The Income-tax Appellate Tribunal has held that the discounted cash flow method was preferable over the “yield” method or “net asset value” method for purposes of determining the arm’s length price of shares transferred to related parties. The tribunal noted the discounted cash flow method was applied by the taxpayer itself in a subsequent year.
The taxpayer transferred its 91% share interest in an Indian entity to its related parties in Singapore and Mauritius. The taxpayer determined a transfer price for the shares based on a valuation certificate provided by chartered accountants.
The valuation was determined, using the “net asset value” method, as INR 15.05 per share and using the “profit earning capacity value” method as INR 9.23 per share. The taxpayer then took the average of these two values, and added a discount of 15% because the shares were not listed on an exchange.
The tribunal found, among other reasons, that because the taxpayer itself used the “discounted cash flow” method in the subsequent year, this was the most appropriate method for determining the value of the shares. Still, the tribunal accepted the taxpayer’s argument that a fresh “discounted cash flow” analysis could be presented to the Transfer Pricing Officer and remanded the case.
