the Appellant that the transactions was at arm‟s length. A detailed show cause notice was issued by the TPO on 24.01.2013 requiring the Appellant to show cause why the ALP worked out by the Appellant should not be rejected and upward transfer pricing adjustment of INR 38,12,50,000/- should not be made. Further, the Appellant was also asked to show cause why the difference between the arms length price determined by the Appellant and arms length price determined by the TPO should not be treated as a terms of loan/credit facility provided by the Appellant to its AE and why arm‟s length interest thereon should not be charged. In response the Appellant contended before the TPO that the valuation undertaken by the Appellant was as per the guidelines issued by the erstwhile Comptroller of Capital Issues (CCI). The independent valuation adopted by the Appellant provided fair market value of the equity share of ECL and such independent valuation provides a direct/independent reference to pricing that should be considered as an external comparable for benchmarking the International Transaction. The stand of the Appellant was that the independent valuer had rightly adopted Net Assets Value (NAV) for determining fair value of equity shares at INR 4.797/- per equity share by taking audited accounts for financial year 2007-2008 as the basis. The Profit Earning Capacity Value (PECV) was rejected since it was resulting in „Nil‟ valuation. The Appellant objected to adoption of Discounted Cash Flow (DCF) valuation and pointed out deficiencies. ITA. No. 2195/Mum/2014 Assessment Year: 2009-10 6 6. The Learned Authorised Representative for the Appellant appearing before us submitted that during the relevant previous year the Appellant had sold 50,000 shares of ECL to its AE (i.e., ECHL, Mauritius) at the rate of INR 10 per share. The aforesaid value of INR 10 per share was more than the value determined by applying external Comparable Uncontrolled Price (CUP) Method. As per the valuation report obtained by the Appellant from an independent valuer, the value of one share of ECL was determined at INR 4.97 following Net Asset Value (NAV) Method. The independent valuer had also determined value of the share by using Profit Earning Capacity Value (PECV) Method, however, since same was coming as „Nil‟, it was ignored. During the assessment proceedings, the TPO rejected the external CUP Method adopted by the Appellant by giving incorrect reasoning. The Learned Authorised Representative for the Appellant vehemently contended that the TPO does not have the right to change the method adopted by the Appellant unless the TPO satisfied that the data or the information used are not reliable or incorrect. The TPO has failed to point out any infirmity in the data or information used and/or the method employed for valuation of the shares. TPO simply concluded that DCF Method is the correct method to be employed in the facts and circumstances of the case without specifying that NAV method is incorrect. The TPO simply stated that CCA guidelines are not binding and have been prescribed for a different purpose. He further submitted that the TPO committed grave error by adopting actual figures for determining value as per DCF Method. According to the Learned Authorised Representative for the Appellant DCF Method was to be applied keeping in view the ITA. No. 2195/Mum/2014 Assessment Year: 2009-10 7 business projections as on the date of sale of shares and not the actual cash flows. He further submitted that the computation of cash flows made by TPO was also laden with mistakes. He further submitted that even as per Valuation Standard issued by the Institute of Chartered Accountants of India (ICAI) DCF method is not appropriate for valuation of an investment company. Reliance in this regard was placed upon the decision of Hyderabad Bench of the Tribunal in the case of DQ International Ltd. vs. Deputy Commissioner of Income Tax: [2022] 141 Taxmann.com 188 (Hyderabad - Trib.)[23-06-2022]. 7. Per Contra, Ld. Departmental Representative relied upon the order passed by the TPO and the DRP. The Learned Departmental Representative placed reliance upon paragraph 18 and 19 of the decision of Chennai Bench of the Tribunal in the case of Ascendas India Private Ltd. Vs. Deputy Commissioner of Income Tax, Circle 11, Chennai [ITA No. 1736/MDS/2011, Assessment Year 2007-08 dated 02.01.2013] and submitted that the TPO has correctly adopted DCF Method for valuation of the shares. The NAV Method and PECV Method adopted in the valuation report relied upon by the Appellant did not yield the correct results. She further submitted that while determining value using NAV Method the financial statements as on 31.03.2008 were relied upon whereas the said transaction took place on 23.06.2008. She further submitted that the subsequent purchases made by the Appellant of shares of ECL, if any, is of no consequence and cannot be considered. In this regard, the DRP had given a clear finding that the shares of ECL said to be purchased by the Appellant subsequently were not reflected in the financial statements of the Appellant. ITA. No. 2195/Mum/2014 Assessment Year: 2009-10 8 8. We have heard the rival submissions and perused the material on record. The grievance of the Appellant is that the TPO/DRP has adopted DCF Method for determining the ALP of the transaction of sale of shares of ECL to ECHL, Mauritius. Further, the TPO/DRP has adopted the actual published results of the Appellant instead of projected future cash flows as on the date of the transactions. Reliance on behalf of the Appellant was placed on the decision of the Hyderabad Bench of the Tribunal in the case of DQ (International) Ltd. [supra] wherein it was held by the Tribunal that while computing value of intangible asset by using DCF Method the future projections cannot be substituted with the actual figures. The relevant extract of the aforesaid decisions of the Tribunal read as under: “8.3 The ld. AR submitted that the valuation by applying DCF method or any other method is always applied by considering projections of revenues (which were based on the detailed market expectation on that particular date) which cannot be tinkered at a later point of time by substituting actuals. Nowhere such an approach is technically accepted. 8.4 Ld. AR referred to the decision of the ITAT, Bangalore in the case of In Tally Solutions (P.) Ltd. v. Dy. CIT [2011] 14 taxmann.com 19/48 SOT 110 wherein the Hon'ble Bangalore Tribunal held as under: "The excess earning method is the method that is adopted by the TPO. We see no infirmity in adoption of this method for the simple reason that the relevant data is available with reasonable accuracy, closing in on real valuation of a software product. This valuation is upheld by the US courts while arriving at the sale value of a software product. Further, the valuation under the method mainly revolves around discounted cash flow DCF analysis which is known to economists for the times immemorial. Thus, the TPO used a reasonable well accepted method of valuation of in tangibles including software products and accepted by courts in the countries like in USA, where the TP regime is well developed. ITA. No. 2195/Mum/2014 Assessment Year: 2009-10 9 Further, the assessee's contention to adopt the actual revenues for the future years which are available now cannot be accepted now for a simple reason that the ALP was calculated on the date of sale which was in January, 2006 itself and also under EEM future revenues will be projected based on the previous year data keeping the current year's data as the base which has got no relevance on the actual revenues during the future years. We also make it clear that the actual CAGR shall be adopted by the TPO without any discount." 8.5 Finally ld. AR submitted that TPO's contentions of replacing the projections with actuals are legally unsustainable and technically incorrect. 9. Ld. DR submitted that the TPO with a view to determine the fair price replaced the projected figures in the DCF with the actual figures from the audited financial statements. In this regard, the TPO observed that there was a wide difference in the valuation of the intangible and therefore the TPO is well within his powers to examine and analyze the transaction and arrived at the Arm's Length Price with the information available. 9.1 Ld. DR submitted that the TPO requested the taxpayer company to provide justification for the revenues projected as he found from the valuation report that the projections have been provided by the management themselves. The TPO obtained that financial statement of DQ Ireland and replaced projected figures in valuation report by Grant Thornton and retained all other values and margins provided by the valuer. The result of such exercise resulted in the value of IP of Jungle Book at a relatively higher amount. The TPO could not arrive at the figures of "Value till patent IP expiry" of RS.2.70 lakhs and "TAB" of RS.1.21 crores as adopted by the valuer. If such figures are known then the value of the IP will further increase. Since the difference in the valuation was so fundamental, that in an uncontrolled circumstances independent parties' would have entered into a renegotiation or an adjustment to the negotiated price. Ld. DR submitted that in such a case of wide variation in the price, the TPO is justified in concluding that the transaction is not at arm's length. The TPO is well within his powers as provided in para 9.87 & 9.88 of QECD Transfer Pricing Guidelines and substituted ITA. No. 2195/Mum/2014 Assessment Year: 2009-10 10 his own prices for the actual transaction undertaken as the difference in valuation was substantial. 10. Considered the submissions of both the parties and perused the material facts on record as well as the orders of revenue authorities. The assessee had sold 'IP' to its "AE" after considering the independent valuation from two valuers and arrived at the sale consideration. No doubt the projections were submitted by assessee for such valuation. Now, the revenue has no problem with the valuation but they are replacing the projected values with actual values. The question arises, whether the action of the revenue was justified for replacing the projection with actuals after three years down the line ? Ld. AR submitted two case laws before us. The first being the valuation submitted by the independent valuers has to be adopted without any modification as held in Social Media India Ltd.'s case (supra). The coordinate bench of this Tribunal held that "the assessee's valuation has to be accepted as it was supported by an independent valuer." We are in agreement with the above decision. But now the question before us is, whether the actual result can be adopted in the valuation of "IP". The ld. AR has also brought to our knowledge the decision of ITAT, Bangalore in the case of Tally Solutions (P) Ltd. (supra). In the above case, the assessee attempted to adopt the actual revenues for the future years which were available then, which was rightly declined by the Bangalore Bench. We are in agreement with the above findings of the Bangalore Bench that the valuation method adopted for determining the future years cannot be replaced with actuals down the line, the valuation will go either way. When it goes to north, the revenue may adopt the same time, when it goes to south, the assessee may adopt, there won't be any consistency. What is important is the value available at the time of making business decision. It should be left to the wisdom of the businessman, he knows what is good for the organization. No doubt, 'IP" was sold to "AE". The method adopted should be consistent and should be documented to review in the future. The review does not mean replacing the projection with actuals. It is the rational of adopting the values for making decision at the point of time of making decision. When the values are replaced subsequently, it is not valuation but evaluation i.e. moving the ITA. No. 2195/Mum/2014 Assessment Year: 2009-10 11 post of result determined out of projections. The revenue is doubting the valuation because the actual revenues were favourable. In rational decision making, the actual results are irrelevant. In the present case, the valuation was done by two independent valuers not by the assessee. The other issue with this are that the revenue adopted the actuals of AE without considering whether they are revenues generated out of the "IP" or not. They simply adopted the revenues of AE without giving proper findings that the revenues of AE are all generated only out of this "IP" (Jungle Book). The assessee submitted that these revenues are generated by "AE" out of other properties (IPs) as well. We are of the view that the revenue cannot adopt such values without proper verification. In our considered view, for valuation of an intangible asset, only the future projections alone can be adopted and such valuation cannot be reviewed with actuals after 3 or 4 years down the line. Accordingly, the grounds raised by assessee are allowed.” 9. In view of the above decision of the Tribunal, we accept the contention of the Appellant that for the purpose of arriving at the valuation using DCF method actual figures cannot be substituted for future projections. 10. We note that the TPO/DRP had relied upon the decision of Chennai Bench of the Tribunal in the case of Ascendas (India) Private Ltd. (supra) while rejecting the valuation adopted by the Appellant. During the course of argument, the Ld. Departmental Representative had placed reliance on paragraph 18 and 19 of the aforesaid decision of the Tribunal which read as under: “18. Now coming to the argument of the Authorised Representative that TPO was bound by the value fixed by the Chartered Accountant in accordance with CCI guidelines. This in our view cannot be accepted for the simple reason that CCI guidelines were for a totally different purpose and could not be transported into a pricing methodology prescribed for fixing ALP. In fact, in the case of Cococola India Inc. (supra), Hon‟ble Punjab & Haryana High Court, specifically held that “price fixed by RBI ITA. No. 2195/Mum/2014 Assessment Year: 2009-10 12 under FERA cannot apply to provisions of the Act which provide for a particular methodology for computation of income with regard to ALP of „International Transaction‟ ”. No doubt, Rule 11 U and 11UA prescribe a method for determination of fair market value of a property other than immovable property for the purpose of sec.56 of the Act. But these rules have been inserted by IT (Second Amendment) Rules, 2010 with effect from 01.10.2009 and cannot be taken as a basis for valuation in a transfer pricing matter. Such rules were only intended for application of section 56 and never intended for arriving at a fair market value for comparing an international transaction. 19. It is to be noted that Ld. Counsel for the Assessee, did submit that if the CUP method and CCI guidelines method suggested by the assessee were not acceptable, DCF method could be adopted but with certain riders. His objections were with regard to the factors considered by the TPO for the DCF analysis. Discounted Cash Flow for valuation is an accepted international methodology for valuing an enterprises 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 potential of the underlying asset. In our opinion, ascertaining net present value of future earnings is all the more appropriate where market value of an investment is not readily ascertainable by conventional methods. In assessee‟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. 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 considered. The value of an equity can be obtained in two methods even under the Discounted Cash Flow method. First one is to discount the cash flow expected from the equity investment and the second is to ascertain the value of the enterprise by applying DCF on its future earnings and then dividing 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 their future cash flows over a period of 20 years ITA. No. 2195/Mum/2014 Assessment Year: 2009-10 13 and thereafter dividing such value by the total number of shares.” (Emphasis Supplied) 11. On perusal of the above decision of the Tribunal, it followed that the Tribunal had preferred use of DCF Method over the use of CCI Guidelines for arriving at the value of shares for the purpose of determining ALP. During the course of hearing, it was contended by the Ld. Authorised Representative for the Appellant that given the fact of the present case DCF Method cannot be adopted since ECL was an investment company with inconsistent and unpredictable stream of revenues. We note that the TPO had computed Earning Before Interest and Tax (EBIT) as under: FY 2007-08 FY 2008-09 FY 2009-10 FY 2010-11 FY 2011-12 (2.60) Lakhs 4394.60 Lakhs (66.42) Lakhs 8.67 Lakhs 168.30 Lakhs 12. ECL was incorporated on 30.01.2007. The above figures support the contention advanced on behalf of the Appellant that ECL, being an investment company, had inconsistent stream of revenue over the years. We note that the EBIT for the financial year 2008-09 was unusually high. On perusal of the financial results for the financial year 2008-09 it became clear that during the said financial year ECL had earned interest of INR 4531.41 lakhs on debentures held as investments. While computing EBIT, the TPO took into account the aforesaid interest income but neglected to take into consideration interest payment of INR 4301.77 lakhs made by ECL. During the course of hearing, it was contended on behalf of the Appellant that the aforesaid interest expenses incurred by ECL were in the nature ITA. No. 2195/Mum/2014 Assessment Year: 2009-10 14 of operating expenses as ECL was an investment company. A perusal of financial statement for the financial year 2009-10 shows that the though the investments made by ECL increased from INR 3922.65 lakhs to INR 6351.63 lakhs, no interest income was received during the financial year 2009-10. In view of the aforesaid facts, we accept the contention of the Appellant that DCF Method cannot be applied in the facts and circumstances of the present case given the uncertainty regarding income/future cash flow projections. Our view also draw support the Indian Valuation Standard 2018 issued by the Institute of Chartered Accountant of India (ICAI), on which reliance was placed on behalf of the Appellant. In paragraph 52 of the Indian Valuation Standard 2018 it has been recommended that use of other valuation approaches instead of income approach be adopted in cases where there was significant uncertainty about the amount in timing of income/future cash flows. The relevant extract of Indian Valuation Standard 2018 read as under: “Income Approach 49. Income approach is a valuation approach that converts maintainable or future amounts (e.g., cash flows or income and expenses) to a single current (i.e., discounted or capitalised) amount. The fair value measurement is determined on the basis of the value indicated by current market expectations about those future amounts. 50. This approach involves discounting future amounts (cash flows/income/cost savings) to a single present value. 51. The following are some of the instances where a valuer may apply the income approach: (a) where the asset does not have any market comparable or comparable transaction; (b) where the asset has fewer relevant market comparables; ITA. No. 2195/Mum/2014 Assessment Year: 2009-10 15 (c) where the asset is an income producing asset for which the future cash flows are available and can reasonably be projected. 52. In some instances, a valuer may consider using other valuation approaches instead of income approach or in combination with income approach, such as, where – (a) the asset has not yet started generating income or cash flows, e.g., projects under development; (b) there is significant uncertainty on the amount and timing of income/future cash flows, e.g., start-up companies; or (c) the client does not have access to the information relating to the asset being valued, e.g., minority shareholder may not have access to projections/budgets or growth expectations specific to the business.” (Emphasis Supplied) 13. In view of the above, we reject the DCF Method adopted by the TPO/DRP to arrive at the ALP for the transaction of sale of shares. 14. At this juncture, it would be pertinent to refer to the following observations made by Chennai Bench of the Tribunal in the case of Ascendas (India) Pvt. Ltd. (supra). “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. ............It thus appears that following one of the methods mentioned in (a) to (f) above are mandatory. However, in our opinion, 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 transfers 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. It may be true that difficulties might arise in ascertaining the fair market value, but such difficulties should not be a reason for not adapting the rules and methods prescribed in this regard. This might require some subtle adjustments in the ITA. No. 2195/Mum/2014 Assessment Year: 2009-10 16 methodology prescribed for evaluation of an international transaction. 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. That interpretation of the word „shall‟ need not 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 Income Tax (Investigation) v. Pooran Mal & Sons (96 ITR 390) and in the case of Sainik Motors v. State of Rajasthan (AIR 1961 SC 1480). 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 is only to arrive at a value which would give a comparable 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.92C(1).” (Emphasis Supplied) 15. On perusal of the above it can be seen that Tribunal had clearly stated that the purpose of the 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 and this might require some subtle adjustments in the methodology prescribed for evaluation of an international transaction. Endeavour is only to arrive at a value which would give a comparable uncontrolled price for the shares sold. In view of the aforesaid, the Tribunal concluded that the TPO was not bound by the method of value fixed in accordance with the CCI Guidelines. We have already concluded that the DCF Method could not be adopted in the facts and circumstances of the present case as the Appellant is an investment company incorporated on 30.01.2007 with ITA. No. 2195/Mum/2014 Assessment Year: 2009-10 17 unpredictable income/cash flows. This takes us to the method adopted by the Appellant for determining the value of shares of ECL. We note that the shares of ECL were sold by the Appellant on 23.06.2008. However, the valuation report is based upon the audited financial statements of ECL as on 31.03.2008. In the synopsis of arguments filed before the Tribunal, the Appellant had, without prejudice basis, stated that the value of shares determined on 23.06.2008 by following the method prescribed in Rule 11UA of the Income Tax Rules, 1962 was INR 112/- this was accompanied by unaudited financial statements as on 23.06.2008. Rule 11UA is also based on Net Asset Value Approach adopted in the valuation report relied upon by the Appellant to support the valuation of shares of ECL. Therefore, accepting the without prejudice submission of the Appellant, we adopt the value of INR 112/- as the fair market value of share of ECL representing the ALP. 16. In view of the above, Ground No. 2 to 6 raised by the Appellant are partly allowed, and Ground No. 7 to 9 raised by the Appellant are disposed off as being infructuous. Ground No. 10 to 14 17. Ground No. 10 to 14 are directed against the transfer pricing adjustment of INR 4,57,88,125/- made by the Transfer Pricing Officer and confirmed by the DRP. 18. The TPO, vide order dated 30.01.2013, passed under Section 92CA of the Act had proposed transfer pricing adjustments of INR 38,12,50,000/- in respect of sale of equity shares of ECL by the Appellant to ECHL, Mauritius. By treating the aforesaid amount as the amount receivable from ECHL, Mauritius, the TPO ITA. No. 2195/Mum/2014 Assessment Year: 2009-10 18 proposed transfer pricing adjustment of INR 4,57,88,125/- being interest computed as under: A. Transfer Pricing Adjustments in respect of sale of equity shares of ECL INR 38,12,50,000/- B. Period for which the amount was outstanding during the relevant previous year 282 C. Interest at rate of 15.55% p.a. (A x B/365) x 15.55% INR 4,57,88,125 19. It was contended by the Ld. Authorised Representative for the Appellant that the above transfer pricing adjustment proposed by the TPO, which in incorporated in the Final Assessment Order after the same was confirmed by the DRP, is in the nature of secondary adjustment. In effect the equity shares purchased by the Appellant have been treated as debt. Relying upon the judgment of Hon‟ble Bombay High Court in the case of Director of Income Tax, International Taxation, Mumbai-II vs. Besix Kier Dabhol SA : [2012] 26 taxmann.com 169 (Bom), he submitted in the absence of any specific provisions in the Act the aforesaid transfer pricing adjustment could not have been made. 20. Per contra, the Ld. Departmental Representative relied upon the order passed by the TPO and submitted that the TPO has neither made secondary adjustment nor treated equity as debt. Since the amount receivable by the Appellant from its AE interest has been charged on the same. The provision whereby the transaction of capital financing was recognized as international transaction came into effect from 01.04.2002 and therefore, the TPO was justified in making the transfer pricing adjustment of INR 4,57,88,125/-. ITA. No. 2195/Mum/2014 Assessment Year: 2009-10 19 21. We have considered the rival submissions and perused the material on record. In the case of Besix Kier Dabhol SA (supra), it was held by the Hon‟ble Bombay High Court that in absence of specific provision in the Act incorporating thin capitalization rules, the TPO was not permitted to re-characterize debt as equity for making transfer pricing adjustments. It is admitted position that for the relevant assessment year there were no provisions in the Act providing for secondary transfer pricing adjustment and/or for making transfer pricing adjustment by treating debt as equity (such as general/specific anti-avoidance rules). The amount of receivable outstanding has arisen on account of transfer pricing adjustment made by the TPO/Assessing Officer. In our view, the transfer pricing adjustment of INR 4,57,88,125/- made by the TPO/Assessing Officer (by treating the aforesaid amount as interest on outstanding receivables) is clearly in the nature of secondary adjustment and cannot be sustained in the absence of specific provision in the Act providing for the same. 22. In view of the above, the transfer pricing addition of INR 4,57,88,125/- is deleted and Ground No. 10 to 14 raised by the Appellant are allowed. Additional Ground 1 to 3 23. Additional Ground 1 to 3 are directed against the disallowance of INR 7,11,32,189/- made by the Assessing Officer under Section 14A of the Act. 24. During the previous year relevant to the assessment year under consideration, the Appellant received exempt income of INR ITA. No. 2195/Mum/2014 Assessment Year: 2009-10 20 9,136/- The Assessing Officer made disallowance under Section 14A read with Rule 8D of the Rules amounting to INR 7,11,32,189/- which was upheld by the DRP. The Appellant had, vide letter dated 03.05.2018, raised additional ground of appeal challenging the disallowance under Section 14A of the Act. We have heard both sides on admitting the additional grounds and are of the view that the additional grounds raised by the Appellant do not require examination of any facts not already on record. Accordingly, in view of the judgment of the Hon‟ble Supreme Court in the case of National Thermal Power Co. Ltd. vs. CIT: 229 ITR 383, the additional grounds raised by the Appellant are admitted. 25. We note that in the case of Pr.CIT, Patiala Vs State Bank of Patiala: 99 taxmann.com 286, the Hon'ble Supreme Court had held that that amount of disallowance under Section 14A of the Act cannot exceed the amount of exempt income. It is admitted position that the Appellant had earned exempt income of INR 9,136/- only. Accordingly, following the aforesaid judgment of the Hon‟ble Supreme Court, we restrict the addition under Section 14A of the Act to INR 9,136/-. Accordingly, Additional Ground No. 1 to 3 raised by the Appellant are partly allowed. 26. In the result, the present appeal is partly allowed. Order pronounced on 28.12.2022. Sd/- Sd/- (B.R. Baskaran) Accountant Member (Rahul Chaudhary) Judicial Member म ुंबई Mumbai; दिन ुंक Dated : 28.12.2022 Alindra, PS ITA. No. 2195/Mum/2014 Assessment Year: 2009-10 21 आदेश की प्रतितिति अग्रेतिि/Copy of the Order forwarded to : 1. अपील र्थी / The Appellant 2. प्रत्यर्थी / The Respondent. 3. आयकर आय क्त(अपील) / The CIT(A)- 4. आयकर आय क्त / CIT 5. दिभ गीय प्रदिदनदि, आयकर अपीलीय अदिकरण, म ुंबई / DR, ITAT, Mumbai 6. ग र्ड फ ईल / Guard file. आिेश न स र/ BY ORDER, सत्य दपि प्रदि //True Copy// उप/सह यक पुंजीक र /(Dy./Asstt. Registrar) आयकर अपीलीय अदिकरण, म ुंबई / ITAT, Mumbai