DCIT, CIRCLE- 2(1), GURGAON vs. MAILS INDIA MEDICAL DEVICES PVT. LTD., GURGAON

The facts in brief are the assessee company was incorporated on 01.03.2012 on the basis of joint venture agreement between a resident company namely M/s. Sysmech Industries LLP and the other non-resident company M/s. Demas Company for Trading and Contracting. Both the joint venture partners agreed to contribute project cost in the ratio of 60 and 40 while keeping share holding ratio 50 : 50. On the basis of valuation of equity shares at Rs. 59.99 per share following the DCF method assessee issued shares Rs 60 per share to non-resident share holder after necessary compliances under FEMA etc. While shares to resident company were issued at Rs. 40 per share. The assessee filed return of income declaring loss of Rs. 2,97,79,141/- and the case was picked up for limited scrutiny to furnish the various details including the share valuation as computed under Rule – 11UA of the Income Tax Rules, 1962. The ld. AO rejected the M/s. Mais India Medical Devices P. Ltd. 3 valuation of share and made addition in the hands of assessee for allotment of shares to the Indian entity Sysmech Industries LLP u/s 56(2)(viib) of the Act, while giving the following finding : “ Therefore, as discussed above, the legislature at its wisdom does not cover receipt in the form of excess of price over the FMV of the share issued to Non resident as income of the issuer company. Hence, the share allotted to Delmas, Saudi Arabia is not come under the purview of section 56(2)(viib ) and also not covered by section 92 of the Income Tax Act. However, such case is not applicable in the case when the shares are issued to the Residents in India. (B) In the given factum of the case the assessee company has issued the shares to the following residents in India :- S.No. Share Date of No. of Face Share Amount Holder’s allotment Shares value Premium Paid Name Allotted 1. Sysmech 30/05/2013 813246 10 0 81,32,460 Industries 18/10/2013 213222 10 30 85,28,880 LLP 16/11/2013 220260 10 30 88,10,400 Regd. 30/12/2013 240934 10 30 96,37,360 Off: Plot no. 1221 sector- 46 gurgaon- 122003 Keeping the above discussion into consideration and applicability of section 56(2)(viib) of the Act, the assessee company has received the benefit which is calculated as under :- S.No. Share No. of Face Share Amount Share Holder’s Shares value Premium Paid premium Name Allotted 1. Sysmech 813246 10 0 81,32,460 0 Industries 213222 10 30 85,28,880 63,96,660 LLP 220260 10 30 88,10,400 66,07,800 Regd. 240934 10 30 96,37,360

In appeal the order of AO was set aside, therefore, Revenue has come in appeal raising following grounds :- “(i). Ld. CIT(A) has erred in providing relief to the assessee on this ground holding that percentage increase in profits over next two years justify the share premium received. (ii). Ld. CIT(A) has erred by not taking into consideration and challenging the assumptions in the DCF Model. (iii) That the appellant craves for the permission to add, delete or amend grounds of appeal before or at the time of hearing of appeal.”

Heard and perused the record. The grounds of appeal and the cross objections arise from same set of facts and law so are taken up together for determination.

Now appreciating the matter on record and the submissions made it can be observed from the assessment order that Ld. AO has rejected the share valuation as computed under Rule 11UA of the Income Tax Rules, 1962 for the reason that the share issued to the resident company was much below the price at which shares were allotted to the non-resident company. The Ld. AO also observed that there was loss in the previous assessment years therefore, the value determined by DCF Method was not correct.

It appears that Ld. AO has fallen in error in not considering objectively the facts and circumstances of the case as reflected in the joint ventures agreement between the resident and non-resident entity. This agreement holds the key for reasons why there was difference in valuation of the shares for each one of them. Clause 4.2.1 of the joint ventures agreement provided that initial share capital of the assessee company shall be by contribution of 5 lac shares from each and Clause 4.2.2 which is reproduced below for convenience, indicated how the project costs was to be funded in the ratio of non-resident, entity paying 40% of the project cost and the resident entity paying 60% of the project cost. “4.2.2 Funding of Project Cost The Project cost, as detailed in Schedule 3 of this Agreement, shall be funded by both SysMech and Demas through subscription of Equity Shares of the JV Company. It is agreed that SysMech shall pay for 10% of the Project cost through subscription of Equity Shares and Demas shall pay for 60% of the Project through subscription of Equity Shares including payment of any share premium amount which shall be mutually decided by the Parties. It is further agreed that after

Thus, in furtherance of these clauses of joint ventures agreement there was difference in the share price as issued to the resident company and that to the non-resident company. The discounted factor has occurred due to difference in the shares of capital contribution to the project cost. However, in the case in hand Ld. AO without considering the relevant clauses of joint ventures agreement presumed that as there was difference in the valuation of share for resident and non-resident entity, so, the valuation given by prescribed expert is liable to be rejected.

Then Hon’ble Supreme Court of India in Duncans Industries Ltd. vs. State of UP, 2000 ECR 19 (SC) which is relied in ITAT Delhi Bench’s order in Cinestaan Entertainment Pvt. Ltd. vs. ITO, New Delhi (2019) 106 taxman.com 300, as relied by the Counsel for assessee, has held that question of valuation is basically a question of fact. Thus, where the law by virtue of Section 56(2)(viib) read with Rule 11UA (2)(b) makes the prescribed expert’s report admissible in evidence, then without discrediting it on facts, the valuation of shares cannot be rejected.

Lastly, there is also force in the contention of counsel for assessee that Ld. Assessing Officer has accepted and rejected the valuation in respect of three entities differently. In regard to the assessee it was rejected, in case of non-resident entity it was accepted but distinguished and in case of resident entity also it was accepted, while holding that it was benefited by allotment of shares by under valuing. Such act of approbation and reprobation itself makes the exercise of statutory powers, liable to be set aside.

In the light of aforesaid discussion, there is no substance in the grounds of appeal of the revenue, the same is dismissed. However, the cross objections are allowed.