Income Tax Appellate Tribunal - Mumbai
Asst Cit (Ltu) 2, Mumbai vs Reliance Industries Ltd, Mumbai on 28 September, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
"K" Bench, Mumbai
Before S/Shri B.R.Baskaran (AM) & Amarjit Singh (JM)
I.T.(TP)A. No. 1547/Mum/2016 (Assessment Year 2010-11)
I.T.(TP)A. No. 2733/Mum/2017 (Assessment Year 2011-12)
I.T.(TP)A. No. 5842/Mum/2017 (Assessment Year 2012-13)
ACIT(Large Taxpayer Unit)-2 M/s. Reliance
World Trade Centre 1 Vs. Industries limited
29 t h Floor, Cuffe Parade Maker Chambers IV
Mumbai-400 005. 3 r d Floor, 222
Nariman Point
Mumbai-400 021.
(Appellant) (Respondent)
I.T.(TP)A. No. 1280/Mum/2016 (Assessment Year 2010-11)
I.T.(TP)A. No. 2414/Mum/2017 (Assessment Year 2011-12)
I.T.(TP)A. No. 5556/Mum/2017 (Assessment Year 2012-13)
M/s. Reliance ACIT(Large Taxpayer Unit)-2
Industries limited Vs. World Trade Centre 1
Maker Chambers IV 29 t h Floor, Cuffe Parade
3 r d Floor, 222 Mumbai-400 005.
Nariman Point
Mumbai-400 021.
(Appellant) (Respondent)
PAN : AAACR5055K
Assessee by Shri Arvind V. Sonde
Department by Shri Jayant Kumar
Date of Hearing 30.7.2018
Date of Pronouncement 28.9.2018
ORDER
Per B.R. Baskaran (AM) :-
These cross appeals are directed against the orders passed by Ld CIT(A)- 57, Mumbai and they relate to the assessment years 2010-11 to 2012-13. Since common issues are involved in these appeals, they were heard together and are being disposed of by this common order, for the sake of convenience.2
M /s . R e l i a n c e In d us tr i e s l i m i te d
2. The assessee company is engaged in the business of Oil & Gas Exploration, Refining of Crude oil, Manufacture and sale of petrochemicals, polyester fibre, textiles etc. It is also engaged in the business of generation and distribution of power, operation of jetties and related infrastructure, retail marketing of petroleum products. It is also engaged in investment activities.
3. We shall first take up the appeals relating to Assessment year 2010-11. The first issue urged by the revenue and the first issue urged by the revenue relates to the Sales tax exemption of Rs.776.76 crores. The assessee established plants at Hazira, Jamnagar, Gandhar, Allahabad and Barabanki, which are located in the States of Gujarat and Uttar Pradesh. Both the Governments provided incentives in the form of Sales tax exemption.During the year under consideration, the assessee appropriated sales tax amount embedded in the Sales, which are eligible for Sales tax exemption. The amount of sales tax so appropriated was Rs.776.76 crores and claimed the same as Capital receipts and accordingly did not offer the same for taxation. The AO took the view that the assessee has appropriated sales tax on notional basis. Further, the AO noticed that in the preceding years viz., AY 2007-08 to 2009-10, the assessing officer had treated the sales tax incentive as revenue receipts. Following the same, the AO rejected the claim of the assessee and assessed the sales tax incentive of Rs.776.76 crores as income of the assessee.
4. The Ld CIT(A) noticed that the Special bench of Tribunal had considered an identical issue in the assessee's own case reported in 88 ITD 273, wherein it was held that the Sales tax incentive was capital in nature. The Ld CIT(A) noticed that his predecessor has followed the above said decision of Special Bench and held that the sales tax incentive is capital receipt. Since the facts are identical in nature, the Ld CIT(A) held that the Sales tax incentive is Capital in nature and accordingly reversed the decision of the AO.
5. Before Ld CIT(A), the assessee had raised an alternative contention on this issue. The assessee's plea was that, if the sales tax incentive is considered as 3 M /s . R e l i a n c e In d us tr i e s l i m i te d revenue receipt, then the same should be allowed as deduction u/s 43B of the Act, as the sales tax amount is deemed to have been paid as per the Sales tax incentive scheme. The Ld CIT(A) noticed that the assessee had raised identical alternative claim in the earlier years and the same was rejected by Ld CIT(A) on the following reasons:-
(a) Since the main contention of the assessee that the sales tax incentive is Capital receipt was accepted, there is no necessity to go into the alternative plea.
(b) The issue of notional payment shall apply only to Sales tax deferral Scheme and not to Sales tax exemption scheme as per CBDT Circular No.496 dated 25.9.1987.
6. Aggrieved by the decision rendered by Ld CIT(A) in holding that the Sales tax exemption amount is Capital Receipts, the revenue has filed appeal. The assessee is aggrieved in rejecting the alternative claim of the assessee.
7. We heard the parties on this issue and perused the record. The assessee has been given Sales tax exemption by Government of Gujarat and Uttar Pradesh and the Special bench of Tribunal in the asseessee's own case (referred supra) has held the notional sales tax receipt is Capital in nature. We notice that the co-ordinate benches of Tribunal has followed the decision rendered by the Special bench in AY 2003-04 to 2009-10 and upheld the decision rendered by Ld CIT(A) in holding that the Sales tax incentive is capital in nature. Before us, the assessee placed reliance on the following case laws also to support the decision rendered by the co-ordinate bench in the earlier years on this issue:-
(a) Shree Balaji Alloys Ltd vs. CIT (138 DTR 36)(SC)
(b) CIT Vs. Rasoi Ltd (335 ITR 438)(Cal)
(c) CIT vs. Bougainvillea Multipled Entertainment Centre P Ltd (373 ITR 014)(Delhi)
(d) CIT vs. Kirloskar Oil Engines Ltd (364 ITR 88)(Mum)
(e) Associated Cement Cos. Ltd vs. CIT (ITA No.7594 & 7644/M/04) 4 M /s . R e l i a n c e In d us tr i e s l i m i te d
8. We notice that the Ld CIT(A) has followed by the decision rendered by Special Bench in holding that the Sales tax incentive is capital in nature. We also notice that the co-ordinate benches of the Tribunal have, in the earlier years, upheld the view taken by the Ld CIT(A) in AY 2006-07 to 2009-10. The assessee has also taken support of decisions cited above in this regard. Hence, we are of the view that the Ld CIT(A) was justified in holding that the Sales tax incentive is in the nature of Capital Receipt and hence not liable to tax.
9. The alternative ground urged by the assessee is to allow the deduction u/s 43B of the Act, if the Sales tax incentive is treated as revenue receipt. We noticed that the co-ordinate bench in the assessee's own case relating to AY 2003-04 to 2006-07 (ITA Nos.4475/Mum/2007 and Others dated 13-09-2013) has held, in paragraph 60.3 of its order, that the Ld CIT(A) was justified in declining to adjudicate the alternative plea of the assessee claiming notional sales tax (sales tax incentive) is allowable as deduction u/s 43B of the Act. Since the sales tax incentive is held to be capital receipt, there is no necessity to adjudicate the alternative ground of the assessee and accordingly we also reject the same.
10. The second issue urged by the assessee relates to the disallowance of depreciation of Rs.8,71,508/- on the capitalised value of goods purchased from Durga Iron & Steel Ltd and Surjbahan Rajkumar P Ltd in AY 2003-04. The assessee had purchased certain materials from the above said parties in the year relevant to AY 2003-04 and had capitalised it. The assessee claimed depreciation on the amount so capitalised. Later it was noticed that the purchases made from the above said parties were alleged to be bogus in nature. Hence the AO disallowed the depreciation claimed on the value of purchases made from the above said parties in AY 2003-04 and the same kind of disallowance was continued in the subsequent years also. The Ld CIT(A) confirmed the disallowance of depreciation so made in all the years. Hence, in 5 M /s . R e l i a n c e In d us tr i e s l i m i te d this year also, the AO disallowed depreciation relatable to the purchases made from the above said concerns. The Ld CIT(A) also confirmed the same.
11. At the time of hearing, the Ld A.R fairly conceded that this issue has been decided against the assessee by the co-ordinate benches of the Tribunal in the earlier years, meaning thereby, the disallowance made by the AO has been confirmed by the Tribunal in the earlier years. We notice that the co- ordinate bench of the Tribunal has decided this issue in AY 2007-08 to 2009- 10 in paragraph 67 of its order and confirmed the decision rendered by Ld CIT(A) on an identical issue. Consistent with the view taken by the co-ordinate benches, we decide this issue against the assessee, i.e., we confirm the order passed by Ld CIT(A) on this issue.
12. The next issue contested by the assessee relates to the Transfer pricing adjustment on the interest free advances paid by the assessee to its foreign Associated Enterprises (AE). The assessee had given interest free advances to two of its subsidiary companies, named RNBV, Reliance India Middle East DMCC (RIME) in the earlier years and the same were outstanding as on 1.4.2009. The assessee repaid the same on 23.10.2009. The TPO computed interest on this advance by adopting interest rate of 6.94% for the outstanding period of the loan and made TP adjustment of Rs.320.82 lakhs. The ld CIT(A), following his earlier order, directed the AO/TPO to compute interest by adopting LIBOR rate plus 3.25% for the outstanding period.
13. The Ld A.R submitted that the purpose of the investment was to fund RIME to acquire majority stake in GAPO group which is engaged in marketing of petroleum products in African Countries. Accordingly he submitted that the assessee had indirectly used the advance for fulfilling its own objective of gaining majority control in overseas acquisitions. He submitted that the intention was not to provide loan to earn interest. He submitted that the advance provided is in the nature of shareholder activities, which do not require any compensation as it will indirectly benefit the shareholders.
6M /s . R e l i a n c e In d us tr i e s l i m i te d Further the loan has been advanced out of business expediency and out of shareholder funds and hence the tax authorities are not justified in computing T.P adjustment in the nature of interest. The Ld A.R relied upon the decision rendered by the Delhi bench of Tribunal in the case of DLF Hotel Holdings Ltd vs. DCIT (ITA No.6336/Del/2012 dated 30-06-2016).
14. The Ld A.R further submitted that the "Capital financing" has been included in the definition of "International Transactions" w.e.f. from 1.4.2012 and hence the same shall apply from the assessment year 2013-14 only. In this regard, he placed reliance on the decision rendered by Mumbai bench of ITAT in the case of Siro Clinpharm P Ltd vs. DCIT (ITA No.2618/Mum/2014 dated 31.03.2016). Accordingly he submitted that the tax authorities are not justified in making T.P adjustment in respect of Capital financing transactions.
15. The Ld A.R, in the alternative, submitted that the co-ordinate bench of Tribunal has sustained the addition to the extent of Libor rate plus 150 bps on an identical issue in the earlier years.
16. We heard Ld D.R on this issue and perused the record. We notice that the co-ordinate bench in the earlier years have taken a consistent view and sustained addition to the extent of LIBOR rate plus 150 bps. Hence we modify the order passed by Ld CIT(A) on this issue and direct the AO/TPO to compute interest by applying rate of LIBOR rate plus 150 bps for the outstanding period of loan.
17. The assessee has also raised following legal grounds by way of Additional Grounds of Appeal in respect of T.P adjustments:-
a. The order of the learned TPO is invalid, illegal, bad in law, in excess of and/or in want of jurisdiction.
b. The learned AO erred in making reference of the Appellant's case to the learned TPO, without applying his mind and without recording satisfaction and without giving opportunity of being heard to the appellant.7
M /s . R e l i a n c e In d us tr i e s l i m i te d c. The learned CIT (A)-57, Mumbai has erred in applying provisions of Chapter X of the Income tax Act, 1961 to the transaction of interest free loan given to Associated Enterprise without appreciating that there is no income arising from such transactions.
The assessee, in its written submissions, did not press above said additional grounds. Accordingly, these grounds are dismissed as not pressed.
18. The next issue contested by the assessee in the Additional Ground relates to the addition made to the book profit u/s 115JB of the Act in respect of expenses related to exempt income. The AO had computed the disallowance u/s 14A r.w. rule 8D of the I.T Rules for computing total income under normal provisions of the Act. The AO adopted the same figure for making addition to the Net profit for the purpose of computing book profit u/s 115JB of the Act. The disallowance computed by AO as per Rule 8D consisted of interest disallowance u/r 8D(2)(ii) and administrative expenses u/r 8D(2)(iii) of the I.T Rules. The Ld CIT(A) deleted the disallowance of interest expenditure made u/s 8D(2)(ii) of the I T Rules, since the own funds available with the assessee was more than the value of investments. In this regard, the Ld CIT(A) followed the decision rendered by Hon'ble Bombay High Court in the case of CIT vs. Reliance Utilities and Power Ltd (313 ITR 340). However the Ld CIT(A) confirmed the disallowance made out of administrative expenses as per Rule 8D(2)(iii) computed @ 0.5% of the value of average investments. The Ld CIT(A) directed the AO to adopt the same for the purposes of sec. 115JB of the Act also for computing Book Profit. The assessee is aggrieved by the direction so given Ld CIT(A) for the purposes of sec.115JB of the Act.
19. The Ld A.R submitted that the Special bench of Tribunal has held in the case of ACIT vs. Vireet Investment P Ltd (165 ITD 27) that the provisions of sec. 14A r.w.r 8D is not applicable while computing book profit u/s 115JB of the Act. He submitted that the co-ordinate bench has also taken identical view in the assessee's own case in AY 2009-10 (vide Corrigendum order dated 02- 04-2018) and in AY 2007-08 also.
8M /s . R e l i a n c e In d us tr i e s l i m i te d
20. We heard Ld D.R on this issue. In view of the decision rendered by the Special bench in the case of Vireet Investments P Ltd (supra), the tax authorities are not correct in law in applying the provisions of sec.14A r.w.r 8D for computing disallowance for meeting the requirement of clause (f) of Explanation 1 to sec.115JB(2). The Special Bench has held that the addition, for the purpose of clause (f) of sec.115JB(2), should be computed without having resort to sec.14A r.w.r. 8D of the I.T Rules. Accordingly we set aside the order passed by Ld CIT(A) with regard to the addition made for the purpose of sec. 115JB of the Act and direct the AO to compute the disallowance for the purpose of clause (f) of Explanation 1 to sec. 115JB(2) without having resort to sec.14A r.w.r 8D of the I T Rules.
21. The next additional ground urged by the assessee relates claim for exclusion of notional Sales tax incentive of R.776.76 lakhs for the purposes of computing Book Profit. The relevant additional grounds read as under:-
(a) The learned CIT(A)-57, Mumbai erred in not excluding notional sales tax incentive of Rs.776.76 lakhs held as Capital receipt not liable to tax (while computing income under the normal provisions of the Income tax Act, 1961 from the Book Profit computed u/s 115JB of the Act.
(b) The Appellant submits that notional Sales tax incentive is not an "income" liable to tax under the Act, and hence the same shall be directed to be excluded while computing the Book Profit u/s 115JB of the Act.
22. The claim of the assessee is that the Sales tax incentive has been held to be "capital receipt" for the purpose of computing total income under normal provisions of the Act. Since the capital receipts are not liable for tax under normal provisions of the Act, it is contended that the same should also be excluded from net profit for the purposes of computing Book Profit u/s 115JB of the Act.
23. We heard the parties on this issue. The Ld A.R placed his reliance on various case laws and submitted that Tribunal/High Court has held that the capital receipts, which are not liable for taxation under the Income tax, are to 9 M /s . R e l i a n c e In d us tr i e s l i m i te d be excluded from Net profit for the purpose of computing book profit u/s 115JB of the Act. The Ld A.R submitted that the Sales tax incentive is embedded in the Sales revenue and the same has been held to be capital receipt under normal provisions of the Act. Accordingly he submitted that the same is required to be reduced from Net Profit for the purposes of sec.115JB of the Act. On the contrary, the Ld D.R submitted that the provisions of sec.115JB do not contain any provision for exclusion capital receipts. He submitted that the AO has only power to examine whether books of accounts are certified by authorities under Companies Act, 1956 as having been properly maintained in accordance with Companies Act and thereafter the AO has limited power to increase and reduce items as provided in Explanation to sec. 115JB of the Act. In support of this proposition, the Ld D.R placed his reliance on the decision rendered by the Special bench of Tribunal in the case of Rain Commodities Ltd (2010)(40 SOT 265). We notice that an identical issue was considered by the co-ordinate bench in the case of M/s Alok Industries Ltd (ITA No.1017/Mum/2017 dated 21-05-2018) and has been held that the Capital receipts cannot be included in the Book Profit u/s 115JB of the Act. We notice that an identical view has been expressed in several other cases also by the co-ordinate benches. For the sake of convenience, we extract below the relevant observations made by the Co-ordinate bench in the case of Alok Industries Ltd (supra):-
25. Contention of learned AR was as under:-
i. Section 115JB should be considered subject to charging provision under Section 4 read with definition of an "income: under Section 2(24).
ii. The definition of income under Section 2(24) has been amended by the Finance Act 2015 to include subsidy within its scope, but only with prospective effect from A.Y. 2016-17.
iii. Therefore, such subsidy which is capital in nature cannot be brought within the purview of Section 115JB as the charging provision fails.10
M /s . R e l i a n c e In d us tr i e s l i m i te d iv. Also, the intention of the legislature in bringing Section 115JB on statute should also be considered [Refer Memorandum explaining Finance Bill 1987 165 ITR (St) 152 at 167. It is only when the company is claiming deductions under the Profits and Gains from Business or Profession and/ or deductions under Chapter VIA, the alternative scheme of taxation attempts to bring the book profit to tax. The impugned transaction does not result into any such deductions but results into a receipt not having character of - income.
v. Thirdly, clause ii to Explanation 1 to Section 115JB which excludes exempt income referred to in Section 10 should also be logically extended to exclude the receipt which does not have the character of income at all.
26. Further, from the judgments as discussed above, it becomes crystal clear that the subsidy received by the company under the TUF Scheme of the Ministry of Textile, Government of India is for helping the growth of textile industries and therefore capital in nature and outside the ambit of section 4 of Income Tax Act. Accordingly, the said receipt cannot be taxed as income of the Company. Article 265 of the Constitution of India lays down that no taxes shall be levied or collected except with the authority of law. Further, entry 82 of the Seventh Schedule to the Constitution of India lays down that the Central Government has the right to levy tax on income. Further, section 4 of the Income Tax Act 1961 which provides for the charge, specifies that every assessee shall be charged for any assessment year income tax in respect of the total income of the previous year.
27. The main charging section provides for levy of income tax only in respect of income of the assessee. Once an item is not considered as income of the person as the same constitutes capital receipt, it shall not be subjected to tax under this Act, Therefore, once the subsidy received under the TUF scheme is held to be capital in nature, it comes outside the meaning of the term 'income' and therefore outside the ambit of section 4 i.e., the charging section. Unless, specifically made taxable such subsidy cannot be taxed as income. Once the subsidy received cannot be taxed under section 4, there cannot arise any taxability under section 115JB of the Act, which merely provides for an alternate mechanism for computation of income and tax thereon. Thus, an item which is not otherwise taxable cannot be subjected to tax under the MAT provision without any express authority in this behalf. Also, if we look at Explanation 1 to section 115JB(2), We find that the legislature has defined 'book profit'. For calculation of such book profit, one has to reduce certain items, which inter alia include, item 'ii' which states that "the amount of income to which any of the provisions of section 10 (other than the provisions contained in clause (38) thereof) or section 11 or section 12 11 M /s . R e l i a n c e In d us tr i e s l i m i te d apply, if any such amount is credited to the profit and loss account". Thus, what can be discerned from above item is that, for calculation of book profit one has to reduce those items of income which do not from part of total income under normal provisions. If that be the case, then it logically follows that those items which do not constitute income at all cannot form part of book profit and no MAT can be levied thereon at all. Even sub-
section (5) of section 115JB states that 'Save as otherwise provided in this section, all provisions of this Act shall apply to every assessee, being a company, mentioned in this section. Thus, provisions of section 4 and section 2(24) shall necessarily apply for computation of book profit and MAT u/s 115JB and as such provisions of section 115JB cannot override the provision of section 4, which is the basic charging section. Accordingly, looked at from whichever angle, the subsidy has to be reduced from the book profit for computation of MAT under section 115JB.
28. We found that issue is covered by the following decision of the Tribunal/High Court, wherein it was held that under the MAT provisions u/s.115JB is not applicable to capital receipts/exempt income.
Sr.N Decision ITAT/High Citation/ITA No. Nature of income held to Relevant
o Court be not includible in book para of
profit the
decision
1 Krishi Rasayan Kolkata ITAT ITANo.883/Kol/ Interest subsidy being a 19 to 21
Exports Pvt. Ltd. 2014 capital receipt
2 Shree Cement Ltd. Jaipur ITAT 614,615 & Sales tax subsidy for 13.1,
635/JP/2010 substantial expansion 13.4 &
13.8
3 Shree Cement Ltd. Jaipur ITAT 152 ITD 561 Sales Tax Subsidy and
receipt from Carbon
Credit
4 Sicpa India(P) Ltd. Kolkata ITAT 80 taxmann.com 87 Excise Duty Subsidy 24 to 26
(exemption)
5 JSW Steel Ltd. Mumbai ITAT 923/Bang/2009 Waiver of loan taken 21, 23
from acquisition of a
capital asset
6 L.H. Sugar Factory Lucknow 46 CCH 354 Sales of carbon credit 50
ITAT being a capital receipt
7 Binani Industries Ltd. Kolkata ITAT 178 TTJ 658 Forfeiture of share 4.3.1, .3.2,
warrants 4.4, 4.5 &
4.6
8 Nilgiri Tea Estate Cochin ITAT 65 SOT 14 Profit on sale of 7&8
Ltd. agricultural land which is
not a capital asset
9 Shivalik Venture Pvt. Mumbai ITAT 173 TTJ 238 Profit arising on transfer 26 to 28
Ltd. of development rights
10 Metal & Chromium Madras ITAT 76 taxmann.com Long-term capital gain 6&7
Plater (P) Ltd. 229 exempt u/s. 54EC
11 Sutlej Cotton Mills Kolkata 45 ITD 22 Capital gain resulting 19.2 19.5
Ltd. Special bench from sale of capital asset
which was exempt
12 Frigsales (India) Ltd. Mumbai ITAT 4 SOT 276 Profit on sale of 3.2
12
M /s . R e l i a n c e In d us tr i e s l i m i te d
depreciable asset which
was not taxable due to
purchase of another
depreciable asset as
provided in Section 50
13 Mcnally Bharat Kolkata ITAT 100/Kol/2011 Retention money 41 to 43
Engineering Co. Ltd.
14 Delhi Gymkhana Delhi ITAT 3585/Del/2006 Income exempt as per 13
Club Ltd. doctrine of mutuality
15 Goldgerg Finance Mumbai ITAT 7496/Mum/2013 Share from AOP which 11
Pvt. Ltd. was not taxable under
normal provisions as per
section 86
29. More importantly, the decision of the Jaipur Tribunal in the case of Shree Lement Ltd. (ITA No. 614/JP/2010) has exhaustively discussed the issue under consideration and also referred to the order of Rajasthan High Court wherein the ground taken up by the revenue on this issue was not admitted as not having a substantial question of law. Thus, it can be concluded that this issue is now being settled by a judgment of the Rajasthan High Court. It also distinguished the decision of Apollo Tyres Ltd. vs. CIT 255 and Rain Commodities Ltd. vs. DCIT 41 DTR 449. Also very recently, Madras HC in the case of Metal & Chromium Plater (P) Ltd. (TCA No. 359 of 2008) has also decided the said issue in the favour of the assessee. The case of Krishi Rasayan Exports Pvt. Ltd. vs. ACIT (ITA No. 883/Kol/2014 is on the similar interest subsidy which was required to be excluded from Book profit. We accordingly direct AO to exclude the TUF subsidy while computing book profit u/s.115JB.
24. Consistent with the view taken by the co-ordinate benches on an identical issue, we direct the AO to exclude the amount of Sales tax incentive from the Net Profit for the purpose of computing book profit u/s 115JB of the Act, as the same is Capital in nature.
25. We shall now take up the appeal filed by the revenue for AY 2010-11. The first ground relates to the taxability of Sales tax incentive. We have dealt with this issue in the earlier paragraphs while dealing with the alternative grounds of the assessee. We have upheld the view taken by Ld CIT(A) that the sales tax incentive constitutes Capital receipt not liable to tax, as the Ld CIT(A) has followed the decision rendered by Special bench in the assessee's own case. Hence this ground of the revenue is dismissed.
13M /s . R e l i a n c e In d us tr i e s l i m i te d
26. The next issue contested by the revenue in ground no.2 relates to the relief granted by Ld CIT(A) in respect of depreciation disallowed by the AO. The facts relating to this issue are that the assessee, in the earlier years prior to AY 2002-03, did not claim depreciation on certain assets on the plea that the depreciation claim is optional in nature. In this regard, the assessee took support of the decision rendered by Hon'ble Supreme Court in the case of Mahindra Mills Ltd (243 ITR 56), wherein it was held that the claim of depreciation is optional in nature. The depreciation claim was made mandatory w.e.f. 1.4.2002 as per Explanation 5 inserted in sec. 32(1) of the Act. Hence the assessee started claiming depreciation on the original Cost of assets w.e.f. AY 2002-03. However, the AO took the view that the depreciation is allowable only on the Written Down Value (WDV) as on 1.4.2002. Accordingly he computed WDV of the asset as on 1.4.2002 by reducing the notional amount of depreciation relating to earlier years. Accordingly he allowed the difference amount of depreciation, i.e., difference between the depreciation computed on Cost of Assets and the depreciation computed on the WDV of assets. This has resulted in reduction of depreciation by an amount of Rs.125.83 lakhs in the year under consideration. The Ld CIT(A) deleted the disallowance by following the decision rendered by the Tribunal in the assessee's own case, wherein it was held that the AO was not entitled to thrust upon depreciation on the assessee.
27. We heard the parties on this issue. We notice that the co-ordinate benches have upheld identical view taken by the Ld CIT(A) in the earlier years. We notice that the co-ordinate bench has considered an identical issue in AY 2007-08 to 2009-10, wherein it has followed the decision rendered by another co-ordinate bench in the assessee's own case on AY 2003-04 to 2006-07 (ITA No.4475/Mum/2007 & others dated 13-09-2013) and upheld the view taken by the Ld CIT(A) on this issue.
28. Since the facts relating to this issue are identical with the facts of earlier years and since Ld CIT(A) has followed the decision rendered by Tribunal in 14 M /s . R e l i a n c e In d us tr i e s l i m i te d the assessee's own case in the earlier years, we uphold the view taken by Ld CIT(A) on this issue.
29. The next issue contested by the revenue in ground no.3 relates to the computation of "profit from Power plants" for the purpose of allowing deduction u/s 80IA of the Act. The assessee computed the sales price of power generated from captive power plants by adopting the price charged by the State power distribution Agency for supply of electricity to the industrial consumers. Accordingly it computed the profit from captive power plants and claimed the same as deduction u/s 80IA of the Act. The AO, however, computed the profit by adopting rate of return of 16% on the capital base, as per the parameters prescribed by the Regulatory authorities. The ld CIT(A) noticed that an identical issue was considered by him in AY 2006-07 (reopened assessment) and the addition made by the AO was deleted by him by following the decision rendered by ITAT and also the decision rendered by him in other years. Accordingly he held that the computation of profit by adopting rate of return of 16% of capital investment made in power plants in terms of MERC order is not correct and accordingly directed the AO to allow deduction u/s 80IA as claimed by the assessee.
30. We notice that an identical issue was considered by the co-ordinate bench in the assessee's own case in AY 2007-08 to 2009-10 (referred supra). The co-ordinate bench has noted that an identical issue has been decided in favour of the assessee in AY 2006-07 by another co-ordinate bench. However in AY 2007-08 to 2009-10, the revenue had placed reliance on the decision rendered by the Calcutta High Court in the case of ITC Ltd (2015)(64 Taxman.com 214) and submitted that the State distribution agencies would incur expenses on distribution of electricity, where as there is no distribution expenses for the assessee. Accordingly it was contended that to the extent of distribution expenses, which has not been actually incurred by the assessee, profit would increase. Accordingly it was contended that portion of profit cannot be said to be derived from industrial undertaking and therefore, to that 15 M /s . R e l i a n c e In d us tr i e s l i m i te d extent deduction u/s 80IA should not be allowed. We notice that the co- ordinate bench has considered the relevant provisions of Electricity Act and held that the decision rendered by the Hon'ble Calcutta High Court in the case of ITC Ltd (supra) was related to the period prior to introduction of Electricity Act, 2003. The co-ordinate bench further considered the various provisions and held that the decision rendered in the case of ITC Ltd is distinguishable in as much as, the same is not applicable to captive power generation units. The Co-ordinate bench also noticed that the Hon'ble Calcutta High Court has dissented with the view expressed by the Chattisgarh High Court in the case of ACIT vs. Godavari Power & Ispat Ltd (223 Taxman 234)(Chattisgarh) and also the decision rendered by Hon'ble Madras High Court. Accordingly, by following the decision rendered by Hon'ble Supreme court in the case of CIT vs. Vegetable Products Ltd (88 ITR 192)(SC), the co-ordinate bench held that the view in favour of the assessee should be taken, in case where two different views of non-jurisdictional High Courts are available. The Co-ordinate bench also considered the decision rendered by Hon'ble Supreme Court in the case of Thiru Arooran Sugars ltd (1997)(227 ITR 432), wherein the question of determination of agricultural income in respect of Sugar cane grown by the assessee, which was also consumed captively. The Hon'ble Supreme court held that the price of sugar cane should be adopted at market price only. The co-ordinate bench also noticed that another co-ordinate bench has held that the market price should be adopted for determining profit in the case of ACIT, Raipur vs. Godavari Power & Ispat Ltd (133 ITD 502)(Bilaspur). Identical view has been expressed in other decisions listed in paragraph 53 of its order. Accordingly, the co-ordinate bench has held that the market price adopted by the assessee to value the electricity generated by it and to determine the Profit therefrom was justified. Accordingly the co-ordinate bench has upheld the view taken by Ld CIT(A).
31. We notice that the facts relating to the claim of deduction u/s 80IA is identical in nature. We notice that the ld CIT(A) has followed the decision rendered by the co-ordinate bench of Tribunal in earlier years. We also notice 16 M /s . R e l i a n c e In d us tr i e s l i m i te d that the co-ordinate bench in AY 2007-08 to 2009-10 has decided this issue in favour of the assessee by considering various decisions rendered by the Tribunal and High Courts. Accordingly, following the decision rendered by the co-ordinate bench in AY 2007-08 to 2009-10, we uphold the view taken by Ld CIT(A) on this issue.
32. The next issue contested by the revenue in ground no.4 relates to the decision of Ld CIT(A) in directing the AO to consider only those investments, which have yielded dividend for the purpose of computing disallowance u/r 8D(2)(iii) of the I.T Rules. As noticed earlier, the AO computed disallowance u/s 14A of the Act as per Rule 8D. Since the own funds available with the assessee was more than the value of investments, the Ld CIT(A) deleted the interest disallowance made under Rule 8D(2)(ii) of I.T Rules. With regard to the disallowance made out of administrative expenses under rule 8D(2)(iii) of the I.T Rules, the Ld CIT(A) directed the AO to consider only those investments which have yielded dividend income during the year under consideration for the purpose of computing disallowance u/r 8D(2)(iii). He further held that, if the expenditure disallowed by the assessee out of administrative expenses is more the amount computed by the AO, then the disallowance made by the assessee should be adopted.
33. We heard the parties on this issue. The decision rendered by Ld CIT(A) is directly covered by the decision rendered by Special bench of Tribunal in the case of Vireet Investments P Ltd (supra), wherein it was held that only those investments, which have yielded dividend, should be considered for the purpose of Rule 8D of the I T Rules. Accordingly we uphold the order passed by Ld CIT(A) on this issue.
34. The next issue urged by the revenue in ground no.5 relates to the direction given by Ld CIT(A) to consider only those investments which have yielded dividend for the purpose of computing disallowance u/s 115JB of the Act. In the preceding paragraphs, we have already held that the provisions of 17 M /s . R e l i a n c e In d us tr i e s l i m i te d sec. 14A r.w.r 8D cannot be applied for computing the addition required to be made under clause (f) of Explanation 1 to sec. 115JB of the Act. In this regard, we have followed the decision rendered by the Special bench of Tribunal in the case of Vireet Investments P Ltd (supra). Accordingly the decision rendered by Ld CIT(A) was reversed on this issue and the matter was restored to the file of the AO. Accordingly this issue is restored to the file of the AO.
35. The next issue urged by the revenue in Ground No.6 relates to the relief granted by the Ld CIT(A) in respect of disallowance of Rs.153.61 lakhs relating to the principal component of lease rent paid by the assessee. The facts relating to this issue are that the assessee has been using Baroda Dahej Pipeline for transportation of gas/raw materials. It paid lease rent of Rs.160.94 lakhs for the above said pipe line. Following AS-19 issued by ICAI, the above said pipe line was shown as asset of the assessee in the books of account. However, since the pipeline was not actually owned by the assessee, it did not claim depreciation thereon and accordingly claimed lease rent actually paid by it as deduction. The assessee did not debit the profit and loss account with the amount of Rs.160.94 lakhs and claimed the same in the computation of income. The AO took the view that the lease entered by the assessee was only a finance lease and accordingly allowed only financial charges, which resulted in disallowance of part of lease rent amount of Rs.153.61 lakhs claimed by the assessee. The ld CIT(A) noticed that this issue was considered by the Tribunal in the assessee's own case in AY 2005-06 (ITA No.1426/Ahd/2009) and in AY 2006-07 (ITA 4005/Mum/ 2003) and the disallowance was deleted by the Tribunal. Accordingly the Ld CIT(A) also deleted the disallowance by following the order of the Tribunal.
36. The co-ordinate bench has considered an identical issue in the assessee's own case in AY 2007-08 to 2009-10 (supra) and noticed that the decision in ITA No.1426/Ahd/2009 was rendered in the case of Indian Petrochemicals Corp. Ltd, which has since been merged with the assessee.
18M /s . R e l i a n c e In d us tr i e s l i m i te d Accordingly, by following the decision rendered in earlier years, the co-ordinate bench has confirmed the relief granted by Ld CIT(A) on this issue. Since there is no change in facts relating to this addition and since the Ld CIT(A) has followed the decision rendered by the Tribunal in granting relief, we uphold his order passed on this issue.
37. The next issue contested by the revenue in ground no.7 relates to the relief granted by Ld CIT(A) in respect of "mark to market loss" of Rs.94.09 crores disallowed by the AO. The assessee, as on the Balance sheet date, revalued the forex derivative contracts, which were taken to cover the risk arising on foreign currency exposures like import of raw materials, export of finished products etc. The assessee did so, since it was following mercantile system of accounting. The same resulted in a loss of Rs.94.09 crores. The AO rejected the above said claim of the assessee, by holding the same is contingent loss. The Ld Ld CIT(A) however, deleted the disallowance by following the decision rendered by the co-ordinate bench in the assessee's own case in ITA No.7223/Mum/2011 dated 20.11.2013 relating to AY 2008-09.
38. We heard the parties on this issue. Before us the Ld A.R placed reliance on the decision rendered by the co-ordinate bench in ITA No.7223/Mum/2011 relating to AY 2008-09. We notice that the co-ordinate bench has followed the decision rendered by Hon'ble Supreme Court in the case of Woodward Governor India (P) Ltd (312 ITR 254) and also in the case of ONGC Ltd vs. CIT (322 ITR 180), wherein it was held that the loss arising on revaluation of foreign exchange on revenue account is allowable as deduction u/s 37(1) of the Act. In the instant case, there is no dispute that the revaluation loss claimed by the assessee related to the revenue items only. Accordingly we are of the view that the order passed by Ld CIT(A) on this issue does not call for any interference as he has followed the decision rendered by the co-ordinate bench in deciding this issue in favour of the assessee, which in turn had followed the decisions rendered Hon'ble Supreme Court.
19M /s . R e l i a n c e In d us tr i e s l i m i te d
39. The next issue urged by the revenue in Ground No.8 and 9 relates to the relief granted in respect of disallowance of T.P adjustment of Rs.10.79 crores relating to debt receivable from AE, by holding that recharacterisation of such transactions is not permissible under the law. The revenue is contending that the TPO has not recharacterised the debtors as loan and held the same as receivable. The revenue is also contending that the comparables relied upon by the assessee for benchmarking its transactions are not related to actual transactions and hence the same cannot be held to be valid CUP.
40. The facts relating to the issue are described by the Ld CIT(A) as under:-
13.9 During the financial year 2008-09 & 2009-1O, the Appellant had sold petroleum products to it's AE's M/s. Gapco Kenya; M/s. R1L USA Inc and M/s. International Oil Trading Ltd. In this connection the Appellant had provided a credit period of 60 days to its AE's for payment of the sale proceeds. However in respect of certain sales made during financial year 2008-09 & 20O9-10, the proceeds were received beyond the aforesaid credit period. Accordingly, in respect of such sales, the Appellant has raised the following debit note on the AE's towards interest on delayed payments beyond the normal credit period agreed upon.
Sr Name of the AE Amount in Amount in `
USD
1 M/s. Gapco Kenya 67,088 29,44,064
2 M/s. R1L USA Inc 484,833 225,02,627
3 M/s. International Oil Trading Ltd 145,377 68,92,322
Total 697,298 3,23,39,013
13.10. The said interest has been charged at the prevailing short term interest rates, which were in the range of 1 month Libor plus spread of 125 basis points. Depending upon the Libor rates prevailing during FY 2009-10, the effective interest rate worked out in the range of @ 1.45% to 1.75% p.a. 13.11. The AO/TPO treated the delayed payments with respect to the sale proceeds of petroleum products, as loan to AE's, and determined the ALP of interest (received) on delayed payments, at Rs. 14,02,70,469 by considering the ALP rate of interest at 6.94% p.a., by adopting the assessee long term cost of borrowing @ 3.94% p.a. plus suitable mark-up of 3% p.a. for various factors such as currency risk, entity risk and country specific risk. Thus the AO made an adjustment of Rs. 10,79,31,456 i.e. 20 M /s . R e l i a n c e In d us tr i e s l i m i te d (ALP interest chargeable of Rs. 14,02,70,469 - value of international transaction of Rs. 3,23,39,013).
41. The submissions made by the assessee before Ld CIT(A) are extracted below:-
13.12 During the course of appellate proceedings, the Appellant has made the following submissions:
(i) The AO, instead of benchmarking the transaction using L1BOR based rates, has benchmarked the ALP interest rate by adopting the cost of assessee's long term borrowing (both foreign and domestic) plus a mark-
up for the various risk factors such as currency risk, entity risk and country specific risks.
(ii) In this connection, the Appellant has relied upon the earlier judicial pronouncements [as stated in Ground No 10{i) above]. Additionally, the Appellant has also relied upon the decision in the case of iGATE Computer Systems Ltd vs. Addl CIT-Range 4, ITA No.25O4/PN/2012 dated
27.OS.2O15 reported in [TS-250-ITAT-2015(PUN)-TP] wherein in respect of amounts outstanding from AE's, the 1TAT has held that such recovery of dues in the international transaction with its AE's is to be benchmarked by applying CUP method of international bank rates. The ITAT accordingly held that L1BOR plus rates should be applied to the amounts due from AE's beyond the credit period allowed to third parties- Accordingly, it was held that once the transaction between the assessee and its AE was in foreign currency, then the same part takes the nature of international transaction and the said transaction have to be looked upon by applying the commercial principles with regard to an international transaction. If this is so, then the domestic lending rate cannot be applied to benchmark the transaction of the assessee with its AE's and the international rates fixed by L1BOR would come into play.
(iii) Further, the Appellant has submitted that except in the case of M/s. International Oil Trading Ltd which remained outstanding for more than 50 days, in other 2 cases, the payment were paid within a time period of 50 days from the due date. In fact in certain cases, the Appellant also received advance payments on which no interest has been paid by the Appellant.
(iv) The Appellant has enclosed in Annexure - 3 and Annexure - 4, copies of letter's issued by M/s. BNP Paribas dated 17/12/2009 and M/s. Intesa Sanpaola dated 16/12/2009 wherein they h.ive agreed to provide short term loan to the Appoildm to finance imports of crude and/or petroleum products and general working capital requirements at Libor plus 0.45% p.a. i.e. 45 bps- In case of M/s. Intesa Sanpaola, para 1 of Clause 5 (Pricing) of the letter dated 16/12/2009 erroneously states, "sub-limit 21 M /s . R e l i a n c e In d us tr i e s l i m i te d mentioned in clause l(c)", instead of stating "sub-limit mentioned in clause 1.3"
42. The decision rendered by Ld CIT(A) on this issue is extracted below:-
13.13. The contentions raised by the Appellant during the course of the appellate proceedings have been examined and the orders of the TPO/AO are perused.
(i) In the process of the transaction of sale, the Appellant grants a normal credit period of 60 days to the AE. There has been a delay in receipt of the sale consideration from the AE. It is the submission of the assessee that in the case of International Oil Trading Ltd, the outstandings have remained receivable for a period of more than SO days. As regards the other 2 AE, the payments were received within a period of 50 days from the due date. This delayed payment, with respect to the sale proceeds of petroleum products, are in the nature of a short-term trade credit facility provided in the normal course of business. It cannot be treated as a loan given by the assessee to the AE.
The assessee has also relied upon the decision of the Hon- Delhi High Court in the case of EKL Appliances (cited supra) as regards the power of the TPO to recharacterize a particular international transaction. Further, the assessee has received money from the AE in advance on some occasions on which no interest has been paid by the assessee to the AE.
(iii) The transaction of sale and the receivables arising out of the same account are both an integral part of the same transaction. The transaction of sale has been incurred in foreign currency and hence the benchmarking of the international transaction on the account of receivables, have also to be benchmarked as a foreign currency transaction. Hence, the international transaction of delayed receivables cannot be benchmarked by applying of weighted average cost of long term borrowings of the assessee (domestic plus foreign). Hence the action of the TPO/AO in applying the benchmark rate of 6.94% based on the weighted average cost of borrowings (foreign + domestic) including 3% markup for the risks involved, cannot be upheld.
(iv) The Appellant has itself benchmarked this international transaction of receivables by applying the rate of LIBOR+125 basis points. In order to benchmark this transaction, it has furnished the copy of letters issued by BNP Paribas Dated 17.12.2009 and M/s Intesa Sanpaola dated 16.12.2009 wherein, these two independent parties have agreed to provide short term loan to the Appellant to 22 M /s . R e l i a n c e In d us tr i e s l i m i te d finance the imports of crude and/or petroleum products and the general working capital requirements at the rate of LIBOR+45 basis points. In rejecting this benchmarking done by the assessee, the TPO/AO has not given any reasoning. In view of the above, the rate of interest charged to AE's for delayed payment by applying an arm's length interest rate of LIBOR+ 125 basis points, after considering the benchmarking done by the assessee, is held to be at arm's length- Hence, the adjustment of Rs 10,79,31,456/- (14,02,70,469 - 3,23,39,013) made by the TPO/AO by applying the arms length rate of 6.94% based upon the weighted average cost of domestic as well as foreign borrowing of the assessee and adding 3% to cover the risks involved, stands deleted. The appeal of the assessee on this point is, therefore, allowed.
43. The Ld D.R supported the order passed by the AO and the grounds urged by the revenue. The Ld A.R, on the contrary, submitted that the Ld CIT(A) has deleted the addition made by the AO on the reasoning that the TPO has not given any reasoning for rejecting the benchmarking done by the assessee. However in the ground taken by the revenue, it is stated that the Ld CIT(A) has deleted the addition on the reasoning that recharacterisation of transaction is not permissible. Accordingly the Ld A.R submitted that the ground urged by the revenue is not based on correct facts. Further the revenue has taken a ground stating that the assessee has benchmarked the transactions on the basis of quotations given by certain financial companies and not based on actual transactions. The Ld A.R submitted that the assessee has actually availed loans from those financial companies and hence this ground of revenue is also not based on actual facts. The Ld A.R further submitted that the assessee has correctly benchmarked its transactions on the basis of internal CUP, which could not be found fault with by the TPO. Accordingly he submitted that the Ld CIT(A) was justified in deleting the addition made by the AO.
44. We heard the parties on this issue and perused the record. It is the submission of the assessee that it has availed short term loans from M/s BNP Paribas and M/s Intesa Sanpaola at Libor plus 45 bps. The assessee has charged interest at the rate of Libor plus 125 bps for the delayed payments.
23M /s . R e l i a n c e In d us tr i e s l i m i te d Since the benchmarking done by the assessee could not be controverted by TPO, in our view, the T.P adjustments made by TPO is devoid of any reasoning as held by Ld CIT(A). Accordingly we are of the view that the Ld CIT(A) was justified in deleting the addition of Rs.10.79 crores made by AO/TPO.
45. The next issue urged by the revenue in ground no.10 relates to the relief granted by Ld CIT(A) in respect of T.P addition of Rs.36.24 crores relating to interest on investment in preference shares of Associated Enterprises. The facts relating thereto are stated in brief. During the year under consideration, the assessee subscribed to preference shares issued by its Foreign Associate Enterprises and the preference shares were allotted during the year itself. The details are tabulated as under by Ld CIT(A) in page 52 of his order:-
Name of the AE Amount Preference share allotted before 31* March 2010 invested in Rs.
Reliance Global Business 324,40,01,932 RGB BV, issued and allotted 2,076.685,411 Shares BV CRGB BV) 'A1 of Euro 0.01 each to assessee on 30th March 2010 and 2,919.069.900 Shares 'A' of Euro 0.01 each to assessee on 15* May 2009 Reliance Industries Middle 99,32.08,000 RIME issued and allotted, 80.224. 5% NCCCPS of East DMCC ('RIME') AED 1000/- each aggregating to AED 80.224,000 to assessee on 23rd March 2010 Reliance Exploration & 658.46.95,319 REP DMCC issued and allotted, 545,000, 5% Production DMCC (:REP NCCCPS of AED 1000V- each aggregating to DMCC) AED 545.000.000 to assessee on 23rd March 2010 Reliance Netherlands BV 83,03,570 RNBV, issued and allotted 62.000 Shares 'A' oi Euro ('RNBV') 1 each AND 1,37,000 Partly Paid up Shares of Euro 1 each (Euro 0.54 paid up) to assessee on 29th March 2010.
The TPO, however, took the view that the aforesaid subscription payment is in the nature of loan transaction. Since no interest was collected from the subscription payments, the TPO determined the ALP rate of interest by adopting the cost of long term borrowing (both foreign and domestic), which worked out to 3.94% plus a mark up of 3% for the various risk factors such as currency risk, entity risk and country specific risks. Thus the TPO charged interest @ 6.94% on the amount paid towards share subscription from the date of payment till the end of previous year as on 31.3.2010. The TPO, however, allowed set off of dividend receivable amount of 5% (from the period of 24 M /s . R e l i a n c e In d us tr i e s l i m i te d allotment till 31.3.2010) in respect of the aforesaid preference shares and determined ALP of the transactions. Accordingly the AO made addition of Rs.36.23 crores as Transfer Pricing adjustment.
46. Before Ld CIT(A), the assessee contended that the application made for subscribing preference shares cannot be treated as interest free loan and hence no T.P adjustment could have been made. In this regard, the assessee placed reliance on the decision rendered by Delhi ITAT in the case of Bharti Airtel Limited vs. ACIT (ITA No.5816/Del/2012 reported in TS-76-ITAT-2014), wherein also identical T.P adjustment had been made. It was held in the above said case that character of payment, i.e., subscription amount cannot be changed as interest free loan, merely due to delay in allotment of shares, as there is no such deeming fiction under Income tax Act. It was further held that it is not open to the TPO to recharacterise the transaction under Income tax Act, unless it is found to be sham or bogus. It was further held that, even under judge-made law, recharacterisation is possibly only if transactions are found to be substantially at variance with the stated form. In the absence of any such finding and also in the absence of anything on record to show that an unrelated applicant for preference shares would be entitled for interest for the period till the date of allotment of shares, the ITAT deleted the addition. The above said ruling was followed by Mumbai bench of ITAT in the case of Parle biscuits P Ltd (ITA No.9010/Mum/2010 reported in TS-127-ITAT-2014). The assessee also placed reliance on the decision rendered by Hon'ble jurisdictional High Court in the case of DIT (Intl. Taxation) vs. Besix Kier Dhabhol SA (210 Taxman 151), wherein it was held that re-characterisation of share application money as loan is not permitted under the provisions of Income tax Act. It was also submitted that the General Anti Avoidance provisions inserted in Chapter X-A of the Act by Finance Act 2013, shall apply prospectively from AY 2016-17 onwards only. Accordingly it was contended that the T.P adjustment made on share application money is not sustainable.
25M /s . R e l i a n c e In d us tr i e s l i m i te d
47. The Ld CIT(A), by following the decision rendered by Hon'ble Bombay High Court in the case of Besix Kier Dhabhol SA (supra) and also following decisions rendered by Tribunal held that the re-characterisation of Share Application money as interest free advance is not permissible:-
(a) Parle biscuits P Ltd of Mumbai ITAT (supra)
(b) Bharti Airtel Limited of Delhi ITAT (supra)
(c) Tooltech Global Engineering P Ltd (TS-271-ITAT-2014)(Pune)
(d) Allcargo Global Logistics Ltd (TS-176-ITAT-2014)(Mum) The Ld CIT(A) also accepted the contentions of the assessee that the provisions relating to General Anti Avoidance shall apply prospectively from AY 2016-17 onwards. Accordingly the Ld CIT(A) held that the adjustment of interest of Rs.36.23 crores made by the TPO/AO in respect of remittances made by the assessee towards subscription of preference shares, which was computed for the period beginning from the date of remittance and ending on the date of allotment of preference shares, cannot be sustained. Accordingly he deleted the above said adjustment made by TPO/AO.
48. We heard the parties on this issue and perused the record. The Ld D.R strongly supported the order passed by AO, while the Ld A.R supported the order passed by Ld CIT(A). We notice that the Ld CIT(A) has followed the decision rendered by Hon'ble jurisdictional High Court in the case of Besix Kier Dabhol (supra) in order to hold that re-characterisation of transaction is not permissible. In the case of Bharti Airtel Ltd (supra), the Delhi ITAT has held that it is not open to the TPO to recharacterise transaction under Income tax Act, unless it is found to be sham or bogus. It was further held that, even under judge-made law, recharacterisation is possibly only if transactions are found to be substantially at variance with the stated form. In the absence of any such finding and also in the absence of anything on record to show that unrelated applicant was to be paid interest for the period ending till the date of allotment of shares, the ITAT deleted the addition. In the case of Bharti Airtel Ltd (supra), there was delay in allotment of shares and still, the Tribunal held 26 M /s . R e l i a n c e In d us tr i e s l i m i te d that re-characterisation is not permissible. In the instant case, it is seen that the preference shares have been allotted within the year itself. The AO/TPO has not shown that the transactions are sham or bogus nor it was shown that the apparent is not real. It was also not shown that the unrelated share applicant has been paid any interest for the period commencing from date of subscription to the date of allotment of shares. It has been held that the amendment made by Finance Act 2012 including capital financing transactions as international transactions cannot be applied retrospectively. The Ld A.R further submitted that the Preference shares carry coupon rate of 5%, which is higher than the 6 months Libor plus 300 bps.
49. In view of the foregoing discussions, we are of the view the order passed by Ld CIT(A) needs no interference, particularly in view of the decision rendered by Hon'ble Bombay High Court in the case of Besix Kier Dhabhol (supra). Accordingly we uphold the order passed by Ld CIT(A) on this issue.
50. The next issue urged by the revenue in Ground No.11 relates to the T.P adjustment of Rs.1.15 crores made by the AO/TPO towards excess payment on investment in preference shares issued by Associated Enterprises. The facts relating to this issue are stated in brief. We have noticed earlier that the assessee has subscribed to Preference shares issued by its foreign associated enterprises. The AO/TPO carried out analysis to find out as to whether the subscription made by the assessee was at a discount or at premium to the value of equity shares. In respect of one AE named M/s RNBV, the AO/TPO determined the ALP of investment @ Eruo 0.05 per share on the basis of book value of equity shares. The assessee had subscribed to the preference shares @ Euro 1 per share. Hence the AO/TPO considered the same as excess payment to the tune of Euro 0.95 per preference share and accordingly worked out T.P adjustment of Rs.1,14,58,320/-.
51. The contentions made by the assessee before Ld CIT(A) against the above said T.P adjustment has been summarised as under by Ld CIT(A):-
27M /s . R e l i a n c e In d us tr i e s l i m i te d 13.19. It is the contention of the Appellant that, the aforesaid adjustment in respect of excess payment towards investment in preference share of M/s. RNBV was uncalled for the following reasons:
a. Firstly, the NCCPS have been subscribed at par value, since subscribing to the NCCPS at a discount is not envisaged under the financial model/structure.
b. Secondly, the AO has erroneously compared the book value of equity shares, to determine the ALP for investment in NCCPS.
c. Thirdly, the entire excess sum has been treated as an 'income', whereas the transaction of subscribing to the NCCPS, is actually in the nature of capital financing. Here the assessee has made an outbound investment by subscribing to the NCCPS issued the respective AE's. The excess amount, if any, can be treated as an income of the 'investee company' and not the income of the 'investor company'. At the most the AO could have treated the excess as interest free loan and charged interest thereon.
13.20. Without prejudice to the above submission, the Appellant has submitted that since the subscription to preference shares does not have a bearing on the determination of income of the assessee, the provisions of section 92(1) of the Act are not applicable to international transactions of such nature, as defined in section 92B(1) of the Act. Accordingly, no adjustment was required to be made in respect of the valuation of preference shares.
52. The Ld CIT(A) agreed with the contentions of the assessee that the sine qua non to apply Chapter X of the Income tax Act is the existence of income element out of international transactions. He also observed that the capital receipts are outside the scope of the definition of income given u/s 2(24) of the Act. The Ld CIT(A) took support of the decision rendered by Hon'ble Bombay High Court in the case of Vodafone India Services P Ltd vs. Union of India (368 ITR 001), wherein it was held that the share premium is capital receipt not liable to tax under the Income tax Act. The Ld CIT(A) further observed that Chapter X of the Act does not change the character of receipts but only permits re-quantification of income uninfluenced by the relationship between the AE. The Ld CIT(A) also took support of following decisions rendered by Hon'ble Bombay High Court:-
(a) Shell India Markets P Ltd (369 ITR 516) 28 M /s . R e l i a n c e In d us tr i e s l i m i te d
(b) Vodafone India Services (P) Ltd (369 ITR 511).
Accordingly the Ld CIT(A) held that the T.P adjustment in respect of excess payment made towards subscription of preference shares, being a capital account transaction, is out outside the scope of T.P provisions. Accordingly he deleted the addition of Rs.1,14,58,320/- made by the AO.
53. We heard the parties on this issue. The Ld D.R submitted that the TPO was justified in making T.P adjustment in respect of subscription of Preference shares, as the assessee has made excess payment. On the contrary, the Ld A.R submitted that the subscription to preference shares is a Capital account transaction and hence the same is outside the scope of T.P provisions. He submitted that the Hon'ble Bombay High Court has considered the issue relating to "receipt" of share premium in the case of Vodafone India Services P Ltd. However, the ratio laid down therein equally applies to the "payment" made towards subscription of preference shares. The Ld A.R further submitted that there is basic flaw in the approach of TPO, as he has compared book value of equity shares for the purposes of computing fair value of Preference shares. He submitted that the rights and liabilities attached to Equity shares are different from Preference shares. He further submitted that the assessee does not derive any income from the transaction of subscription of preference shares. He further submitted that the decision rendered by Mumbai bench of Tribunal in the case of Topsgroup Electronic Systems Ltd (ITA No.2115/Mum/2015 dated 19-02-2016) squarely applies to the facts of the present case, wherein the T.P adjustment made towards excess payment of share application money was deleted.
54. In the case of Topsgroup Electronic Systems Ltd (supra), the said assessee invested in the shares of its AE named Tops BV Netherlands. The TPO held that the share premium paid by the assessee was nothing but a loan given by the assessee to its AE. Accordingly he made T.P adjustment of Rs.124.17 lakhs. The Tribunal, by placing reliance on the decision rendered 29 M /s . R e l i a n c e In d us tr i e s l i m i te d by Hon'ble Bombay High Court in the case of Vodafone India Services P Ltd (368 ITR 1) held that there is no income/potential income arising to the assessee out of impugned international transaction of investment in acquiring shares in its subsidiary Tops BV, Netherlands and hence the same would fall outside the purview of Indian Transfer Pricing provisions. The Tribunal also held that the outbound transactions are also covered by the ratio laid down by Hon'ble Bombay High Court and in this regard, it has taken support of the decision rendered by Hyderabad bench of Tribunal in the case of Vijay Electricals Ltd (60 SOT 77) and Hill Country Properties Ltd (48 taxmann.com
94). The Tribunal also examined the provisions of Rule 10B and 10C of the I.T Rules and concluded that the T.P provisions cannot be different for inbound and outbound transactions. Accordingly the Tribunal deleted the addition relating to excess payment made for subscription of shares.
55. We agree with the contentions of Ld A.R that the decision rendered by the co-ordinate bench in the case of Topsgroup Electronic Sytems (supra) would squarely apply to the present issue. Accordingly, following the said decision, we uphold the order passed by Ld CIT(A) on this issue.
56. The last issue urged by the revenue in Ground No.12 relates to the T.P adjustment made by the AO/TPO in respect of Guarantee Commission. During the year under consideration, the assessee has provided corporate guarantee to banks in connection with loans taken by its foreign Associated Enterprises named M/s Recron (Malaysia) Sdn bhd; M/s Reliance Industries (Middle East) DMCC (RIME); M/s Reliance Europe Ltd; M/s Reliance Global Energy Services Ltd (RGESL) and M/s RIL USA Inc. The assessee charged guarantee commission @ 0.30% of the guarantee amount so given. A major portion of the guarantees was provided to Hongkong Shanghai Banking Corporation (HSBC). The assessee used internal CUP to benchmark the transactions. The assessee produced a letter dated 10-03-2011 received from HSBC stating that, in line with market pricing, their offer for an indicative pricing for guarantees is as follows:-
30M /s . R e l i a n c e In d us tr i e s l i m i te d
- Guarantee Commission for tenors below 1 year : 35 bppa
- Guarantee Commission for tenors upto 2 years : 45 bppa The above quotations were considered as internal CUP by the assessee. Alternatively, the assessee also produced documents to show the rate actually charged by the banks in the respective Countries, viz.,
- Copies of debit notes issued by Citibank Malaysia to M/s Recron (Malaysia) SDN, BHD, wherein they had charged the bank guarantee commission, which worked out to 0.30%.
- Copy of facility offer letter dated 07-06-2010 issued by HSBC Bank Middle East Ltd to M/s RIME, wherein they have agreed to offer Guarantee line facility by charging Guarantee Commission @ 0.40%.
Alternatively, the assessee also submitted that the prevailing rate of guarantee commission charged by banks for giving guarantees to the assessee and its group companies during the financial year relevant to AY 2010-11 was in the range of 0.25% p.a. to 0.40% p.a. of guaranteed amount.
57. The TPO, however, proposed to apply external CUP on the basis of quotations received from SBI (1.75%) plus a mark up of 1.25% for various risk factors such as currency risk, entity risk and Country specific risk. Accordingly the TPO adopted the guarantee commission fee at 3% and thus made adjustment of Rs.67.19 crores.
58. Before Ld CIT(A), the assessee contended that the respective AEs have provided enough security to the respective banks and the Corporate Guarantee has been provided by the assessee to banks in its capacity as the parent of AEs in order to provide comfort to the banks for due performance of its obligations by respective AEs in connection with the loans given to them. It is submitted that it is a normal commercial practice to provide comfort guarantees and the same is not a business transaction. Accordingly it was submitted that the assessee has not incurred any cost for providing guarantee to banks. The assessee submitted that the maximum rate charged by SBI for an amount exceeding Rs.10 crores was only 1.75%.
31M /s . R e l i a n c e In d us tr i e s l i m i te d
59. It was further submitted that, as per OECD guidelines and international commentaries on Transfer Pricing, in cases where both internal CUP and external CUP are available, the internal CUP should be preferred over the external one. It was submitted that the assessee has followed actual guarantee commission rates charged in the respective Countries of AEs. The assessee also placed reliance on the decision rendered by Hon'ble Bombay High Court in the case of CIT vs. Everest Kento Cylinders Ltd [TS-200-HC-2015 (Bom)-TP]. The assessee also placed reliance on the decision rendered by Ld CIT(A) in earlier years, wherein the rate of guarantee commission ranged between 0.38%
- 0.58%. The assessee further submitted that the ALP of guarantee commission would fall in the range of 0.30% p.a. to 0.40% p.a. based on the documentary evidences furnished by the assessee.
60. The Ld CIT(A) noticed that his predecessor has considered the guarantee commission rate charged by the banks to its AE for the purpose of bench marking the transactions. He further noticed that the Tribunal has considered an identical issue in the assessee's own case in AY 2003-04 to 2006-07 (TS- 260-ITAT-2013 dated 13.09.2013) and held that the guarantee commission @ 0.38% would meet the arms length test. The Ld CIT(A) also noticed that the decision rendered by the Tribunal in the case of Everest Kanto (supra) rejecting the quotations received from banks was upheld by the Hon'ble Bombay High Court. The Ld CIT(A) noticed that the TPO has not established similarity between the quotes obtained from SBI and the assessee's transactions with its AE. Accordingly he held that the TPO was not justified in taking the SBI quotes as comparable without establishing the parity of facts. He also held that the TPO was not also justified in making further mark-up of 1.25%. Accordingly the Ld CIT(A) rejected the T.P workings made by TPO.
61. The ld CIT(A) held that the comparables given by the assessee in the form of actual debit notes issued by Citibank charging guarantee commission @ 0.30% and the quotes of HSBC bank Middle East Limited quoting 0.40% to M/s RIME could be considered as reliable internal comparables. He noticed 32 M /s . R e l i a n c e In d us tr i e s l i m i te d that major portion of guarantee was given to Recron (Malaysia) SDN BHD and RIME. Considering the guarantee commission rate of 0.30% and 0.40% charged/quoted by the banks, the weighted average rate of guarantee commission worked out to 0.31%. Since the rate of 0.30% charged by the assessee fell within the limit of +/- 5% of the transaction value, the Ld CIT(A) held that no adjustment is called for. Accordingly he deleted the T.P adjustment made on this issue.
62. The Ld D.R submitted that the assessee has benchmarked the transactions on the basis quotations received from banks and not on the basis of actual transactions. He submitted that the Ld CIT(A) has also rendered his decision on the basis of quotes received from banks. The actual commission charged was by the banks of different countries and hence it should not have been taken as comparable basis. On the contrary, the Ld A.R submitted that the TPO has also adopted the rate of 1.75% on the basis of quotes received from SBI and further added a mark-up of 1.25% to it. Accordingly the ld A.R submitted that the external CUP adopted by the TPO is also not based on actual transactions. He submitted that the rate of 0.30% charged by Citibank is based on actual transactions. He further submitted that the co-ordinate bench of Tribunal has held in the following cases that quotes given by banks can be taken as valid CUP, which has been upheld by High Courts:-
(a) CIT vs. Toll Global Forwarding India P Ltd (ITA No.5025/Del/10 dated 18-11-2014), which has since been upheld by Hon'ble Delhi High Court in (2016)(66 taxmann.com 53)(Delhi)
(b) CIT vs. Adani Wilmar Ltd (Tax Appeal No.240 of 2014)
(c) DCIT vs. Noble Resources & Trading P Ltd (ITA No.3155/Del/2013 & others dated 05-05-2016)
(d) Gulf Energy Maritime Services P Ltd (ITA No.3812/Mum/2015 dated 29-02-2016) The Ld A.R further submitted that the Tribunal has considered an identical issue in the assessee's own case in AY 2005-06 to 2009-10 and has upheld the ALP of guarantee commission @ 0.38/0.385%.33
M /s . R e l i a n c e In d us tr i e s l i m i te d
63. We heard rival contentions on this issue and perused the record. We notice that the assessee has also partially considered the quotes received banks for issuing Guarantees and the TPO has also considered only the quotes given by SBI. In any case, the quote given by banks has been considered to be valid CUP in the above cited cases. Hence, we do not find merit in the grounds urged by the revenue stating that the quotes from banks should not have been considered by Ld CIT(A). For the sake of completion on this matter, we prefer to extract the operative portion of the order passed by the co-ordinate bench in the case of Gulf Energy Maritine Services P Ltd (supra):-
6. We have noted that even as the Assessing Officer has rejected the determination of arm's length price by the assessee and has proceeded to ascertain the arm's length price on his own, he has not done so on the basis of any known method of determining the arm's length price or on the legally sustainable basis. It is not open to the Assessing Officer to decide that for each variation in the number of crew members on the job, the charges must vary. The computation of fees on the basis of number of members, as done by the Assessing Officer, is devoid of any legally sustainable basis. While determining arm's length price, the Assessing Officer can only decide as to what is the arm's length price for services rendered but he has to do so on the basis of a legally recognized method.
The arm's length price so determined has not been decided on the basis of a recognized method. Even if one is to proceed on the basis that determination of ALP by the assessee is incorrect, the Assessing Officer cannot ascertain the ALP on an adhoc basis or make adhoc disallowances. The determination of the ALP, under the scheme of the Act, is to be done on the basis of a recognized method. That has not been done in the present case. Even the basis on which minimum wages per crew member is computed, though with certain assumptions which are not established to be correct, is assessee's transactions with its AE but then intra AE transactions can never be legally acceptable inputs for application of CUP method. We have noted that the assessee had given certain quotations, the Assessing Officer duly examined these quotations and did not dispute the bonafides of these quotations. The rejection by the Assessing Officer is only on the basis of his observation that no actual transactions have taken place on the basis of these quotations, and, therefore, this I.T.A. No.3812/Mum/2015 Assessment year: 2011- 12 quotations cannot be valid inputs for the CUP method. Undoubtedly, under rule 10B(1)(a), the valid inputs for CUP method can only be "the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions". This rigidity about the price being for an actual transaction has, however, been considerably relaxed when we take into account the rule 10AB 34 M /s . R e l i a n c e In d us tr i e s l i m i te d which allows hypothetical price of a transaction being taken into account as well. The scheme of law, as evident from reading of rule 10B(1)(a) read with rule 10 AB, now admits a price 'which would have been charged or paid in comparable uncontrolled conditions' to be taken into account. The rule 10AB, as stated in the Income Tax Rules, is effective from 1st April 2012. However, as held by a coordinate bench of this Tribunal in the case of Toll Global India Forwarding Pvt. Ltd Vs DCIT [(2014) 37 ITR (Trib) 391 (Del)], rule 10AB, which provides that "..................any method which takes into account the price which has been charged or paid, or would have been charged or paid, for the same or similar uncontrolled transaction, with or between non-associated (i.e. independent) enterprises, under similar circumstances considering all the relevant facts" is retrospective in effect. The coordinate bench, inter alia, has further observed as follows:
25. In effect, thus, it would appear that as long as one can come to the conclusion, under any method of determining the arm's length price, that price paid for the controlled transactions is the same as it would have been, under similar circumstances and considering all the relevant factors, for an uncontrolled transaction, the price so paid can be said to be arm's length price. As we have noted earlier in this order, the price need not be in terms of an amount but can also be in terms of a formulae, including interest rate, for computing the amount. In any case, when the expression 'price which....would have been charged on paid" is used in rule 10BA, dealing with this method, in this method the place of "price charged or paid", as is used in rule 10B(1)(a), dealing with CUP method, such an expression not only covers the actual price but also the price as would have been, hypothetically speaking, paid if the same transaction was entered into with an independent enterprise. This hypothetical price may not only cover bonafide quotations, but it also takes it beyond any doubt or controversy that where pricing mechanism for associated enterprise and independent enterprise is the same, the price charged to the associated enterprises will be treated as an arm's I.T.A. No.3812/Mum/2015 Assessment year:
2011-12 length price. In this view of the matter, the business model said to have been adopted by the assessee, in principle, meets the test of arm's length price determination under rule 10AB as well.
(Emphasis, by underlining, supplied by us now)
7. The views so expressed by the coordinate bench have been upheld by Hon'ble Delhi High Court, in the case of PCIT Vs Toll Global Forwarding India Pvt. Ltd. [(2016) 66 taxman.com 53 (Del)], by observing as follows:
......... the Court finds the impugned order of the ITAT to be well reasoned and researched. The legal principles governing the determination of ALP in a TP adjustment exercise have been expounded lucidly by the ITAT in the impugned orders.35
M /s . R e l i a n c e In d us tr i e s l i m i te d
8. In this view of the matter, it would indeed seem that a bonafide quotation, as referred to and relied upon by the assessee in this case- and particularly bearing in mind limited scale of operations of the assessee and the smallness of amount involved, could indeed be a valid input under the residuary method set out in rule 10AB read with rule 10B(1)(a).
In our considered view, in the light of insertion rule 10AB, the rigour of rule 10B(1)(a) stands relaxed to the extent that not only the actual price of transactions under comparable uncontrolled conditions but also hypothetical price which would have been charged under comparable uncontrolled conditions can be taken into account for computing the arm's length price. The Assessing Officer was thus in error not only in resorting to an unscientific and unrecognized method ascertaining the arm's length price of the services rendered by the assessee but also in rejecting bonafide quotations as a valid input for ascertaining the arm's length price by the assessee.
64. Even though the Ld D.R contended that the actual commission charged was by banks operating in a different country, yet the Ld D.R could not show to us that the commission rate charged in the Country for which guarantee was given by the assessee was more. In the instant year, the Ld CIT(A) has considered two comparables, one is actual commission charged by Citibank on the AE and another one is the quote received from HSBC bank by the AE. The weighted average rate of commission worked out to 0.31% and the rate charged by the assessee was 0.30%. The ld CIT(A) found that the amount received by the assessee fell within the range of +/- 5% and accordingly held that the transactions are at arm's length. Before us, no fault was found by the revenue with the workings given by Ld CIT(A) except the apprehension that the actual rates related to different Country. Accordingly we are of the view that the order passed by Ld CIT(A) on this issue does not call for any interference.
ASSESSMENT YEAR 2011-12
65. We shall now take up the appeal filed by the assessee for AY 2011-12.
66. The First ground urged by the assessee relates to the alternative plea of the assessee to allow the sales tax incentive of Rs.213.41 lakhs u/s 43B of the Act, in case it is considered as Revenue receipt. As in last year, the AO treated the sales tax incentives embedded in the Sales value as revenue in nature as 36 M /s . R e l i a n c e In d us tr i e s l i m i te d against the claim of the assessee that it is capital in nature. However, the Ld CIT(A), by following his earlier order, held it to be a capital receipt. Accordingly the ld CIT(A) declined to adjudcite the alterntive plea of the assessee. In this year, the revenue has accepted decision of Ld CIT(A) holding that the sales tax receipt embedded in Sales is capital in nature. Since the Ld CIT(A) has held it to be capital receipt, he held that there is no necessity to address the alternative plea of the assessee. In AY 2010-11 also, in the earlier paragraphs, we have upheld the view taken by the Ld CIT(A) on this issue. Consistent with the view taken by the Tribunal in the earlier years, we uphold the order passed by Ld CIT(A) on this issue.
67. The second issue urged by the assessee in ground no.2 relates to the disallowance of depreciation of Rs.7,40,782/- on the capitalised value of goods purchased from Durga Iron & Steel Ltd and Surajbhan Rajkumar P Ltd. Identical issue has been considered by us in AY 2010-11 in the earlier paragraphs and we have confirmed the disallowance made by the AO, by following the decision rendered by the Tribunal in the earlier years. Following the same, we confirm the order passed by Ld CIT(A) on this issue.
68. The third issue urged in Ground no.3 of the assessee relates to the depreciation rate applicable on office equipments which are in the nature of Plant & Machinery. The assessee claimed depreciation @ 15%, being the rate applicable to plant & Machinery. However, the AO allowed depreciation at the rate of 10% applicable to furniture and fittings. The Ld CIT(A) restored the matter to the file of the AO for examining the claim of the assessee. At the time of hearing, the Ld A.R submitted that similar claim made by the assessee in AY 2012-13 has been allowed by the AO while giving effect to the order of Ld CIT(A). Accordingly, the Ld A.R submitted that the AO is expected to allow the claim of the assessee in this year also, while giving effect to the order of Ld CIT(A). In view of this submission, we are of the view that the order passed by Ld CIT(A) on this issue does not call for any interference.
37M /s . R e l i a n c e In d us tr i e s l i m i te d
69. The next issue urged by the assessee in ground no.4 relates to the deduction claimed u/s 80IB(9) of the Act in respect of Refinery SEZ undertaking. The facts relating to this issue are discussed in brief. The assessee is having a refinery in Jamnagar-SEZ, which is eligible for 100% deduction u/s 10AA of the Act as well as u/s 80IB of the Act. During the year under consideration, the assessee earned profit of Rs.5036.35 crores from this unit. As per the formula prescribed in sec.10AA of the Act, the deduction allowable u/s 10AA on the above said profit worked out to Rs.4379.13 crores, i.e., as against the profit of Rs.5036.35 crores, the deduction actually allowed u/s 10AA of the Act was Rs.4379.13 crores only. The difference between the two figures was Rs.657.22 crores. The assessee claimed deduction u/s 80IB(9) of the Act on the above said profit, which was worked out to of Rs.421.39 crores and the said deduction was claimed over and above the amount of Rs.4379.13 crores claimed u/s 10AA of the Act. The amount of deduction of Rs.421.38 crores u/s 80IB(9) of the Act was arrived at by the assessee as under:-
Profit from Refinery in SEZ - 5036.35 crores
Less:- Set off brought forward loss - 4614.96 crores
-------------
421.39 crores
== ========
The assessee contended that there is no restriction in any of the provisions of the Act in claiming both the deductions (except sub section 10 of sec.10AA, which was inserted by Finance (No.2) Act, 2014). In this regard, the assessee referred to section 80A(4) and sec. 80IA(9) of the Act, which is made applicable to sec. 80IB(9) also. The assessee contended that the above said provisions make it clear that there should not be double deduction for "same amount of profit" and further the aggregate amount of deduction should not exceed the profit earned from SEZ unit. Accordingly it was submitted that both the deductions were not claimed on "same amount of profit" and the aggregate amount of both the deducitons does not exceed the amount of profit earned from SEZ unit.
38M /s . R e l i a n c e In d us tr i e s l i m i te d
70. The AO, however, took the view that once the profit of an undertaking is considered for deduction u/s 10AA of the Act and also allowed deduction, no further deduction under any other sections of the Act can be allowed in respect of the profits of the SEZ refinery unit. Accordingly, he rejected the claim for deduction u/s 80IB(9) of the Act.
71. The ld CIT(A) also confirmed the order passed by the AO on this issue. The Ld CIT(A) noticed that the assessee has adopted two different parameters to compute the eligible amount of deduction u/s 10AA and u/s 80IB(9) of the Act. The profit from SEZ refinery unit was determined at Rs.5036.35 crores. The same was considered for determining the deduction u/s 10AA of the Act, which was worked out to Rs.4379.13 crores. For computing deduction u/s 80IB(9) of the Act, the assessee again proceeded with the very same profit figure of Rs.5036.35 crores, from which it deducted the brought forward unabsorbed depreciation of Rs.4614.96 crores from the earlier years. Accordingly, it computed eligible amount of Rs.421.39 crores for deduction u/s 80IB(9) of the Act. The Ld CIT(A), thus, noticed that the assessee has followed two different parameters of computing profit and eligible amount of deduction u/s 10AA and u/s 80IB(9) of the Act. The Ld CIT(A) held that the adoption of two different parameters is not correct. Further, the Ld CIT(A) took cognizance of provisions of sub.sec.(8) of sec.10AA of the Act, which states that sub.sec (5) and (6) of sec.10A of the Act shall apply to sec.10AA of the Act. The said provisions of sub.sec.(5) and (6) of sec.10A of the Act prohibit claiming of deduction u/s 80HH or sec. 80HHA or sec. 80I or sec. 80IA or sec. 80IB in relation to the profits of undertaking. The Ld CIT(A) also placed reliance on the following case laws to butress his view that the assessee is not entitled to claim deduction u/s 80IB(9) as well:-
(a) CIT vs. TEI Technologies P Ltd (2012)925 taxmann.com 5)(Delhi)
(b) CIT vs. Sasken Communication Technologies Ltd (2014)(50 taxmann.com 134)(Kar)
(c) Reviera Home Furnishing vs. Addl CIT (2016)(65 taxmann.com
287)(Delhi)
(d) CIT vs. KEI Industries Ltd (2015)(57 taxmann.com) 412)(Delhi) 39 M /s . R e l i a n c e In d us tr i e s l i m i te d
(e) ACIT vs. Sri Adhikari Bros. Television Network Ltd (2012)(23 taxmann.com 332)(Mum).
72. Before the tax authorities, the assessee relied upon various case laws to contend that both the deductions could be claimed by it. Before us also, following cases were relied upon by the assessee:-
(a) Associated capsules P Ltd vs. DCIT (332 ITR 42)(Bom)
(b) ACIT vs. Grindwell Norton Ltd (32 CCH 177)(Mum)
(c) Jindal Exports (P) Ltd vs. ACIT (31 ITD 217)(Delhi)
73. The ld A.R relied upon the submissions made before the tax authorities and contended that the assessee has not claimed any double deduction. He submitted that the amount of deduction claimed u/s 80IB(9) on the profit remaining after allowing deduction u/s 10AA of the Act, i.e., the same is over and above the deduction claimed and allowed u/s 10AA of the Act. He submitted that the provisions of sec.80A(4) and 80IA(9) prohibits claiming deduction on "same amount of profit". He further submitted that the provisions of sub.sec.(5) and (6) of sec.10A shall apply only for the periods succeeding the years in which the assessee was eligible to claim deduction u/s 10AA of the Act. Hence those provisions do not apply to the year under consideration, as the assessee is eligible to claim deduction u/s 10AA of the Act for the year under consideration.
74. The Ld A.R submitted that the legislature has made specific provision in the Act, wherever it intended to put blanket bar for double deduction. The Ld A.R submitted that the provisions of sec. 80HHB(5) provided that if any deduction is permitted u/s 80HHB(1) from any consideration received from foreign projects as defined therein, the same income would not qualify for deduction under any other provisions of the Act. He submitted that identical type of restrictions are placed in sec. 80HHBA(4), 80HHD(7) (the phrase "shall not qualify" is used). The provisions of sec. 80IC(5), 80ID(4), 80IE(4), 80HHE(5) and sec. 35AD(3) contains similar prohibition and the phrase used there in is "no deduction shall be allowed in relation to". The provisions of sec. 10BA(6) uses the phrase "in respect of" to make similar prohibition.
40M /s . R e l i a n c e In d us tr i e s l i m i te d Accordingly the Ld A.R submitted that the tax authorities are not justified in rejecting the claim for deduction u/s 80IB(9) of the Act.
75. On the contrary, the Ld D.R strongly supported the order passed by Ld CIT(A). He submitted that the assessee has adopted two different parameters to compute the deduction u/s 10AA and sec. 80IB(9) of the Act. Since the entire amount of profit earned by SEZ unit has been considered to computing deduction u/s 10AA of the Act, the Ld D.R contended that the assessee is not eligible for deduction u/s 80IB(9) of the Act for the same amount of profit.
76. We have heard rival contentions and perused the record. The dispute between the parties revolve around sec. 80A(4) and sec.80IA(9) of the Act. For the sake of convenience, we extract below both the provisions:-
"80A(4) Notwithstanding anything to the contrary contained in section 10A or section 10AA or section 10B or section 10BA or in any provisions of this Chapter under the heading "C-Deductions in respect of certain incomes", where, in the case of an assessee, any amount of profits and gains of an undertaking or unit or enterprise or eligible business is claimed and allowed as a deduction under any of those provisions for any assessment year, deduction in respect of, and to the extent of, such profits and gains shall not be allowed under any other provisions of this Act for such assessment year and shall in no case exceed the profits and gains of such undertaking or unit or enterprise or eligible business, as the case may be."
"80IA(9) Where any amount of profits and gains of an undertaking or of an enterprise in the case of an assessee is claimed and allowed under this section for any assessment year, deduction to the extent of such profits and gains shall not be allowed under any other provisions of this Chapter under the heading "C.--Deductions in respect of certain incomes", and shall in no case exceed the profits and gains of such eligible business of undertaking or enterprise, as the case may be."
The provisions of sec. 80A(4) uses the expression "where any amount of profits.....of undertaking .....is claimed and allowed as deduction under any of those provisions for any assessment year... deduction in respect of, and to the extent of, such profits shall not be allowed under any other provisions of this Act for such assessment year and shall in no case exceed the profits 41 M /s . R e l i a n c e In d us tr i e s l i m i te d and gains of such undertaking...". The expressions "any amount of profits...", "claimed and allowed" and "deduction in respect of and to the extent of such profits" are, in our view, crucial words that need to be understood while interpreting this provision. The expression "any amount of profits....", in our view, would also mean "a portion of profit". The expression "claimed and allowed", in our view, would mean that the deduction actually allowed on the portion of profit. The expression "in respect of and to the extent of such profits", in our view, would mean the portion of profit so allowed as deduction (under sec.10A or 10AA or 10B or 10BA or any provisions of Chapter VI under the heading "C - deductions in respect of certain incomes") is not eligible for deduction under any other provisions of the Act to the extent so allowed. In the instant case, the assessee has been allowed deduction u/s 10AA of the Act only to the extent of Rs. Rs.4379.13 crores against the profit of Rs.5036.35 crores. The above said amount is the amount claimed and allowed u/s 10AA of the Act. Hence the deduction in respect of such profits and to the extent of Rs.4379.13 crores shall not be allowed under any other provisions of the Act. Had the expression "to the extent of" not been there in sec. 80A(4), there is a possibility to say that the expression "in respect of" refers to the entire profit of Rs.5036.35 crores. Accordingly we are of the view that there is merit in the contentions of the assessee. Our view is further fortified by the expression "shall in no case exceed the profits and gains of such undertaking.... as the case may be". The above said expression visualises the situation that an assessee may be claiming deduction under different provisions of the Act for the profits derived from the same undertaking. Hence the provisions of sec. 80A(4) visualises that the deduction in respect of profits and gains of an undertaking may be claimed under different provisions and hence the restriction is only for that portion of profit claimed and allowed as deduction under sec.10A or 10AA or 10B or 10BA or any provisions of Chapter VI under the heading "C - deductions in respect of certain incomes" shall not be eligible for deduction under any other provisions of the Act. For the remaining portion of profit, the assessee is eligible to claim deduction under any other section.
42M /s . R e l i a n c e In d us tr i e s l i m i te d
77. The ld CIT(A) has referred to the decision rendered by Hon'ble Delhi High Court in the case of TEI Technologies P Ltd (supra). Following observations made by Hon'ble High Court, which has been extracted by Ld CIT(A) at page 84 of his order, in fact, support our view:-
"This section seems to indicate, as contended by the Revenue, that Section 10A or Section 10B are only deduction provisions. No doubt, the assumption underlying the sub-section is that Section 10A and Section 10B are deduction provisions and once a deduction is allowed to the assessee under those sections, the same profits shall not be allowed as a deduction under any other provision of this Act for the same assessment year and that in any case the deduction shall not exceed the profits and gains of the eligible undertaking or unit or enterprise or business, as the case may be. Even if Section 10A/Section 10B are construed as exemption provisions, sub-section (4) of Section 80A cannot defeat such construction. The sole object of the sub-section is to ensure that double benefit does not result to an assessee in respect of the same income, once under Section 10A or Section 10B or under any of the provisions of Chapter-VIA and again under any other provisions of the Act.
The Hon'ble Delhi High Court has explained that the objective of sec. 80A(4) of the Act is to ensure that double benefit does not result to an assessee in respect of same income.
78. The decision rendered by Hon'ble Karnataka High Court in the case of Sasken Communication Technologies Ltd (supra) is with regard to the deduction claimed u/s 10A/10AA and u/s 80HHE of the Act. Both these deductions are related to income derived on export of computer software. The question that was considered was - whether the "export turnover" considered for deduction u/s 10A/10AA can be included in the total turnover for computing deduction u/s 80HHE of the Act. However the facts of the present case is different. The decision rendered by Hon'ble Delhi High Court in the case of Reviera Home Furnishings (supra), relied upon by Ld CIT(A), also deal with claim for deduction under two different Section of the Act for "same income". The decision rendered by Hon'ble Delhi High Court in the case of KEI Industries Ltd (supra) proceeds on the view that the deductions provided u/s 43 M /s . R e l i a n c e In d us tr i e s l i m i te d 10A/10B/10AA in Chapter III are "exemption" provisions and the deductions provided under Chapter VIA (80IA, 80IB etc) are deduction provisions. Though the above said interpretation is contrary to the decision rendered by Hon'ble Bombay High Court in the case of Black & Veath Consulting P Ltd (251 CTR
265), yet the ratio of the decision rendered by Hon'ble Delhi High Court is that the double benefit is not available in respect of same income.
79. The assessee has relied upon the decision rendered by Hon'ble Bombay High Court in the case of Associated Capsules (P) Ltd (supra). The High Court was concerned with the eligibility of the assessee to claim deduction u/s 80IA and 80HHC of the Act. The provisions of sec. 80IA(9) provided that where any amount of profits and gains of an undertaking is claimed and allowed under sec. 80IA(1) for any assessment year, deduction to the extent of such profits and gains shall not be allowed under any other provisions of Chapter VIA and shall in no case exceed the profits and gains of such eligible business or undertaking. The Hon'ble Bombay High Court held that the provisions of sec. 80IA(9) affects only allowability of deduction and not computation of deduction. This decision rendered by Hon'ble Bombay High Court supports the case of the assessee that sec. 80A(4) and sec. 80IA(9) restricts only allowability of deduction and not "computation of deduction".
80. The ld CIT(A) has expressed the view that the assessee has adopted two different parameters for computing deductions u/s 10AA and u/s 80IB(9) of the Act. We have noticed earlier that, during the year under consideration, the assessee earned profit of Rs.5036.35 crores from this unit. As per the formula prescribed in sec.10AA of the Act, the deduction allowable u/s 10AA on the above said profit worked out to Rs.4379.13 crores. Against the profit of Rs.5036.35 crores and the deduction actually allowed u/s 10AA of the Act was Rs.4379.13 crores. The difference between the two figures was Rs.657.22 crores. The assessee claimed deduction of Rs.421.39 crores u/s 80IB(9) of the Act, which was over and above the amount of Rs.4379.13 crores claimed u/s 44 M /s . R e l i a n c e In d us tr i e s l i m i te d 10AA of the Act. The amount of deduction of Rs.421.38 crores u/s 80IB(9) of the Act was arrived at by the assessee as under:-
Profit from Refinery in SEZ - 5036.35 crores
Less:- Set off brought forward loss - 4614.96 crores
-------------
421.39 crores
========
The assessee was constrained to restrict the deduction u/s 80IB(9) of the Act to Rs.421.39 crores on account of the specific provisions contained in sec. 80IA(5), which mandates that the quantum of deduction u/s 80IB of the Act shall be computed as if such eligible business were the only source of income of the assesseee. Since the Act provided different methodologies to compute deduction u/s 10AA and u/s 80IB(9) of the Act, the assessee was required to adopt different parameters for computing deduction.
81. In view of the foregoing discussions, we are of the view that the assessee shall be eligible to claim deduction u/s 80IB(9) of the Act in respect of profits "not allowed as deduction u/s 10AA" of the Act. Accordingly we set aside the view taken by Ld CIT(A) and AO on this issue.
82. The next issue urged by the assessee in Ground no.5 relates to the disallowance of depreciation claimed u/s 32 of the Act on the "intangible assets" pertaining to KG-DWN-98/3 (also referred as "KG-D6 unit). This is related to the following grounds urged by the Revenue:-
a. Ground no.6:- On the facts and in the circumstances of the case and in law, the ld CIT(A) erred in deleting the disallowing of Rs.2042.69 crores incurred by the assessee on aborted blocks of other contract areas under Production Sharing Contracts other than KGD.
b. Ground no.7:- On the facts and in the circumstances of the case and in law, the ld CIT(A) erred in allowing deduction u/s 80IB(9)(ii) of the Act at Rs.2385,45,72,559/- instead of Rs.510,72,94,313/- as held by the Assessing Officer."45
M /s . R e l i a n c e In d us tr i e s l i m i te d All these grounds are related to the deduction u/s 80IB(9) of the Act in respect of KG-D6 unit. The facts relating to these three issues are common in nature. Hence we prefer to adjudicate these three grounds together.
83. The assessee is engaged in exploring and production of mineral oil in "Krishna-Godavari basin" (KG basin). The assessee started commercial production of petroleum products on 01-05-2009. Hence the first year of commercial production is 01.05.2009 to 31.3.2010 relevant to AY 2010-11. However, in that year, the assessee incurred loss. During the year under consideration, i.e., in AY 2011-12, the assessee achieved sales of Rs.14,739.44 crores and profit of Rs.5,695.45 crores. The assessee claimed deduction u/s 80IB(9) of the Act to the extent of Rs.2,385.23 crores.
84. There is no dispute between the parties that the assessee is eligible for deduction u/s 80IB(9) of the Act. The dispute is with regard to the quantum of deduction. As against the claim of Rs. 2,385.23 crores, the AO allowed deduction u/s 80IB(9) of the Act only to the extent of Rs.510.72 crores only. The adjustments made by the assessing officer to the net profit declared by the assessee are:-
(a) disallowance of depreciation claimed on "intangible assets" created by the assessee by accumulating the expenses.
(b) deducting expenses relating to aborted contracts from the net profit.
(c) Computing the deduction u/s 80IB(9) of the Act only in respect of profit relating to sale of "Crude oil".
The Ld CIT(A) sustained the disallowance of depreciation and deleted the other two adjustements made by the AO. Hence the assessee is contesting the decision of Ld CIT(A) in not granting depreciation on intangible assets. The revenue is aggrieved by the relief granted by Ld CIT(A) in respect of other two items, referred above.
85. The facts relating to the above said three issues are stated in brief. The assessee was awarded 31 contract areas in KG basin under separate 46 M /s . R e l i a n c e In d us tr i e s l i m i te d Production Sharing Contracts (PSC) signed with Government of India. The above contract areas were awarded in separate auction conducted for each of the contract area. The assessee treated each contract area as "separate undertaking".
86. The Income tax Act contains special provision for deductions in the case of business for prospecting, etc., for mineral oil in section 42 of the Act. The provisions of sec. 42(1) of the Act reads as under:-
"Special provision for deductions in the case of business for prospecting, etc., for mineral oil 42 (1) For the purpose of computing the profits or gains of any business consisting of the prospecting for or extraction or production of mineral oils in relation to which the Central Government has entered into an agreement with any person for the association or participation of the Central Government or any person authorised by it in such business] (which agreement has been laid on the Table of each House of Parliament), there shall be made in lieu of, or in addition to, the allowances admissible under this Act, such allowances as are specified in the agreement in relation-
(a) to expenditure by way of infructuous or abortive exploration expenses in respect of any area surrendered prior to the beginning of commercial production by the assessee;
(b) after the beginning of commercial production, to expenditure incurred by the assessee, whether before or after such commercial production, in respect of drilling or exploration activities or services or in respect of physical assets used in that connection, except assets on which allowance for depreciation is admissible under section 32:
Provided that in relation to any agreement entered into after the 31st day of March, 1981 , this clause shall have effect subject to the modification that the words and figures" except assets on which allowance for depreciation is admissible under section 32" had been omitted; and]
(c) to the depletion of mineral oil in the mining area in respect of the assessment year relevant to the previous year in which commercial production is begun and for such succeeding year or years as may be specified in the agreement; and such allowances shall be computed and made in the manner specified in the agreement, the other provisions of 47 M /s . R e l i a n c e In d us tr i e s l i m i te d this Act being deemed for this purpose to have been modified to the extent necessary to give effect to the terms of the agreement."
The agreement entered with the Central Government is loosely described as "Production Sharing Contract" (PSC). As per the provisions of sec.42 of the Act, the allowances specified in the agreement shall be "in lieu of, or in addition to, the allowances admissible under Income tax Act.
87. The Article 17 of the PSC deals with the computation of profits and gains for the purposes of Income tax and it is named as "Taxes, Royalties, Rentals, Duties etc.". Clause 17(2) of the PSC has allowed the benefits of sec.42(1) of the Act and it reads as under:-
"17.2 Pursuant to the provisions of section 42 of the Income tax Act, 1961, the allowances specified herein shall apply in computing income tax payable by a Company on its profits and gains from business of Petroleum operations in lieu of (and not in addition to) corresponding allowances provided for under the heading "Profits and Gains of Business or Profession" in the Income tax Act, 1961. Any other allowance, which are not specified herein, shall be treated in accordance with the provisions of Income tax Act, 1961.
17.2.1 Subject to the provisions herein below, deductions at the rate of one hundred percent (100%) per annum shall be allowed for all expenditures, both capital and revenue expenditures, incurred in respect of Exploration Operations and drilling operations. The expenditure incurred in respect of Development operations, other than drilling operations, and Production Operations will be allowable as per the provisions of the Income tax Act, 1961. The expenses so incurred are subject to the following:-
(a) where any expenditure is not solely incurred on Petroleum Operations or is incurred as part of or in conjunction with any other business, only that proportion of the total expenditure which can be proved to the assessing officer to represent a fair proportionate part thereof, having regard to all relevant facts and circumstances, shall be allowed;
(b) sections 40A and 44C of the Income tax Act, 1961 shall apply."
17.2.2 A company shall be entitled, for income tax purposes only, to deduct all its unsuccessful Exploration Costs in contract areas covered by other contracts from the aggregate value of Petroleum allocable to the 48 M /s . R e l i a n c e In d us tr i e s l i m i te d Company from any Field(s) in the Contract Area in the manner as follows:
(a) Unsuccessful Exploration costs incurred in contract areas other than the Contract Area where a Commercial Discovery has been made upto the date of commencement of Commercial Production shall be aggregated and the Company shall be entitled to deduct such costs at the rate of one hundred percent (100%) per annum.
(b) Unsuccessful Exploration Costs incurred in contract areas other than the Contract Area where a Commercial discovery has been made, after the commencement of Commercial Production, shall be deductible at the rate of one hundred percent (100%) per annum on such costs beginning from the year such costs are incurred."
17.2.3 All allowable expenditure incurred prior to the Year in which Commercial production commences shall be aggregated and the assessed loss for that year as well as the assessed loss, if any, incurred in the assessment year relevant to the Year in which Commercial Production commences, or in any subsequent assessment year, shall be carried forward to succeeding assessment years and set off as provided in the Income tax Act, 1961."
The AO referred to the Guidance Note on Accounting for Oil and Gas Producing Activities issued by the Institute of Chartered Accountants of India in order to understand the meaning of the term viz., Exploration and drilling, development of wells etc. It is stated therein that the "drilling can be of two types viz.,
(i) Exploratory drilling for the purposes of searching for undiscovered oil and gas accumulations on any geological prospect and
(ii) Development drilling referring to drilling or deepening, completion or recompletion of a well within the proved area....
88. After considering the provisions of sec. 42(1) of the Act and the articles/clauses of PSC, the AO held that, in paragraph 15.14 of the assessment order, the deduction in respect of prospecting etc., of mineral oils is allowable as under:-
(a) All revenue and capital expenses on Exploration Operations:- They are allowable fully.49
M /s . R e l i a n c e In d us tr i e s l i m i te d
(b) All revenue and capital expenses on drilling operations (both on exploration and development wells):- They are allowable fully.
(c) All revenue and capital expenses incurred in respect of Development operations (except expenses on drilling cost part of development oil well):- The revenue expenses are fully allowable and on capital expenses, depreciation will be allowed as per the provisions of Act.
(d) All revenue and capital expenses incurred in respect of Production operations:- The revenue expenses are fully allowable and on capital expenses, depreciation to be allowed as per the provisions of Act.
89. The AO further noticed that the clause 17.2.4 of PSC has provided alternative manner of deduction at the option of the assessee and the same reads as under:-
"17.2.4 For any or accumulated expenditures incurred in respect of Exploration Operations and drilling operation prior to the date of commercial production, Company(ies) shall have option to amortize such expenditures over a period of ten (10) years from the date of first commercial production."
90. With the back ground of various provisions discussed above under the Income tax Act and the Production Sharing Contract, the AO analysed the methodology adopted by the assessee to claim deduction. The AO noticed that the assessee has followed following accounting practice:-(paragraph 15.16.1 of assessment order) "In respect of each Block allocated, the assessee company continues to incur expenditure over a period of several years and continue to capitalise such expenses at the end of each financial year and,
(i) If at some point of time, it is realised that it is a case of infructuous or abortive exploration, then the block is surrendered to the Central Government (after obtaining due approvals etc.) and all the expenses incurred till the date of surrender are claimed as deduction u/s 42(1)(a) of the Act, in the A.Y pertaining to the financial year in which that particular Block is surrendered.
(ii) If the discovery of resources /oil is made and commercial production begins in a Block, then all the expenses incurred till the date of commencement of commercial production, as well as the expenses incurred thereafter till the end of that particular Financial year, are aggregated and capitalised in the accounts.
50M /s . R e l i a n c e In d us tr i e s l i m i te d The same then (with effect from the year in which commercial production begins) are treated as "INTANGIBLE ASSETS" on which depreciation @ 25% is claimed as expenses, in that year as well as in subsequent years on similar accounting practices."
91. The assessing officer took the view that the accounting practice adopted by the assessee is not in accordance with the method prescribed in the article/clause 17.2 to 17.2.3 of PSC. The AO took the view that, after commencement of commercial production, all expenses incurred in respect of unsuccessful exploration in contract areas covered by other contracts should be deducted from the aggregate value of Petroleum allocable to the Company from any field(s) in the Contract area (i.e., KG-DWN-98/3 in this case). It is pertinent to note that KG/DWN-98/3 is the block in which the assessee has commenced commercial production. Accordingly, the AO held as under:-
"15.16.3 Thus a legal fiction is placed by the legislature by envisaging that once the commercial production commences, thereafter the expenses relating to "Unsuccessful Exploration Ventures" henceforth would not be allowable U/s 42, but the same mandatorily will get clubbed or merged as if those expenses were part of the contract area namely KG-DWN-98/3. It is again mentioned that these expenses on "Unsuccessful Exploration Ventures" are henceforth (after commencement of commercial production) allowed by virtue of the PSC signed in respect of this contract area, thereby intention of the legislature is to merge the other contract areas (where "Unsuccessful Exploration Ventures" happened) with the contract area namely KGD-6, where commercial production has commenced. Explanation under clause 9 of section 80IB reads as below: -
Explanation.--For the purposes of claiming deduction under this sub- section, all blocks licensed under a single contract, which has been awarded under the New Exploration Licencing Policy announced by the Government of India vide Resolution No. 0-19018/22/95-ONG.DO.VL, dated 10th February, 1999 or has been awarded in pursuance of any law for the time being in force or has been awarded by the Central or a State Government in any other manner, shall be treated as a single "undertaking".] The words "or has been awarded by the Central or a State Government in any other manner"
Certainly refers to such a situation where in the Central Govt. while signing an PSC with a company, intends to merge certain contract areas in to one contract area. Now this is clearly the situation and condition of 51 M /s . R e l i a n c e In d us tr i e s l i m i te d contract areas whereupon "Unsuccessful Exploration Ventures" has happened, and hence the expenses incurred thereupon cannot be claimed under any of the section of the Act. But merging those contract areas with the one where commercial production has commenced will certainly afford the assessee company the deduction of those expenses which otherwise were not allowable under the provisions of the Act."
92. However the AO noticed that
(a) the assessee has continued to claim deduction of expenses incurred in respect of unsuccessful exploration u/s 42(1)(a) of the Act, even after commencement of commercial production. The AO considered it to be in gross violation to the mandatory provisions of Clause 17.2.2 of PSC agreement signed in respect of undertaking, viz., KG-DWN-98/3.
(b) Further the accounting practice adopted by the assessee in capitalising all the expenses incurred in respect of successful exploration as "INTANGIBLE ASSETS" and claiming depreciation @ 25% thereon was also considered by the AO as patently wrong and in violation to the mandatory provisions of clause 17.2.3 of PSC.
93. We have noticed earlier that the AO had held that the expenses relating to unsuccessful exploration in contract areas covered by other contracts also should be deducted from the aggregate value of Petroleum allocable to the Company from any field(s) in the Contract area. Accordingly the AO held that the deduction of expenses relating to unsuccessful exploration (also known as "Aborted blocks") claimed by the assessee u/s 42(1)(a) is not correct. The AO also held that the accumulation of expenses relating to successful exploration under the head "Intangible assets" is also not correct. Accordingly, the AO proceeded to recast the "Profit and Loss Account" of KG basin undertakings in accordance with the view taken by him, which is discussed by us in paragraph 88 (supra) for both the financial years relevant to AY 2010-11 and 2011-12. In this process,
(a) the AO disallowed the depreciation claimed by the assessee on "Intangible assets" discussed above.
(b) the AO also deducted the expenses relating to Aborted blocks or unsuccessful exploration (2042.69 crores).
(c) allowed depreciation at the applicable rates prescribed under Income tax Act on the Capital assets.
52M /s . R e l i a n c e In d us tr i e s l i m i te d Since Article/clause 17.2.4 of PSC gave an alternative option to amortise expenses in 10 years, the AO asked the willingness of the assessee to opt for the alternative methodology. From the reply given by the assessee, the AO inferred that the assessee is opting for alternative method of deduction. Accordingly the AO deducted 1/10th of expenses requiring amortisation. Accordingly he re-computed the profit from KG basin activities for the financial year 2009-10 (AY 2010-11) and FY 2010-11 (AY 2011-12). The same resulted in loss of Rs.3367.38 crores in AY 2010-11. For AY 2011-12, the AO arrived at a profit of Rs.2672.16 crores.
94. The AO analysed the break-up of Sales revenue generated by the assessee from various products, which is given below:-
Natural Gas - 11,728.99 crores
Crude oil - 2,817.15 crores
Condensate - 193.30 crores
-----------------
Total - 14,739.44 crores
===========
The AO noticed that the deduction u/s 80IB(9) is available only for production of "mineral oil". The AO took the view that the "Natural Gas" cannot be included in the definition of "Mineral oil", as the word or term "natural gas" is not mentioned in sec.80IB(9)(ii) of the Act. The AO also took support of decision rendered by Hon'ble Supreme Court in the case of Navopan India Ltd vs. CCE 1994 (73) ELT 679 (SC) and other decisions of Hon'ble Supreme Court to buttress his views that the exemption provisions should be construed strictly. The AO also referred to the speech given by Hon'ble Finance Minister while moving the Finance Bill 2008 and also the Notes and clauses of Finance Bill, 2008, wherein a view was expressed that the term "mineral oil" does not include petroleum and natural gas for the purposes of sec. 80IB. However, the Government did not make any amendment in 2008 and left the question as to whether the term "mineral oil" would include "petroleum and natural gas" or not to the wisdom of courts.
53M /s . R e l i a n c e In d us tr i e s l i m i te d
95. The AO took the view that the underlying intent of the Government is that the term "Mineral Oil" should not include natural gas. Further the natural gas was included in the definition of mineral oil subsequently for those new participants who are prospecting mineral oil under VIII round of bidding for award of exploration contracts. The assessee had placed reliance on the decision rendered by Ahmedabad bench of Tribunal in the case of NIKO Resources Limited vs. DCIT (22 DTR 225), wherein it was held that mineral oil would include natural gas also. The AO, however, refused to follow the same by observing that the Income tax Department has not accepted the decision rendered by the Tribunal by filing appeal before the High Court by the revenue.
96. Accordingly, the AO took the view that the assessee is not entitled for deduction u/s 80IB(9) of the Act in respect of profit arising from sale of "natural gas". He took the view that the "Crude oil" alone falls under the definition of "mineral oil" used in sec.80IB(9) of the Act. Accordingly the AO held that the profit relating to sale of crude oil alone is entitled for deduction u/s 80IB(9) of the Act. Since the crude oil constituted 19.11% of the total turnover, the AO computed the profit arising on sale of crude oil (mineral oil) @ 19.11% of the total profit from the undertaking, i.e., 19.11% of Rs.2672.16 crores, which worked out to Rs.510.72 crores. Accordingly, he restricted the deduction u/s 80IB(9) of the Act to Rs.510.72 crores.
97. In the appellate proceedings, the Ld CIT(A) confirmed the disallowance of depreciation claimed on "Intangible assets". Hence the assessee is contesting the said decision of Ld CIT(A).
98. The ld A.R submitted that the assessee has followed the accounting practice of accumulating the costs incurred till the date of commercial production as "Intangible asset", since the "Participating right" acquired by the assessee from Government of India in the oil field is "Commercial right" eligible for depreciation. The Ld A.R submitted that the AO has allowed depreciation in AY 2010-11 and hence the AO should not have taken different view on this 54 M /s . R e l i a n c e In d us tr i e s l i m i te d matter during the year under consideration. He submitted that the AO has however allowed 1/10th of revenue expenses as deduction and also allowed depreciation on the capital assets at the applicable rates. The Ld A.R contended that the assessing officer may be directed to allow depreciation as claimed by the assessee.
99. On the contrary, the Ld D.R submitted that the assessee has followed accounting practice contrary to the methodology prescribed under Production Sharing Contract. The Ld D.R submitted that the assessment order passed in AY 2010-11 has since been revised by Ld Pr. CIT u/s 263 of the Act. He submitted that the AO has rightly computed the deduction as provided in Production Sharing Contract. Accordingly he submitted that the order passed by Ld CIT(A) on this issue does not call for any interference.
100. We heard the parties on this issue and perused the record. We notice that the assessee is required to account for and claim expenses as provided in Production Sharing Contract, as per the provisions of sec. 42 of the Act. The PSC does not envisage accumulation of expenses and account as "Intangible Assets". In that case, there is no scope for allowing depreciation on the intangible assets, which is not permitted under PSC. Hence the Ld CIT(A) has taken the view that the assessee's accounting practice is not in accordance with the method prescribed in PSC and the AO was justified in disregarding the same and in disallowing the depreciation claimed on the Intangible assets. We have earlier examined the reasoning given by the assessing officer for disallowing the claim of depreciation. Before us, the assessee could not show how the method of accounting of accumulating expenses under the head "Intangible Assets" followed by the assessee is permitted under the provisions of the Act read with the PSC. The only contention of the assessee is that the AO has allowed depreciation in AY 2010-11 on intangible assets. However, the Ld D.R has submitted that the assessment order passed for AY 2010-11 has since been revised by Ld Pr. CIT us 263 of the Act. In any case, the principle of Res-judicata shall not apply to the income tax proceedings. Since the 55 M /s . R e l i a n c e In d us tr i e s l i m i te d assessee is required to claim expenses in accordance with the clauses of PSC, in our view, the tax authorities are justified in rejecting the claim of "Intangible assets" and consequently rejecting the depreciation claimed thereon. Accordingly we uphold the order passed by Ld CIT(A) on this issue.
101. We would like to prefer to dispose of the Ground No.6 and 7 urged by the Revenue at this stage, as the facts relating to those grounds have been discussed in the preceding paragraphs. In Ground no.6, the revenue is challenging the decision of Ld CIT(A) in holding that the expenses relating to aborted blocks need not be reduced from the profit from sale of mineral oils for computing deduction u/s 80IB(9) of the Act, since the deduction is allowable for each "undertaking".
102. We have noticed earlier that the AO has taken the view that, after the commencement of commercial production, all the expenses relating to Aborted blocks (unsuccessful blocks) should be reduced from the profit arising from sale of mineral oil taken from successful block. Accordingly, the AO reduced a sum of Rs.2042.69 crores from the profit from sale of mineral oil obtained from successful block (here KG-DWN-98/3) for the purpose of allowing deduction u/s 80IB(9) of the Act. For this purpose, the AO placed reliance on the clause/article 17.2.2 of PSC, which provided that "...to deduct all its unsuccessful Exploration Costs in contract areas covered by other contracts from the aggregate value of Petroleum allocable to the Company from any field(s) in the Contract area (i.e., KG- DWN-98/3 in this case)"
However the assessee contended that the deduction u/s 80IB(9) is allowed for each of the "undertaking" and it is so provided in sec. 80IA(5), which is made applicable to the deduction u/s 80IB(9) of the Act.
103. The submissions made by the assessee before Ld CIT(A), as discussed by Ld CIT(A), are extracted below:-
"48. Assessee's submissions:56
M /s . R e l i a n c e In d us tr i e s l i m i te d During the appellate proceedings, the assessee made submissions. They are summarized as under:
In this regard the relevant provisions of the Act are reproduced as under:
Section 80IA[5) reads under:
"(5) Notwithstanding anything contained in any other provision of this Act, the profits and gains of an eligible business to which the provisions of sub-
section (1) apply shall, for the purposes of determining the quantum of deduction under that sub-section for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such eligible business were the only source of income of the during the previous year relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made."
Section 801B(9) reads as under:
"(9) The amount of deduction to an undertaking shall be hundred per cent of the profits for a period of seven consecutive assessment years, including the initial assessment year, if such undertaking fulfils any of the following, namely:--
(i) .............
(ii) is located in any part of India and has begun or begins commercial production of mineral oil on or after the 1st day of April, 1997:
[Provided that the provisions of this clause shall not apply to blocks licensed under a contract awarded after the 31st day of March, 2011 under the New Exploration Licencing Policy announced by the Government of India vide Resolution No. 0-19018/22/95-ONG.DO.VL, dated the 10th February, 1999 or in pursuance of any law for the time being in force or by the Central or a State Government in any other manner;]
(iii)......];"
The assessee submitted that on perusal of section 80-IB(9J, it can be observed that this sub-section provides for granting deduction on the profits and gains derived from "such - undertaking", it is clear pointer for granting deduction in respect of profit earned by each of such eligible undertakings separately.
According to the assessee in light of the provisions of section 80-IB(9) r.w.s 80-IA(5) of the Act, there is no warrant for reducing the loss of one eligible undertaking from the profit of the other eligible undertaking. Such an interpretation would violate the unambiguous language of section, which otherwise talks of granting deduction in respect of the 'profits and gains 57 M /s . R e l i a n c e In d us tr i e s l i m i te d derived from such undertaking'. If we were to read the section in a way that has been read by the AO, then instead of the phrase extracted in the preceding line, it should have been 'aggregate of profits and gains derived from such undertakings'.
The assessee has placed reliance in this regard is placed on the decision of the Hon'ble Supreme Court in the case of CIT v. Canara Workshop (P.) Ltd.[1986] 161 ITR 320. The Supreme Court in this case held that in computing the profits for the purpose of deduction under section 80E, the loss incurred by the in the manufacture of alloy steels (a priority industry) could not be set off against the profits of the manufacture of automobile ancillaries (another priority industry) and hence the was entitled to deduction at the specified rate on the entire profits of the automobile parts industry included in the total income without deducting therefrom the loss in the alloy steel manufacture. Thus it was submitted by the assessee that by substituting the word 'undertaking' for the word 'priority industry' in the aforesaid Supreme Court judgment, it can be said that losses from abortive blocks/ wells, cannot be set off against the profit derived from KGD Block which is also an independent undertaking. Further, reliance was also placed on the decision of the Hon'ble Andhra Pradesh High Court in the case of CIT v. Visakha Industries Ltd. [2001] 251 ITR 471 where a similar view was taken by the High Court by holding that the deductions contemplated under section 80HH and 80-1 are to be allowed with reference to the profits of the particular industrial undertaking and not with reference to the total income of the and therefore loss in another unit cannot be set off against the profits of eligible unit.
Further, it was submitted that while computing deduction u/s.80IB(9) of the IT Act, the provisions of section 80IA(5) are applicable, which provide that for the purposes of determining the quantum of deduction, the profits and gains of the eligible business shall be computed as if such eligible business were the only source of income of the assessee. The term eligible business here would means, profits and gains from contract area KGD. Therefore, the losses in respect of unsuccessful exploration of other blocks are not be reduced while working out profits and gains of the eligible undertaking i.e. contract area KGD.
The assessee has claimed deduction in respect of abortive blocks u/s 42(l)(a) of the Act The plain reading of section 42(1) implies following conditions to be satisfied for the purpose of allowing deduction/allowance in addition to the allowance admissible in other sections of the Act a. There should be an agreement of the person with Central Government (and agreement should be laid on the table of each house of the Parliament) 58 M /s . R e l i a n c e In d us tr i e s l i m i te d b. Only such allowance are allowed which are specified in the PSC c. Such specified allowance should be in relation to various specific natures as mentioned in sub-clause (a) (b) and (c).
d. Such allowances shall be computed and made in the manner specified in the PSC.
The AO while computing deduction u/s.80lB(9) of the Act in respect of KGD undertaking has reduced the amount of Rs.2042.69 crores being the abortive cost of wells incurred in contract areas other than KGD undertaking. In doing so he has relied upon the provisions of Article 17 of the PSC signed by the assessee with the Central Government which deals with the computation of profits and gains for the purpose of Income-tax and is named as "Taxes, Royalties, Rental Duties etc". The relevant extract is reproduced below.
Article 17.2.2 states that" a Company shall be entitled, for income tax purpose only, to deduct all its unsuccessful Exploration Costs in contract areas covered by other contracts from the aggregate value of Petroleum allocable to the Company from any Field(s) in the Contract Area in the manner as follows:
a. unsuccessful Exploration Costs incurred in contract areas other than the Contract Area where a Commercial Discovery has been made up to the date of commencement of Commercial Production shall be aggregated and the Company shall be entitled to deduct such costs at the rate of one hundred per cent (100%) per annum;
b. unsuccessful Exploration Costs incurred in contract areas other than the Contract Area where a Commercial Discovery has been made, after the commencement of Commercial Production, shall be deductible at the rate of one hundred per cent (100%) per annum of such costs beginning from the Year such costs are incurred."
Thus, on harmonious reading of the aforesaid provision, it can be concluded as follows:
The deduction under Article 17.2.2 in respect of abortive/unsuccessful blocks is to be allowed to a Company while computing its profits and gains from the business of Petroleum Operations. Thus, the same are not be reduced for the purpose of computing the profits of an 'Undertaking' eligible for deduction u/s80IB of the Act.59
M /s . R e l i a n c e In d us tr i e s l i m i te d As stated above, as per provisions of section 80IB(13) of the Act, the provisions of section 80IA(5) of the Act are applicable while computing the deduction under section 80IB(9). Section 80IA(5) of the Act provides that for the purposes of determining the quantum of deduction, the profits and gains of the eligible business shall be computed as if such eligible business were the only source of income of the assessee. Thus while computing the profits of an 'Undertaking', the same shall be computed as if, such Undertaking were the only source of income of the assessee and hence losses of other Undertaking should not be adjusted/considered while working out the income from such Undertaking. Thus, in light of the provisions of section 80-IB(9) r.w.s 80-1A(5) of the Act, it was submitted by the assessee that deduction u/s 42(l)(a) in respect of abortive/unsuccessful blocks are not be reduced while computing the profits of the undertaking viz: KGD which is eligible for deduction u/s 801B(9)."
104 After analysing the facts of the case and after considering the contentions of the assessee, the Ld CIT(A) decided this issue in favour of the assessee by holding that the expenses relating to aborted blocks need not be reduced from the profits for the purpose of computing deduction u/s 80IB(9) of the Act. The revenue is aggrieved by this decision rendered by Ld CIT(A).
105. The Ld D.R submitted that the "Production Sharing Contract" shall override the provisions of Income tax Act in terms of sec.42 of the Act. This is so held by Hon'ble Supreme Court in the case of Enron Oil & Gas India Ltd (2008)(305 ITR 75). He submitted that the Article/clause 17.2.2 of the PSC provided for deduction of expenses relating to Abortive blocks against the profit from sale of mineral oil. Accordingly he submitted that the AO has rightly deducted Rs.2042.69 crores relating to Abortive blocks from the profit in order compute the deduction u/s 80IB(9) of the Act.
106. The Ld A.R, on the contrary, submitted that the clause/article 17.2.2 of PSC provides the manner of computation of profit at entity level and hence the expenses relating to aborted blocks are required to be reduced from the profit from sale of mineral oil while computing profit at entity level. However clause/article 17.2.5 of PSC has also stated that "all other provisions of Income tax Act will apply". He submitted that, by virtue of sec.80IB(13) of the 60 M /s . R e l i a n c e In d us tr i e s l i m i te d Act, the provisions of sec. 80IA(5) has been made applicable to the deduction allowed u/s 80IB(9) of the Act. As per the provisions of sec. 80IA(5), the deduction is to be computed as if such eligible business were the only source of income of the assessee. He submitted that the assessee has obtained 31 different contracts from Government of India through auction process and each contract should be treated as separate undertaking for the purpose of sec. 80IB(9) of the Act. He submitted that the provisions of sec.42 and PSC governs the deduction allowable in respect of expenses incurred on aborted blocks and sec.80IA(5) read with article/clause 17.2.5 of PSC overrides the provisions of sec.42 and PSC. He further submitted that the Explanation given below sec.80IB(9) is concerned with "all the blocks" licensed under a "single contract". He submitted that the expenses relating to abortive blocks sought to be reduced by the AO were related to different Contracts and hence the above said Explanation given below sec.80IB(9) will not apply to the instant case.
107. We have heard rival contentions on this issue. We have noticed earlier that the Ld CIT(A) has decided this issue in favour of the assessee by holding that each contract is a separate undertaking and hence the expenses relating to aborted blocks of different contracts cannot be reduced from the profit from sale of mineral oil obtained from another contract. The operative portion of Ld CIT(A) on this issue are extracted below:-
"49. Decision:
I have considered the facts of the case and the submissions made by the assessee. The issue for consideration is whether cost of abortive/unsuccessful blocks (other independent undertakings) are be reduced while computing the profits of a successful block (KGD in the assessee's case which is independent undertaking) for the purpose of claiming deduction u/s 80-IB(9).
The assessee was engaged in the business of exploration and production of mineral oil. The assessee was awarded 31 contract areas under separate production sharing contracts (PSC) signed with the Government of India. The above contract areas were awarded on bidding in separate auction for each contract area. There is no dispute that for 61 M /s . R e l i a n c e In d us tr i e s l i m i te d the purpose of claiming deduction u/s.80IB [9) of the Act each contract area constituted an independent undertaking. Since the assessee had complied with the conditions specified u/s 80IB(9) of the Act, it claimed deduction of the profits and gains of KGD undertaking u/s 80- IB(9) of the Act. While computing the profits and gains of KGD undertaking for the purpose of claiming deduction under the section 80IB(9) of the Act, the provisions of section 80IA(5) are applicable, which provide that for the purposes of determining the quantum of deduction, the profits and gains of the eligible business shall be computed as if such eligible business were the only source of income of the assessee.
Accordingly, the assessee has correctly not reduced the unsuccessful exploration cost incurred in contract area other than KGD, which has been made in the computation of income u/s 42(l)(a) against the entire income of the assessee company while computing the business income.
The AO has however, rejected the above claim of the assessee and has reduced the amount of Rs.2042.69 crores being the abortive cost of wells incurred in contract areas other than KGD while computing deduction u/s.80IB(9) of the Act in respect of KGD undertaking. In doing so, he has relied on the provisions of Article 17.2.2. of the Production Sharing Contract (PSC).
However, on harmonious reading of the provisions of Article 17 of the PSC, it can be concluded that the deduction under Article 17.2.2 in respect of abortive/unsuccessful blocks is to be allowed to a Company while computing its profits and gains from the business of Petroleum Operations. Thus, the same are not be reduced for the purpose of computing the profits of an 'Undertaking' eligible for deduction u/s 80IB.
Thus, this ground of appeal is allowed and AO is directed to compute the profits of KGD undertaking on a standalone basis as per the provisions of 80IA(5), for the purpose of claiming deduction under the section 801B(9) of the Act. The AO is accordingly, directed that cost in respect of abortive/unsuccessful blocks are not be reduced while computing the profits of the undertaking viz: KGD which is eligible for deduction u/s 80IB(9). This ground of appeal is accordingly allowed."
108. We notice that the article/clause 17.2.2 of PSC allows deduction of expenses relating to aborted blocks against the profit arising from other blocks. In our view, the assessee was right in contending that the article/clause 17.2.2 was concerned with the computation of income at entity level in terms of sec.42 of the Act. The article/clause 17.2.5 of PSC states that 62 M /s . R e l i a n c e In d us tr i e s l i m i te d all other provisions of Income tax Act shall apply. The PSC does not deal with the deduction given u/s 80IB(9) of the Act and hence the provisions of the Act shall apply. Hence the deduction u/s 80IB(9) of the Act has to be computed in terms of sec.80IB of the Act. Sec. 80IB(13) of the Act provides that the provisions of sec. 80IA(5) shall apply and under the provisions of sec.80IA(5) of the Act, the profits and gains of eligible business, for the purposes of sec. 80IB, shall be computed as if such eligible business were the only source of income of the assessee. In view of these provisions, the deduction u/s 80IB(9) has to be computed after ascertaining profits and gains of eligible business in terms of sec 80IA(5) of the Act. Hence there is no scope to adjust expenses relating to other "undertakings" while computing deduction u/s 80IB(9) of the Act. Hence, we are of the view that the decision rendered by Ld CIT(A) does not call for any interference and accordingly we uphold the same.
109. The next issue urged by the revenue in ground no.7 is relating to the decision of the AO in restricting the deduction u/s 80IB(9) of the Act to the proportionate profit relating to sale of Crude oil. We noticed earlier that the AO did not allow deduction on the profit arising on sale of Natural gas and condensate by holding that the "natural gas" shall not fall under the category of "Mineral Oil" for allowing deduction u/s 80IB(9) of the Act. The Ld CIT(A), however, held that the mineral oil shall include "natural gas" also and accordingly directed the AO. The revenue is aggrieved by the said decision of Ld CIT(A).
110. We heard the parties on this issue and perused the record. We notice that the question as to whether "natural gas" shall fall under "mineral oil" or not was examined by the Ahmedabad bench of ITAT in the case of "NIKO Resources Ltd vs. DCIT (22 DTR 225) and it has been held that the natural gas shall fall under "mineral oil" in terms of sec. 80IB(9) of the Act. The said decision of Tribunal has since been affirmed by Hon'nle Gujarat High Court in the same case reported in 374 ITR 369.
63M /s . R e l i a n c e In d us tr i e s l i m i te d
111. The AO had taken support of sub-clause (iv) inserted in sec. 80IB(9) by Finance (No2) Act, 2009 w.e.f. 1.4.2010, whereby the commercial production of natural gas in blocks licensed under the VIII round of bidding award was made eligible for deduction u/s 80IB(9) of the Act. Since the impugned license was allotted to the assessee prior to VIII round, the AO held that the deduction u/s 80IB(9) shall not be available for natural gas. The AO had also taken support of speech made by the Hon'ble Finance Minister in 2008, wherein he has stated that the impugned issue shall be decided by the Courts for allotments made in the rounds earlier to round VIII. However, the Hon'ble Gujarat High Court has held that the insertion of sub-clause (iv) in sec. 80IB(9) does not mitigate against meaning attributed to the expression "mineral oil" by the Hon'ble Apex Court in the case of Association of Natural Gas & Ors. Vs. Union of India & Ors (2004)(4 SCC 489), wherein it was noticed that Entry 53 of List I does not refer to Natural Gas separately. The Ld CIT(A) has further noticed that the Hon'ble Gujarat High Court has also rejected the contention raised by the Department that petroleum products and natural gas have been made part of "mineral oil" only through inclusive provisions contained in sections 42, 44BB and 293A and its conspicuous absence in section 80-IB(9) has to be inferred that the natural gas and condensate should not be included in "mineral oil" for the purpose of sec. 80IB(9) of the Act. Accordingly the ld CIT(A) has held that the deduction shall be available on the profit arising from sale of natural gas and condensate also u/s 80IB(9) of the Act.
112. Since identical issue has been decided by Hon'ble Gujarat High Court in favour of the assessee in the case of NIKO Resources Ltd (which holds 10% share in the block) and since the Ld CIT(A) has followed the same, we do not find any infirmity in the order passed by Ld CIT(A) on this issue.
113. We shall now revert to appeal of the assessee. The ground no.6 relates to legal grounds urged on reference being made to TPO. Identical legal grounds were urged in AY 2010-11 also and the assessee, in its written submissions, 64 M /s . R e l i a n c e In d us tr i e s l i m i te d did not press them. Accordingly we dismiss the legal grounds urged in ground no.6 as not pressed.
114. The next ground urged by the assessee in Ground no.7 relates to the TP adjustment made on the interest chargeable in respect of loan advanced to REP DMCC at Libor plus 325 basis points. Identical adjustments were made in AY 2010-11 also. We noticed that the co-ordinate benches in the earlier years have taken a consistent view and sustained addition to the extent of LIBOR rate plus 150 bps. Accordingly we modified the order passed by Ld CIT(A) on this issue in AY 2010-11 and directed the AO/TPO to compute interest by applying rate of LIBOR rate plus 150 bps for the outstanding period of loan. Accordingly, following the said order, we modify the order passed by Ld CIT(A) on this issue and direct the AO/TPO to compute interest by applying rate of LIBOR rate plus 150 bps for outstanding period of loan.
115. The Ground no.8 relates to the TP adjustment made on Guarantee given by the assessee on behalf of foreign AEs. The revenue is also contesting the decision of ld CIT(A) rendered on this issue in ground no.13. The assessee's contention is that the Guarantees so given do not fall under the category of International Transactions. In the alternative, it is submitted that the assessee has charged @ 0.30% p.a. (upto 31.12.2010) and @ 0.38% p.a. (from 01.01.2011) for short term guarantees and @ 1.80% for long term guarantees on the basis of internal CUP. It was prayed that the same may be upheld.
116. Identical issue was considered in AY 2010-11. As in AY 2010-11, the TPO had made adjustments by taking Guarantee commission @ 3% (quote received from SBI being 1.75% + adhoc mark up of 1.25%). The Ld CIT(A), by following the order passed by the Tribunal in the assessee's own case in the earlier year (ITA No.885/Mum/2009 dated 13-09-2013) directed the AO to charge Guarantee Commission @ 0.38% for short term Guarantees and @ 1.80% for long term Guarantees. In AY 2010-11 also, we have upheld the view taken by Ld CIT(A) on identical issue. In the instant year, i.e., in AY 2011-12, 65 M /s . R e l i a n c e In d us tr i e s l i m i te d we notice that the Ld CIT(A) has followed the decision rendered by the Tribunal in the assessee's own case in the earlier year. Accordingly we uphold the order passed by Ld CIT(A) on this issue.
117. The assessee has raised an additional ground challenging the decision of Ld CIT(A) in directing the AO to adopt the disallowance computed u/s 14A of the Act for making addition u/s 115JB of the Act. Identical issue was considered by us in AY 2010-11 in the earlier paragraphs and we have held as under:-
"In view of the decision rendered by the Special bench in the case of Vireet Investments P Ltd (supra), the tax authorities are not justified in applying the provisions of sec.14A r.w.r 8D for computing disallowance for the requirement of clause (f) of Explanation 1 to sec.115JB(2). The Special Bench has held that the addition for the purpose of clause (f), referred above, should be computed without having resort to sec.14A r.w.r. 8D of the I.T Rules. Accordingly we set aside the order passed by Ld CIT(A) with regard to the addition made for the purpose of sec. 115JB of the Act and direct the AO to compute the disallowance for the purpose of clause (f) of Explanation 1 to sec. 115JB(2) without having resort to sec.14A r.w.r 8D of the I T Rules."
Following the above said decision, we restore this issue to the file of the AO with identical directions.
118. The next additional ground urged by the assessee relates to the exclusion of Sales tax incentive from Net Profit for the purpose of computing book profit u/s 115JB of the Act, as the same has been held to be capital in nature. Identical issue was considered by us in AY 2010-11 and we have held that the Sales tax incentive is a Capital receipt and the same is required to be excluded from the net profit for the purpose of computing book profit u/s 115JB of the Act. Following the same, we direct the AO to exclude the sales tax incentive from net profit (as the same is held to be capital in nature) for the purpose of computing book profit u/s 115JB of the Act.
119. We shall now take up the appeal filed by the revenue. The issue urged by the revenue in Ground No.1 relates to the decision of Ld CIT(A) in holding 66 M /s . R e l i a n c e In d us tr i e s l i m i te d that the claim of depreciation was optional in nature. This is identical with the ground no.2 taken by the revenue in AY 2010-11. The assessee did not claim depreciation on certain assets upto 2002-03 contending that it has got an option not to claim depreciation. During the year under consideration, the AO reworked WDV of the assets and accordingly disallowed a portion of depreciation. Identical issue was considered by us in AY 2010-11 and we have noticed that the claim of the assessee has been allowed by the Ld CIT(A) in earlier years also by following the decision taken by the Tribunal. We noticed that the co-ordinate bench has considered an identical issue in AY 2007-08 to 2009-10, wherein it has followed the decision rendered by the co-ordinate bench in the assessee's own case on AY 2003-04 to 2006-07 (ITA No.4475/Mum/2007 & others dated 13-09-2013) and upheld the view taken by the Ld CIT(A) on this issue. Since the facts are identical, we uphold the view taken by ld CIT(A) on this issue in this year also.
120. The next issue urged by the revenue in Ground no.2 relates to the computation of deduction u/s 80IA of the Act. This is identical to Ground No.3 urged by the revenue in AY 2010-11. The assessee computed the profit from captive power plants by adopting the price charged by the State power distribution Agency for supply of electricity to the industrial consumers. The AO, however, computed the profit by adopting rate of return of 16% on the capital base, as per the parameters prescribed by the Regulatory authorities. In AY 2010-11, we have upheld the view taken by Ld CIT(A) that the assessee was justified in adopting the rate charged by State power distribution Agency for the purpose of determining the profit from power plant for the purpose of computing deduction u/s 80IA of the Act. We have held so by following the decision rendered by co-ordinate benches in the earlier years. Accordingly, following the orders passed for AY 2010-11 and earlier years by the Tribunal, we uphold the order passed by Ld CIT(A) on this issue.
121. The next issue urged by the revenue in Ground no.3 relates to the computation of disallowance u/s 14A of the Act, wherein the Ld CIT(A) has 67 M /s . R e l i a n c e In d us tr i e s l i m i te d directed the AO to compute the disallowance under Rule 8D(2)(iii) by considering only those investments, which have yielded dividend. This is similar to Ground no.4 urged in AY 2010-11 by the revenue. The decision rendered by Ld CIT(A) is directly covered by the decision rendered by Special bench of Tribunal in the case of Vireet Investments P Ltd (supra), wherein it was held that only those investments, which have yielded dividend, should be considered for the purpose of Rule 8D of the I T Rules. Accordingly we uphold the order passed by Ld CIT(A) on this issue.
122. The next issue urged by the revenue in Ground no.4 relates to the direction given by Ld CIT(A) to consider only those investments, which have yielded dividend for the purposes of making addition u/s 115JB of the Act. This is identical with ground no.5 urged by the revenue in AY 2010-11. While adjudicating the additional ground urged by the assessee on the addition made u/s 115JB of the Act, we have held that the provisions of sec. 14A r.w.r 8D cannot be applied for computing the addition required to be made under clause (f) of Explanation 1 to sec. 115JB of the Act. In this regard, we have followed the decision rendered by the Special bench of Tribunal in the case of Vireet Investments P Ltd (supra). Accordingly the decision rendered by Ld CIT(A) was reversed on this issue and the matter was restored to the file of the AO. Accordingly this issue is restored to the file of the AO.
123. The next issue urged by the revenue in Ground No.5 relates to the deduction principal component of lease allowed by Ld CIT(A). This issue is identical to Ground no.6 urged by the revenue in AY 2010-11. The co-ordinate bench has considered an identical issue in the assessee's own case in AY 2007-08 to 2009-10 (supra) and noticed that the decision in ITA No.1426/Ahd/2009 was rendered in the case of Indian Petrochemicals Corp. Ltd, which has since been merged with the assessee. Accordingly, by following the decision rendered in earlier years, the co-ordinate bench has confirmed the relief granted by Ld CIT(A) on this issue. Since there is no change in facts relating to this addition and since the Ld CIT(A) has followed the decision 68 M /s . R e l i a n c e In d us tr i e s l i m i te d rendered by the Tribunal in granting relief, we uphold his order passed on this issue.
124. We have already adjudicated Ground no.6 and Ground no.7 urged by the revenue in earlier paragraphs (paragraphs 101 to 112).
125. The next issue urged in Ground no.8 relates to T.P adjustment of Rs.10.18 crores made on sale of equipment & material and provision of support services to M/s REP DMCC. The facts relating to this issue, the assessee's contentions and the decision taken by Ld CIT(A) are extracted below, for the sake of convenience:-
"60. During the year under proceedings, the TPO observed that the Assessee assessee had undertaken the following transaction with the AE during FY 2010-11.
Particulars Amount (in USD ) Amount (in Rs)
Sale of various equipments 57,95,372 26,27,75,434
and material to AE, for
drilling operations
Provision of support services 1,27,10,057 57,51,21,041
to AE, for drilling operations
Total 1,85,05,429 83,78,96,475
It was submitted by the assessee that the assessee being an operator in various oil and gas exploration blocks was sufficiently equipped with the sophisticated equipments and materials required for drilling operations which were lying idle and were not immediately required by the assessee. In absence of any immediate alternative use, they would have become obsolete and would have resulted in a dead cost. Thus, by selling sophisticated equipment/s and materials to AE, the assessee has successfully tried to recover at least the cost. Further, no independent buyer in the market would have paid the price which was charged to AE, in respect of such equipments and materials considering that these materials were old and lying idle in the inventory.
Further, it was submitted by the assessee that as per the Production Sharing Contracts ('PSC') entered between the AE and the foreign