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India - Decision on method of valuation of shares for determining ALP for sale of shares

June 8, 2017

The Indian Income Tax Appellate Tribunal (ITAT) delivered its decision on 2 January 2013 in the case of Ascendas (India) Pvt. Ltd. v. DCIT (ITA No. 1736/Mds/2011) that the Discount Cash Flow (DFC) method is preferred over the erstwhile valuation guidelines issued by the Controller of Capital Issues (CCI) in order to determine the arm's length price (ALP) for the sale of shares.

(a) Facts. The taxpayer (Ascendas (India) Private Limited) entered into a joint venture (JV) with L&T Infocity Ltd. to develop, own and manage information technology (IT) parks in India. It had also entered into a joint agreement with its JV partner to sell their respective shares in the JV to the Ascendas Property Fund India (the Fund), regarded as an Associated Enterprise of the taxpayer. Further, the taxpayer incorporated another Indian company (Company A) for carrying on the business of development of IT parks and had also entered into an agreement to sell its share in this Indian company to the Fund. The taxpayer filed its income tax return disclosing its income from the sale of its shareholding in JV and Company A. The taxpayer stated that the determination of sale consideration is based on the valuation guidelines issued by the CCI as required under the then prevalent foreign exchange regulations in India.

The taxpayer further supported its claim that the sale consideration was at arm's length by stating that its JV partner (an unrelated entity with equal shareholding) has also determined its sale consideration by following the same method and therefore, should be regarded as a comparable uncontrolled price (CUP) for transfer pricing purposes. The tax authorities did not agree and contended that the value of shares for transfer pricing purposes should be determined by following the DCF method and accordingly, made the addition. The Dispute Resolution Panel confirmed the addition and the taxpayer went in appeal before the ITAT.

(b) Issue. The main issue is whether the sale transaction of its JV partner could be regarded as a CUP for the taxpayer. Further, whether the DCF method is an appropriate method in determining the ALP for sale of shares.

(c) Decision. The ITAT held that the taxpayer and its other JV partner had sold their respective shares in JV under a single agreement and therefore, could not be regarded as a CUP. It also held that the valuation guidelines issued by CCI are from a foreign exchange regulations perspective and these guidelines cannot be used to determine the value of shares for transfer pricing purposes. It further stated that, in the present case, where the market value of shares is not easily ascertainable, DCF is held to be the most appropriate valuation method even though it is not specifically prescribed in the Indian Income Tax Act 1961.

India - Decision on the method of valuation of shares for determining ALP for sale of shares (21 Feb. 2013), News IBFD.

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