IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, CHENNAI

Transcription

1 IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, CHENNAI BEFORE SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER AND SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER ITA No. 1736/Mds/2011 Asst. Year : ASCENDAS (INDIA) PRIVATE LTD, International Techpark, Pinacle #01-7&8, Taramani Road, CHENNAI PAN : AAACJ90554H. (Appellant) v. The Dy. Commissioner of Income Tax, Circle-I(1), CHENNAI. (Respondent) Appellant by : S/Shri Kanchan Kaushal, Dhanesh Bagna & Abhishek Jain, C.A., Respondent by : Ms. Jayanthi Krishnan, CIT(D.R), Mr. N. Jayasankar, Addl.CIT(TPO-I) Mr. V. Janardhanan, Asst.CIT., (TPO-IV) Date of hearing : 06 Dec 2012 Date of Pronouncement : 02 Jan 2013

2 2 O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER : In this appeal filed by Assessee two issues have been raised. One of this relate to transfer pricing and the other to a disallowance of claim for exchange fluctuation loss. Issue relating transfer pricing is taken up first for disposal. 2. Facts apropos are that Assessee is a subsidiary of an international company called Ascendas Land International Limited which in turn is a wholly owned subsidiary of Ascendas Ltd., Singapore. Assessee is engaged in real estate business by way of building and leasing out techno-park and software parks. Assessee had in 2002 entered into a joint venture agreement with one M/s. L&T Infocity Limited (LTIL) for developing, owning and managing Information Technology Parks in India. For the purpose of enabling the joint venture business, assessee alongwith LTIL incorporated a company called LTIAL (L&T Infocity Asendas Ltd.) on Assessee and M/s. LTIL each held 25,000 equity shares of.10/- each and 9.88 lakhs preferential shares of.100/- each in LTIAL. LTIAL thereafter pursued the business of developing information technology parks. On November , an agreement was entered by

3 3 Assessee and LTIL with one M/s. Ascendas Property Fund India (APFI) selling their respective holdings in LTIAL to M/s.APFI. At this juncture it should be noted that Assessee and APFI were Associated Enterprises as defined in Chapter X of the Income Tax Act, Consideration received from M/s.APFI on sale of the shares, coming to.79 crores was split between Assessee and LTIL equally. 3. Assessee had also incorporated another company called Ascendas (India) IT Park Ltd (AITPL) on along with Tamilnadu Industrial Development Corporation Ltd. (TIDCO). Assessee had 84.97% shares in the said company whereas TIDCO had 11%. Ascendas Property Management Services (India) Private Limited, another company falling within the group of Assessee held 4.02%. M/s. AITPL was also into development of IT parks and buildings. Said company was doing some projects of this nature. On , an agreement was entered by Assessee with M/s.APFI to sell its share holdings in AITPL to M/s. APFI and the same was effected in two stages. First tranche of the share transfer happened in March 2007 which fell within the relevant previous year.

4 4 4. While filing return for the impugned Asst. Year, Assessee had justified the price at which it had sold the shares in LTIAL and AITPL to M/s.APFI. According to it the prices were at arms length. It s contentions before the Assessing Officer are summarized hereunder :- i) LTIL who was also an equal shareholder like assessee in LTIAL was not in any manner connected with Assessee or its associated enterprise M/s.APFI, to which the shares were sold. ii) The price at which M/s.LTIL sold their share holding in LTIAL to APFI gave the correct internally comparable uncontrolled price (CUP). The price at which LTIL sold came to.11,848/- per share and this was the same price at which Assessee also sold its shares in LTIAL to APFI. iii) The sale price of shares in LTIAL were perfectly comparable and in accordance with rules for determining ALP. iv) Sale price of per share in AITPL was supported by a valuation certificate determining the enterprise value of AITPL prepared by a Chartered Accountant in accordance with Controller of Capital Issues (CCI) Valuation guide lines.

5 5 v) CCI guidelines were as per Foreign Exchange Management (Transfer or Issue of security by a personnel resident outside India) Regulations vi) Such valuation of the enterprise was made considering average of net asset value and yield. vii) The price at which shares of AITPL was sold to APFI at per share was much higher than the value of 3.07 per share arrived by the Chartered Accountant based on CCI guideline. 5. It is to be mentioned that assessee had filed various transfer pricing documents including audit reports along with its return for justifying the price at which it had sold the shares. Assessing Officer referred the issue of determination of ALP to the TPO. TPO was of the opinion that transfer of shares in LTIAL by LTIL to APFI could not be considered as an uncontrolled comparable transaction. According to her, the relationship of Assessee with M/s. LTIL which was through common participation in LTIAL, automatically resulted in LTIL and assessee becoming Associated Enterprises. Further, according to her, sale of shares effected by LTIL to APFI was intimately connected to the sale of shares by assessee to APFI.

6 6 Thus, she reached a prima facie opinion that internal CUP adopted by Assessee was not in accordance with the spirit of Chapter X of the Act, in so far as pricing of the shares of LTIAL was concerened. 6. As for the price of shares AITPL sold to APFI, the TPO was of the opinion that share price as valued by the Chartered Accountant based on CCI valuation guidelines, could not be accepted. As per the TPO the price of ` per share received by Assessee for selling the shares was computed based on a single year data. Again as per the TPO, the guidelines and rules for valuation of shares for CCI, were not relevant for the purpose of ascertaining the ALP under the Transfer Pricing Rules. The purpose of CCI valuation guidelines were entirely different and in any case according to the TPO, the said guidelines were replaced by SEBI guidelines with effect from April 2010 and the replaced guidelines recommended adoption of Discounted Cash Flow (DCF) method for valuation of an enterprise. 7. When the above proposals were put to the assessee, it did vehemently object. It was argued that most appropriate method for the

7 7 purpose of arriving at ALP of shares in LTIAL was the CUP method, especially since all the conditions specified in Rule 10B(2) of Income-tax Rules, 1962(in short Rules ) stood satisfied. However, this was not accepted by the TPO. As per the TPO, the valuation and data used by Assessee in computing ALP were neither reliable nor correct. Relying on the decision of Hon'ble Punjab & Haryana High Court in the case of Cococola India Ltd. v. ACIT (309 ITR 174), the TPO held that the value computed for M/s.LTIAL based on the alleged CUP method and for AITPL based on CCI Guidelines were not reliable basis for determining the ALP of the share prices. He put Assessee on notice that he was going to adopt Discounted Cash Flow Method for determining the ALP of the shares sold by Assessee. The methodology proposed for arriving at the value of both the companies, using the DCF method was also provided to Assessee. 8. Assessee replied to the TPO that it could not accept adoption of DCF for valuing the shares of the companies for determining the prices of the shares. It also pointed out that there were a number of errors in DCF method being proposed by the TPO.

8 8 9. After correcting some of the mistakes pointed out by Assessee, TPO arrived at an ALP of per share for AITPL and.26,655/- per share for LTIAL, based on DCF applied on future cash flows. Accordingly, adjustments were carried out on the value of international transactions viz. sale of shares by Assessee tom/s.apfi. This resulted in an upward adjustment of.239,82,91,448/- being recommended by the TPO. Draft assessment order was issued by the Assessing Officer in accordance with the report of the TPO, and forwarded to the assessee. 10. Assessee, thereupon moved the Dispute Resolution Panel (DRP) objecting to the draft Assessment Order. Vis-à-vis sale of shares of LTIAL, argument of Assessee once again was that shares in the same company were also transferred by LTIL, which was not at all an AE and, therefore, CUP method which was adopted by Assessee was unjustly rejected. In so far as value of shares of AITPL was concerned, Assessee once again relied on the valuation certificate issued by the Chartered Accountant as per CCI Valuation guidelines, for justifying the price. Further, as per Assessee the TPO had adopted certain erroneous parameters while working out the value of enterprise based on DCF Method. The cost of debt of LTIAL was

9 9 taken at 7.5% without considering the actual interest rate. Weighted average cost of capital (WACC) for applying the discount factor was worked out based on book value and not market value. TPO had taken cost of equity at 11% without following capital asset pricing method for determining the cost of equity. TPO had considered increase in future rental income at 15% every three years without considering business realities. TPO did not give liquidity discount on the finally arrived price per share, and ignored that both the companies were private and there were restraints in transfer of shares. Similar objections were also raised for the price determined by the TPO on sale of shares in AITPL to APFI. 11. However, the DRP was not impressed by the above submissions of the Assessee. According to the DRP, valuation done by a Chartered Accountant, based on CCI guidelines, was essentially to safeguard the interest of existing shareholders at the time of new issue of shares. Purpose of valuation for determining the ALP was not similar. Further according to the DRP, DCF method was the most used and popular method for valuation of shares since it truly reflected the intrinsic value of a company. As for the argument of Assessee that CUP method was ideal

10 10 for ascertaining the ALP of the shares in LTIAL, opinion of the DRP was that both the transactions, were so closely related that these could not be considered as comparably uncontrolled. As per the DRP, cost of equity capital considered at 10% by the TPO was reasonable. Assessee having sold the shares to AITPL at per share, the compounded annual return when reckoned from the year of acquisition of the shares came to 32% per annum and this was almost in line with the cost of equity of 23.68% worked out by Assessee itself. In any case, as per the DRP, TPO had put before the assessee the assumptions taken by him for computing the cost of equity and cost of debt, and such costs were adopted after considering the view of Assessee. Therefore, as per the DRP, there was no need to interfere with the values arrived at by the TPO. DRP also rejected the objections taken by the Assessee on the project life of 20 years considered by the TPO for working out the future cash flows. Assessee s objections before the DRP on the quantum of future cash flows considered by the TPO based on increased lease rentals also did not find any favour with the DRP. As per the DRP income and expenses considered by the TPO for working out the future cash flows were both increasing in the same proportion and was realistic. In this view of the matter the DRP

11 11 confirmed the draft Assessment Order. Assessing Officer thereafter completed the assessment accordingly. 12. Now, before us the Authorised Representative strongly assailing the orders of the lower authorities, has preferred two different lines of arguments. First set of arguments are relevant for transfer of shares by LTIAL and second set of arguments are relevant for transfer of shares of both AITPL as well as LTIAL. Adverting to the first line of argument, Authorised Representative submitted that CUP method was most appropriate one since LTIL was not an interested party nor an Associated Enterprise. According to him, there was no common share holding between LTIL and APFI. LTIL had independently transferred shares which were held by it in LTIAL to APFI. Provisions of Rule 10B(2) were satisfied fully. Hence, according to him, lower authorities erred in rejecting the CUP method and foisting a different method based on Discounted Cash Flow, for arriving at the ALP of the shares. 13. In so far as sale of shares by AITPL was concerned, Authorised Representative submitted that certificate of valuation given by a

12 12 independent Chartered Accountant based on CCI valuation guidelines had given the fair price per equity share at.3.07 whereas Assessee had sold the shares at On the other hand, DCF method adopted by the TPO had enhanced the value to per share. The objectives of CCI valuation and guidelines and TP Rules were the same. Both were to ensure that a resident company did not over price the shares which were transferred to non-resident. In any case, according to him, DCF method adopted by the TPO was based on a notification dated under FEMA which had no retrospectivity. As per Authorised Representative, yield based method adopted by Assessee was an accepted one. Against per share of AITPL valued by the Chartered Accountant, Assessee had proactively considered per share based on yield method. As per Authorised Representative, Rule 11UA of Rules had prescribed a methodology to be followed for determining the fair market value of a property other than immovable property. At Clause c thereof, a formula prescribed for such valuation and it was nothing but application of net asset value method. Even if this method was adopted the value per share of AITPL would come to only. As per the Authorised Representative, Assessee being engaged in real estate business net asset

13 13 value method was most appropriate one for valuation of the enterprise. In any case, the DCF method as adopted by lower authorities suffered from various errors. As per ld. A.R., the sale of share took place in March 2007 and, therefore, the first year that should have been considered was In other words, the PV factor (present value factor) was incorrectly applied. Further, according to him, the cost of debt was considered at 7.5% by TPO whereas the actual interest paid by Assessee was 11.50% as on the date of transaction, which thereafter increased to 12.75%. Cost of equity, was considered at 11.5% based on the agreement entered by Assessee with TIDCO whereby TIDCO would have earned 11.5% return on its equity investment, if it exercised an option to divest its investments at a later date. However, according to the Authorised Representative, this was not a correct methodology since TIDCO as a general practice never divested the shares held by it. The shares issued to TIDCO were in lieu of the land received from them. Such land was given to AITPL for the particular purpose of developing software parts and could be used for nothing else. TIDCO therefore always ensured that they had a say in the management of AITPL.

14 Continuing his arguments Ld. Authorised Representative stated that lower authorities had committed a number of errors while working out the weighted average cost of capital. According to him the weighted average cost of capital would always lie between cost of equity and cost of debt. The cost of equity considered by TPO herself was 11.5% and cost of debt 7.5%. However, the TPO had worked out a weighted average cost of capital for AITPL at 5.24%, which was impossible. This itself showed the arithmetic inaccuracies in the working. The TPO while taking the Denominator for working out the WACC, had considered the aggregate of (i) equity (ii) share application money (iii) debt of Phase I and (iv) debt of phase II. However, in the Numerator he took the value of equity and debt of Phase I alone, ignoring the share application money and debt of phase II. In any case, according to him an illiquidity discount, on account of restriction in transfer of shares was not given to Assessee. Thus, according to him the price recieved by Assessee for sale of shares in both these were not in variance from the ALP. Therefore Ld. A.R. submitted that the adjustments carried out by the lower authorities were not called for.

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. Resale Price Method cannot be applied since the shares sold by the Assessee

16 16 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 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

17 17 unrelated or at Arm s 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 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

18 18 of LTIAL, was not an independently entered one but a joint effort. In such circumstances, Assessee s 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 :- 92C. (1) The arm s length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely : (a) (b) (c) (d) (e) (f) comparable uncontrolled price method; resale price method; cost plus method; profit split method; transactional net margin method; such other method as may be prescribed by the Board. 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

19 19 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 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

20 20 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). 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 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

21 21 have been inserted by IT(Second Amendment) Rules, 2010 with effect from 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

22 22 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 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 present value (NPV). The Discounting factor generally used is the Weighted Average Cost of capital. Widely used method of valuation based on discounted cash flow seems to be as under :-

23 23 Cashflow to concern EBIT (1-t) ~~ Cash flow projected over n years based on expected ~ - ~, (Cap Ex - Depr) growth f-- - Change in WC '"... = FCFF I I Terminal Value= FCFF n+1 /(r-gn) FCFF1 FCFF2 FCFF3 FCFF4 FCFF5 FCFF n Apply Discount at WACC= Cost of Equity (Equity/(Debt + Equity)) + Cost of Debt (Debt/(Debt+ Equity))=Value of operating asset Cost of Equity I Cost of Debt Weights, (Riskfree Rate Based on Market Value, + Default Spread) (1-t) -- Riskfree Rate - No default risk Risk Premium - No reinvestment risk Beta - Premium for average - In same currency and + - Measures market risk x risk investment in same terms (real or I nominal as cash flows 1 1!Type of Operation!FinanClal! Business Leveraae Leverage Country Risk 1 I I Premium Value of operating asset + Non operating asset = Value the enterprise Value of enterprise Value of debt = Vale of equity 21. It is obvious that difficult parts are (i) determining the future cash flows, (ii) determining the cost of equity, (iii) determining the cost of debt and (iv) determining the period of discounting. Here both parties

24 24 have agreed that 20 years is an appropriate one and hence last mentioned difficulty is not there. Future cash 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 of the very nature of the business of Assessee. Problem is with 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 in our opinion cost of equity will always be higher than the risk free interest rate in the market. When risk free interest rate is adjusted with the risk premium the resulting figure will be cost of equity. It is a basic principle of economics that risk and returns go together. Greater the risk, the higher is the possibility of return and vice-versa. A person who places his money in a Fixed Deposit with a Bank will be satisfied with a lower rate of interest than the returns he would expect, had he placed his money in equity shares. Risk of investment in equity shares is higher since returns are not

25 25 assured. Therefore, cost of equity will always be higher than the cost of debt. 22. Weighted average cost of capital of AITPL worked out by the TPO is as under :- Particulars Numerator Denominator Discount Rate WACC Equity 435,000,000 2,264,156, % 2.21% Debt 913,620,707 2,264,156, % 3.03% Total 1,348,620, % Against this, Assessee s contention is that WACC of AITPLwill be as under:- Particulars Numerator Denominator Discount Rate WACC Equity 680,000,000 2,264,156, % 3.45% Debt 1,584,156,235 2,264,156, % 5.25% Total 2,264,156, % Equity and debt of AITPL as at the end of the relevant previous year stood as under :-

26 26 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 Total Debt 1,58,41,56,235 Debt Total Debt & Equity 2,264,156,235 Thus, in working our the WACC the Assessing Officer considered only equity and debt of Phase 1. Nevertheless in the Denominator he took the aggregate of equity share application money, debt of phase 1 and debt of phase 2. This is an obvious mistake in the working out done by the TPO. As pointed out by Assessee, PV factor also is to be spread starting with the year in which the transaction took 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 change in the valuation of the company. If the ALP of the shares are worked out without considering a reasonable value for the enterprise, it will result in injustice. As already noted by us here, there is no dispute with regard to cash inflows and cash out-flows. Only dispute is

27 27 only with regard to weighted 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 are, therefore, of the opinion that the issue of working out of value of the companies so as to ascertain the ALP of the shares requires a re-look by the Assessing Officer and TPO. 23. With regard to the argument of the Ld. Authorised Representative that a discount for illiquidity of shares should be given, this cannot be accepted for the reason that when weighted average cost of capital is worked out and discounting factor is applied for ascertaining the net present value of the future cash flows, such discounting rate would take into account all associated risks. When value of an enterprise is fixed based on present value of its future earnings there is no scope for any further allowance for any perceived risk factor. 24. Thus while holding that discounted cash flow method was appropriate to determine the ALP of the international transaction, we set aside the issue to the file of Assessing Officer for re-working the value afresh in accordance with standard practices adopted for such valuation.

28 28 Assessee shall be given an opportunity for giving it s work-out and this shall be duly considered by the TPO and the A.O. 25. Only other ground taken by Assessee is with regard to disallowance of Exchange Fluctuation Loss on loans. It is not disputed that commercial borrowings availed by Assessee were used for meeting working capital requirements. Necessarily, therefore, loss due to exchange rate fluctuation is only a Revenue outgo. In our opinion decision of Hon'ble Apex Court in the case of CIT v. Woodward Governor India Pvt. Ltd. & Others (312 ITR 254)(S.C) goes in favour of Assessee. We, therefore, hold that such disallowance was not called for and stands deleted. 26. In the result, the appeal of Assessee is allowed pro tanto. 27. Order pronounced on Wednesday, 2 nd of January, 2013, at Chennai. sd/- sd/- (CHALLA NAGENDRA PRASAD) ( ABRAHAM P GEORGE ) JUDICIAL MEMBER ACCOUNTANT MEMBER Chennai, Dated : 2 nd January, Jls. Copy to:- Appellant/Respondent/CIT(A), Chennai/CIT, Chennai/ D.R./Guard File