VODAFONE M-PESA LIMITED,MUMBAI vs. DEPUTY COMMISSIONER OF INCOME CIRCLE 8(3)(2), MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL “F” BENCH, MUMBAI BEFORE SHRI S. RIFAOR RAHMAN, AM & SHRI RAVISH SOOD, JM आयकरअपीलसं./ I.T.A. No. 1073/Mum/2019 (निर्धारणवर्ा / Assessment Year: 2015-16)

DCIT Circle 8(3)(2), Vodafone M-Pesa Ltd. Room no. 615, 6th floor Peninsula Corporate बिधम/ Aayakar Bhavan, M. K. Park, Ganpatrao Kadam Vs. Road, Mumbai-400 020 Marg, Lower Parel, Mumbai-400 013 स्थायीलेखासं./जीआइआरसं./PAN No. AAECV8934F (अपीलाथी/Appellant) (प्रत्यथी / Respondent) : & आयकरअपीलसं./ I.T.A. No. 2032/Mum/2019 (निर्धारणवर्ा / Assessment Year: 2015-16) DCIT Circle 8(3)(2), Room Vodafone M-Pesa Ltd. no. 615, 6th floor Aayakar Peninsula Corporate Park, Bhavan, M. K. Road, Ganpatrao Kadam Marg, बिधम/ Mumbai-400 020 Lower Parel, Mumbai- Vs. 400 013

(अपीलाथी/Appellant) (प्रत्यथी / Respondent) :

अपीलाथीकीओरसे/ Appellant by : Shri Deepak Chopra and Ms. Manasvini Bajpai, ARs प्रत्यथीकीओरसे/Respondent by : Shri Sushil Kumar Poddar, DR

2 I.T.A. No. 10731Mum/2018 & 2032/Mum/2019 Vodafone M-Pesa Ltd. सुनवाईकीतारीख/ : 16.10.2019 Date of Hearing घोषणाकीतारीख / : 13.12.2019 Date of Pronouncement आदेश / O R D E R PER S. RIFAOR RAHMAN (ACCOUNTANT MEMBER):

The present two Appeals have been filed by the assessee and revenue against the order of Commissioner of Income Tax (Appeals)-14, Mumbai, dated 19.02.2019 for AY 2015-16 respectively.

3 I.T.A. No. 10731Mum/2018 & 2032/Mum/2019 Vodafone M-Pesa Ltd. 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. When the AO asked assessee to furnish the information provided by the assesse to the Valuer in order to conduct the valuation and it was provided to

4 I.T.A. No. 10731Mum/2018 & 2032/Mum/2019 Vodafone M-Pesa Ltd. the AO and AO came to the conclusion that valuer has not independently valued the prospects of the assessee company and has merely relied on information supplied by the assessee. Further, he observed that the valuer has recorded the following sentences in the valuation report, which is reproduced below:-

“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……”

"We refer to the notice dated 4th December 2017, issued by your office under section 142(1) of the Act, in respect of the valuation of the shares issued by VMPL to its holding company during the subject AY and the valuation report issued by Ernst & Young Merchant

5 I.T.A. No. 10731Mum/2018 & 2032/Mum/2019 Vodafone M-Pesa Ltd. Banking Services Pvt Limited [EYMBSPL] in this regard. Copy of the subject notice is attached as Annexure 1.

In the said notice, your office after perusal of the report has mentioned that since EYMBSPL while issuing the report has stated "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", it appears that EYMBSPL has not 'independently verified the prospects of the company and by using the phrase "We have been given to understand" has avoided to comment on the correctness of the information. In this context, your office has also sought the following information:

- Information provided by VMPL to the EYMBSPL for issuance of such report; and

- Valuation of shares as per Rule 11UA of the Income Tax Rules, 1962 (Rules)

In this connection, as requested by your office, on behalf of and under instructions of our client, VMPL, we wish to submit as under:

A. As regards the Statement used in the Valuation Report

6 I.T.A. No. 10731Mum/2018 & 2032/Mum/2019 Vodafone M-Pesa Ltd. 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 a discounting factor that needs to be applied to future net cash flows. The valuer is not required to verify the AOthenticity of the historical and future projections of the company

7 I.T.A. No. 10731Mum/2018 & 2032/Mum/2019 Vodafone M-Pesa Ltd. submitted but undertake a scientific exercise of determining the correct 'discounting factor' which indicates the minimum return from the asset being valued had the investor invested in the next best alternative. Please refer to pages 21 to 23 of the Valuation Report which provide a detailed basis of the exercise undertaken by EYMBSPL in arriving at the discounting factor. Therefore, the valuer has undertaken a detailed scientific exercise of determining the fair value of shares basis the DCF methodology (and has arrived at a DCF valuation of shares of JNR 24.7 per share) and hence, undue importance to the statement that the valuer has relied on the information provided by the management is not warranted here.

It is also worth mentioning here that valuation of businesses and unlisted companies is not an exact science and the conclusions arrived at are dependent on the exercise of individual judgment. This is even more true for early stage companies, like in the instant case, due to lack of track record or lack of relevant metrics.

In this connection, your attention is also specifically invited page 7 of the valuation report, wherein the 'Source of Information' is clearly stated, basis which valuation of shares has been determined. For your easy reference, the same is reproduced below:

8 I.T.A. No. 10731Mum/2018 & 2032/Mum/2019 Vodafone M-Pesa Ltd. The following sources of information have been utilized in conducting the valuation analysis.

Company specific information - The following Company specific information, as provided by the Management, verbally or in written form have been inter-alia used in the valuation

- UnAOdited carved out profit and loss statement for FY14 and period 1 April 2014 to 6 November 2014 for the m-pesa business segment while it was carried out under MSCL.

- unAOdited profit and loss statement for period 7 November 2015 to 31 January 201 Sand balance sheet as at 31 January 2015 for VMPL.

- Projected profit and loss account for 2 months period ending 31 March 2015 and the years ending 31 March 2016 to 31 March 2024.

- Projected incremental working capital and capital expenditure for the 2 months period ending 31 March 2015 and years ending 31 March 2016 to 31 March 2024.

- Background information provided through emails, word documents or during discussions.

9 I.T.A. No. 10731Mum/2018 & 2032/Mum/2019 Vodafone M-Pesa Ltd. - 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 stated that as part of valuation, no AOdit function has

10 I.T.A. No. 10731Mum/2018 & 2032/Mum/2019 Vodafone M-Pesa Ltd. been undertaken. For your ease of reference relevant clAOses are reproduced below:

"Provision of valuation opinions and consideration of the issues described herein are areas of our regular valuation practice. The services do not represent accounting, assurance, accounting/tax due diligence, consulting or tax related services that may be provided by us or our affiliates."

The valuation has relied on the unAOdited accounts of the Company dated 31 January 2015. In accordance with our Engagement Letter and in accordance with the customary approach adopted in valuation exercises, we have not AOdited, reviewed or otherwise investigated the historical financial information provided to us. Accordingly, we do not express an opinion or offer any form of assurance regarding the truth and fairness of the financial position as indicated in the financial statements.

EY is not aware of any contingency, commitment or material issue which could materially affect MGSL economic environment and future performance and therefore, the fair value of MCSL's business. No efforts has been made to determine the possible effect, if any, on the subject business due to future central, state or

11 I.T.A. No. 10731Mum/2018 & 2032/Mum/2019 Vodafone M-Pesa Ltd. local legislation, including any environmental or ecological matters or interpretations thereof

The valuation exercise and results are governed by concept of materiality.

The financial forecast used in preparation of the Report reflects Management's judgment based on present circumstances, as the most likely set of conditions and course of action it is most likely to take..........

From the perusal of the above, it is apparent that the observation of your office that EYMBSPL has not verified the data submitted to it by the management should not be given any undue importance and hence, should clearly not form any basis of questioning the valuation of VMPL shares.

B. Information provided by VMPL to the EYMBSPL for issuance of such report

The details of information provided by VMPL to EYMBSPL is documented at page 7 of the valuation report under the head 'Sources of Information'. Further, VMPL also provided a Management Representation Letter (MRL), which categorically documents/summarizes the information and basis of projection of future prospects. The same was duly

12 I.T.A. No. 10731Mum/2018 & 2032/Mum/2019 Vodafone M-Pesa Ltd. 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 of VMPL principally comprise of wallet revenues on account of transactions carried out by M-Pesa subscribers (ie.

13 I.T.A. No. 10731Mum/2018 & 2032/Mum/2019 Vodafone M-Pesa Ltd. online bill payments, money transfers etc) and commission receivable as a business correspondent.

The above services were started in India couple of years back and VMPL with couple of other operators are the pioneer who started such services in India. Further, these services/facilities is still at nascent stage and are likely to grow exponentially with the growth of economy and as and when Indian customers start using such services/facilities on a large scale basis. Therefore, while the projections prepared by VMPL at the time of obtaining the valuation report may be different from how the first few years have actually unfolded as a result of the uncertain business environment, there are strong future prospects and VMPL is likely to grow rapidly and exponentially with the various digital initiatives invading the economy.

C. Valuation of shares as per Rule 11 UA of the Income Tax Rules, 1962 ('Rules')

Rule 11 UA of the Rules, prescribes the following method for determining the valuation of unquoted shares:

(2) Notwithstanding anything contained in sub-clAOse (b) of clAOse (c) of sub-rule (1), the fair market value of unquoted equity shares for the purposes of sub- clAOse (1) of clAOse (a) of Explanation to clAOse

14 I.T.A. No. 10731Mum/2018 & 2032/Mum/2019 Vodafone M-Pesa Ltd. (viib) of subsection (2') of section 56 shall be the value, on the valuation date, of such unquoted equity shares as determined in the following manner under clAOse (a) or clAOse (b), at the option of the assessee, namely:—

(a) the fair-market value of unquoted equity shares = (A-L)/PE x [PV), where,

A = book value of the assets in the balance-sheet as reduced by any 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 and any amount shown in the balance-sheet as asset including the unamortised amount of deferred expenditure which does not represent the value of any asset;

L = book value of liabilities shown in the balance- sheet, but not including the following amounts, namely;-

(i) the paid-up capital in respect of equity shares;

(iii) the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the date of transfer at a general body meeting of the company;

15 I.T.A. No. 10731Mum/2018 & 2032/Mum/2019 Vodafone M-Pesa Ltd. (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 rule, it is apparent that the valuation can be computed by the aforementioned two method i.e., either by the methodology prescribed

16 I.T.A. No. 10731Mum/2018 & 2032/Mum/2019 Vodafone M-Pesa Ltd. under clAOse (a) or Discounted Free Cash Flow ('DCF9 Method [clAOse (b)] at the option of assesse. Thus, DCF method is accepted method of computing the fair value of unquoted shares as per the prescribed Rules.

In the instant case, the valuation report has been obtained by VMPL for the purpose of filing with the Reserve Bank of India/AOthorized dealer for complying with FEMA regulations. Since VIL (the holding company of VMPL), is a subsidiary of a non- resident company, any infusion of capital by VIL into VMPL, should be as per valuation arrived in accordance with the FEMA Regulations by SEBI registered Category 1 Merchant Banker as per any internationally accepted pricing methodology on arm's length basis. Accordingly, VMPL had requested EYMBSPL in its capacity as a Category 1 - Merchant Banker to carry out the valuation of its equity shares. Since DCF method, is one of the internationally accepted method of determining fair value of the share, the valuation has been arrived by EYMBSPL by following such method. Further, the reason for using such method out of internationally accepted pricing methodology is detailed at page 19 of the valuation report.

17 I.T.A. No. 10731Mum/2018 & 2032/Mum/2019 Vodafone M-Pesa Ltd. Since Rule 11 UA of the Rules, prescribes DCF as one of the method for determining the fair value of unquoted shares and the valuation report already submitted before your office has also determined the fair value of shares as per the DCF method, the DCF value determined in the valuation report qualifies as the value as per Rule 11 UA of the Rules.

We request you to kindly take the above on record. In case your office does not agree with the above submissions, we request you to kindly provide us the requisite reasons for non-agreement and grant us an opportunity of personal hearing and filing detailed submissions in this regard. ".

a) Assessee has tried to underplay the important disclosures by the valuer as being standard or routine.

b) The cash flow from operations is not positive and there is no basis to make reliable forecast. The prediction of sales and operating expenses has been done by the assessee without any rationale.

18 I.T.A. No. 10731Mum/2018 & 2032/Mum/2019 Vodafone M-Pesa Ltd. c) The 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.

19 I.T.A. No. 10731Mum/2018 & 2032/Mum/2019 Vodafone M-Pesa Ltd. A. Y Net sales Projected Net sales (Amt in millions) Actual (Amt in millions) 2015-16 290.5 128.70 2016-17 801.8 520 2017-18 1661.40 837.80

20 I.T.A. No. 10731Mum/2018 & 2032/Mum/2019 Vodafone M-Pesa Ltd. total excess amount received by the assessee over and above the net assets value was Rs. 207,99,59,372/- was treated as excess received and he applied provision of section 56(2)(viib) of the Act to make addition to the total income of the assessee. Accordingly, AO determined the total taxable income at Rs. 1,38,77,00,850/-.

21 I.T.A. No. 10731Mum/2018 & 2032/Mum/2019 Vodafone M-Pesa Ltd. report submitted by the assessee as erroneous by adopting the DCF method, but accepted the DCF valuation only to the extent of actual performance in the subsequent years and accordingly, 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

22 I.T.A. No. 10731Mum/2018 & 2032/Mum/2019 Vodafone M-Pesa Ltd. marketing strategy was not good or their competitors were better.

If we accept the reasons given by the AO, no new company or company with a new idea would ever be able to choose DCF method for determination of fair market value of its shares because there would be insufficient or no background data and projections would always be questionable. Clearly, this is not the intention of the legislature or else they would have prescribed that only companies with certain years of business behind them would be allowed to use DCF method for determination of fair market value of their shares.

Similarly, negative cash flow in the initial years is very normal in the modern age of technology driven /idea- based companies. In fact, it is true for all companies that they would start making profits only after a critical amount of sales is reached. If the management is not confident of the future growth, it will never put in more money into the company. After all, everybody is in the business for getting returns on the money invested.

If we look at the sales figures and other financial information provided by the management to the EYMBSPL, it can be seen that the MCSL, whose

23 I.T.A. No. 10731Mum/2018 & 2032/Mum/2019 Vodafone M-Pesa Ltd. business was taken over by the appellant, started operation in 4 circles with active customer base of 13,874 in April, 2013. The operation grew to 23 circles with active customer base of 2,30,451 in October, 2014. Number of active customers in the month of September, 2014 was even higher at 3,19,860. Total customer base in the month of October, 2014 was 22,02,634. Thus, the business of the appellant was growing and there was scope for future growth. Therefore, it cannot be stated that projections given by the management were without any basis. It may be possible that they were too optimistic.

In view of these facts, I'm of the opinion that the AO was not justified in outrightly rejecting the valuation report given by EYMBSPL as per the DCF method. This report was based on the financial projections given by the management and even though the management has not provided any justification for the projections made, if the AO was not satisfied with the and reworked the fair market value of the shares accordingly. If we see the actual performance of the appellant vis-a-vis the projections in respect of the years for which the data is quoted in the assessment order, we would See that the net sales of the appellant were 44% of the projected sales in A. Y. 2015- 16, 65% of the projected sales in A.Y. 2016- 17 and 50% of the

24 I.T.A. No. 10731Mum/2018 & 2032/Mum/2019 Vodafone M-Pesa Ltd. 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.

GROUNDS OF APPEAL

The Appellant respectfully submits that:

25 I.T.A. No. 10731Mum/2018 & 2032/Mum/2019 Vodafone M-Pesa Ltd. On the facts and circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) -14 ['CIT(A)], Mumbai has erred in partly confirming the additions made by the Deputy Commissioner of Income Tax, Circle 8(3)(2), Mumbai ('A 09 in the assessment order passed under section 143(3) ('impugned assessment order) of the Income Tax Act, 1961 ('Act) for the captioned AY.

Each of the ground is referred to separately, which may kindly be considered independent of each other.

1.1. On the facts and in circumstances of the case and in law, the learned CIT(A) has erred in not treating the impugned assessment order passed by the AO as bad- in-law and void since it is perverse on facts and in law.

1.2. On the facts and in circumstances of the case and in law, the learned CIT(A) has erred in holding that the impugned assessment order passed by the AO is not liable to be set aside even though no show cause notice was issued to the Appellant before provisions of section 56(2)(viib) of the Act were invoked by the AO in relation to share issuance by the Appellant, thereby violating the principles of natural justice.

26 I.T.A. No. 10731Mum/2018 & 2032/Mum/2019 Vodafone M-Pesa Ltd. 1.3. On the facts and in circumstances of the case and in law, the impugned appellate order passed by the learned C1T(A) is liable to be set aside since neither any opportunity was given to the Appellant prior to recomputing the enterprise value nor the Appellant was given the right to confront such valuation, which is in direct conflict with the principles enunciated by the Hon'ble High Court in Appellant own writ for the subject AY [WP (C) No 654 of 2018 dated March 1, 2018].

2.1. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in confirming the action of the AO in making addition under section 56(2)(viib) of the Act in relation to issuance of shares by the Appellant to its holding company, Vodafone Idea Limited (earlier known as Vodafone India Limited which stands merged with Idea Cellular Limited and consequently known 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

27 I.T.A. No. 10731Mum/2018 & 2032/Mum/2019 Vodafone M-Pesa Ltd. 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 Banker without providing any rationale basis for the same.

2.5. Without prejudice to ground 3.4 above, on the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in recomputing the

28 I.T.A. No. 10731Mum/2018 & 2032/Mum/2019 Vodafone M-Pesa Ltd. enterprise value of the Appellant at INR 463.2 million, by applying an ad hoc percentage (ie, 40%) to the enterprise value of INR 1,158 million computed by a Category -I Merchant banker without providing cogent reasons.

3.1. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming levy of consequential interest under section 234B of the Act.

4.1. On the facts and circumstances of the case and in law, the learned CIT(A) has erred in dismissing the ground on initiation of penalty proceedings under section 271(1)(c) of the Act holding that it is not an appealable matter.

All the above grounds are without prejudice to each other. The Appellant craves for leave to add, amend, vary, omit or substitute or withdraw any of the aforesaid grounds at any time before or at the time of

29 I.T.A. No. 10731Mum/2018 & 2032/Mum/2019 Vodafone M-Pesa Ltd. hearing of the matter with the Income Tax Appellate Tribunal.

All the above grounds are without prejudice to each other. The Appellant craves for leave to add, amend, vary, omit or substitute or withdraw any of the aforesaid grounds at any time before or at the time of hearing of the matter with the Income Tax Appellate Tribunal.

The Appellant prays that appropriate relief be granted based on the said grounds of appeal and the facts and circumstances of the case.

30 I.T.A. No. 10731Mum/2018 & 2032/Mum/2019 Vodafone M-Pesa Ltd. 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 result, he determined the share value at Rs.

31 I.T.A. No. 10731Mum/2018 & 2032/Mum/2019 Vodafone M-Pesa Ltd. 11.17 per share and the excess of the amount received by the assessee was treated as addition u/s 56(2)(viib) of the Act.

32 I.T.A. No. 10731Mum/2018 & 2032/Mum/2019 Vodafone M-Pesa Ltd. 9. We note that, the Commissioner of Income Tax in the impugned order dated 23rd February, 2018 does not deal with the primary grievance of the petitioner. This, even after he concedes with the method of valuation namely, NA V Method or the DCF Method to determine the fair market value of shares has to be done /adopted at the Assessee's option. Nevertheless, he does not deal with the change in the method of valuation by the Assessing Officer which has resulted in the demand. There is certainly no immunity from scrutiny of the valuation report submitted by the Assessee. Therefore, the Assessing Officer is undoubtedly entitled to scrutinise the valuation report and determine afresh valuation either by himself or by calling for a final determination from an independent valuer to confront the petitioner. However, the basis has to be the DGF Method and it is not open to him to change the method of valuation which has been opted for by the Assessee. If Mr. Mohanty is correct in his submission that a part of demand arising out of the assessment order dated 2P' December, 2017 would on adoption of DCF Method will be sustained in part, the 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.

33 I.T.A. No. 10731Mum/2018 & 2032/Mum/2019 Vodafone M-Pesa Ltd. 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 weeks from today, the demand of Rs. 62.38 crores arising consequent to the impugned order dated 21 December, 2017 is stayed till the stay application is disposed of and for a further period of 2 weeks thereafter.

34 I.T.A. No. 10731Mum/2018 & 2032/Mum/2019 Vodafone M-Pesa Ltd. parties. This is so as the controversy appears within a narrow compass.

35 I.T.A. No. 10731Mum/2018 & 2032/Mum/2019 Vodafone M-Pesa Ltd. never submitted before AO. He referred to para 9 of the Hon'ble High Court stay order, in which Hon'ble High Court has clearly held that AO can verify the valuation report, accordingly AO verified the valuation report and the DCF method adopted by the valuer is not consistent and he once again brought to our notice the various shortcomings highlighted by the AO. He further submitted that above findings of the AO clearly indicates that method and information adopted by assessee are not reliable. He further brought to our notice the historical profit and loss account which is placed at page no. 97 of the paper book, as per which he brought to our notice that the FY 2016 and the forecast adopted by the assessee is too high compare to previous year and he submitted that the projections were not scientifically adopted, hence he supported the AO in rejecting the DCF method of such projections.

36 I.T.A. No. 10731Mum/2018 & 2032/Mum/2019 Vodafone M-Pesa Ltd. 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 real and genuine - Held, yes - Whether however as two appellate Authorities, viz., Commissioner (Appeals) and Tribunal, are also forums for fact-finding, in event of Assessing Officer failing to discharge his functions properly, obligation to conduct proper inquiry on facts would naturally shift to door of said appellate Authorities and they having noticed want of proper inquiry, cannot close chapter simply by allowing appeal and deleting additions made - Held, yes

37 I.T.A. No. 10731Mum/2018 & 2032/Mum/2019 Vodafone M-Pesa Ltd. 17. In the rejoinder, Ld. AR relied upon the decision of ITAT Delhi in the case of Stryton Exim India Pvt. Ltd. vers. ITO in ITA No. 5982/Del/2018, which is placed at page no. 32 to 83 of the paper book.

38 I.T.A. No. 10731Mum/2018 & 2032/Mum/2019 Vodafone M-Pesa Ltd. valuer, which is independent entity. We observe that the reason for rejecting the valuation report by the AO was well answered by Ld. CIT(A) and also Ld. CIT(A) has appreciated the fact that assessee has option to choose one of the method i.e. net asset method or DCF method, whichever is favourable to them.

39 I.T.A. No. 10731Mum/2018 & 2032/Mum/2019 Vodafone M-Pesa Ltd. 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. CIT(A) has compared the factuals with projections and assessee has achieved 40% of the actual results is too harsh to the assessee and the valuation is done in order to carry out certain activities by the management. In this case, the valuation was used to issue of rights shares. The AO or Ld. CIT(A) is trying to evaluate the accuracy of the valuation at the time of assessment, this is not proper and also the factuals are based on so many factors subsequent to adoption of projection and valuation. Accordingly,

40 I.T.A. No. 10731Mum/2018 & 2032/Mum/2019 Vodafone M-Pesa Ltd. we are not in a position to accept the method adopted by Ld. CIT(A). In the similar facts, the Coordinate Bench of ITAT has held as under:

41 I.T.A. No. 10731Mum/2018 & 2032/Mum/2019 Vodafone M-Pesa Ltd. company was in the initial phase of the setting up of the business, therefore, there was no business of film production as such. The assessee company to start its venture of its film production approached accredited ace investors of India to join in as equity partners, namely, Shri Rakesh Jhunjhunwala, Shri Anand Gopal Mahindra & Shri Radhakishan Damani. The funds were raised by way of issue of equity shares to the aforesaid equity partners and by raising premium on such shares over and above the face value of Rs.10/- per share. The details and quantum of premium received from each of the equity partners are as under:

S.No. Name of equity Date No. Premium Amount partner of Issue Of shares (Rs.) of premium per share (Rs.)

42 I.T.A. No. 10731Mum/2018 & 2032/Mum/2019 Vodafone M-Pesa Ltd. 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 assessee to substantiate the figures of projected revenue in the valuation report and has also failed to submit any basis for projection. Instead, AO held that assessee should have invested the share premium amount to earn some income, whereas assessee has made investment in debentures of its associate company and hence the basic substance of receiving the high premium was not justified. After invoking the provision of Section 56(2)(viib), AO took fair market value of premium at Nil and face value of Rs. 10/- per share.

43 I.T.A. No. 10731Mum/2018 & 2032/Mum/2019 Vodafone M-Pesa Ltd. investors to seek confirmation, information and documents pertaining to transaction of issuance of shares. In response to the said notices, Assessing Officer has received all the details and replies directly from these investors confirming the transaction. The venture agreement between the assessee and the investors were also filed before the Assessing Officer and in this regard, our attention was also drawn by the Id. counsel that the investment was to be made by these investors in various phases and transactions and it was only after they have gone by the projection and satisfied with the potentials and credentials of future growth, they were willing to make such huge investment in the 'start-up company’ like assessee. Thus, neither the identity nor the creditworthiness of the investors nor the genuineness of the transaction can be doubted and in fact the same stands fully established to which Assessing Officer has also not raised any doubt or disputed this fact. Thus, under the deeming provisions of section 68, the test of proving the nature and source of the credit received stood accepted.

44 I.T.A. No. 10731Mum/2018 & 2032/Mum/2019 Vodafone M-Pesa Ltd. provision of Section 56(2)(vii) could have determined the fair market value of the premium on shares issued at Nil after rejecting the valuation report given by the Chartered Accountant on one of the prescribed methods under the rules adopted by the Valuer. Before us, learned counsel, Mr. Dinodia, first of all had harped upon the spirit and intention of the Legislature in introducing such a deeming provision and submitted that such a provision cannot be invoked 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

45 I.T.A. No. 10731Mum/2018 & 2032/Mum/2019 Vodafone M-Pesa Ltd. 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 are one of the leading industrialists and businessman of the country, after considering the valuation report and future prospect of the company, have chosen to make investment as an equity partners in a 'start-up company' like assessee, then can it be said that there is any kind of tax abuse tactics or laundering of any unaccounted money. It cannot be the unaccounted or black money of investors as it is their tax paid money invested, duly disclosed and confirmed by them; and nothing has been brought on record that it is unaccounted money of assessee company routed through circuitous channel or any other dubious manner through these accredited investors. If such a strict view is adopted on such investment as have been done by the Assessing Officer and by Id. CIT(A), then no investor in the country will invest in a 'start-up company', because investment can only be lured with the future prospects and projection of these companies.

46 I.T.A. No. 10731Mum/2018 & 2032/Mum/2019 Vodafone M-Pesa Ltd. 33. Section 56(2)(viib) is a deeming provision and one cannot "expand the meaning of scope of any word while interpreting such deeming provision. If the statute provides that the valuation has to be done as per the prescribed method and if one of the prescribed methods has been adopted by the assessee, then Assessing Officer has to accept the same and in case he is not satisfied, then we do not find any express provision under the Act or rules, where Assessing Officer can adopt his own valuation in DCF method or get it valued by some different Valuer. There has to be some enabling provision under the Rule or the Act where Assessing Officer has been given a power to tinker with the valuation report obtained by an independent valuer as per the qualification given in the Rule 11U. Here, in this case, Assessing Officer has tinkered with DCF methodology and rejected by comparing the projections with actual figures. The Rules provide for two valuation methodologies, one is assets based NAV method which is based on actual numbers as per latest audited financials of the assessee company. Whereas in a DCF method, the value is based on estimated future projection. These projections are based on various factors and projections made by the management and the Valuer, like growth of the

47 I.T.A. No. 10731Mum/2018 & 2032/Mum/2019 Vodafone M-Pesa Ltd. company, economic/market conditions, business conditions, expected demand and supply, cost of capital and host of other factors. These factors 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

48 I.T.A. No. 10731Mum/2018 & 2032/Mum/2019 Vodafone M-Pesa Ltd. view that the performance did not match the projection is unknown to the law on valuations. Valuation being an exercise required to be conducted at a particular point of time has of necessity to be carried out on the basis of whatever information is available on the date of the valuation and a projection of future revenue that valuer may fairly make on the basis of such information."

ii) Rameshwaram Strong Glass Put. Ltd. v. ITO [2O18-TIOL-1358-ITAT- Jaipur]

"4.5.2. Before examining the fairness or reasonableness of valuation report submitted by the assessee we have to bear in mind the DCF Method and is essentially based on the projections (estimates) only and hence these projections cannot be compared with the actuals to expect the same figures as were projected. The valuer has to make forecast on the basis of some material but to estimate the exact figure is beyond its control. At the time of making a valuation for the purpose of determination of the fair market value, the past history may or may not be available in a given case and therefore, the other relevant factors may be considered. The projections are affected by various factors hence in the case of company where there is no commencement of production or of the business, does not mean that its share cannot command

49 I.T.A. No. 10731Mum/2018 & 2032/Mum/2019 Vodafone M-Pesa Ltd. any premium. For such cases, the concept of start-up is a good example and as submitted the income-tax Act also recognized and encouraging the start-ups."

iii) DQ (International) Ltd. vs. ACIT (ITA 151/Hyd/2015) "10...... In our considered view, for valuation of an intangible asset, only the future projections along can be adopted and such valuation cannot be reviewed with actuals after 3 or 4 years down the line. Accordingly, the grounds raised by the assessee are allowed".

The aforesaid ratios clearly endorsed our view as above.

Therefore, respectfully following the decision of Coordinate Bench of ITAT, we allow the grounds raised by the assessee.

50 I.T.A. No. 10731Mum/2018 & 2032/Mum/2019 Vodafone M-Pesa Ltd. Sr.PS. Dhananjay आदेशकीप्रनिनिनिअग्रेनर्ि/Copy of the Order forwarded to : 1. अपीलाथी/ The Appellant प्रत्यथी/ The Respondent 2. 3. आयकरआयुक्त(अपील) / The CIT(A) 4. आयकरआयुक्त/ CIT- concerned 5. यवभागीयप्रयतयनयि, आयकरअपीलीयअयिकरण, मुंबई/ DR, ITAT, Mumbai गार्डफाईल / Guard File 6. आदेशधिुसधर/ BY ORDER, .उि/सहधयकिंजीकधर (Dy./Asstt.Registrar) आयकरअिीिीयअनर्करण, मुंबई/ ITAT, Mumbai