The first limb of s. 2(22)(e) is attracted if the payment is made by a company by way of advance or loan “to a share holder, being a person who is the beneficial owner of shares”. While it is correct that the person to whom the payment is made should not only be a registered shareholder but a beneficial share holder, the argument that a firm cannot be treated as a “shareholder” only because the shares are held in the names of its partners is not acceptable. If this contention is accepted, in no case a partnership firm can come within the mischief of s. 2 (22)(e) because the shares would always be held in the names of the partners and never in the name of the firm. This would frustrate the object of s. 2(22)(e) and lead to absurd results. Accordingly, for s. 2(22)(e), a firm has to be treated as the “shareholder” even though it is not the “registered shareholder”
The argument that the “Excess Earning Method” adopted by the TPO is not a prescribed method is not acceptable. A sale of IPR is not a routine transaction involving regular purchase and sale. There are no comparables available. The “Excess Earning Method” is an established method of valuation which is upheld by the U.S Courts in the context of software products. The “Excess Earning Method” method supplements the CUP method and is used to arrive at the CUP price i.e. the price at which the assessee would have sold in an uncontrolled condition (method explained, Intel Asia Electronics Inc followed)
While, in Devendra Motilal Kothari 50 DTR 369, the Mumbai Bench held that the fees paid for portfolio management services was neither diversion of income by overriding title nor cost of acquisition nor cost of improvement, a contrary view was taken by the Pune Bench in KRA Holding & Trading by relying on the judgement of the Bombay High Court in Shakuntala Kantilal 190 ITR 56 (Bom). Subsequently, the Mumbai Bench in Pradeep Kumar Harlalka (included in the file) declined to follow the Pune Bench on the ground that the judgement of the Bombay High Court in Shakuntala Kantilal had been held to not be good law in Roshanbabu Mohammed 275 ITR 231 (Bom). The majority opinion (in terms of number of orders) and the latest order (in the point of time) were against the assessee.