Intel Asia Electronics Inc vs. ADIT (ITAT Bangalore)

CUP ALP of slump sale should be determined with valuation report and failing that on IT WDV but not on Company law WDV

The assessee, a foreign company with a branch in India, decided to close down the branch and transfer all assets and liabilities of the branch as a going concern to its Associated Enterprise in India. The consideration was to be determined as the difference between the value of assets and liabilities in the books of the assessee. For transfer pricing purposes, the assessee adopted the “Comparable Uncontrolled Price” method and obtained a valuation report which computed the “arms length price” (ALP) of the assets & liabilities. The TPO rejected the valuation on the ground that it was arbitrary and held that the “book value” of the assets and liabilities should be taken to be the ALP. This was confirmed by the CIT (A). On appeal to the Tribunal, HELD:

(i) The CUP method for determining the ALP is suitable when goods of a similar type are sold by independent enterprises. In an isolated transaction of sale of the PE as a ‘going concern’ to the AE, there are no similar comparable independent transactions available for comparison. In order to determine the ALP in the absence of other identical transactions, the valuation by a registered valuer is the most appropriate means under CUP method. However, as the valuation report filed by the assessee is not reliable, the only option is to adopt the value of the assets sold as per the company law or income-tax WDV. As the depreciation rates prescribed by company law are static, the WDV of the assets so arrived at will not be at par with the net present market value and, therefore, the valuation of the assets based on the book value is not justifiable. 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;

(ii) 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. However, no comments made as the lower authorities have not made any reference to these factors.