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TMI Blog2023 (6) TMI 335X X X X Extracts X X X X X X X X Extracts X X X X ..... al and business activities of operating a bakery restaurant and operating quick service restaurants (QSR) in India and Sri Lanka through its wholly owned subsidiaries (WOS). 4. The assessee had filed its return of income for AY 2016-17 on 08.10 .2016 declaring a loss of Rs. 10 ,24,33 ,542/-. The AO passed order u/s 143(3) of the Act assessing the income at Rs. 14,56,05 ,630/- after making an addition of Rs. 24,80,39 ,169/- under section 56 (2)(viib) of the Act. 5. During the year, the assessee company had issued 54,33,548 equity shares to Sapphire Foods India Pvt. Ltd. at a premium of Rs.55.65 for the share of Face Value of Rs.10 /- and received a total of Rs.30,23 ,74,146/-. Sapphire Foods Pvt. Ltd. is an entity of large venture capitalists [Goldman Sachs Investments Holding (Asia) Limited] and the investment in the assessee company was part of overall transaction of acquisition of Pizza Hut and KFC outlets in India and Sri Lanka. The overall transaction has been cleared by the Competition Commission of India (CCI) vide its order dated 13.08.2015 under section 31(1) of Competition Act, 2002. Invocation of Section 56 (2)(viib): 6. The assessee company has obtained a valuation r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... To sum up since valuation report as per DCF prepared by Mr. Ashok Kumar Verma has lost its sanctity & company has not performed accordingly. Therefore assessee through its authorized representative is hereby show caused as to why valuation report submitted by assessee should not be rejected & value per share should be taken as per method provided in rule as per I.T. Rules, 1962. After taking value of shares as per Rule 11UA, necessary addition to be made in assessee' s income as per S. 56(2)(viib) of the I. T. Act." 10. In response to the said show cause, the assessee filed its reply on 03 .12 .2018 highlighting the following points: a) As per the requirement under the Act, the company had obtained a report from the accountant who has determined FMV of the share under DCF method and that DCF method was the most appropriate method for valuation of share of a going concern. b) For larger businesses entities, DCF value is commonly a sum-of-the-parts analysis, where different business units are modeled individually and added together. c) Even though DCF is based essentially on projections, it is not correct to expect the same figure in actual performance. The projections are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fact that reply dated 06. 12.2018 was uploaded on 10.12.2018 as e- proceedings were not closed though Order is of date as 09. 12.2018. * Sworn Affidavits of Ashok Kumar Verma, Chartered Accountant Valuer of FMV of Equity Shares issued during the financial year ending 31.03.2016 relevant for assessment year 2016-17. * Document and Papers relied by the Valuer for preparing the Valuation report. * Audited financial statements of the company as provided by the management for the year ended March 31, 2014. * Provisional financial statements of the company as provided by the management for the year ended March 31, 2015. * Financial projections of the company for years ended on March 31, 2016 (part period); March 31 ,2017; March 31,2018; March 31,2019 and March 31,2020. * Management certificate of fair value of share of its subsidiaries In Sri Lanka viz. French Restaurants (Private) Limited and Gamma Pizzakraft Lanka (Private) Limited from respective management of its subsidiaries. * Information on the business and profile of the Company. * Information and explanations provided to the valuer for the valuation of shares - Shareholder' s agreement dated 28.04.2015 entere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e AO, as additional evidence. They have also filed an affidavit from the Valuer who has claimed that he had visited the office of the AO on the appointed date i.e. 26. 11 .2018 but had to return without filing the details as the AO was busy with some other matter and he could not wait longer as he had some other appointment. In the Remand Report, the AO has stated that this fact is not emerging from the Assessment Order and that the AO has clearly stated that the Valuer did not submit the details till the date of order. 14 Finally the AO, in her Remand Report, requested this office not to entertain the Additional Evidences as the conditions specified under Rule 46A are not satisfied. Decision on admission of additional evidence 15. Examination of facts shows that the appellant had made an attempt to submit certain reply and details vide letter dated 06. 12 .2018. This fact is established by the Speed Post details, affidavit of the AR and also the uploading of the letter on 10. 12 .2018. All these events could not have been an afterthought as the same are supported by hard evidences. As regards, date of order, I agree with the AO that the system does not allow backdating of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The decision of Ld. CIT(A) on each of these issues is at para 20 -26 of the order which has been duly perused. Issue no. 1 : 18. Whether AO is correct in rejecting the DCF method and the FMV determined under DCF method by comparing the actual performance figures with the projections used under the DCF method? The appellant had issued shares to M/ s Sapphire Foods India Pvt. Ltd. at Rs.65 .56per share of face value Rs.10/- per share. The valuation has been carried out by Shri Ashok Verma, CA who determined the value based on DCF method. He has relied upon the projections as estimated by the Management. The question here is whether he is required to independently verify the correctness of the projections given by the Management. It is a fact that a chartered accountant / valuer is an expert in valuing the shares as per certain set rules and guidelines issued by Accounting bodies such as the Institute of Chartered Accountant of India (ICAI). He is not expected to have an expertise on the potential of any business operation. Hence, his reliance on the estimated projection of financials given by the Management cannot be faulted in entirety. However, it is noted here that if the proj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the total income under this Act shall be chargeable to income- tax under the head " Income from other sources", i f it is not chargeable to income- tax under any of the heads specified in section 14, items A to E. (2) In particular, and without prejudice to the generality of the provisions of sub- section (1), the following incomes, shall be chargeable to income- tax under the head " Income from other sources", namely :- (i) dividends; (ia) income referred to in sub- clause (viii) of clause (24) of section 2; ib)............ (viib) where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares: Provided that this clause shall not apply where the consideration for issue of shares is received- (i) by a venture capital undertaking from a venture capital company or a venture capital fund; or (ii) by a company from a class or classes of persons as may be notified by the Central Government in this be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eneral body meeting of the company; (iii) reserves and surplus, by whatever name called, even i f 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." 23. From the above, it is evident that Rule 11UA(2) prescribes two methods - Book Value method and DCF method. However, the sai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ws that the legislature has not made any distinction as going concern or otherwise in valuation of unquoted equity shares. The Rules give option to choose between the two methods and the only criteria to choose is the option to be exercised by the assessee. In the absence of any such prescription under the law, one cannot read into the statute anything without showing that the Legislature intended it. Hence, the AO has erred in not accepting DCF as the most appropriate and scientific method for valuing shares of the appellant. Issue no. 5 : 30. Whether AO can reject the DCF method when this method has been duly prescribed under the Law itself? 31. The DCF method is one of the duly prescribed methods for valuing unquoted shares of a company. Rule 11UA gives option to the assessee to choose between the two methods. The said rule nowhere fixes any hierarchy between the two methods. Once the option has been exercised by the assessee, AO has no right to reject the method. However, the rejection of method is not appropriate not because it is a prescribed method but because the AO has no role in selection or rejection of the method under Rule 11UA. Hence, the AO has erred in rejecting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t be accepted. Issue no. 7 : 36. Whether the AO erred in observing that the appellant should have deposited advance tax as per the projection figures? 37. The AO has observed in the assessment order that non- payment of advance tax as per the projection of financial figures in the DCF method would show that the projections were meant only to arrive at the desired value of shares under DCF method. 38. Thus, after detailed analysis of the issue, the ld. CIT(A) deleted the addition. 39. Aggrieved by the order of CIT(A), the revenue has filed appeal before us. 40. The ld. DR argued that the ld. CIT(A) has erred in deleting the addition when the AO examined the valuer and disputed that the valuer is not competent enough to do the valuation. The ld. DR argued that the entire valuation has been made at the behest of the assessee company and the inputs given by them and there was no independent analysis or application of mind by the valuer. He referred to the statement of Sh. Ashok Kumar Verma, Chartered Accountant recorded by the AO with specific reference to Question No. 3, 13, 16 and 17. The ld. DR has also argued that the book value of the shares has to be considered and any paym ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt securities. Further, I consider equity risk premium equal to 7%. This is based on the expected market return over and above risk free rate considering the risk of investment in the security. Q.9. Can you provide the details of Government securities where risk free return is 7 .8 % and equity risk premium which is 7% in this case as taken by you? Further, these figures has been taken by you or given by the assessee company i.e. equity risk premium which is 7% in this case i.e. M/ s Gamma Pizza Kraft (Overseas) Pvt. Ltd. (PAN: AACCG 8016 D) Ans: The company did not provide me these information. These rates keep on fluctuating with the passage of time I took these rates at the time of preparing report from the information available on authenticated internet sites containing these information. Q.10. Can you name few sites where you got these information? Ans: These information can be procured by making a search on google. Q.11. Please provide formula for equity risk premium? Ans: There is no formula for equity risk premium it is one of the factor to calculate valuation of shares under DCF Method. Q.12. Are you aware with any method which is being used for calculating e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0. 51 in the present case and what material documents/ papers did you use for calculating this discount factor? Ans: As the name DCF stands for discounted cash flow it is based on future projections, the future incomes and other financial information needs to be discounted to ascertain the present value. The discounted factor as shall be evident from the report varies from year to year. It was 89 in relation to F. Y. 2015-16 and it kept on reducing from year to year. Q.22. How you have reached to these values of discount factor of 0. 89, 0. 77, 0 .67, 0. 58, 0. 51 for F.Y. 2015- 16 to F.Y.2019- 20. Please produce calculation? I am again asking that what material documents/ papers did you use for calculating this discount factor? Ans: The base discounting factor for F.Y. 2015- 16 was determined on the basis information available on different internet sites and the same rate was applied for the subsequent years. Q.23. This means that you not done any calculation and just relied only on internet for calculation discount factor and equity risk premium etc. Please explain? Ans: Our calculations are based on rate picked from reliable authenticated web contents are available. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in excel sheet. Q.32. And what about cash flow for explicit period? Ans: The figure of cash flow has been ascertained and taken from annexure 1 above. Q.33. You have not annexed any separate sheets for calculation with valuation report as you are mentioning. Please explain. Ans: All the calculation in relation to valuation of shares as per annexure attached with the report. Q.34. However, in annexure 1 there are only figures based on audited financial statements or projections in upcoming years there is no any calculation in annexure 1. Ans: In case you see the annexure 1 in totality there are calculation also. Q.35. You were requested to bring all the documents and papers which you relied on for preparing report. Are you carrying these documents please show me. Ans: I am carrying some of the documents, rest are there in our computer. In case you need any specific documents in relation to the same I can file the same as when required, Q.36. Please produce all the documents and papers which you relied on for preparing of report. Ans: I will provide all the documents before 26. 11. 2018. Q.37. Have you ever done audit for any financial year of M/ s Gamma Pizza K ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ethod resorted by the valuer. 47. The provisions of Rule 11UA are as under: (2) Notwithstanding anything contained in sub- clause (b) of clause (c) of sub-rule (1), the fair market value of unquoted equity shares for the purposes of sub- clause (i) of clause (a) of Explanation to clause (viib) of sub-section (2) of section 56 shall be the value, on the valuation date, of such unquoted equity shares as determined in the following manner under clause (a) or clause (b), at the option of the assessee, namely:- 48. The Rule 11UA prescribes FMV of the unquoted equity shares as determined as per DCF method determined by a Chartered Accountant (subsequently by a merchant banker) or by the formula of (A-L)/ (PE) x(PV) 49. Thus, we find that the assessee has option of DCF method and the formula given under Rule 11UA. The option given to the assessee cannot be read as the option given to the Assessing Officer. Hence, the Assessing Officer has no right to change the method of valuation. The AO can refuse the method of valuation after proving that the methodology resorted by the assessee is incorrect or not as per the standards laid down. The courts have held this view as is evident from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot only given details of the Formulae in the DCF method but also explained and the figures adopted by him, hence, it cannot be said that there is lack of application of mind by the valuer. 53. He was examined by the AO u/s 131 of the Act wherein he had given clear cut answers to all the questions relating to the DCF method and justified his stand on each and every aspect of the Valuation Report prepared by him. He had submitted that there were different templates of the valuation report and various attributes like market situation etc have been duly considered by him for compilation of the said report. He had explained in detail the meaning of and the methodology of DCF method of valuation of shares how the same was carried out by him including the meaning of different terms used in the DCF method. Hence, it can be said that the valuer being a Chartered Accountant is authorized to do the valuation as per the provisions of the Act. 54. The transaction has been cleared by the Competition Commission of India (CCI) and the investor in the company namely Sapphire Foods Pvt. Ltd. is a venture capitalist and the investment in the assessee company was part of overall acquisition of Pizza ..... X X X X Extracts X X X X X X X X Extracts X X X X
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