CAPITALG INTERNATIONAL LLC (FORMERLY KNOWN AS GC AISA L.L.C.),MUMBAI vs. ASSISTANT COMMISSIONER OF INCOME TAX INT TAX CIRCLE 2(1)(1), MUMBAI

आदेश / O R D E R PER AMIT SHUKLA (J.M): The aforesaid appeal has been filed by the assessee against final assessment order dated 14/03/2023 passed u/s.143(3) r.w.s. 144C(13) in pursuance of direction given by the DRP vide order dated 27/02/2023 for the A.Y.2017-18. 2. In various grounds of appeal assessee has challenged the transfer pricing adjustment of Rs.98,02,84,080/- which was

2 ITA No.1632/Mum/2023 CapitalG International Ltd made with regard to arm‟s length price of acquisition of equity shares and Compulsorily Convertible Preferring Shares (CCPS) of Girnar Software Private Limited which is a third party.

S. Date of Transactio Transactio No. of Value per Total value of Bench No. transaction n n share / share transaction marking with CCPS (in INR) (in INR) method

A 14.02.2017 Purchase Capital G 14,814 68,435.58 101,47,36,976 Other of 2015 LP method - Equity Based Shares on valuation and CCPS report of Girnar

3 ITA No.1632/Mum/2023 CapitalG International Ltd B 14.02.2017 Sale of GC Asia 14,814 68,435.58 101,47,36,976 Other Equity method - Shares/CC Based PS on valuation report of Girnar Short Term Capital Gain (C) = (A) - (B) NIL

4 ITA No.1632/Mum/2023 CapitalG International Ltd day and at the same price, on the ground that the valuation adopted by the assessee basis the valuation report/application of DCF Method was found to be acceptable.

5 ITA No.1632/Mum/2023 CapitalG International Ltd 1. It has been noticed on perusal of annual report of Girnar Software Pvt. Ltd, obtained from the assessee and data available in Public domain that this company has consistently incurred losses as per audited annual reports. The assessee has relied on DCF Method to value the equity share and CCPS of the Girnar Software. It is well known that in the DCF method first step is to forecast expected cash flow based on assumptions regarding the company's revenue growth rate, net operating profit margin income tax rate, fixed investment requirement, and incremental working capital requirement. The revenue growth rate as well as the net profit margin of Ginar Software Company since FY 2013-14, is negative and Girnar Software has been incurring business losses. On perusal of audited financial of this company le Girnar Software, it is found that the company has incurred losses (loss of Rs. 100.54 Lakh in FY 2013-14, Rs. 4711.48 Lakh FY 2014-15, Rs. 14377 27 lakh in FY 2015-16, Rs. 12571/- in FY 2016-17, Rs. 7845 Lakh in FY 2017-18, Rs. 12797 Lakh in FY 2018-19, Rs. 32646 Lakh in FY 2019-20 & Rs. 34,287 Lakh in FY 2020-21 However, as per the computation of valuation report dated 30.09.2016, the free cash flow to equity figures are Rs. -680.31 Million for FY 2016-17, Rs. -713.69 Million for FY 2017-18. Rs. 88.08 Million for FY 2018-19, Rs. 747.87 Million for FY 2019-20 & Rs. 1241.86 Million for FY 2020-21. Further, as per the computation of valuation report dated 29.02.2016, the free cash flow to equity figures are Rs. -78.32 Million for FY 2015-16. Rs. - 862.50 Million for FY 2016- 17. Rs. -139.31 Million for FY 2017-18, Rs. 305.02 Million for FY 2018-19, Rs. 717. 11 Million for FY 2019- 20 & Rs. 1104.75 Million for FY 2020-21 On verification, it seems that these are unrealistic. Further, on examination/perusal of audited financial data of Girnar Software P Ltd, it is seen that the company has declared loss për share Rs 2356/- in FY 2014-15, Rs. 7,188/- in FY 2015- 16, Rs. 6108/- in FY 2016-17, Rs. 3 645- in FY 2017-18, Rs. 6.087/- in Rs. 2018-19, Rs. 15,462/- in FY 2019-20 & Rs. 16,1887 In FY 2020/21 It is clear that the company has incurred losses per equity share since FY 2014-15, nevertheless, the valuer has valued per share at Rs. 67,940.09/- using DCF method which is not commensurate with the original data i.e, audited financial data of the company ompany M/s Girnar Software P Ltd.

6 ITA No.1632/Mum/2023 CapitalG International Ltd The details of annual report for loss after tax and loss per share are given as under in tabular form: Financial Actual Profit/loss Profit after Actual loss Year profit/loss after tax (in tax (in per share after tax lakh) of lakh) of (in Rs.) as (in lakh) as Girnar Girnar per the per Software Software audited audited as per the as per the financial of financial of valuation valuation Girnar the Girnar report report Software Software dated dated 29.02.2016 20.09.2016 2013-14 -106.54 2014-15 -4711.48 2,356/- -14377.27 -12361.9 7,188/- 2015-16 2016-17 -12571 -0167.9 -11582.1 6,108/- 2017-18 -7845 2165.4 -1404.7 3,045/- 2018-19 -12797 4992.5 6276.9 6,087/- 2019-20 -32646 10087.5 10531.6 15,462/- 2020-21 -34287 12934.1 15015.4 16,187/-

From the above table, it is seen that oven for the period prior to the valuation dates, the company was not only running in losses but the losses were increasing year on year. Thus the growth trajectory had a negative slope and any extrapolation/forecast would continue in the same direction. However in the valuation, the projections have been made to completely change the direction of growth and arrive at a pre determined valuation. What prompted this anticipation of trend reversal has never been substantiated by the valuation report or the assessee.

7 ITA No.1632/Mum/2023 CapitalG International Ltd

Obviously from the above table, there is a huge difference in actual profit/ loss after tax and projected profit/loss after tax as per valuation report dated 29.02.2016 & 20.09.2016. The actual data has not matched with projected data. This raised a question on reliability of valuation report dated 29.02.2016 & 20.09. 2016. 2. Further, on perusal of valuation report dated 30.09.2016, it is seen that during the period of 2017 to 2021, the projections of cash flow and profit after tax are exceptional. The Same are given in tabular form as under Particulars FY 2017- FY 2018- FY 2019- FY 2020- 18 19 20 21 Cash Flow 45% 112% 749% 66% projected growth

Profit after 87% 529% 68% 43% tax projected growth

This is especially stark in comparison with actual data for the same periods. These kind of exorbitant projections were never based on reality and the subsequent actual data proved that sufficiently. So the assessee cannot take shelter in the argument that the valuation has been done using the best data available at that point and hence is unassailable in an post -facto analysis. Rather, in this case, the valuation has totally ignored the historical data available, the year on year losses piled up, the trajectory of increasing losses and used arbitrary projections which were not at all based on the data available at that point. Hence, the valuation report is not rejected merely on post facto comparison with actuals but because the projections itself were not based on the available data, the company's performance till that date and relied merely on figures profited by the management. Hence, the facts of the case laws relied upon by the assessee are not

8 ITA No.1632/Mum/2023 CapitalG International Ltd Similar to the facts of this case. 3. During the TP proceedings, the assessee was specifically asked to furnish the information and document mentioned in valuation report which were considered to determine / arrive the value of equity and CCPS vide notice u/s 82CA(2) of the IT. Act., dated 01.04.2022. However till this date assessee has arguments put forth by assesses are documentation to justify unsubstantiated the and theoretical and without supporting documentation to justify the factual valuation. The assessee in its 3CEB report and TP Study Report has stated that proper information and documents as prescribed have been kept by the assessee in respect of the international transactions. Even though assessee failed to furnish the information and document which are vital factor to influence to determine the value of equity share and CCPS, mentioned in Valuation report on which the third-party independent valuer made the value of shares and CCPS which were considered by the independent third party. Thus the claim of assessee that, it has maintained the documentation in support of the ALP is found incorrect. 5. Further, during the proceedings the assessee has furnished the copy form PAS-5 filed by Girnar Software with the registrar of the company. The same has been considered but it is not sufficient to justify the transaction made between assessee company and its AEs. Further, in the case of assessee, the assessee company has purchased equity shares and CCCPs of Girnar Software from its AE ie CapitalG 2015 LP. The asessee has filed details in support of purchase of equity shares and CCPS of Girnar Software Pvt Ltd., whereby trying to substantiate the legality of transaction by furnishing Form PAS 5 relation to share purchase transaction of various parties. It is seen that share purchase transaction is between, Girnar Software Pvt Ltd and various parties. However it is pertinent to note that the share purchase transaction by the assessee is with its AE and not direct purchase from Girnar Software Pvt Ltd. Thus the Form PAS 5 facts are distinguishable from the facts of assessee. 7. It is noticed that the assessee mainly relied on valuation report dated 26.02.2016 & 20.09.2016 for valuation of shares of Girnar

9 ITA No.1632/Mum/2023 CapitalG International Ltd Software Company The purchase value of the share was determined at Rs. 67.940.09 by the Independent Valuer, ie, M/s SPA Advisors Pvt. Ltd. By analysing both dated valuation reports, it is revealed that the said Valuer has arrived share value at Rs. 67,940.09/- even though the projected figures are different. Also, it is noticed that Valuer has considered 30% expected growth for initial 10 years and 6% thereafter in valuation report 20.09.2016 and 30% expected growth for first 10 years and 6.5% thereafter in valuation report dated 29.02.2016. There is no explanation for change in estimated figures within a short span of 7 months between the 2 valuation reports. Secondly, even with changed estimated figures, surprisingly, the under brought the valuation of shares to the same value. Thus the entire exercise of valuation appears have no basis but an ex- post facto venture to arrive at the pre determined price. The variation in growth projection has also not been justified, nor any basis is given for the individual figures arrived at. From the actual figures of Profit after Tax for projected financial years, it is revealed that the said company i.e. Girnar Software P Ltd never declared any profit since FY 2015-16 to FY 2020- 21 i.e. the said company has incurred losses and the losses are increasing as against the trend in projection. So not only the projected figures are irrational, but even the trend of projections is in the completely opposite direction. Considering the all above facts, it is crystal clear that the valuation report furnished by the assessee of the Independent Valuer is not commensurate with the actual audited financial data of Girnar Software P Ltd. In its valuation report, the Valuer has taken high growth rate @ 30% of projected first 10 years and 5 or 6.5 thereafter of the said company and taken estimated profit after tax on higher level To estimate the price of the share which is never achieved in a single year of the estimated years. The said company never turned up in a profitable position. Further the assessee stated vide has Independent valuer has valued the shares of Girnar Software P. Ltd. after getting the details from the management of Girnar Software. As per valuation report, the key factor which played a pivotal role in the valuation of the shares of the company i.e. Girnar software are: i.Consolidated provisional financial as on March 31, 2016,

10 ITA No.1632/Mum/2023 CapitalG International Ltd

ii. Business Projections for the next five years (till the year ending March, 31, 2021) iii. Information and explanation given by management of Girnar Software iv. Other Information as required available in public domain. On perusal of valuation report, it is seen that the independent valuer has relied on above mentioned four key factors which are provided by the management of Girnar Software. The same were asked to be furnish by the assessee, ie the details of documents which have been provided by management of Girnar software to value the share of Girnar Softwere However, the assessee failed to provide these documents. The primary onus to prove the correctness of the valuation Report is on the assessee as he has special knowledge and he is privy to the facts of the company and only he has opted for this method. Hence, he has to satisfy about the correctness of the projections, Discounting factor and Terminal value etc. with the help of Empirical data or industry norm if any and/or Scientific Data, Scientific Method, scientific study and applicable Guidelines regarding DCF Method of Valuation. Considering the assessee's approaches and in absence of the information and documents called in respect of valuation report for valuation of shares and CCPS made by the third-party independent valuer who valued the equity shares and CCPS on the basis of information provided by the Management of Girnar Software during the valuation (as per the assessee's reply) and determination of the fair value of equity shares and CCPS at Rs.67,940.00 per 1 each equity as per the valuation report by using the Discounted Cash Flow method has not been found correct and the same is hereby rejected 10.2.8. The submissions of assessee have been carefully considered. The assessee has benchmarked this transaction under Other Method as Most Appropriate Method. In support of MAM the assessee relied on the Valuation Report issued by an independent Valuer where in DCF method was considered to determine fair value of per share taking the projected cash flow

11 ITA No.1632/Mum/2023 CapitalG International Ltd statement for the period of six years from March 2016 to March 2021 as per the valuation report dated 29.02.2016 and projected cash flow statement for the period of five years le. March, 2017 10 March 2021 as per the valuation report dated 20.09.2016. As illustrated above it is clearly an exaggerated growth rate considering the audited financials results of the earlier years of the company which has shown consistent losses year after year Thus the both the projections used, and the critical assumption assumed in the valuation suffers from factual inaccuracies and lacks any merit and are not reliable. Accordingly the said valuation is bound to be rejected and accordingly rejected. 8. Accordingly, TPO made adjustment of Rs.98.03 Crores after observing as under:- 10.2.10. Thus, in absence of any valid and meaningful justification for the projections considered and adopted in determining the value of equity shares of Girnar Software P Ltd under DFC method by independent valuer is not found to be acceptable. Thus, this left no option except to reject the DCF method and to go by NAV-method to determine the value of the equity share and CCPS. 10.2.11. Having rejected the DCF methodology adopted by assessee for lack of accuracy the other option available is Net Asset Value method to arrive at the book value of the share which his applied to work out the value of equity and CCPS of Girnar Software Pvt. Ltd (GSPL). The Book value of equity and CCPS worked out based on the audited financials of the Girnar Software P Ltd by taking the base point of valuation date as on the 1st day of the financial year ie 1st April 2016. The book value work out on the basis of total value of shareholder fund and No. of shares i.e. Rs. 2,325.70. The working of book value of GSPL as on 31.03.2016 same is given as under:- No. of Share (Rs.1 each)(A) 16,68,228 Reserve (B) 387,81,36,116 Shareholder funds (C=A+B) 387,98,04,344 Book Value per share (D=C/A) 2,325.70

12 ITA No.1632/Mum/2023 CapitalG International Ltd

10.2.12. On the basis of the above mentioned working price of per equity and CCPS has arrived at Rs.2.325.77. However, the assessee has purchased equity shares and CCPS per shares Rs.68.435.58 per share & Rs. 68,514.25 per share as per figure reported in TP study report. Thus, there was a difference in price per share is worked out as under. Particulars No. of Purchase Working Difference Downward shares(A) considerati Book per share Adjustment on per value (D-B-C) (E-D*A) share (B) share per s (C) Equity 2,963 68,435.58 2,325.7 66,109.08 19,58,83,57 Shares 4.4 CCPS 11,851 68,514.25 2,325.7 66,188.25 78,44,00,50 6.1 14,814 Total 98,02,84,0 Adjustme 80.5 nt In view of the above table the total ALP adjustment on this account on purchase of 14,814 equity shares & CCPs of Girnar Software Pvt. Ltd., works out to Rs.98,02,84,080/-, (Thus, there is 'Downward Adjustment to the cost of acquisition of shares of GSPL:- Rs.98,02,84,080/-)

13 ITA No.1632/Mum/2023 CapitalG International Ltd 10. As noted above, the assessee had carried out the benchmarking analysis by applying “other method” both for sale and purchase of the transaction. For this purpose, the assessee company relied upon the valuation report dated 28/09/2016 obtained by the Girnar Software Private Limited and accordingly, in the TP study report it has been stated that assessee had purchased and sold the investment in Girnar Software Private Limited at an amount which was in line with the fair market value determined in the valuation report using DCF method. Further, in order to apply “other method”, the assessee group requested Girnar Software Private Limited to provide confirmation of the fair market value. In response, Girnar Software Private Limited confirmed that fair market value of the shares of the company has not changed, since investment made by CapitalG 2015 LLP in March 2016. One very important fact which was brought on record that the other third party investors had also made investment in the Girnar Software Private Limited, based on some valuation report dated 20/09/2016. Further, it is an admitted fact that Girnar Software Private Limited is third party and nowhere associated/ related with the assessee or any of its group company nor does it fall in the category of „associated enterprises‟ defined in the Act. Here in this case the transaction of purchase is with regard to a third party company, i.e. Girnar Software Private Limited. It had valued its CCPS and equity shares of Rs.10/- at a premium of Rs.67,982/-. It is on this valuation of the shares done by the Girnar by adopting DCF methodology, many investors had

14 ITA No.1632/Mum/2023 CapitalG International Ltd subscribed to the equity shares in CCPS not only the assessee but also various other third parties. 11. The ld. TPO has rejected the independent valuer report which was based on DCF methodology briefly on following reasons:- i. On perusing annual report of Girnar, he noticed that Girnar has consistently incurred losses. Accordingly, he opined that cash flow forecasts used for DCF valuations are unrealistic and not commensurate with actual/ original data of Ginar. ii. The assessee has not furnished the information and documents mentioned in the valuation report of Girnar. iii. Copy of Form PAS-5 filed by assessee showing details of similar investments made by other external companies is not sufficient to justify the transaction between assessee and its AE iv. There is no explanation provided for difference in growth rate of 6% vis-à-vis 6.5% adopted in 11th year and onwards between the two valuation reports dated 26 February 2016 and 20 September 2016 Thus, having rejected DCF, TPO held that the only other option available is NAV which is worked out at INR 2,325.7 per share as against the DCF valuation to make an adjustment of INR 98,02,84,080/- 12. The ld. DRP upheld the adjustment made by the ld. TPO on the following counts:-

15 ITA No.1632/Mum/2023 CapitalG International Ltd (a) Appellant's objection that TPO only computed ALP of purchase transaction (in violation of High Court's directions) is erroneous as the TPO has undertaken ALP determination of sale transaction by accepting the offered value; (b) Though DCF method adopted by Appellant for valuation of equity is permissible in law, however, such DCF based valuation report is rejected considering that: (i) such DCF valuation report contains various generic disclaimers and hence appears to be not reliable (ii) it was incumbent upon the valuer/ Girnar to provide the supporting evidence and data for the projections arrived at as on 2016. The Appellant has also not submitted such information.

However, it is seen that the DRP itself has contradicted the above finding in para 1 at pg. 97 of its direction that calling for any specific information under section 133(6) in respect of valuation report pertaining to Girnar would not yield any further useful information.

(iii) The Beta adopted in the valuation report is incorrect (para 8, pg. 69 of DRP direction) and the estimates of profit after tax (PAT)/ its growth rates have no bearing/ link with actual past/ future performance).

However, the DRP uses the same Beta (as above), cost of equity and perpetual growth rates as adopted by the valuer at pg. 81 of its directions whilst applying and agreeing with Appellant's DCF methodology. 13. Now before we proceed to adjudicate the issue of valuation of shares of Girnar, it would be relevant to refer to the brief profile about the investee company, i.e., Girnar Software Private

16 ITA No.1632/Mum/2023 CapitalG International Ltd Limited, as to why it commanded such a huge premium and had big investors across the globe. Girnar is an ISO 9001 and ISO 27001 Certified Company, which was set up in 2007 and is engaged in providing business value-based IT solutions and services. It transforms ideas into fully functional web and mobile applications. Girnar's noticeable web/ mobile applications include India's top automotive market, Cardekho.com, Zig Wheels, and other portals like PriceDekho.com, BikeDekho.com, OTO, Insurance dekho.com to name a few and it has various other such portals around the world. These webs have very high viewers and users across the country and across. Further, Girnar is a fast emerging leader in next- generation digital services and consulting with over 450+ projects, 2500+ skilled professionals, and 15+ years of industry experience. Further Girnar has grown over the years with the trust of esteemed investors like, Sequoia USA, Tybourne, Dentsu Inc. Japan, HDFC, Mr. Ratan Tata and the Capita G Group as well. Thus, it is one of the leading fully functional web and mobile application company which has very high premium portals across the world. One thing is to be kept in mind that valuation of shares in question is not that of the assessee or its AE, albeit an independent third party done by an independent Valuer which has been commercially relied upon for the transactions undertaken by the assessee. 14. One important fact which has been brought on record is other than the assessee who has relied upon the third party independent Valuer‟s report, i.e., report obtained by Girnar for

17 ITA No.1632/Mum/2023 CapitalG International Ltd valuation of its shares while purchasing the shares in its TPSR, there were other third party investors between the period 2016- 2019 who had purchased shares of CCPS of Girnar at the same price or more, the details of which were as under, which was also been produced before the ld. TPO: S.No. Name of Country Shareholder Type of No.of Face Price per Investors of 3rd resolution Shares Shares Value share Party Investor 1 Hillhouse CD Mauritius 16-Mar-16 Compulsorily 15,346 10.00 67,992.72 Holdings Convertible Limited Cumulative (CapitalG Preference 2015 LP also Shares purchased the CCPS/Shares on the same date) 2. Dentsu Inc. Japan 30-Sep-16 Compulsorily Convertible 989 10.00 67,992.72 Cumulative Preference Shares (Series B4) 3. SCI Growth Mauritius 19-Feb-18 Compulsorily Investments Convertible 2,390 10.00 67,992.72 II Cumulative Preference Shares (Series B5) 4. Hillhouse Mauritius 25-Nov- Compulsorily 6,988 10.00 74,326.00 CD 2019 Convertible Holdings Cumulative Limited Preference Shares (Series D)

18 ITA No.1632/Mum/2023 CapitalG International Ltd 5. Sequoia USA 25-Nov- Compulsorily 10,061 10.00 74,326.00 Capital 2019 Convertible Global Cumulative Growth Fund Preference -III Shares (Series D)

19 ITA No.1632/Mum/2023 CapitalG International Ltd the assessee, albeit, assessee was an investor and investee company had got its shares and CCPS value on which the investors can subscribe to the shares and what should be the premium. Based on this valuation report, issued on February 2016, the price was paid by the assessee shareholder CapitalG 2015 LP and Hillhouse CD Holdings for purchase of Girnar shares in March, 2016. The second valuation report dated September 2016 alongwith confirmatory letter dated 11/01/2017 given by the Girnar whereby the management of the Girnar company confirmed the methodology, assumptions, projections and other inputs used in September 2016 Valuation Report, which in turn has been used to arrive at the ALP in respect of purchase and sale of the investment. As an independent party there is nothing more assessee could have asked from the investee company. The ld. TPO is questioning the decision of the assessee company as that assessee should not have purchased the shares at such a high value. It is the commercial call of the assessee whether or not to invest in Girnar Company. 17. Regarding, one of the ld. TPO‟s allegation that the 2nd valuation report measures projected growth rate in 11 year at 6.5% as against 6% for 11 year used in one valuation report and that there is no basis for change in such estimates within a short span of 7 months of the 2 valuation reports. He submitted that the change alleged above is a mere 0.5% upward variation in growth rate in 11th year onwards and the TPO himself concludes that the end result in both valuations is the same. Hence, the allegation at outset deserves to be negated.

20 ITA No.1632/Mum/2023 CapitalG International Ltd 18. Even otherwise, the higher valuations made in later years (i.e., until 2019 as tabulated above) also justifies the upward estimate made by independent Valuer from 11th year. In any case, this is a minor variation in an estimate which should not warrant any specific justification 19. He further submitted that, the growth rates considered are estimates made by an independent valuer of an independent 3rd party (i.e., Girnar) in which the assessee has no role or influence other than to commercially accept or reject it like other third party investors invested at the same or higher prices as explained above during the same and subsequent time periods. He further submitted that before the ld. TPO as well as ld. DRP, assessee had made a request for underlying details and information pertaining to the valuation report / estimate can be sought directly from the Girnar or the valuer means u/s.133(6) of the Act for which assessee has also given the relevant details and addresses. The same was not done. 20. One another important fact to be borne in mind is that this is not the case involving direction subscription of CCPS / shares of Girnar but acquisition of such third party shares from its AE. Thus, the underlying details and basis for estimates / projections made in the valuation could not have been justified further by the assessee. The assessee had no control over such information which would easily be independently called for / verified from Girnar or the valuer to clarify any doubts. Thus, the

21 ITA No.1632/Mum/2023 CapitalG International Ltd DCF method could not have been rejected on some unsubstantiated and unverified doubts and apprehensions. 21. Ld. Counsel further submitted that one of the key reasons given by the ld. TPO and ld. DRP is that, Girnar has constantly incurring losses as per audited annual accounts which is not commensurate with the growth rates and projections considered by the valuer. First of all, any past / recurring losses cannot be a basis to reject a valuation arrived for by any company as is sufficiently evident from the start-up companies drawing huge valuations and having parallel losses. In support of his contention, he strongly relied upon the decision of ITAT Delhi Bench in the case of Cinestaan Entertainment P. Ltd. in ITA No.78113/Del/2018 order dated 27/05/2019. This judgment has been affirmed by the Hon’ble Delhi High Court vide judgment order dated 01/03/2021 in ITA No.1007 of 2019. In that case also the respondent-assessee had received a huge share premium from various subscribers / equity partners based on the valuation of DCF method. In that case the receiving of high premium based on the valuation report of the valuer done under DCF method was rejected by the Revenue that the annual grown and projections did not match with the real results. The Hon‟ble Delhi High Court quoting the judgment of the Tribunal observed and held as under:-

4…..The Appellant-Revenue now assails the aforementioned impugned order by way of the present appeal urging the following question of law:

22 ITA No.1632/Mum/2023 CapitalG International Ltd " A. Whether. the Ld. ITAT has erred in law and on facts in deleting the addition made u/s 56(2)(vii)(b) of the Income Tax Act, 1961, by ignoring the sound reasoning and detailed analysis of the AO that the Cash Flow projections taken into account in the Discounted Cash Flow Method by the assessee are nothing but paper plans that have no relation with the reality?" 5. Mr. Ajit Sharma, learned Senior Standing Counsel for the Appellant- Revenue submitted that the learned ITAT has erred in deleting the additions made by the AO as confirmed by the CIT(A). He argued that the Respondent-Assessee was asked to submit the basis of projection/estimated figures as presented in the valuation report. However, no efforts were made to justify the projection made in the said report under Rule 11UA and for premium as per Section 56(2)(viib) of the Act. Mr. Sharma further submitted that the CIT(A) had concluded that no independent enquiry was done by the valuer to verify the truth or the figures furnished by the Respondent-Assessee and that the valuation was based on assumption without independent verification of the truth/accuracy and completeness of the information and data provided by the company. He further argued that the AO had conducted a detailed analysis of allotment of shares at premium and further investment by the Respondent-Assessee and noted that the ratio of allotment of shares at premium is 1:2602, whereas further investment made by Respondent-Assessee is in the ratio of 1:4. Further, the Respondent-Assessee failed to submit the basis of projection/estimated figures as represented in the valuation report, thus, justifying the additions made. In this situation, the AO analysed the business profitability of the Respondent- Assessee only to the extent that such profitability was not commensurate with the actual financials provided by the Respondent- Assessee during the course of assessment proceedings. Therefore, the financials of the Respondent-Assessee did not support the business module of the company.

23 ITA No.1632/Mum/2023 CapitalG International Ltd 6. Mr. Sharma further submitted that while there cannot be any dispute on the fact that it is for the entrepreneur to visualize the business based on certain projections and to undertake all kind of risks, but in the case of the Respondent-Assessee, the valuation report projected profits, and whereas the financials represented losses, thereby demonstrating that the actual financials and the valuation report were completely contradictory to each other…… . . . 8. We have heard and duly considered the arguments and contentions advanced by the learned counsel for both the parties. 9. … 10. The AO has disregarded the valuation report of the Respondent- Assessee primarily on the ground that the projections of revenue as considered for the purpose of valuation do not match the actual revenues of subsequent years. The AO has made additions based on the assumption that the Respondent-Assessee made no efforts to achieve the projection as made out in the valuation report and therefore the share premium received by the Respondent-Assessee is without any basis and contrary to provisions of Section 56(2)(viib) read with Section 2(24)(xvi) of the Act. Further, the AO held that the Respondent-Assessee has failed to submit any basis of projection…. 11. We note that in the instant case, the AO had issued notice under Section 133(6) to all the investors to seek confirmation, information and documents pertaining to the issuance of shares….. 12. In this factual background, the learned ITAT then proceeded to examine whether the AO after invoking the deeming provision under Section 56(2)(viib), could have determined the FMV of the premium on the shares issued at nil after rejecting the valuation report given by the Chartered Accountant based on one of the

24 ITA No.1632/Mum/2023 CapitalG International Ltd prescribed methods under the Rules adopted by the valuer. On this aspect, after examining the statutory provisions and the factual position, the ITAT inter-alia observed as under: " 32. What is seen here is that, both the authorities have questioned the assessee's commercial wisdom for making the investment of funds raised in 0% compulsorily convertible debentures of group companies. They are trying to suggest that assessee should have made investment in some instrument which could have yielded return/ profit in the revenue projection made at the time of issuance of shares, without understanding that strategic investments and risks are undertaken for appreciation of capital and larger returns and not simply dividend and interest. Any businessman or entrepreneur, visualise the business based on certain future projection and undertakes all kind of risks. It is the risk factor alone which gives a higher return to a businessman and the income tax department or revenue official cannot guide a businessman in which manner risk has to be undertaken. Such an approach of the revenue has been judicially frowned by the Hon'ble Apex Court on several occasions, for instance in the case of SA Builders, 288 ITR 1 (SC)and CIT vs. Panipat Woollen and General Mills Company Ltd., 103 ITR 66 (SC). The Courts have held that Income Tax Department cannot sit in the armchair of businessman to decide what is profitable and how the business should be carried out. Here in this case if the investment has made keeping assessee's own business objective of projection of films and media entertainment, then such commercial wisdom cannot be questioned. Even the prescribed Rule 11UA(2) does not give any power to the Assessing Officer to examine or substitute his own value in place of the value determined or requires any satisfaction on the part of the Assessing Officer to tinker with such valuation. Here, in this case, Assessing Officer has not substituted any of his own method or

25 ITA No.1632/Mum/2023 CapitalG International Ltd valuation albeit has simply rejected the valuation of the assessee. 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 we 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 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

26 ITA No.1632/Mum/2023 CapitalG International Ltd 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………. The attempt on the part of SEBI to challenge the valuation which is by 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. 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 Pvt. Ltd. v. ITO [2018- TIOL- 1358-ITAT- Jaipur)…… iii) DQ(International) Ltd. vs. ACIT (ITA 151/Hyd/2015) "…. 35. There is another very important angle to view such cases, is that, here the shares have not been subscribed by any sister concern or closely related person, but by an outside investors like, Anand Mahindra, Rakesh Jhunjhunwala, and Radhakishan Damania, who are one of the top investors and businessman ofthe country and if they have seen certain potential and accepted this valuation, then how AO or Ld. CIT(A) can question their wisdom. It is only when they have seen future potentials that they have invested around Rs.91 crore in the current year and also huge sums in the subsequent years as informed by the ld. counsel. The investors like these persons will not make any investment merely to give dole or carry out any charity to a startup company like, albeit their decision is guided by

27 ITA No.1632/Mum/2023 CapitalG International Ltd business and commercial prudence to evaluate a startup company like assessee, what they can achieve in future. It has been informed that these investors are now the major shareholder of the assessee company and they cannot become such a huge equity stock holder if they do not foresee any future in the assessee company. In a way Revenue is trying to question even the commercial prudence of such big investors like. According to the Assessing Officer either these investors should not have made investments because the fair market value of the share is Nil or assessee should have further invested in securities earning interest or dividend. …… 13. From the aforesaid extract of the impugned order, it becomes clear that the learned ITAT has followed the dicta of the Hon'ble Supreme Court in matters relating to the commercial prudence of an assessee relating to valuation of an asset. The law requires determination of fair market values as per prescribed methodology. The Appellant-Revenue had the option to conduct its own valuation and determine FMV on the basis of either the DCF or NAV Method. The Respondent-Assessee being a start-up company adopted DCF method to value its shares. This was carried out on the basis of information and material available on the date of valuation and projection of future revenue. There is no dispute that methodology adopted by the Respondent-Assessee has been done applying a recognized and accepted method. Since the performance did not match the projections, Revenue sought to challenge the valuation, on that footing. This approach lacks material foundation and is irrational since the valuation is intrinsically based on projections which can be affected by various factors. We cannot lose sight of the fact that the valuer makes forecast or approximation, based on potential value of business. However, the underline facts and assumptions can undergo change over a period of time. The Courts have repeatedly held that valuation is not an exact science, and therefore cannot be

28 ITA No.1632/Mum/2023 CapitalG International Ltd done with arithmetic precision. It is a technical and complex problem which can be appropriately left to the consideration and wisdom of experts in the field of accountancy, having regard to the imponderables which enter the process of valuation of shares. The Appellant-Revenue is unable to demonstrate that the methodology adopted by the Respondent-Assessee is not correct……” 22. Ld. Counsel also relied upon the decision of the Tribunal in the case of Vodafone M-Pesa Ltd. in ITA No.1073 & 2032/Mum/ 2019 in the context of difference between the projection and actual profits wherein the Tribunal has upheld the projections made under DCF rather than going by the actual. 23. Further, ld. Counsel submitted that in so far as reference to the standard disclosures used by the valuer, the same cannot be the basis the clause to doubt on the validity of the valuation report because these are standard clause used in all valuation reports. The valuer is required to rely on the information provided by the company in terms of its historical data and projection and is not required to verify the authenticity of the data. Thus, such disclosure cannot be the reason for rejecting the DCF method. 24. On the other hand, ld. DR referring to various observations made by the ld. TPO and the ld. DRP (as discussed in the earlier part of the order) submitted that here the benchmarking of the transaction is the cost of acquisition of equity shares / CCPS of Girnar which is a transaction between two AEs. Thus, under the transfer pricing principle, the ALP is to be determined whether such a high premium would be paid for the purchase of the

29 ITA No.1632/Mum/2023 CapitalG International Ltd shares whose value was far less regarding various defects in the valuation report he referred to the observations of the ld. TPO. Thus, he submitted that direction of the ld. DRP and the order of the ld. AO should be upheld. Decision 25. We have heard both the parties and perused relevant finding given in the impugned order and material placed on record. We have already discussed the background and the facts of the case and the only issue which requires our consideration relates to determination of arm‟s length price of acquisition of equity shares and CCPS of Girnar Soft ware Pvt. Ltd., which assessee had acquired from its AE CapitalG 2015 LP. The shares were acquired on 14th February 2017 and on the same date assessee had sold the entire equity shares and CCPS to another AE, GC Asia Investments, Mauritius at the same purchase price of Rs.101.47 Crores. It was acquired from above AE. This was done because of certain restructuring in the CapitalG Group. We have already discussed in detail the findings of the ld. TPO and his main reasons for rejecting the assessee‟s contention. The CapitalG 2015 LP had acquired equity shares and CCPS based on the valuation report prepared by the Girnar for valuing these shares for the investors. The assessee had acquired these shares at the same price being purchase consideration of Rs.101.47 Crores and sold it to another AE on the same date. To put it succinctly, the ld. TPO‟s reason for the rejection of valuation report following DCF methodology was; firstly, that Girnar has constantly incurred losses and the cash flow forecast used for

30 ITA No.1632/Mum/2023 CapitalG International Ltd DCF methodology are unrealistic and not commensurate with actual data of Girnar; secondly, the assessee has not furnished the information and documents mentioned in the valuation report of Girnar; thirdly, copy of Form PAS-5 filed by assessee showing details of similar investments made by other external companies is not sufficient to justify the transaction between assessee and its AE; and lastly, there is no explanation by the assessee provided for the difference in growth rate of 6.5% adopted in 11th year and onwards, it means that two valuation reports dated 26/02/2016 and 29/02/2016 are not commensurate. 26. One very important fact which has to be kept in mind here in this case that the valuation of the shares is not of any group company or any AE. It is a valuation of a third party company and assessee being an investor had purchased the shares based on the valuation provided by the investee company. The commercial decision and the wisdom cannot be the question as to why the equity shares and CCPS had been acquired at such a higher rate, wherein the one leg of transaction, i.e., the sale made by the assessee to another AE has not been doubted. What has been doubted is the purchase of the shares by the assessee from its another AE. Since it is a transaction between the related parties, the assessee in the TP study report has valued the shares as per “other method” which is prescribed under the Rules. The basis of “other method” was based on the valuation report of the Girnar. This very valuation report has been doubted

31 ITA No.1632/Mum/2023 CapitalG International Ltd by the ld. AO on the aforesaid grounds and has applied NAV method to make the transfer pricing adjustment.

32 ITA No.1632/Mum/2023 CapitalG International Ltd assumed defects in the valuation report. When the law provides two valuation methods, i.e., NAV and DCF, then AO cannot say one method should be applied for another and reject the valuation adopted by the assessee. DCF is always based projections based on current data and future market and economic condition for a particular industry and can‟t be equated with actual. Hon’ble Jurisdictional High Court in the case of Securities & Exchange Board of India & Ors reported in (2015) ABR 291 wherein the Hon‟ble Court made following observations:-

“48.6 Thirdly, it is a well settled position of law with regard to the valuation that valuation is not and exact science and can never be done with arithmetic precision. The attempt on the part of SEBI to challenge the valuation which is but 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. 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." 28. If ld. AO had any doubt on the valuation based on DCF method, then ld. AO may exercise an option to conduct his own valuation and determined the FMV by another independent Valuer on same methodology. He himself is not an expert to carry out such valuation without pointing out what factors should have been applied in projections or what is the error in

33 ITA No.1632/Mum/2023 CapitalG International Ltd the formula. Rejecting the DCF valuation that data is not substantiated by the assessee cannot be the ground and justify applying NAV method. For this precise reason cited by the Revenue that the projection of the annuals do not match with the actual, has been dealt by the Hon‟ble Delhi High Court in the case of PCIT vs. Cinestaan Entertainment P. Ltd. (supra) wherein Hon‟ble Court on a similar kind of finding of the ld. TPO / ld. AO for rejecting the DCF method of a start-up company has been frowned upon.

34 ITA No.1632/Mum/2023 CapitalG International Ltd carries. We have already discussed above that not only in the year 2016 at the time when assessee had undertaken the transaction of purchase of shares various other third party investors have purchased these shares ranging from Rs.67,993/- and Rs.88,350/- which is evident from the table incorporated above. This is a very vital fact to see the comparable price on which assessee acquired the shares and act as an external CUP. This also justifies the arm‟s length price. Once the other parties/ investors had purchased the shares at the same price and later on at a much higher price, then the entire premise and hypothesis of the ld. TPO / ld. DRP that assessee transaction is not at ALP, gets demolished. If these investors had purchased the price based on the same valuation report of Girnar, then why such a valuation should be discarded in the case of the assessee simply because it has brought the share that at the same time price from its AE.

....where there is no reason to consider that the valuation was sufficiently uncertain at the outset that the parties would have

35 ITA No.1632/Mum/2023 CapitalG International Ltd required a price adjustment clause or would have renegotiated the terms of the agreement, there is no reason for tax administrations to make such an adjustment as it would represent an inappropriate use of hindsight. The mere existence of uncertainty should not require an ex post adjustment without a consideration of what independent enterprises would have done or agreed between them." Similarly, the United Nations Transfer Pricing Manual 2017 specifically states that it is generally inappropriate to undertake the analysis based on ex post data;

"...It is important to stress that it is generally inappropriate for a taxpayer or tax authority to undertake a DCF analysis based on ex post data in order to formulate an assessment of the ex-ante value of an intangible. This is because it is difficult and often subjective to determine the ex-ante view of risks after the risks have already materialized. Such an analysis may constitute an inappropriate use of hindsight. Thus, the above guidelines clarify that replacing the estimated values with actual by the tax authorities would be inappropriate and would result in impossibility of the performance at the end of the valuer.

36 ITA No.1632/Mum/2023 CapitalG International Ltd initial years have still fetched higher values. Few such instances from public domain can be referred:-

Name of Sector Valuation company E-commerce start-up in USD 3.25 bn Zomato food chain industry Oyo Hospitality industry USD 8 bn

Swiggy E-commerce start-up in USD 3.6 bn food chain industry

37 ITA No.1632/Mum/2023 CapitalG International Ltd 36. Accordingly, we reject the entire premise and the reasoning given by the ld. TPO as well as by the ld. DRP for rejecting the valuation report given by the Girnar to justify the purchases made by the assessee and we reject his valuation based on NAV method to make upward adjustment of Rs.98,02,84,080/- Thus, the entire addition made by the AO/TPO is deleted.

Order pronounced on 8th July, 2024.

Sd/- Sd/- (GAGAN GOYAL) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai; Dated 08/07/2024 KARUNA, sr.ps Copy of the Order forwarded to : 1. The Appellant 2. The Respondent. 3. CIT 4. DR, ITAT, Mumbai 5. Guard file. //True Copy// BY ORDER, (Asstt. Registrar) ITAT, Mumbai