The decision of the Bangalore ITAT in the case of Palmer Investment Group Ltd in ITA No. 2929&2930/Bang/2018
Facts of the Case:
·
Palmer Investment Group Ltd(“Palmer’) is
an Investment Company established in British Virgin Islands. Palmer is part of
the United Spirits Limited Group.(‘USL Group”)
·
Palmer and other Companies part of the USL
group entered into a Share Purchase of Agreement on 09-Nov-2012 with Relay BV,
a Netherland Company for sale of controlling stake of 25.1% in United Spirits
Limited, a Company Listed on the Stock Exchange at a price of Rs. 1,440/- per
share.
·
Palmer sold 43,76,771 Equity Shares to Relay
BV, the transfer was completed on 04-Jul-2013
·
Subsequently Relay BV purchased 19,67,940
shares from unrelated parties on 28-Nov-2013, thereby the shareholding of Relay
BV exceeded above 26%, thereby USL has become an associated enterprise as per
Income tax Act as per section 92A(2), therefore Form 3CEB was filed by Palmer.
·
Before the transaction could be completed
between Palmer and Relay BV, Relay BV purchased 55,668 shares from the open
market on 13-May-2013 during which time open market offer was open at the price
of Rs. 1,440/- per share.
·
The TPO held that the price which was paid to
Palmer was for purchase of a Controlling Stake in USL, therefore the purchase
price at which the stock was publicly traded cannot be said to be at arm’s
length. Therefore applying the DCF method, the TPO determined the Arm’s Length price
of Rs. 2,038.79 per share which was recomputed to Rs. 2,039.25 per share based
on DRP’s Direction.
·
The Capital gain on sale of listed equity
shares was taxed at 20%.
·
Aggrieved by the addition made and rate of tax
applied, Palmer filed an appeal with the Bangalore Bench of the Tribunal
Observations of the Tribunal:
·
The transaction between Palmer and Relay was a
transaction between associated enterprises as Relay held more than 26% stake in
USL on 28-Nov-2023 i.e. at anytime during the year as per section 92A(2).
·
What is transferred is a controlling interest
in USL therefore, a control premium is payable. The Control premium payable as
per Phillip Sounders Jr PHD Report is in the range of 30% to 50%, which
calculated in the present case, wherein the sale price is Rs. 1,440/- would be
in the range of Rs. 1,800/- to Rs. 2,100/-, therefore the price calculated of
Rs. 2,039.25/- appears to be reasonable.
·
Further, the TPO was correct in applying the
Discounted Cash Flow Method(“DCF Method”) to arrive the Arm’s Length Price. For
Calculating the value as per DCF Method projected future cash flows are to be
considered and not the actual cash flows.
·
The applicable tax rate in case of sale of
listed equity shares by non-resident is 10% u/s 112.
Summary
·
The provisions of section 92A(2) are attracted
for transactions undertaken before the date of fulfilling the conditions
mentioned in the said section.
·
In case controlling interest is transferred
then control premium is payable on such transactions.
·
The DCF method is an appropriate method to
calculate the price of the share.
·
The applicable tax rate in case of sale of
equity shares by non-resident as per section 112 is 10%
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