Transfer Pricing News

​The Central Board of Direct Taxes (‘CBDT) has amended annexure to Form 3CEB, also commonly referred as Transfer Pricing Audit Report, wherein, the existing clause 25 has been renumbered as clause 26 and new reporting requirement under clause 25 has been inserted.

The focus of this amendment is on reporting of Specified Domestic Transactions between domestic related parties, especially those involving a Co-operative society eligible for a lower tax rate for carrying out manufacturing activity.

​In a recent ruling on the issue of interest on loan granted in Euros to an Associated Enterprise (‘AE’), the Delhi Income Tax Appellate Tribunal (‘ITAT’) in the case of Motherson Sumi Systems Limited [ITA-TP No 2054/Del/2015], reviewed and accepted the benchmarking analysis undertaken by the taxpayer and determined that the interest rates arrived at by using EURIBOR was indeed at arm’s length basis (‘ALP’), leading to the deletion of the proposed addition by the Transfer Pricing Officer (‘TPO’).

As per the facts of the captioned case, the taxpayer had applied the Comparable Uncontrolled Price (‘CUP’) method to benchmark the interest income, supported by a credit rating analysis and comparison of the interest rates that were agreed in third-party comparable loan agreements. Based upon the same, the taxpayer justified that the interest rate charged to the AE was at ALP, as it was higher than rates charged between unrelated entities in the comparable circumstances.

However, the TPO recalculated the ALP of the interest income by applying the Prime Lending Rate of the State Bank of India for loans issued in India, which had resulted into a transfer pricing adjustment.​

In an important ruling by the Mumbai ITAT in the case of Tata Sons Private Limited [ITA No.1349/Mum/2019], the Hon’ble ITAT accepted DCF method for valuation of unlisted shares. 

As per the facts of the captioned case, the taxpayer had sold unlisted shares to its AE, wherein, the value of shares was based on a valuation report issued by an independent valuer, who calculated the value of shares as a combination of Comparable Company Multiple (‘CCM’) method and DCF method, with 50 per cent weightage given to share value under each method.

However, during the assessment proceedings, the TPO rejected method of valuation and applied DCF method for valuation of such unlisted shares.

The taxpayer argued before the TPO and the Hon’ble ITAT, that the hybrid method used by the valuer was justified and compliant with Reserve Bank of India’s Circular, which provided for acceptance of the hybrid valuation methodology subject to certain conditions.

In this regard, the Hon’ble ITAT observed that as long as valuation of shares is based on accepted method(s), the underlying valuation as per single or combination of methods should be accepted, subject to justifiable reasons are given for allocatin​g weightage for each of the method adopted after factoring limitations.

However, on the perusal of the valuation methodology in the taxpayer’s case, it was observed that selection of comparables under CCM method was faulty, as majority of companies selected were not engaged in similar business.

Thus, the Hon’ble ITAT upheld the use of DCF method, emphasizing its widespread acceptance but also noted that it's not the only accepted method, and it is only for the reason that the flaw in valuation methodology was found in the CCM approach, the said valuation was rejected in the present case.