ALP of slump sale to be determined using valuation report, failing which IT WDV can be considered as a reasonable methodology
Intel Asia Electronics Inc., India Branch Office vs ADIT (Bangalore) (ITA No. 131 of 2010)
Background :- The assessee is a foreign company, having a branch office as well as a subsidiary in India. The assessee decided to close down its branch office and transfer all its assets and liabilities as a going concern to its subsidiary. The assessee adopted CUP method to determine the ALP for transfer of such business and obtained a valuation report from a chartered engineer and registered valuer. The TPO/ AO rejected the valuation report on the ground that it was arbitrary and held that the “book value” of the assets and liabilities should be considered to be the ALP of such business transfer. This adjustment was subsequently confirmed by the CIT (A). The issue pertains to Assessment Year 2004-2005.
Issues before the Bangalore Tribunal
• Whether the valuation of the assets based on the WDV as per the Companies Act should be adopted or value determined by the chartered engineer and registered valuer should be considered for CUP analysis?
• Whether rejection of valuation report submitted by the assessee from a chartered engineer and registered valuer is justifiable?
Contention of the Assessee
• Value of the assets sold has been determined in accordance with the certificate issued by the chartered engineer and registered valuer.
• The chartered engineer and registered valuer has valued the assets considering all factors affecting pricing in the open market and such valuation is on a scientific basis.
• In the instant case, majority of the assets sold were computers and accessories which have a very high rate of obsolescence on account of rapid technological developments. In this regard, both Companies Act and Income Tax Act have prescribed different rates of depreciation on computers.
• Depreciation rates prescribed under the Companies Act have remained static over a long period. Such rate does not reflect the correct diminution in the value of assets in the present market conditions.
• The revenue has not found any specific defect in the registered valuer’s report but has passed only generalized comments to reject it.
Ruling of the Bangalore Tribunal
• In the absence of identical/ similar transaction(s), valuation report could be the most appropriate means for bench marking under CUP method.
• The registered valuer has not explained with proper reasoning as to why varying depreciation rates were considered while depreciating the value of an asset. As such, valuation done without any reasoned footing was held to be erroneous.
• In the absence of reliable valuation report, the only option is to adopt the value of the assets as per the Companies Act or the Income Tax Act.
• Depreciation rates prescribed by the Companies Act are static and therefore the WDV of the assets so arrived cannot be considered to be at par with the net present market value.
• The only reasonable approach is to value the assets by applying the depreciation rates as provided by the Income Tax Act, for it is more dynamic and so schemed to bring in a notional charge on the profit and loss account to arrive at the actual income of an assessee keeping in view of the depletion of the assets.
• Accordingly, the matter was remitted back to the AO with a direction to determine the ALP by adopting the value of assets using WDV as per the Income Tax Act (IT WDV).
• While passing the order, the Tribunal observed that in the sale of a going concern, factors like profitability of the branch office, goodwill, and various other commercial and technical aspects will have a bearing on the ALP.
This is an interesting ruling as it throws some light on the basis of valuation of business transferred as a going concern and appropriate determination of the ALP of such business transfers. However, taxpayers need to keep in mind other factors like profitability of the business, goodwill etc. which may impact the valuation.
Source: Intel Asia Electronics Inc., India Branch Office Vs ADIT (Bangalore) (ITA No. 131 of 2010)