M/s Tally Solutions Private Limited Vs. Deputy Commissioner of Income Tax, Bangalore for ITA No. 1235(Bang)/2010; AY- 2006- 07
Facts:– The taxpayer was engaged in the business of software development, marketing and sale of ‘tally’ branded financial accounting and management software. On 31 January, 2006 it sold its intellectual property rights including patent, copyrights and trademarks (`IPR’) to Tally Solutions FZLLC, Dubai (Tally Dubai) for a total consideration of INR 38.5o crores. The taxpayer did not use any particular method to compute the value of IPR, on the premise that there was no comparable uncontrolled transaction and hence none of the methods applied. The Transfer Pricing Officer (TPO) disregarded the valuation of the IPR by the taxpayer and recomputed the value of the IPR at INR 501.46 crores using the EEM, basing the valuation on the premise that it was equivalent to an internal CUP. Aggrieved by the order, the taxpayer took up the issue with the dispute resolution panel (DRP).
Issues before the Tribunal-
1. Whether the TPO is justified in applying EEM, being an unspecified method not prescribed in the Indian Transfer Pricing (TP) regulations?
2. Apart from the aforesaid legal issue the taxpayer had pointed out errors in the application of EEM by the TPO which are fact specific.
Ruling of the Tribunal
The Tribunal held as below in relation to the above issues:
i. Sale of an Intangible Property (IP) was not a routine transaction involving regular purchases and sales. In such transactions, being highly sophisticated process, valuation held the key. The taxpayer itself had admitted to the absence of com parables available to benchmark this particular transaction– and hence had adopted some other valuation method (Discounted Cash Flow Method).
ii. Due to the absence of com-parables, the TPO had adopted an established method called EEM, issued by the International Valuation Standard Council and such kind of valuation methods was usually admitted in the U.S. courts. Reference was made to the ruling in Intel Asia electronics Inc. Vs. ADIT (2011) – TII – 14-ITAT-Bang-TP wherein it was held that the application of any valuation method meant adoption of CUP method. It was held that the objective of the CUP method would be to determine the actual market value, and, in the absence of such identical uncontrolled transaction, the valuation determined by the registered valuer could be the most appropriate means to apply the CUP method. Drawing a parallel to the Intel Asia ruling, the Tribunal concluded that application of EEM effectively meant application of CUP method.
iii. Lastly the Tribunal accepted the method of application of EEM by the TPO and corrected some computations in the same.