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TMI Blog2019 (11) TMI 1355X X X X Extracts X X X X X X X X Extracts X X X X ..... Rules. This amendment is only prospective in nature and cannot apply to the year under appeal. No method was prescribed earlier for valuation of shares of a foreign company i.e KNP Industries Pte Ltd prior to Asst Year 2019-20, which mischief was sought to be rectified by way of an amendment made in the rules under Rule 11U(b)(ii) of the Rules w.e.f. 1.4.19 having prospective applicability. As we have already held supra that the legislature had sought to rectify the mischief hitherto prevailing upto Asst Year 2018-19 in the statute / rule and had accordingly brought an amendment effective from Asst Year 2019-20 onwards to curb the loophole available in the Act / Rules, hence we hold that the pre-amended definition of balance sheet cannot include foreign company therein. DR later filed the comments dated 26.6.2019 received from the AO before the bench. We have gone through the same and we find that the same is nothing but reiteration of the findings already recorded in the assessment order which had already been dealt by us hereinabove. DR that the issue needs to be remanded back to the file of ld CITA for fresh adjudication to decide in the light of pre-amended rule, as it would ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... turn of income was filed on 20.9.2016 declaring the same loss figure of ₹ 44,457/- with minor modification in the return. The reasons for revising the return was due to omission in showing investments of ₹ 1,36,00,000/- in Schedule FA of original return of income made in M/s KNP Industries Pte Ltd , a Singapore based company. The shares of this company were purchased from assessee company's directors who are also directors in KNP Industries Pte Ltd. The Directors of assessee company had acquired the shares in the year 2008 at ₹ 34/- per share and they sold the shares to assessee company in Asst Year 2015-16 at the same rate of ₹ 34/- per share on the basis of valuation done as per Discounted Cash Flow Method (DCF) of M/s KNP Industries Pte Ltd which was taken at USD 0.50 (Dollar rate considered at ₹ 68) . Both the Directors Mr Kedar Vaze and Mr Ramesh Vaze booked Long Term Capital Loss of ₹ 51,64,854/- on the transaction due to indexation. The ld AO asked the assessee company to furnish the basis and justification for valuation of purchasing the shares from its directors. The assessee submitted that the valuation of the shares were done as per DC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ismanagement. Finally on intervention of H'ble Company Law Board, the dispute was resolved and company could function smoothly again . Due to this reason, the company could not declare any dividend from 2005 to 2011. Hence the accumulated dividend was distributed over the next few years once operations of the company normalized. Hence the dividend was earned in 2014 and 2016. The assessee also enclosed the order of H'ble Company Law Board in CP Nos. 68 & 73/2005 and 66/2008 (Mum) dated 4.9.2009. e) The assessee submitted the Escrow Agreement dated 29.11.2013 between S H Kelkar and Company Limited and Blackstone Capital Partners (Singapore) VI FDI Two Pte Ltd, having registered office at Singapore, who came in as investor , by appointing Deutsche Bank AG, Hongkong Branch as an Escrow Agent. f) The assessee submitted Shareholders Agreement dated 2.8.2012 relating to S H Kelkar and Company Limited between Blackstone Capital Partners (Singapore) VI FDI Two Pte Ltd (as BCP 1) and Blackstone Family Investment Partnership (Singapore) VI FDI Two Pte Ltd (as BCP 2) and Blackstone Family Investment Partnership (Singapore) VI-ESC FDI Two Pte Ltd (as BCP 3) and several persons named as Pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... market value of KNP Industries Pte Ltd was made on the basis of audited balance sheet for the previous year ended on 31.12.2014 as under:- Book value of Assets US$.2,37,95,451 Less Advance Tax/ TDS/TCS Nil Deferred revenue expenditure Nil Nil A US$.2,37,95,451 Book value of Liability US$ 6,09,317 L US$ 6,09,317 PV US$ 0.5 PE 289885 Fair market value of unquoted equity shares = (A-L) * (PV) (PE) = (23795451-609317} * (0.5) 289885 = US$ 39.99 Same was converted to Indian Rs as taken by the assessee ie ₹ 68 /US$ = ₹ 2719.32 = Say ₹ 2719 5.2. Based on the above, the ld AO proceeded to make an addition u/s 56(2)(viia) of the Act to the tune of ₹ 107,40,00,000/- ( 400000 shares * (2719-34)) by treating the difference between the fair market value of the shares and the purchase price of the shares by the assessee . 6. Before the ld CITA, the assessee reiterated the submissions made before the ld AO and the crux of the arguments made before the ld CITA could be summarized as under:- a) The transaction of acquisition of shares by the assessee was merely a restructuring conducted to comply with the law of the land without an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the valuation report , which was obtained in March 2018, demonstrates the fact that , notwithstanding the option available with the assessee company to value shares under DCF or NAV method, even if NAV method is adopted to value the shares, the valuation claimed by the ld AO was incorrect and arbitrary. 6.3. With regard to the objection of the ld AO that the valuation report furnished by the auditor of KNP Industries Pte Ltd, Singapore cannot be accepted, by stating that the same was in conflict of interest and more so that the same was furnished by the auditor by placing reliance on the projections / prospective results submitted by the management of KNP, the assessee submitted that Rule 11UA nowhere creates a restriction that Chartered Accountant of the company cannot value the shares. The assessee also submitted in this regard that the valuation of shares was done by the said auditor by using NAV method and hence there is no question of considering future projections, as wrongly alleged by the ld AO. Moreover, the said valuation of shares using NAV method was furnished by the auditor based on the audited financial statements as on valuation date of 10.2.2015, which clearl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... peal before us. 8. We have heard the rival submissions and perused the materials available on record including the judicial pronouncements relied upon by both the sides at the time of hearing before us. During the year under consideration, the assessee company acquired 400000 shares in KNP Industries Pte Ltd, Singapore. These shares were acquired from Mr Kedar Vaze and Mr Ramesh Vaze, who were holding 200000 shares each in KNP Industries Pte Ltd, Singapore. The said shareholders are the directors in the assessee company and hold 50% shares each in the assessee company. Those two shareholders had acquired the shares in KNP Industries Pte Ltd in the year 2008 for ₹ 68,00,000/- each thereby making the total cost at ₹ 1,36,00,000/-. Pursuant to the above, in the year 2015, RBI / FEMA changed the norms with regard to investment in foreign shares by a resident individual. As per the revised RBI notification No. FEMA 263/RB-2013 dated 5.3.2013, it was notified that resident individuals are prohibited from making direct investment in a Joint Venture of wholly owned subsidiary abroad. This fact is not in dispute before us. In order to comply with the above legal requirement, Mr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s on certain decisions taken by Board of Directors of S H Kelkar and Company Limited due to which a group of shareholders viz Mr Ajit S Vaze, Mr Girish S Vaze and their families filed a case with the Hon'ble Company Law Board against S H Kelkar and Company Limtied u/s 397 and 398 of the Companies Act, 1956 towards Oppression and Mismanagement, which ultimately resulted in separation of two factions from the company viz The Ajit Vaze Faction and the G D Kelkar Faction. There was a stalemate in the group for almost more than 4 years on account of litigation. c) Ultimately after 4 years of deliberation, the Honorable Company Law Board passed an order of settlement keeping in view interests of SHK and its various stakeholders. d) However, as part of the settlement, the promoters of company had to raise capital to fund settlement cost of the existing factions from the company. Most financial institutions / banks do not grant loans for funding settlement costs. The banks, which did agree, demanded exorbitant rates of interest. Therefore, the promoters decided to raise capital in the form of private equity from M/s. Blackstone Capital Partners (Singapore) VI FDI TWO PTE. LTD (hereinaf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance of S H Kelkar and Company Limited as on Dec 2014, there was an anticipated net liability of KNP towards Blackstone, which had effectively brought the value of shares of KNP to negative. In these circumstances, the valuation per share of USD 0.50 per share is above the fair market value of the shares. The most crucial fact to be considered is that as on the date of valuation of shares, the valuer did not have the benefit of the actual figures which had happened subsequent to the valuation date. Valuation has been done based on future performance and projections of the valued company under DCF method. The actuals may vary with the projections. It is a calculated business risk and commercial decision taken by the respective investors by placing reliance on the share valuation report. In this factual matrix, the promoters of the assessee company came forward to sell the shares of KNP Industries Pte Ltd to the assessee company at the same price at which it was acquired by them originally, without having any benefit thereon, in order to comply with the regulations of RBI / FEMA. This goes to prove that the entire transaction has been carried out with a bonafide intention of all th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1956) and where the balance-sheet on the valuation date is not drawn up, the balance-sheet (including the notes annexed thereto and forming part of the accounts) drawn up as on a date immediately preceding the valuation date which has been approved and adopted in the annual general meeting of the shareholders of the company; and (ii) in any other case, the balance-sheet of such company (including the notes annexed thereto and forming part of the accounts) as drawn up on the valuation date which has been audited by the auditor appointed under section 224 of the Companies Act, 1956 (1 of 1956)" 8.4. We hold that since the shares of a foreign company were acquired by the assessee company in the instant case, the ld AO ought to have relied on the balance sheet as audited by the auditor appointed under the Indian Companies Act. In the instant case, the ld AO had relied on the balance sheet of KNP Industries Pte Ltd, Singapore, which is prepared in accordance with Singapore Companies Act, which fact is not in dispute before us. Admittedly, the case of the assessee falls squarely on clause (ii) of the definition of 'Balance Sheet' as defined in Rule 11U of the Rules supra. Hence it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... From the said valuation report, we find that the valuer had categorically stated as under:- 3.2. Valuation Conclusion Based on the aforesaid method, the fair value per Ordinary Share of KNP INDUSTRIES PTE LTD is United States Dollar 2.58 per share. The detailed working of the valuation of the KNP INDUSTRIES PTE LTD under NAV method is provided as Annexure 1. As against the valuation of US$ 2.58 per share, as aforesaid, based on net value of assets of KNP INDUSTRIES PTE LTD., Mr Ramesh Vinayak Vaze and Mr Kedar Ramesh Vaze have an obligation to meet the value of investment put in by Mr Tan Cheng Hai of USD 4,500,000 which is secured by way of pledge of Mr Ramesh Vinayak Vaze and Mr Kedar Ramesh Vaze shares in his favour. Accordingly, the value of shares in the hands of Mr Ramesh Vinayak Vaze and Mr Kedar Ramesh Vaze comes to USD (-) 8.64 being the net value after adjusting the value of obligation towards Mr Tan Cheng Hai which is valued at US$ 4,500,000. (Emphasis supplied by us) 8.5.1. We find that the lower authorities had not looked into the para 3.2 of the valuation report in full and had only taken that part of the report which is favourable to the revenue alone. It is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .2015 by the valuer. At that point in time, an independent valuer would have to necessarily rely on the projected performance and estimates provided by the management for the purpose of valuation of shares under DCF method. There is no dispute that M/s Kaveri Venkataraman & Associates is an independent valuer. There is absolutely no conflict of interest alleged on them by the revenue. Hence based on the projections given by the management of KNP Industries Pte Ltd, the valuation exercise was carried out by Kaveri Venkataraman & Associates on 5.2.2015 and accordingly value per share using DCF method was arrived at USD 0.5 (equivalent to ₹ 34 per share). This rate of ₹ 34 per share was finally used for purchasing the shares by the assessee company from its directors on the valuation date i.e 11.2.2015. There is no dispute that valuation of shares using DCF method is one of the recognized methods provided in the statute. Hence we do not find any infirmity in the said valuation report of Kaveri Venkataraman & Associates dated 5.2.2015 valuing the share at ₹ 34 using DCF method. We would at this point in time, at the cost of repetition, would like to reiterate that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndian company, the balance sheet of such company (including the notes annexed thereto and forming part of the accounts) as drawn up on the valuation date which has been audited by the auditor of the company appointed under the laws relating to companies in force; and (B) in relation to a company, not being an Indian company, the balance sheet of the company (including the notes annexed thereto and forming part of the accounts) as drawn up on the valuation date which has been audited by the auditor of the company, if any, appointed under the laws in force of the country in which the company is registered or incorporated;] Hence we hold that no method was prescribed earlier for valuation of shares of a foreign company i.e KNP Industries Pte Ltd prior to Asst Year 2019-20, which mischief was sought to be rectified by way of an amendment made in the rules under Rule 11U(b)(ii) of the Rules w.e.f. 1.4.19 having prospective applicability. 8.9. We find that the ld DR fairly agreed that the ld CITA wrongly applied the amended rule in his order which is not applicable to the facts of the instant case. But he prayed for remanding this issue back to the file of ld CITA for fresh adjudicat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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