TaxTMI 
TaxTMI 
2020 (10) TMI 403
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....ax Rules as per the valuation methodology opted for by the Appellant could not be disregarded by the authorities below. 3.. That the AO/CIT(A) cannot be considered as the specified valuer/ independent expert as per Rule UA of Income-tax Rules and accordingly, the AO has no jurisdiction or authority to substitute his own valuation of unquoted equity shares and reject the one as undertaken by the specified valuer/ independent expert. 4.. That without prejudice to Ground No. 1 to 3 above, the addition of Rs. 1,59,39,863 /- as made u/ s 56 (2)(vii(b) of Income-tax Act was very excessive. Various observations made by the authorities below in their respective orders while making the above additions/ disallowances are either factually incorrect or legally untenable." 3. The assessee is a Private Limited company registered under Companies Act, 1956 with Registrar of Companies Vide CIN U72300DL2008PTC179627. The company' s main object is to provide Software Development/IT services in India and abroad. Most of the clients of assessee are based outside India. Directors of assessed company have valuable professional background from reputed educational institutions like....
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....tical for the report. The valuation is pertinent to a particular point of time. * While computing the cost of Equity, through Capital Asset Pricing Model, Beta coefficient i. e. unsystematic risk has been estimated at 1. 23. Beta measures how much a company' s share price reacts against the market as a whole. A beta of one, for example, suggests that the company moves in line with the market. If the beta is in excess of one, the share is exaggerating the market' s movements, if less than one, it means share is more stable. A reliable beta cannot be established with insufficient price history. The trouble is that betas are merely rear- view mirrors, reflecting very little of what lies ahead. For traders looking to buy and sell stocks within short time period, beta is a fairly good risk metric. However, for long term investor, it is not that useful. There is no reason stated in the report why it is estimated at 1. 23 and why not. 75 or why not 1.45. Details of Beta are generally available on the website of NSE, BSE or other websites of different companies. The basis of estimating Beta has been stated to be CA' s understanding of the risk in the similar i....
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.... Further, there is no basis for projecting the results for future years, be it sales, cost, depreciation, capex or Net Working Capital. No basis is provided at all. * Also, the company is a private limited company and is not a listed company. The value which has been determined is not a fair estimated value also because of the fact that the shares of private limited company are discounted for lack of liquidity and marketability. However, the valuer has not considered the same at all." 7. Before us during the arguments, the ld. AR argued that the shares have been issued to one entity namely, Tangerine Digital Entertainment Pvt. Ltd. on 10.09.2013 of 2591 shares at premium of Rs. 6165/-. He explains the reasons for such premium as the assessee company help Internet-based businesses and product companies design and develop cloud- native web and mobile solutions. It drives digital transformation for businesses by helping them provide a rich, seamless experience to their customers across digital channels resulting in higher engagement, efficiency and profitability. 8. It was submitted that the asseesee company' s promoter is from IIT Delhi and they have business plans....
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....sks on continuing basis. BASIS OF VALUATION The Fair Value is based on the following: a. Financials forecasts made by the management of the company for 5 years and provided to us. b. Information gathered based on the discussions with the management and representatives of the company. c. The assumptions which we feel are prudent to determine the' Pre Money valuation. All the above information and facts have been relied on without auditing and verification. DISCOUNTED CASH FLOWS: The financials forecasts provided by the management form the basis for our DCF analysis and assumptions based on the perception of attendant circumstances of the case. Value of Firm: The value of the firm is obtained by discounting expected cash flows after meeting all operating expenses and taxes but prior to any payments either debt or equity holders, at the weighted average cost of capital, which is the cost of the different components of financing used by the firm, weighted by their market value proportions. Cost of Equity or the Discounting Factor: Discounting rate is the rate of return that a willing buyer would expect to receive from an investment to....
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....minal Value 878 Discount Factor 0.51 Present Value of Terminal Value 448 % of Enterprise Value 73% Enterprise Value 612 Less: Total debt 0 Plus: Cash and Cash Equity 5 Net Debt -5 Implies Equity Value 6174,87,612 Outstanding shares 1,00,000 Implied share price 6,174.88 Implies Multiple Enterprise Value 612 SALES 2013 97 EBITDA 2013 37 Implied EV/ SALES 6.3x Implied EV/ EBITDA 16.6x The Annexure to this Certificate contains the basis for arriving at the Fair Value of equity shares. LIMITATIONS 1. All financial statement and other data pertaining to the Company have been provided by the management of the company and we have accepted and relied on without further verification, including conformity or non- conformity with generally accepted accounting principles and/or other guidelines established by regulatory bodies. 2. All reported facts, comments, estimates, opinions and statistical information set forth in the valuation exercise have been obtained from sources believed to be accurate and reliable. No liability is assumed for the content or accuracy of t....
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....n specific Rule 11UA(2) of I.T. Rules as applicable for issue of unquoted equity shares, which states that fair market value of unquoted equity shares is to be determined as per clause (a) or clause (b) of Rule 11 UA(2) at the option of the Assessee. Clause (a) refers to book value method whereas clause (b) refers to DCF method as supported by valuation report of a merchant banker or a chartered accountant. In the instant case, the assessee had opted for clause (b) of Rule 11UA(2) of I.T. Rules by applying DCF method and obtained valuation report form a chartered accountant thereby fulfilling both the requirements of such specific Rule. 20. When the assessee Company had opted for valuation of unquoted equity shares in accordance with DCF method as prescribed under clause (b) of specific Rule 11UA(2) as applicable, the AO/CIT(A) had no power/authority to change such valuation methodology and adopt a different book value method as prescribed under clause (a) of such Rule and hence such action of the authorities below was arbitrary. 21. It is trite law that " when a statute requires, a thing to be done in a certain manner, it shall be done in that manner alone and not otherwise"....