TaxTMI 
TaxTMI 
2020 (1) TMI 684
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 142(1) of the I.T. Act, 1961 were issued and served upon the assessee. In response, assessee filed relevant information as called for. The assessee company is wholly owned subsidiary of Vodafone India Ltd. and engaged in operation of the mobile wallet business. During the year under consideration, the assessee company has shown loss from business of Rs. 69,90,70,978/- and income from other sources of Rs. 68,12,459/-. During the year under consideration, the assessee company has issued 10,12,14,568 shares of face value of Rs. 10/- each at a premium of Rs. 14.70 per share, accordingly received share premium of Rs. 148,78,54,000/-. During assessment proceedings, assessee was asked to furnish the working of premium and valuation report in respect of the intrinsic value of shares issued during the year under consideration. Assessee vide letter dated 24.08.2017 furnished valuation report from Ernst & Young Merchant Banking Services Pvt. Ltd. dated 11.03.2015. AO observed that in the valuation report, the valuer has relied on company specific information with respect to various projections up to March 2024 and this information was provided to the Valuer by the Management of the assessee.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Valuation Report At the outset, before we submit the information requested by your of through the subject notice, we wish to address the concern raised by your office on account of the below mentioned statement: "In particular, it may be noted that we have relied upon the information provided by the management. We have been given to understand that the information provided is correct and accurate....." With respect to the aforesaid statement, we wish to highlight that the above clAOse is a standard clAOse used in all valuation reports and there is nothing unusual or atypical about it. Further, it may be appreciated that a valuer is required to rely on the information provided by the Company in terms of its historical data and projections and is not required to verify the AOthenticity of the data, unlike an AOditor who is required to examine and verity the details in an AOdit process. For determining the fair value of shares as per the Discounting Cash Flow ('DGF7 method, a valuer, basis the future projections of earnings provided by a company, is required to compare it to general industry/economy trends and associated risks and accordingly, arrive at ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ending 31 March 2016 to 31 March 2024. - Background information provided through emails, word documents or during discussions. - Besides the above listing, there may be other information provided by the Company which may not have been perused by us in any detail, if not considered relevant for our defined scope. - Industry and economy information - The following sources were utilized for analyzing the industry and the competitors: - Discussion with the Management - Publicly available information - Proprietary data bases subscribed to by EY In addition to the above, we have also obtained such other information and explanations from the Management as were considered relevant for the purpose of the valuation. - It may be mentioned that the Management has been provided opportunity to review factual information in our report as part of our standard practice to make sure that factual inaccuracies/omissions/etc, are avoided in our final report In addition, we wish to draw your attention to page 11 of the valuation report, which contains the 'Statement of Limiting Conditions wherein it has been clearly sta....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uly examined and relied upon by EYMBPSL while issuance of valuation report [please refer statement of Limiting conditions and specific clAOses as reproduced above]. Copy of such MRL is attached as Annexure 2 for your reference. • At this stage, we also wish to also emphasis that VMPL is a wholly owned subsidiary of Vodafone India Limited ('VIL7. VMPL has been AOthorized by the Reserve Bank of India to operate payment system for issuance and operation of prepaid instruments in India under the Payments and Settlement Systems Act, 2007. VMPL offers mobile-based payment instruments like mobile wallets, linked cards, etc. to customers for enabling payments through mobile phones in a convenient and secure manner. VMPL has built a Mobile Wallet, which is a virtual wallet residing on a customer's mobile phone containing virtual money under the brand name of M-Pesa. By using M-Pesa, the customers can make c-commerce or mobile commerce transactions ie, buy products/ avail services at defined outlets registered with VMPL, deposit and withdraw cash, transfer money to mobile phone or bank account, etc., thereby, reducing the need to carry cash. Thus, the operating revenues ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... not been declared before the date of transfer at a general body meeting of the company; (iii) reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation; (iv) any amount representing provision for taxation, other than amount of tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income-tax Act, to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto; (v) any amount representing provisions made for meeting liabilities, other than ascertained liabilities; (vi) any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares; PE = total amount of paid up equity share capital as shown in the balance-sheet, PV = the paid up value of such equity shares; or (b) the fair market value of the unquoted equity shares determined by a merchant banker or an accountant as per the Discounted Free Cash Flow method." From the perusal of the above....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e valuer, in his report dated 11.03.2015 has clarified that the forecast regarding future revenues was made by the management and further they stated that company specific information was provided by the Management verbally or in written form. d) This information includes ejected incremental working capital and capital expenditure for the years ending 31.3.2016 to 31.3.2024. e) Further the valuer has stated that the valuation is based on the unAOdited balance sheet of the company as provided by the Management and the Management has not provided them detail assumption and back-up information. 6. From the above, AO observed that the valuer has not undertaken any independent enquiry with respect to the claim made by the assessee for the purpose of valuation. Further AO observed that M-pesa business was bought by the assessee company from Mobile Commerce Solutions Ltd. (another group company) w.e.f. 7.11.2014 and the projected & actual figures of sales for F.Y. 2015, 2016 & 2017 is as under: A. Y Net sales Projected (Amt in millions) Net sales Actual (Amt in millions) 2015-16 290.5 128.70 2016-17 801.8 520 2017-18 1661.40 837.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cordingly, partly allowed the ground raised by the assessee with the following observations:- I have considered the submission made by the appellant in this regard. I'm in agreement with the submission of the appellant that disclaimers given in the report are routine and nothing much should be read in those disclaimers. Such reports are invariably based on the financial data and projections provided by the management which is in the best position to provide such data. If the whole exercise of verification of data and the future projections is to be done by the valuation team, it will be very time consuming and will turn out to be costly. There will always be some element of subjectivity in the forecast data provided by the management and the actual results will always differ from the forecasts. This is more so in the cases like that of the appellant where the business is new and the results are unpredictable. It is the general experience that in the same line of business some companies do extraordinarily well and others fail because their marketing strategy was not good or their competitors were better. If we accept the reasons given by the AO, no new....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n A.Y. 2016- 17 and 50% of the projected sales in A. Y. 2017 - 18. Since the profitability of the appellant would be primarily dependent on the projected sales figures and the profitability would fall at a greater rate, if the sales do not grow at the projected rate and the enterprise value has a direct relationship with the profitability, fin of the opinion that it would be fair to adopt the enterprise value of the appellant at 40% of the projected value of Rs. 1158 mn i.e. at Rs. 463.2 mn. Therefore, equity value of the enterprise would be Rs. 558.5 million (as per the working given by the EYMBSPL in the report) and value per equity share would work out to Rs. 11.17 per share. The appellant has received consideration at the rate of Rs. 24.7 per equity share. Accordingly, the excess amount charged per equity share is Rs. 13.53. Total number of equity shares issued at premium are 10, 12,14,568. Accordingly, the amount taxable tinder section 56(2)(viib,) works out to Rs. 136,94,33,1051-. The AO is directed to restrict the addition to this amount. This ground of appeal is, accordingly, partly allowed. 9. Aggrieved with the above order, assessee preferred the appeal before us with ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... as Vodafone Idea Limited) at a premium. 2.2. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in confirming invocation of the provisions of section 56(2)(viib) of the Act, by not appreciating that the legislative intent of introducing section 56(2)(viib) of the Act is to deter creation and generation of unaccounted money which clearly is not the case in the present situation where shares were issued to the parent company in compliance with the Reserve Bank of India ('RBI') regulations. 2.3. On the facts and in the circumstances of the case and in law, while the learned CIT(A) has correctly observed that "there will always be some element of subjectivity in the forecast data provided by the management and actual results will always differ from the forecasts ", he has erred in completely disregarding his own observation and computing an ad hoc enterprise value of the Appellant basis a random comparison of projected net sales and actual net sales. 2.4. On the facts and in circumstances of the case and in law, the learned CIT(A) has erred in disregarding the valuation report issued by Category -1 Merchant Ban....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 35 of the paper book. 11. Further he brought to our notice at para no. 4 of the assessment order in which AO observed in his report that assessee has not supplied any information regarding information submitted to valuer for valuation purposes which was not submitted before AO. In this regard, he submitted all the information as asked by the AO was already submitted before him and he submitted that the AO rejected the valuation report and proceeded to value the fair market value of the shares based on net assets value rejecting the DCF method adopted by the valuer. However, he brought to our notice the order of Ld. CIT(A) in which Ld. CIT(A) has accepted that as per rule 11UA, assessee has two options available to it, as per which, DCF valuation is one of the method prescribed in the above said rule. However, Ld. CIT(A) after accepting the valuation report proceeded to compare the projections adopted by the valuer with the actual results or actual performance of the company in the subsequent years and arbitrarily he holds that the business is growing at 40% and hence the enterprise value of the assessee should also be taken up what the merchant banker has determined. In the res....
X X X X Extracts X X X X
X X X X Extracts X X X X
....same is without working out the figures. This was an exercise which ought to have been done by him. In fact, he has completely disregarded the DCF Method for arriving at the fair market value. Therefore, the demand in the facts need to be stayed. 10. However, in view of the fact that the petitioner's Appeal is pending before the CIT (A) and the issue of the fair market value of the shares issued at a premium by the petitioners to its holding Company would be an issue which would be subject matter of consideration in the appeal and would be appropriately dealt with by him in appeal. Further, it is the petitioner's contention that the assessment order is without jurisdiction as it has ignored the DCF method to arrive at fair market value of its shares, it would be open to the petitioners to file an application for stay of the order dated 21 December 2017 passed by the Assessing Officer to the CIT(A) in its pending Appeal. In the above circumstances, there would be a stay of the order dated 21't December 2017 to the extent of the demand raised for a period of 4 weeks from today. In case, the petitioner files a stay application to the GIT (A) within a period of 4 w....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y adopted, hence he supported the AO in rejecting the DCF method of such projections. 16. Ld. DR accepted that assessee has option to adopt either of the method prescribed in rule 11 UA and at the same time, he supported the findings of Ld. CIT(A) for adopting 40% of the projected value of the shares considering the fact that assessee has actually achieved sales result @ 40% as compared to the initial projection. Further, he relied upon the decision of Hon'ble Delhi High Court in the case of CIT vrs. Jansampark Advertising & Marketing Pvt. Ltd. (2015), wherein it was held as under:- Section 68 of the Income-tax Act, 1961 - Cash credits (Burden of proof) -Assessment year 2004-05 - Whether when Assessing Officer sets about seeking explanation for unaccounted credit entries in books of account of assessee in terms of section 68, it is legitimately expected that exercise would be taken to logical end, in all fairness taking into account material submitted by assessee in support of his assertion that person making payment is real, and not non-existent, and that such other person was actually source of money forming subject matter of transaction and that transaction is re....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Therefore, we are inclined to dismiss the ground raised by the department. 20. Coming to the findings of Ld. CIT(A), we notice that Ld. CIT(A) has accepted the DCF method adopted by the assessee and he analyzed the factual performance of the assessee subsequent to issue of shares. The valuation of shares are for that matter any valuation is itself is a projection of future events or activities and no doubt it has to be done with some accuracy, however no person in the world at the time of projecting events or result to project with 100% of accuracy and actual events are highly volatile and highly dependent on so many factors. Assessee has projected based on the fact that software of wallet and association of ICICI bank will increase the market share and accordingly, they have projected the figures and further the valuer has adopted the projection figures provided by the assessee and it is left to the wisdom of valuer to accept or reject or to carry out independent investigation raised with the valuer and legislature in more than one place depends on the skills of the professionals like merchant banker only to value the valuation of shares or other volatile securities. Since, Ld.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....partners are as under: S.No. Name of equity partner Date of Issue No. Of shares Premium (Rs.) per share Amount of premium (Rs.) 1. Shri Anand Mahindra 06.01.2015; 23.02.2015 4,15,385 1949 80,95,85,365/- 2. Shri Rakesh Jhunjhunwala 24.03.2015 19,207 2602 4,99,80,793/- 3. Shri Radhakishan Damani 24.03.2015 19,207 2602 4,99,80,793/- Total 4,53,799 90,95,46,200/- 26. The assessee before issuing the shares had got the share valued by Chartered Accountant, i.e., 'Accountant' as provided under Rule 11UA(2) by using the 'DCF Method' which is one of the prescribed method in Rule HUA(2)(b) r.w.s. 56(2)(viib). Based on the said valuation report dated 15.12.2014, the assessee company had issued the shares to the aforesaid equity partners on premium. The Ld. Assessing Officer has discarded the valuation report of the CA mainly on the ground that valuation of the equity shares carried out by the assessee was based on projection of revenue which did not match with the actual reyenues of the subsequent years. He further held that no efforts have been made by the a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on a normal business transaction of issuance of shares unless it has been demonstrated by the Revenue authorities that the entire motive for such issuance of shares on higher premium was for the tax abuse with the objective of tax evasion by laundering its own unaccounted money. His main contention was that, being a deeming fiction, it has to be strictly interpreted and there is no mandate to the Assessing Officer to arbitrarily reject the valuation done by the assessee on his own surmises and whims. We are in tandem with such a reasoning of the Id. Counsel, because the deeming fiction not only has to be applied strictly but also have to be seen in the context in which such deeming provisions are triggered. It is a trite law well settled by the Constitutional Bench of Supreme Court, in the case of Dilip Kumar & Sons (supra) that in the matter of charging section of a taxing statute, strict rule of interpretation is mandatory, and if there are two views possible in the matter of interpretation, then the construction most beneficial to the assessee should be adopted. Viewed from such principle, here is a case where the shares have been subscribed by unrelated independent parties, who....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ctors are considered based on some reasonable approach and they cannot be evaluated purely based on arithmetical precision as value is always worked out based on approximation and catena of underline facts and assumptions. Nevertheless, at the time when valuation is made, it is based on reflections of the potential value of business at that particular time and also keeping in mind underline factors that may change over the period of time and thus, the value which is relevant today may not be relevant after certain period of time. Precisely, these factors have been judicially appreciated in various judgments some of which have been relied upon by the Ld. Counsel, for instance: - i) Securities & Exchange Board of India &Ors [2015 ABR 291 - (Bombay HC)] "48.6 Thirdly, it is a well settled position of law with regard to the valuation, that valuation is not an exact science and can never be done with arithmetic precision. The attempt on the part of SEBI to challenge the valuation which is bu its very nature based on projections by applying what is essentially a hindsight view that the performance did not match the projection is unknown to the law on valuations. Valuati....