Bangalore ITAT: Valuation done by the registered valuer could be considered as CUP

A very important judgment from Bangalore Bench of Income Tax Appellate Tribunal (‘Bangalore ITAT’), in case of Intel Asia Electronics Inc., India Branch Office vs. ADIT (ITA No.131/Bang/2010), in respect of computation of arm’s length price wherein the business is transferred on going concern basis to associated enterprise. Further, as per our understanding the judgment shall find more use in transactions relating to purchase/ sale of used asset(s) to associated enterprise(s).

Relevant Facts of the Case

During financial year 2003-04, Intel Asia Electronic Inc. India Branch Office (‘Taxpayer’) of Intel Asia Electronics Inc has transferred all its assets and liabilities on going concern basis to its associated enterprise, M/s Intel Technologies India Pvt. Ltd., for a consideration to be determined by the difference between the value of assets and liabilities in the books of the Taxpayer. For the purpose of determining value of the assets, the Taxpayer relied upon the certificate issued by the Chartered Engineer and Registered Valuer.

The case was selected for the normal scrutiny and was also referred to the transfer pricing officer for computation of arm’s length price in respect of international transaction. During transfer pricing audit, the transfer pricing officer rejected the value determined by the Taxpayer and instead considered book value of the assets for the purpose of computation. The reason for not considering the certificate issued by the registered valuer by the transfer pricing officer was that the registered valuer has determined the value of the assets by using depreciation method and depreciation is worked out arbitrarily.

Aggrieved by the computation done by the transfer pricing officer, the Taxpayer filed petition before the Commissioner of Income-tax (Appeals), however Commissioner of Income-tax (Appeals) also confirmed the order passed by the assessing officer based on the computation done by the transfer pricing officer. Not accepting the order passed by the Commissioner of Income-tax (Appeals), the Taxpayer preferred an appeal before Bangalore ITAT.

Learning from observation of Bangalore ITAT

• In case of transactions relating to transfer of assets, the valuation done by the registered valuer could be considered as the most appropriate arm’s length price under Comparable Uncontrolled Price (‘CUP’) method.
• The report of registered valuer should be detailed and shall be with proper reasoning.
• Wherein the business is transferred on going concern basis factors like profitability of the business transferred, goodwill etc. may also have an impact on the computation of arm’s length price.   
• In a case where assets are transferred and valuation report is not available, the reasonable approach would be to value the assets by applying the depreciation rates as provided by the Income Tax Act.

Our Comments

We believe that the judgment is important and provides judicial backup to the valuation reports wherein the taxpayer is not having comparable data. However, the valuation report should not be arbitrary and should be based on scientific and logical basis along with the logical explanations supporting the basis. 

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Best Regards

Gaurav Garg

Transfer Pricing Consultants

JGarg Economic Advisors

New Delhi, India

(M) +91 9899994934

(e) gaurav@jgarg.com

www.jgarg.com