JT. CIT (OSD) - 2 (3)(1), MUMBAI vs. TATA SONS PRIVATE LTD., MUMBAI

Per contra, Shri Manoj Kumar representing the Department, supporting the order of TPO and the CIT(A) submitted that the assessee has followed hybrid method of valuation of shares which is not permissible. The Transfer Pricing provisions do not distinguish between inbound and outbound investments. The method which provides most reliable estimate/value should be adopted. In the present case DCF is the most reliable method for valuation of shares. The TPO has adopted the same for valuation of shares. Referring to the findings of TPO in para 9.7 and 9.8 of the TPO order he submitted that there are fundamental errors in valuation report, therefore, the valuation report has been has been rightly rejected by the TPO/CIT(A).

We have heard the submissions made by rival sides and have examined the orders of authorities below. During the period relevant to assessment year under appeal, the assessee sold 10 million Equity Shares in TGBGL an unlisted registered company in UK to TGBCL one of assessee’s group company. The shares were sold to TGBCL @ GBP 2.56 per share with a total consideration of GBP2,56,60,000/- The shares were sold at a price based on a valuation report. The said report is available at pages 4 to 54 of the paper book. For the valuation of shares, the Valuer adopted combination of Comparable Companies Multiple (CCM) method and Discounted Cash Flow (DCF) method. The Valuer assigned 50% weightage to CCM method and 50% weightage to DCF method. The valuation of shares as per report is tabulated as under: Valuation analysis for computing equity value of TGBCL as at March 2011(GBP Million) Valuation methodology Weights Equity Value Comparable Companies’ Multiple Method (Using projected FY 30% 513.0 2012 financial) Comparable Companies’ Multiple Method (Using projected FY 20% 588.9 2013 financial) Discounted Cash Flow method 50% 663.1 Assets Value method 0% 293.7 Equity Value 603.2 Number of equity shares (in million) (on a fully diluted basis as 235.1 informed to us by the Management) Value per ordinary share (GBP/share) 2.56 The case of the assessee is that the valuation of unlisted shares of the overseas company is in accordance with RBI Master Circular No.11/2011-12 dated 01/07/2011, hence, should be accepted. The TPO rejected assessee’s method of valuation inter-alia questioning hybrid method adopted by the Valuer instead of pure DCF method as prescribed under Income Tax Rules and raising objections to selection of comparable companies under CCM method. The TPO held that value of shares should have been determined in accordance with DCF method. The TPO accordingly applied DCF method for the valuation of share and made adjustment of Rs.35,00,07,909/-.

What is relevant in Transfer Pricing analysis is determination of ALP of an international transaction by applying the most appropriate method prescribed under section 92C of the Income Tax Act, 1962 (herein after referred to as ‘the Act’). If none of the five methods as specified in Section 92C of the Act applies, than the ‘other method’ has to be applied. The ‘other method’ for determination of ALP has been specified in Rule 10AB of the Income Tax Rules, 1962 (herein after referred to as ‘the Rules’). Rule 10AB, as was applicable to Assessment Year under appeal, reads as under: “10AB. For the purposes of clause (f) of sub-section (1) of section 92C, the other method for determination of the arms’ length price in relation to an international transaction shall be any method which takes into account the price which has been charged or paid, or would have been charged or paid, for the same or similar uncontrolled transaction, with or between non-associated enterprises, under similar circumstances ,considering all the relevant facts.” The valuation of shares by an independent Valuer falls in the category of the ‘Other Method’. The assessee transferred shares at a rate determined by the Valuer. Generally, such valuation and the transaction based thereon are not to be disregarded, unless the valuation is based on patently wrong approach or assumptions or there is fundamental flaw in the valuation. In transfer pricing mechanism there is no concept of valuation based on RBI Circular for the purpose of determination of ALP. Valuation made under any such Circular at the best be considered under the ‘Other Method’, if valuation cannot be made under any of the approved methods specified u/s. 92C of the Act. As per RBI Circular (supra), where shares of an unlisted company are disinvested in a private arrangement, the share price should not be less than the value certified by a Chartered Accountant/Certified Public Accountant based on the latest Audited Financial Statement of the wholly owned subsidiary (WOS). It is an undisputed fact that TGBGL is a WOS of the assessee, the shares of TGBGL are sold to TGBCL in a private arrangement. A perusal of the valuation report dated 17/11/2011 reveals that valuation analysis of shares of TGBCL is based on Audited Financial Statement as on 31/03/2011. The report has been certified by a Chartered Accountant. Thus, all the mandatory conditions set out in RBI Circular (supra) are duly complied.

The Valuers in Section 5 of the report (para 5.2) have pointed certain limitations in selection of comparable companies for the purpose of applying CCM method. The relevant extract of the practical difficulties highlighted by the Valuer are as under: “ Practical difficulties that may be faced  No or very few sufficiently comparable companies.  No or very few listed/recent transactions history in sufficiently comparable companies.

 Lack of availability of the credible data about recent transaction in sufficiently comparable companies.” A list of comparable companies selected for the purpose of analysis under CCM method is given in para 1.7 of the report. The gist of comparables and there business activities is reproduced herein under: a. Sara Lee Corporation (Sara Lee) is a global manufacturer and marketer of consumer products. It derived 40.7% from the business of beverage segment which sells coffee and tea products. b. Peets coffee & Tea Inc., is a specialty coffee roaster and distributor of fresh roasted whole bean coffee. c. Unilever PLC is a supplier of fast moving consumer goods. It derives only 19.4% of its revenue from icecream and beverages. d. Associated British Foods PLC is engaged in the processing and manufacture of food worldwide. It derived 33.7% of its revenues from the grocery segment. e. The J.M. Smucker Company is a marketer and manufacturer of fruit spreads, retail packaged coffee etc. It derived 40% of its revenues from coffee products. f. Caribou Coffee Company, Inc. is engaged in operating coffeehouses in the United States. g. Tata Global Beverages Limited [holding company]. h. Tata Coffee Limited is engaged in growing of coffee, pepper, tea and other plantation crops. i. Strauss Group Limited is engaged in the production of branded beverages, fresh foods, instant coffee and snacks. It derived 51.6% of its revenues from the coffee segment.

In our considered view the objection of the TPO against application of hybrid method for valuation of shares is devoid of merit. As long as valuation of shares is based on accepted method(s), single or combination of methods and justifiable reasons are given for allocating weightage for each of the method adopted after factoring limitations, the valuation should be accepted. In the instant case, the TPO has rejected the valuation report highlighting fundamental flaws in valuation of shares under CCM method. The TPO inter- alia pointed that no reason has been given for assigning 50% weightage to CCM method; selection of comparables is faulty, as majority of companies selected are not even engaged in business of tea in particular or beverages in general, hence selected companies are not comparable.

As far as selection of DCF method for valuation of shares, we would like to observe that it is one of the widely accepted methods of valuation of shares, but that does not mean that it is ‘the only’ accepted method. The advantage of DCF method is that it can be applied in wider spectrum based on reasonable assumptions. Here we would like to reiterate that the purpose of transfer pricing is to benchmark the arm’s length price of the transaction by applying the most appropriate method. The method that takes into account the price which has been charged or paid, or would have been charged or paid, for the same or similar uncontrolled transaction, with or between non-associated enterprises, under similar circumstances should be applied. In the present case, since there were flaws in valuation of shares under CCM approach, the valuation report to that extent is rejected. The Valuer has also used DCF method giving it 50% weightage, the DCF method is applied by the TPO giving 100% weightage, the same has been upheld by the CIT(A) as well. We see no reason to take a different view. Hence, ground no.4 of appeal is rejected. Ground No.5- Income from House Property : 11. The ld.Counsel for the assessee submits that the assessee had incurred expenditure of Rs. 48,51,650/- towards amenities and maintenance of facilities like salaries, security charges, electricity, etc. and the same was claimed as deduction from Annual Letting Value(ALV). The Assessing Officer disallowed the claim of assessee. The assessee carried the issue in appeal before the CIT(A). The CIT(A) following the order of his predecessor in Assessment Year 2009-10 and Assessment Year 2011-12 dismissed the said ground of appeal

The ld. Departmental Representative fairly stated that identical issue has been considered by the Tribunal in the preceding Assessment Years. The CIT(A) has already granted part relief to the assessee. Against the relief granted u/s. 14A of the Act by the CIT(A), the Revenue is in appeal.

Both sides heard. The representatives of rival sides have unanimously stated that the issue of disallowance u/s. 14A of the Act on identical set of facts has been considered by the Tribunal in the preceding assessment years. We find that the Co-ordinate Bench in appeal of assessee for assessment year 2011-12 considered the issue of disallowance u/s. 14A on similar set of facts. The assessee in sub-grounds to ground No.6 has assailed disallowance u/s.14A of the Act on different facets. The Ld.Counsel for the assessee has restricted her submissions primarily on sub-ground No.(ii) i.e. adjustment of gross interest income of Rs.159.26 against interest expenses of Rs.78.64 crores. In other words, the assessee is seeking that net interest expenses i.e. interest expenditure minus interest income to be considered for the purpose of disallowance u/r. 8D(2)(ii) and sub-ground No.(iii) relating to alleged double disallowance of interest, i.e. interest already disallowed u/s.43B of the Act not to be considered again while computing disallowance u/r. 8D(2)(ii). The Co- ordinate Bench in A.Y. 2011-12 deleted the disallowance u/s. 14A of the Act r.w.r. 8D by observing as under: “20. We have considered the rival submissions and perused the material available on record. Section 14A of the Act disallows the expenditure incurred in relation to income which does not form part of the total income under the Act. On the other hand, under section 43B expenditure of the nature mentioned in the said section are allowable only on the payment basis, irrespective of the method of accounting regularly followed by the assessee. Thus, there could be certain expenditures which may fall under both the sections for the purpose of disallowance. In such a situation, question arises whether the same expenditure can be disallowed under both the aforesaid sections and thus resulting in double disallowance. It is pertinent to note that the Act is silent on this aspect. In this regard, it is relevant to note following observations of Hon’ble Supreme Court in Jain Brothers vs Union of India, [1970] 77 ITR 107 (SC): “It is not disputed that there can be double taxation if the legislature has distinctly enacted it. It is only when there are general words of taxation and they have to be interpreted, they cannot be so interpreted as to tax the same subject twice over to the same tax..... If any double taxation is involved the legislature itself has, in express words, sanctioned it. It is not open to anyone thereafter to invoke the general principles that subject cannot be taxed twice over.”

In respect of ground no. 10(v), raised in assessee’s appeal, only grievance of the assessee is against non-consideration net interest expenditure, i.e. after adjusting the interest earned, for the purpose of computing the disallowance under section 14A read with rule 8D. In this regard, we find that this issue is already covered in favour of the assessee in its own case by order dated 06/11/2019 passed by the coordinate bench of the Tribunal in and 3508/Mum/2013, for assessment year 2008-09. The aforesaid decision rendered in assessment year 2008–09 has been consistently followed in assessee’s own case for assessment years 2009–10 and 2010–11 cited supra, by the coordinate bench of the Tribunal. Thus, respectfully following the judicial precedents in assessee’s own case, ground no. 10(v) raised in assessee’s appeal is allowed. The other aspect raised in aforesaid ground pertaining to allocation of net interest between exempt dividend income and taxable brand income was not pressed during the course of hearing. Therefore, the said part of ground no. 10(v) is dismissed as not pressed.” The sub-grounds No. (ii) and (iii) of ground No.6 are allowed for parity of reasons.

In respect of sub-ground No.(iv) of ground No.6, the Ld.Counsel for the assessee stated at Bar that she is not pressing the same. In view of the aforesaid statement ground No.6(iv) is dismissed as not pressed. In the result, ground No.6 of appeal is partly allowed in the aforesaid terms. Ground No.7 –Increasing the Adjusted Book Profit u/s. 115JB of the Act : 18. The assessee vide application dated 11/09/2021 has modified ground No.7 of appeal. The modified ground No.7 of appeal reads as under: “ The learned AO be directed to increase the “book profit” in terms of clause (f) to Explanation 1 to section 115JB, only the direct expenditure incurred relatable to income to which the provisions of section 10 apply in terms of clause (i) of sub-rule(2) to Rule 8D of the Income –tax Rules, 1962 and not by the disallowance estimated in terms of clause (ii) an (iii) of he said Rule.”

The Ld.Counsel for the assessee submits that the issue raised in modified ground of appeal

The ld. Departmental Representative fairly stated that the issue has been considered by the Tribunal in assessee’s own case in the preceding assessment year.

Both sides heard. We find that the issue of disallowance of provision for pension was considered by the Tribunal in assessee’s own case for Assessment Year 2011-12 (in para 25 onwards). The Co-ordinate Bench after considering decisions rendered in the case of PCIT vs. State Bank of India. 109 taxmann.com11(Bom); CIT vs. Eveready Industries Ltd., 98 taxmann.com 90(Cal) and CIT vs. Mahindra & Mahindra Ltd., 284 ITR 679 (Bom) concluded as under: “33. In the present case, the net provision for pension of Rs. 21.94 crore was claimed as deduction on the basis that assessee is following mercantile system of accounting. It is not in dispute that such an estimate has been made by the assessee from year to year to provide for the pension amount payable to the Directors in recognition of their servicesrendered during the tenure as whole time Directors. Further, it is also not disputed that during the year under consideration assessee has made payment of Rs. 4.45 crore. The assessee has made an estimate on reasonable basis of such liability on the basis of actuarial valuation. In this regard, it is relevant to note following observations of the Hon’ble Supreme Court in Bharat Earth Movers vs CIT, [2000] 245 ITR 428 (SC): “4. The law is settled: if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied, the liability is not a contingent one. The liability is in praesenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain.

Thus, respectfully following the aforesaid decisions rendered by the Hon’ble jurisdictional High Court, we are of the considered view that assessee is entitled to claim deduction of the provision for pension provided on an actuarial basis. In the result, ground no. 11 raised in assessee’s appeal is allowed.” No contrary decision has been placed on record by the Revenue. Thus, respectfully following the aforesaid decision by the Co-ordinate Bench ground No.8 of appeal is allowed for parity of reasons.

In ground No.4 of appeal the Revenue has assailed the findings of CIT(A) in allowing consultancy fees paid to M/s. Vaishnavi Corporate Communications Pvt. Ltd. (in short ‘Vaishnavi’). The ld. Departmental Representative has drawn our attention to the findings of Assessing Officer in para -8 of the assessment order. He submitted that the assessee has paid consultancy fee of Rs.7.22 crores to Vaishnavi. As per assessee’s own admission the said payment has been made in respect of land transactions and for acquiring 2G licences. The consultancy fee paid by the assessee to Vaishnavi is not in respect of assessee’s business, hence, the payment was disallowed.

The Ld.Counsel for the assessee submits that identical issue was considered by the Tribunal in assessee’s own case in in appeal by the Department and dismissed the aforesaid ground.

Both sides heard. A perusal of the impugned order (para -48) shows that the CIT(A) has allowed relief to the assessee on this issue as the same has been examined in the preceding assessment year and the payments made to the same very agency since assessment year 2007-08 was allowed as deduction in earlier assessment years. The facts and circumstances in the impugned assessment year are identical. We find that the Co-ordinate Bench has allowed the aforesaid payments made to Vaishnavi in the preceding Assessment Year for the reason that the relief has been allowed to the assessee consistently on same set of facts since assessment year 2004-05. This fact has not been rebutted by the Department. We find no infirmity in the findings of CIT(A) in allowing relief to the assessee following the decision of Co-ordinate Bench in assessee’s own case on same set of facts. Thus, ground No.4 of appeal by the Department is dismissed.

In the result, appeal of the Revenue is dismissed.

To sum up, appeal of the assessee is partly allowed and appeal of the Revenue is dismissed.