Income Tax Appellate Tribunal - Mumbai
Jsw Energy Limited,Mumbai vs The Assistant Commissioner Of Income ... on 26 March, 2025
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH "K" MUMBAI
BEFORE SHRI OM PRAKASH KANT (ACCOUNTANT MEMBER)
AND
MS. KAVITHA RAJAGOPAL (JUDICIAL MEMBER)
ITA Nos. 3714 /MUM/2024
Assessment Year: 2020-21
JSW Energy Ltd., The Asst. CIT, Central Circle-8(3),
2nd floor, JSW Centre, Bandra Room No. 659, 6th floor, Aayakar
Kurla Complex, Bandra East, Vs. Bhavan, Maharishi Karve Road,
Mumbai-400051. Mumbai-400020.
PAN NO. AAACJ 8109 N
Appellant Respondent
ITA Nos. 3713/MUM/2024
Assessment Year: 2020-21
JSW Energy (Barmer) Ltd., The Asst. CIT, Central Circle-8(3),
2nd floor, JSW Centre, Bandra Room No. 659, 6th floor, Aayakar
Kurla Complex, Bandra East, Vs. Bhavan, Maharishi Karve Road,
Mumbai-400051. Mumbai-400020.
PAN NO. AAACR8812 N
Appellant Respondent
Assessee by : Mr. Gaurav Kabra
Revenue by : Ms. Neena Jeph, CIT-DR/
Mr. Tushar Mohite, Sr. DR
Date of He aring : 09/01/2025
Date of pronouncement : 26/03/2025
JSW Energy Ltd 2
ITA Nos. 3714 & 3713/MUM/2024
ORDER
PER OM PRAKASH KANT, AM
appeal by the assessee(s) are directed against The captioned appeals respective final assessment orders dated 12.06.2024 and 27.05.2024, passed by the Ld. Assistant Commissioner of Income-
Income tax, Central Circle 8(3), Mumbai [in short 'the Ld. Assessing Officer'], for assessment year 2020 pursuant to the direction of 2020-21 ,pursuant (DRP).. As common issues in the Ld. Dispute Resolution Panel (DRP) dispute are involved volved in these appeals, therefore, same were heard together and disposed off by way of this consolidated order for sake of convenience.
ITA No. 3714/Mum/20242. Firstly, we take up the appeal in ITA No. 3714/Mum/2024 for AY 2021. The grounds raised by the assessee in its appeal are reproduced as under:
1. On the facts and circumstances of the case as well as in law, the Hon'ble Disputed Resolution penal has erred in confirming the action of the Learned Assessing Officer in 10,32,75,726/- to making an upward adjustment of Rs. 10,32,75,726/ the Arm's Length Price in relation to providing guarantee to its Associated Enterprises, without considering the facts and circumstances of the case.
2. On the facts and circumstances of the case as well as in law, the Hon'ble Disputed Resolution Resolution penal has erred in confirming the action of the Learned Assessing Officer in 41,81,59,866/- u/s.14A of making a disallowance of Rs. 41,81,59,866/ the Income Tax Act, 1961, without considering the facts and circumstances of the case.
JSW Energy Ltd 3 ITA Nos. 3714 & 3713/MUM/2024
3. On the facts and circumstances o off the case as well as in law, the Hon'ble Disputed Resolution penal has erred in confirming the action of the Learned Assessing Officer in making an addition of Rs. 41,81,59,866/-
41,81,59,866/ on account of alleged disallowance of expenses u/s.14A of the Income Tax Act, Act, 1961, while computing the book profit u/s.115JB of the Act, without appreciating the fact no such addition is to be made in computing the book profit u/s.115JB of the Income Tax Act, 1961.
4. On the facts and circumstances of the case as well as in law, the Hon'ble Disputed Resolution penal has erred in confirming the action of the Learned Assessing Officer in 53,10,000/ u/s.37 of the making a disallowance of Rs. 53,10,000/- Income Tax Act, 1961, on the alleged plea that the same are capital in nature, without considering considering the facts and circumstances of the case.
5. On the facts and circumstances of the case as well as in law, the Hon'ble Disputed Resolution penal has erred in reversing the action of the Learned Assessing Officer in considering the disallowance of Rs.53,10,000/-
Rs.53,10 as Short Term Capital Loss eligible to set off against the Short Term Capital Gain, without considering the facts and circumstances of the case.
6. On the facts and circumstances of the case as well as in law, the Hon'ble Disputed Resolution penal has erred in confirming the action of the Learned Assessing Officer in disallowing the deduction of Rs. 69,30,25,027/-
69,30,25,027/ claimed u/s.80IA of the Income Tax Act, 1961, without considering the facts and circumstances of the case.
7. On the facts and circumstances of the case as well as in law, the Hon'ble Disputed Resolution penal has erred in confirming the action of the Learned Assessing Officer in not allowing the claim of the assessee company to reduce Rs.29,48,977/ on account of write off of the amount of Rs.29,48,977/-
Non-mo ving stores and spares which was inadvertently moving offered in the computation of income, without considering the facts and circumstances of the case.
8. On the facts and circumstances of the case as well as in law, the Hon'ble Disputed Resolution penal has erred in confirming the action of the Learned Assessing Officer in not allowing the claim of the assessee company to reduce 1,09,08,529/- on account of gratuity the amount of Rs. 1,09,08,529/ routed through OCl which was inadvertently offered twice in the computation of income, income, without considering the facts and circumstances of the case
3. Before us, the assessee revised its ground No. 1 as under:
JSW Energy Ltd 4 ITA Nos. 3714 & 3713/MUM/2024 On the facts and circumstances of the case as well as in law, the Hon'ble Dispute resolution Panel has erred in confirming the action ion of the Learned Assessing Officer in making an upward adjustment of Rs 10,32,75,726/ - to the Arms Length Price in relation to providing interest to its associated enterprises without considering the facts and circumstances of the case."
3.1 Further, the e assessee also filed an additional ground in relation to issue of disallowance u/s 14A of the Act, Act which is reproduced as under:
"On the facts and circumstances of the case as well as in law, the Hon'ble Dispute resolution Panel has erred in confirming the th action of the Learned Assessing Officer without appreciating the decision of Delhi Tribunal Special bench in the case of Vireet Investment (58 /TRT) 313) wherein it has been concluded that only those investments are to be considered for computing average value of investment which yielded exempt income during year."
4. We have heard rival submission of the parties on the issue of admissibility of the additional ground. We find that the ground raised being purely of legal nature without requiring investigat investigation of fresh facts, therefore, same was admitted for adjudication in view of decision of Hon'ble Supreme Court in the case of NTPC Ltd. 229 ITR 283 (SC).
5. Briefly stated, facts of the case are that the assessee company is a public limited company involved involved in the business of generation of power and operation and maintenance of power plants spread across India including in the states of Karnataka, Maharashtra, Rajasthan and Himachal Pradesh. For the year under consideration, the assessee filed its return of income on 15.02.2021 JSW Energy Ltd 5 ITA Nos. 3714 & 3713/MUM/2024 declaring total income at Rs.145,43,82,260/-
Rs.145,43,82,260/ under regular
provisions of the Income
Income-tax
tax Act, 1961 (in short 'the Act') and book Rs.66,87,76,855/ u/s 115JB of the Act. The return of profit of Rs.66,87,76,855/-
income filed by the assessee was selected for scrutiny and statutory notices under the Act were issued and complied with. In the course of scrutiny proceedings, the Assessing Officer noticed international transactions carried out by the assessee with its associated enterprises (AEs),, therefore, he referred the matter for determination of arm's length price of those international transactions to the ld. Transfer Pricing Officer (TPO).
(TPO) On receipt of order dated 20/07/2023 of ld TPO,, the Assessing Officer issued a draft assessment order to the assessee on 31.08.2023 incorporating the adjustments made by the Ld. TPO. Against the draft assessment objection before the Ld. DRP, order,, the assessee preferred objections DRP which were disposed off on 30.05.2024. Pursuant to the direction of the Ld. DRP, the Assessing Officer passed the impugned final Aggrieved with the impugned final assessment order on 12.06.2024. A assessment order, the assessee is in appeal before us by way of raising grounds as reproduced above.
6. Before us, the Ld. Counsel for the assessee filed a Paper Book containing page 1 to 214.
7. The ground No. 1 (Revised) of the appeal of the assessee relates to upward adjustment of Rs.10,32,75,726/-
Rs.10,32,75,726/ to the arm's JSW Energy Ltd 6 ITA Nos. 3714 & 3713/MUM/2024 length price in relation to provision of interest on loans extended to its associated d enterprises.
7.1 The facts in brief qua the issue in dispute as noted by the AO 2019 2020 i.e. relevant to the are that during the financial year 2019-2020 consideration, the assessee was to receive assessment year under consideration, interest of Rs.6,14 4,49,281/- in respect of loan(s)
(s) granted vide agreement dated 26.07.2010 entered into with associated enterprises namely JSW Energy Minerals (Mauritius)) Ltd. As per the agreement, the borrower was required to pay interest to the lender at the rate of three month's nk Offered Rate( month London Inter Bank Rate(LIBOR) , which would be computed on the basis of 360 days year.
year The interest on said loan was payable every year on 31st December. The agreement also contained provision for charging of penal interest at the rate of one percentile at the discretion of lender in case of default in repayment of loan. The said agreement was modified/ amended from time to time up to the year under consid consideration.
Under amendment dated 31.03.2012 31.03.2012, interest was made payable at the rate of six months LIBOR and period of interest payment was made six monthly, simultaneously, the first payment for interest due was deferred eferred to 30.09.2012. Thereafter, agree Thereafter again agreement was amended on 22.02.2012 where loan amount limit was enhanced from United nited Sates Dollar(USD) Dollar(U 42 Million to USD 50 Million. Interest due date was was further deferred to 30.09.2013 and tenure of loan was changed three years to four years from the date of JSW Energy Ltd 7 ITA Nos. 3714 & 3713/MUM/2024 disbursement. Again the loan agreement was modified on 18.07.2013 and 27.09.2013 27.09.2013, revising the loan limit from USD 50 Million to UDS 54 Million and payment of interest due was further deferred to 30.09.2014. The agreement was again amended on 20.07.2014 on 31.07.2015.
31.07.2015. As far as year under consideration is concerned, the loan agreement was lastly amended on 16.12.2016 and the assessee deferred the first installment for payment of interest to 31.03.2019. The Assessing Officer has reproduced the ment made by the assessee to the international suo-motu adjustment transaction of receipt of interest on each tranches of loan released from 19/07/2010 to 25/2/2020, which is available on pages page 7 to 9 of the final assessment order.
7.2 The assessee benchmarked the international transaction of the interest payment under Comparable uncontrolled price(CUP) price( method. The assessee also submitted that during during the financial year 2019-2020 2020 the loan outstanding with associated enterprises was crores which was disbursed to them from amounted to Rs.330.96 crores, financial year 2010-11 2010 onwards in tranches, based on /amended agreements between assessee and Mauritius agreement/amended entity. The amendments include utilisation of loan for paying off debts and working capital capital needs and also to increase the limits of loan to be disbursed to AE with increase in time limit for repayment of loan. According to to the assessee, the last amendment to loan agreement was carried out on 16/12/2016 and said last amended JSW Energy Ltd 8 ITA Nos. 3714 & 3713/MUM/2024 agreement was in force during the year under consideration and therefore, there was no change in the terms and conditions of the loan agreement and hence the benchmarking analysis concluded in financial year 2016 2016-17, was applicable to the current financial year. In the transfer pricing report submitted,, the assessee referred to credit rating of AEs and compared loan transactions of the assessee with other interbank loan transactions based on search results carried out on databases and concluded that LIBOR interest rate was the appropriate arms length rate considering the commercial and economic reasons, however by abundant and precaution, the assessee further suo-motu offered that interest rate at LIBOR plus a m median of 300 basis points (bps) could be considered as an arm's length interest rate for the loans.
loan Accordingly, the assessee submitted that interest amount at Rs.6,14,49,281/- charged by the assessee was justified in accordance with the arm's length rate based on the commercial and regulatory consideration.
7.3 However, the assessee considered additional spread of basis point on LIBOR and computed arms length price of interest transaction at Rs. 16,59,18,029/-
16,59,18,029/ in the return of income filed and offered additional Rs. 10,44,68,748/ 10,44,68,748/- as quantum of arm's length price ce of the interest transaction as under:
Particulars Amount in INR Amount in 3CEB (as reported in books) 6,14,49,281 Amount in 3CEB (with regards to ALP) 16,59,18,029 JSW Energy Ltd 9 ITA Nos. 3714 & 3713/MUM/2024 Difference offered to tax 10,44,68,748 7.1 The Ld. TPO however was not convinced with the explanation he TPO rejected the comparables selected by the of the assessee. The assessee, which were located in South Africa geography i.e. country of ultimate utilisation of loans instead of Mauritius i.e. the country TPO observed that the assessee in which loan was given. The TPO should have searched for comparable interest on loan data applicable for borrowers in Mauritius geography from appropriate databases like Bloomberg. The ld TPO concluded that the assessee rate of interest receivable from did not determine the arm's length rate the AE in accordance with the provisions of section 92C(1) and 92C(2) and also the information or data used by the assessee not being reliable, he rejected the comparison analysis made by the assessee. The ld TPO referred to the loans taken by the assessee in Blooomberg database' earlier years and proposed to compare 'Blooomberg database rate keeping in mind currency of loan, geography of borrower, terms and conditions of tenor of loan, security given, repayment of loan etc etc. The ld TPO mentioned that ld TPO in earlier AYs 2012-13, 2012 2013-14, 2014-15, 2015-16 16 , 2016-17 2016 19 has held that , 2017-18 and 2018-19 the assessee had actually not received any interest from the AE, therefore, the floating rate of interest would not be applicable in the case of assessee essee and instead the appropriate fixed rate of interest erg database' was to be ascertained from 'Bloomberg database using 'Swap Manager' tool and accordingly interest rates should be charged at the rates applicable for fixed rates loan. He considered the JSW Energy Ltd 10 ITA Nos. 3714 & 3713/MUM/2024 Mauritius entity as the borrower and also considered loans issued in different tranches as well as no interest payment for more than five years. The ld TPO used 'Swap Manger'' tool available in Bloomberg database for converting a floating rate of interest rate to fixed ed interest rate post inputting certain parameters. The ld TPO concluded that facts and circumstances for the year under consideration being same to AYs from 2012-13 2012 13 to 2018-19, 2018 fixed loan. The relevant part rate should be applied for different years of loan. of order of ld TPO is reproduced as under:
"6.4.3 6.4.3 As the facts of the case are same in this year as that were in AY 2012-13 2016 17, accordingly, as per Bloomberg 13 to AY 2016-17, database the corresponding Fixed rates of interest applicable for loan transactions is stated below:
Financial Floating rate of interest Fixed rate of interest 2010-11 LIBOR + 389 bps 8.03% 2011-12 LIBOR + 575 bps 9.40% 2012-13 LIBOR + 600 bps 8.23% 2013-14 LIBOR + 382 bps 5.43% 2014-15 LIBOR + 352 bps 6.71% 2015-16 LIBOR + 352 bps 6.71% 2016-17 LIBOR + 612 bps 7.43% 2017-18 LIBOR + 725 bps 9.11% 7.2 The assessee objected of converting floating rate of interest to reasons firstly,, the ITAT in AY 2012-13 fixed interest rate for the reasons, 2012 already rejected the fixed rate of interest applied by the ld TPO and justified floating rate of interest in the case of the assessee for arm's length price computation. Secondly,, while making search of JSW Energy Ltd 11 ITA Nos. 3714 & 3713/MUM/2024 comparables over the database, filters like country of risk, database, risk country of incorporation etc were not applied consistently, thirdly thirdly, criteria used to arrive comparables was very broad and did not consider parameters like credit rating of borrower, country of borrower, etc., fourthly, rate of loan was applied on tenor/maturity of loan etc. each loan/tranche based on the year in which said loan/tranche was first advanced to the AE, disregarding the fact that loan agreements had been amended to extend the tenure retrospectively from the date of issuance of respective tranche, lastly, while computing fixed rate of interest , various parameters required to be inputted in the Swap Manager tool need to be correct with the facts of the transaction.
7.3 But the ld TPO rejected the contention of the assessee observing as under:
1. The objections of the assessee are dealt with as hereunder:
1. The assessee's claim that the search was undertaken on an inconsistent basis is not correct.
• The assessee has stated in his submission that th the "Security Status" filter has not been applied for FY 2010-11.
2010It was explained to the AR during the course of the hearing that the screenshot taken at the time of undertaking the search did not capture the said filter - however, it was applie to "Include All" - which has also been done indeed applied for the other FY's.
• Furthermore, the Assessee has stated in his submission 2011 12, the country of incorporation (Mauritius) that for FY 2011-12, has not been specified / not applied and instead, the JSW Energy Ltd 12 ITA Nos. 3714 & 3713/MUM/2024 country of risk has been taken as India. It was again explained to the AR during the course of the hearing that the interest spread taken for the said year (i.e. 575 BPS) pertains specifically to Mauritius only - as can be verified from the screenshot provided. Se hermore, given that the AE had taken the first
1. Furthermore, tranche in 2010 (which at the time - was for a period of 3 years) - the AE and the Assessee have time and again amended the agreement to increase the interest payment dates as well as the tenure of the loans. Given the above, the search has been undertaken after considering all the loans to be repayable on 31.3.2020.
2. Ideally, the assessee should have searched for comparable interest on loan data applicable for borrowers in Mauritius geography from appropriat e databases like appropriate Bloomberg. This is because the repayments has to be done by the entity in Mauritius and it is in the cash flow of this entity which will repay the assessee's loan and not that of the entity in South Africa. External CUP has been correctly applied by the TPO by searching for appropriate interest rates prevailing in the borrower geography (Mauritius)
3. Since, the assessee had not determined the arms' length rate of interest receivable from the AE in accordance with the provisions of section 92C(1) and 92C(2), and also since the information or data used by the assessee in computation of the arms' length price is not reliable or correct, hence the same deserves to be rejected and provisions of section 92C(3)(a) and 92C(3)(c) are invoked to determine rmine the ALP.
4. So far as the assessee's contention that the Hon'ble Mumbai ITAT has accepted the assessee's without prejudice Benchmarking Methodology for A.Y. 2011 12 and 2012-13 2011-12 2012 is concerned, it is seen that the said issue is yet to at the higher stages. Therefore, the achieve finality at assessee's reliance on the above mentioned order is not accepted.
7.4 Accordingly, the ld TPO calculated the adjustment to interest to be received from the AE as follows:
JSW Energy Ltd 13 ITA Nos. 3714 & 3713/MUM/2024 "1. 1. Accordingly, the adjustment is calculate calculated as follows:
Amt Rate of Interest Amt
Date of initial FY of initial
Tranche Disbursed Interest (USD)
Disbursement disbursement
(USD) (PA) 31.3.2020
1 19-Jul-10
10 FY 2010-11 17,50,000 8.03%
1,40,525
2 21-May-12
12 FY 2012-13 -10'000 8.23% 823
3 29-JUI-10
10 FY 2010-11 17,50,000 1,40,525
8.03%
10,00,000
4 1-Oct-10
10 FY 2010-11 8.03% 80,300
5 4-Nov-10
10 FY 2010-11 30,00,000 8.03%
2,40,900
6 3-Dec-10
10 FY 2010-11 2,00,00,000 8.03% 16,06,000
7 21-Mar-11
11 FY 2010-11 2,70,000 8.03% 21,681
8 27-Apr-11
11 FY 2011-12 25,00,000 9.40% 2,35,000
9 30-May-11
11 FY 2011-12 28,00,000 9.40% 2,63,200
10. 27-Jun-11 FY 2011-12 10,000 9.40% 940
11. 29-Aug-11
11 FY 2011-12 85,00,000 9.40% 7,99,000
12 11-Nov-11
11 FY 2011-12 4,000 9.40% 376
13. 18-Oct-12
12 FY 2012-13 12,00,000 8.23% 98,760
14 30-Nov-12
12 FY 2012-13 11,55,000 8.23% 95,057
15 7-Dec-12 FY 2012-13 58,20,000 8.23% 4,78,986
16 23-Jul-13
13 FY 2013-14 36,00,000 5.43% 1,95,480
17 24-Jun-14
14 FY 2014-15 25,000 6.71% 1,678
18 9-Oct-15 FY 2015-16 3,50,000 6.71% 1,678
19 9-May-16
16 FY 2016-17 50,000 7.43% 3,715
20. 6-Jun-16
16 FY 2016-17 50,000 7.43%% 3,715
21 19-Aug-16
16 FY 2016-17 3,00,000 7.43% 22,290
22. 30-Sep-16
16 FY 2016-17 1,85,000 7.43% 13,746
23 6-Jan-17 FY 2016-17 -10,69,519 7.43% 079,465
24 9-Jun017
Jun017 FY 2017-18 11,100 9.11% 1,011
25 19-Sep-17
17 FY 2017-18 04,50,000 9.11% -40,995
26 29-Nov-17
17 FY 2017-18 2,000 9.11% 182
JSW Energy Ltd 14
ITA Nos. 3714 & 3713/MUM/2024
27 25-Jan-18
18 FY 2017-18 4,00,000 9.11% 36,440
28 30-Jan-18
18 FY 2017-18 1,34,788 9.11% 12,279
29 15-Feb-18
18 FY 2017-18 10,95,681 9.11% 99,817
30 18.-Jun-18
18 FY 2018-19 -68,33,050 9.11% -6,22,491
31 11-Mar-19
19 FY 2018-19 -10,00,000 9.11% -91,100
32 2-Dec-19 FY 2019-20 -5,00,000 9.11% -45,550
33 24-Jan-20 FY 2019-20 -5,00,000 9.11% -45,550
34 13-Feb-20 FY 2019-20 -8,00,000 9.11% -72,880
35 25-Feb-20 FY 2019-20 -5,00,000 9.11% -45,550
Total 4,43,00,000 35,70,683
Exchange Rate as on 31/03/2020 75.39
Arm's Length Interest (INR) 26,91,93,755
Amount offered by Assessee in Form 3CEB 16,59,18,029
(INR)
Adjustment (INR); 10,32,75,726
1. Summary of Adjustments:
In view of the above discussion the total adjustments made to the international transactions reported by the assessee for AY 2020-21 2020 stands as below:
Sr. International Transactions : Adjustment Amount (INR)
1. Interest receivable on loans given to associated 10,32,75,726 enterprises Total 10,32,75,726 7.3 DR the assessee reiterated the submission Before the Ld. DRP, n the decision of Cotton made before the ld TPO and relied on Natural India Pvt. Ltd. v. DCIT [ITA No. 5855/Del/2012].
5855/Del/2012] But, the Ld. DRP rejected the contention of the assessee observing as under:
With regard to the contention of conversion to fixed rate, "With the Panel is of the view that the terms of the agreement hugely differ from the actual conduct of the parties. Whereas the terms of the agreement requires that the JSW Energy Ltd 15 ITA Nos. 3714 & 3713/MUM/2024 interest payments have to be made within a fixed period in each year, the conduct of the parties is contrary to the terms wherein no interest or capital has been paid till date. This has been the Department's contention in all years starting with AY 2012-13 2012 till AY 2018-19. IT
19. The Hon'ble ITAT's order 2012 13 which is the first year of the loan is for AY 2012-13 transaction when actual facts would not have been different from the terms of the loan or considerable time has not elapsed from the advance of the first tranche. Hence the decision of the Ho Hon'ble n'ble ITAT for the said year is not applicable to the later years. In uncontrolled transactions whether the assessee would have agreed to receive the same interest rate under same facts and circumstances is the moot point. The answer is definitely no. Henc Hence TPO's action of converting it to fixed interest rates terms is found to be in order.
As regards the claim that the country of risk and country of incorporation has not been applied uniformly over the years, it is fact that the loan was availed by the AE in Mauritius even though the ultimately it was used in projects for South Africa. Here the ultimate end user is not required to be considered as the loan was availed as part of the agreement between the assessee and the Mauritius entity and hence the country count of borrower is rightly taken as Mauritius.
The other objections of the assessee is that credit rating of the AE has not been considered by the TPO. The assessee has arrived at the credit rating of the AE using the 'Riskcalc' application, whereas the TPO has not considered the same. In this regard, it is the observation of the Panel that even though credit rating of the borrower is an important criteria, the credit rating arrived at by the assessee is also not sacrosanct as it has not been provided by an independent agency but by using a software called 'Riskcalc'. Moreover, it is seen that assessee has taken the credit rating for the AE's entities in South Africa, whereas it should have been for Mauritius. Hence the Id TPO's benchmarking using the Bloombergrg database is found to be correct.
With regard to the other contentions, the findings of the Panel are as follows:
JSW Energy Ltd 16 ITA Nos. 3714 & 3713/MUM/2024 Security status not applied uniformly - the Id TPO has clarified that it was a mistake in the screenshot and the same has been applied uniformly.
unifo Country of borrower - As discussed it should be Mauritius as loan was availed by AE there and repayments are also to be made by the Mauritius entity Tenure - the Id TPO has applied the tenure as applicable for each year's tranches separately.
Hence the he ground of objection is dismissed."
7.4 Before us, the Ld. counsel for the assessee relied on the order of the Tribunal dated 07.11.2019 for assessment year 2011-12 2011 and 2012-13, wherein the Tribunal has rejected the benchmarking the Ld. TPO i.e. using interest rate as methodology adopted by th ascertained from the Bloomberg Bloombe database using Swap Manager M to benchmark the loan given to the AE and upheld the methodology of the assessee of benchmarking using floating rate interest.
interest 7.5 On the contrary, the Ld. DR submitted that actual conduct of the parties significantly diverged from the contractual terms agreed upon stipulating fixed timeline for interest payment and in practice no such interest payment had been made. The Ld. DR submit submitted that the he loan, as agreed upon in the restatement he initial terms of tthe agreement dated 31 March 2012, provided that interest was payable annually, with the first installment due by 30 semi-annually, 30th September 6 month LIBOR rate. The loan tenure 2012, based on the 6-month tenu remained at 3 years ars from the original agreement, however, in reality, no however, interest payments were made as per the stipulated schedule, JSW Energy Ltd 17 ITA Nos. 3714 & 3713/MUM/2024 undermining the assessee's claim that the terms of the agreement were adhered to. The ld DR referred numerous amendments over he loan transaction has undergone, indicating time to support that tthe a continuous change in its structure and tenure, as detailed below:
Amendment No. 7 (22 November 2012): The original loan limit of USD 42 million was increased to USD 50 million, and an the first interest payment date was deferred to 30 September 2013. The tenure of the loan remained at 3 years, but the delay in the first payment indicated that the financial discipline required by the agreement was not followed.
Amendment No. 8 (18 July 2013) & Amendment No. 9 (27 July September 2013): The loan limit was further increased to USD 54 million. The first installment for interest payment was once again deferred to 30 September 2014, extending the timeline even though the official tenure remained at 3 years.
Amendment No. 10 (20 July 2014): The tenure of the loan was extended from 3 years to 4 years, with the first interest payment now pushed to 30 September 2015. This formal extension highlights that the original loan terms were no longer reflective ive of the actual financial arrangement.
Amendment No. 11 (31 July 2015): The loan tenure was further extended from 4 years to 5 years from the date of disbursement. The first installment for interest payment was JSW Energy Ltd 18 ITA Nos. 3714 & 3713/MUM/2024 now deferred to 31 March 2017, demonstrating a continued departure from the initial agreement.
Amendment No. 12 (16 December 2016): The loan tenure remained at 5 years, but the first interest payment was deferred yet again to 31 March 2019.
7.6 According to the ld DR, this this continuous extension of the due date for interest payments reflects that the financial obligations agreed upon terms. This were being postponed, contrary to the agreed-upon pattern of repeated amendments to defer interest payments and nure of the loan demonstrates that the terms of the extend the tenure original loan agreement have been fundamentally altered over time. The consistent postponement of interest payments and changes to the loan terms suggest that the AE was not operating on an arm's length basis.
asis. Hence, the original facts upon which the Hon'ble ITAT based its decision for AY 2012 13 have materially changed, making 2012-13 that decision inapplicable to the subsequent years.
7.7 Further, the Ld. DR submitted that the assessee had argued hould have a floating rate of interest, citing that the that the loan should (6 months LIBOR).
original agreement was linked to the LIBOR rate (6-months However, the Department submits that while the agreement may have referred to a floating rate, the actual conduct and the financial arrangements rangements between the assessee and its Associated Enterprise (AE) show that this is no longer applicable. Despite the terms JSW Energy Ltd 19 ITA Nos. 3714 & 3713/MUM/2024 annual interest payments, no interest has been requiring semi-annual received by the assessee from its AE for several years. This failure to comply with the interest payment schedule renders the floating rate structure ineffective.
7.8 The Ld. DR further submitted that in accordance with established transfer pricing principles, the arm's length rate for the interest charged should be ascertained using the appropriate reference points for fixed-rate fixed rate loans. Bloomberg's Swap Manager, fixed rate loan transactions, is a which provides relevant data for fixed-rate reliable source for determining such rates. Therefore, the interest should be computed based ba on the applicable fixed-rate rate loan terms, which better reflect the economic reality of this transaction, rather than the floating rate originally agreed upon but never implemented.
7.9 he concept of "substance over The Ld. DR submitted that the ld be acknowledged , which has been emphasized by the form", should courts in several rulings, including Vodafone International Holdings BV v. Union of India(2012) 341 ITR1 (SC) , where the India(2012) Hon'ble Supreme Court held that tax liability must reflect the real and substantive transaction rather than its legal form.
ive aspects of a transaction The ld DR relied upon the said decision to further buttress the submission that, given the lack of actual interest payments, a fixed rate of interest should be applied in order to accurately reflect the JSW Energy Ltd 20 ITA Nos. 3714 & 3713/MUM/2024 substance of the transaction, which better reflect the economic reality of this transaction.
7.10 The Ld. DR also rejected the arguments s of assessee before lower authorities that the "Security Status" filter was not uniformly transfer pricing analysis conducted by the applied during the transfer Transfer Pricing Officer. She submitted that this contention is the TPO has clarified that factually incorrect. She submitted that the the non-capturing capturing of the "Security Status" in the search results was oversight in the screenshot, not in the actual due to a technical oversight application of the filter.
7.11 The Ld. DR further submits that the correct borrower geography for determining the arm's length rate of interest is Mauritius, where the AE (i.e., the immediate borrower) is based, base and not South Africa, where the funds were ultimately deployed. The transfer pricing rules mandate that external comparables should be based on the specific economic conditions and risk profiles associated with the borrower, not the ultimate destination of the funds. The repayment obligations of the loan are tied to the Mauritius-based based AE, and it is the financial and economic conditions of this entity, not those of the South African operations, that should be considered for benchmarking the loan. The met method applied by the TPO, which focused on interest rates prevailing in the Mauritius market, is appropriate and in line with international best practices as reflected in OECD Transfer Pricing Guidelines, which prioritize JSW Energy Ltd 21 ITA Nos. 3714 & 3713/MUM/2024 he borrower in pricing such the geographic and risk profile of tthe transactions.
7.12 The Ld. DR further submitted that the tenure of the loans, as detailed in the previous paragraphs, has undergone multiple extensions over the years, which directly affects the determination of the arm's length interest rate. The TPO has considered the correct tenure applicable to each tranche of the loan based on the terms at the time of disbursement, and subsequent amendments.
8. We have heard rival submissions of the parties and perused the relevant materials on record.. The issue in dispute involved in the grounds raised is regarding adjustment made by the Ld. TPO to the international transaction of the interest to be received from the associated enterprises applying fixed rate of interest as against the floating rate of interest i.e. LIBOR applied by the assessee. The primary contention of the assessee is that identical issue of ed rate of the interest applying floating rate of interest vis-a-vis fixed has been decided by the Tribunal in assessment year 2011-12 2011 and 2012-13 in ITA No. 2452 & 2316/Mum/2017 in favour of assessee assessee.
8.1 The Tribunal(supra), (supra), in assessment year 2011-12 12 noted that the assessee advanced unsecured loans of ₹ 115.19 crore crores to associated enterprise namely M/s JSW Energy Minerals Mauritius limited and received interest of the 13.82 lakhs. The said loan was in the nature of unsecured loan having tenure of three years. The currency of JSW Energy Ltd 22 ITA Nos. 3714 & 3713/MUM/2024 interest payment as well as principal repayment was said to be in US dollars. The interest rate was stated to be floating interest rate LIBOR.. The loan was advanced in five to be computed as per LIBOR trenches during the year and accordingly, the interest was charged at three months average average LIBOR rate ranging between 0.29% to 0.30% for actual number of days for which loan was used by the AE. The relevant facts for AY 2010-11, 2010 11, reproduced by the Tribunal (supra), are extracted as under:
"2.9.2 The assessee explained that non residents who wished non-residents to invest in South Africa by means of loan capital needs approval from South African Reserve Bank particularly with reference to intended repayment dates and interest rates. The agree to interest rates in excess of prime Reserve Bank will not agree rate being charged by non resident shareholders on loans to non-resident the South African subsidiaries but loans from non non-residents residents other than shareholder may be allowed to carry interest at prime +2%. The relevant extracts of the regulations were provided to Learned TPO. It was submitted that intra-group intra loan advanced to Mauritius Entity was ultimately utilized in South Africa since JSWEMML further advanced the said loan to JSW Energy South Africa Ltd. [JSWENRSAL] and in view of o the South African Reserve Bank regulation, the Mauritius entity would not be able to charge any interest more than LIBOR from South African Entity. In the aforesaid background, it was submitted that the intra group transaction was to acquire the asset is South Africa and therefore, transaction was at Arm's Length Price as prescribed in the Indian Regulations. In nutshell, it was submitted that due to regulatory restraints of South Africa, the interest rate could not borrowings from any group be more than LIBOR rate for any borrowings companies outside South Africa.
2.9.3 Without prejudice to the above submissions, the assessee benchmarked the loan transaction on the basis of External Comparable Uncontrolled Price [CUP] Method by JSW Energy Ltd 23 ITA Nos. 3714 & 3713/MUM/2024 comparing the interest rates at which the independent parties with similar credit ratings would be able to obtain intra-group intra loans. The AE was selected as the tested party and its credit rating was determined to be Baa1 (Moody; equivalent to S&P BBB+) which fall in the lower medium investment grade. Selecting the borrower country to be Mauritius/South Africa/USA, the assessee arrived at mean ALP margin of 243.83 basis points over LIBOR. Applying the spread of 243.83 basis point to LIBOR, the ALP interest was computed to be US Dollars 367598 (INR (INR Equivalent Rs.164.13 Lacs) as against Rs.13.82 Lacs charged by the assessee from its AE. The assessee, in support of LIBOR, also submitted that the loans were advanced from internal accruals and it did not have any foreign borrowings. The weighted average avera of domestic borrowings was computed as 10.14% as per the workings submitted by the assessee.
2.9.4 However, upon due consideration, the Ld. TPO opined that the regulatory restriction imposed under South African Regulations would not be determinative sin ce the loan was since advanced to Mauritius entity and not to South African entity. Further, the regulatory authority of any country would not take into account the transfer pricing provisions to determine the appropriate rates which could be considered as Arm' Length Price for interest payment. Drawing analogy from the decision rendered in Coca Coca-Cola India Inc. v. Asstt. CIT [2009] 177 Taxman 103/309 ITR 194 (Punj & Har.) that the royalty rates represent ALP of any international permitted by RBI would not represent transactions, Ld. TPO opined that determination of ALP was to be examined from the point of view of Transfer Pricing Provisions under the Income Tax Act.
2.9.5 Proceeding further, finding defects in the assessee's methodology to benchmark the same by External CUP in view of the fact that comparable entities were based in USA whereas the loans was advanced to Mauritius entity and further, the credit rating of Mauritius AE would be much lower than BBB+ as adopted by the assessee for benchmarking, Ld. TPO concluded that the search process was not proper and was required to be rejected. The argument that the loans were advanced from internal accruals was also rejected since the assessee, in the opinion of Ld. TPO, failed to prove nexus JSW Energy Ltd 24 ITA Nos. 3714 & 3713/MUM/2024 between interest free funds available with the assessee vis-à-
vis vis loans advanced to its AE.
2.9.6 The Ld. TPO also came to a conclusion that interest on outbound loan was not to be benchmarked with LIBOR since no company would like to advance loans outsid outside e India without security as the interest rate in India would be higher than those prevailing in the developed country. Therefore, the rates prevailing in India would be an appropriate benchmark to determine the ALP of loans advanced by Indian entities. Although hough the assessee placed reliance on certain judicial pronouncements for the submission that LIBOR would be appropriate benchmark rate, however Ld. TPO opined that certain vital aspects remained to be considered in the cited decisions. Rather reliance was placed on the decision of Tribunal rendered in Aurionpro Solutions Ltd. v. Addl. CIT [2013] 33 taxmann.com 187 (Mum. - Trib.) for the conclusion that lending should not be below the cost of the borrowings of the assessee and the assessee should earn income which it would have earned by advancing loans to third parties.
2.9.7 Finally, Ld. TPO proceeded to work out the mean ALP rate on the basis of above factors. The assessee was taken as the tested party and External CUP method method was used for benchmarking the aforesaid transaction. External CUP, as per Ld. TPO, could be the Bank Prime Lending Rate [PLR], Corporate Bond Rates or the cost of borrowings in the domestic market. Applying the average spread of 2.89% to assessee's cost st of borrowing i.e. 10.14%, cost of domestic borrowings was worked out to be 13.03%. Relying upon safe harbor rules, Prime Lending Rate was worked out to be 10.50%, which was nothing but 3% spread over State Bank of India base rate of 7.5%. The ALP based on Corporate Bond Rates was worked out to be 15%. Finally, the most conservative rate i.e. 10.5%, out of three rates, was adopted to benchmark the stated transactions. The ALP interest, thus, worked out to be Rs.441.61 Lacs as per computations made in para 5.8 of learned TPO's order. Adjusting the interest of Rs.13.82 Lacs as charged by the assessee from its AE, the net TP adjustment, thus proposed, worked out to be Rs.427.78 Lacs.
JSW Energy Ltd 25 ITA Nos. 3714 & 3713/MUM/2024 2.9.8. The aforesaid TP adjustment was incorporated in assessment order dated dated 17/04/2014. The assessee submitted that it did not want to pursue the matter before Ld. Dispute Resolution Panel and expressed its intention to contest the same through normal appellate channel of Ld. CIT(A). Accordingly, the assessment order was passed by Ld. AO on 17/04/2014 which was subjected to further appeal before Ld. first appellate authority.
2.10 Before Ld. first appellate authority, the assessee, inter-
inter alia, drew attention to the fact that similar benchmarking, in immediately succeeding year i.e. AY assessee's own case for immediately 2012-13, 13, has been done by Ld. TPO himself in its subsequent order dated 29/01/2016 adopting LIBOR rates as the base rates and ruled out the application of Corporate Bond Rate, SBI PLR Rate or Cost of Borrowing rate etc. RelianReliance was placed, inter-alia, alia, on the decision of Hon'ble Delhi High Court rendered in CIT v. Cotton Naturals (I) (P.) Ltd. [2015] 55 taxmann.com 523/231 Taxman 401 to support the benchmarking submissions that LIBOR would be appropriate benchmarking rate on such outbound loan transactions. The list of other decisions which has also affirmed the said view, as relied upon by assessee during appellate proceedings, has also been tabulated on page nos. 18 19 of the appellate order.
18-19 with assessee's submissions, Ld. CIT(A) allowed Concurring with assessee's ground by observing as under: --
I have considered the submissions of the assessee, the views of the AO in the assessment order and the material on record.
use of intra-group It is apparent from the above that the end use intra loan was to acquire the asset company in South Africa and it is clearly evident that the JSWEMML was not able to charge the interest more than LIBOR from JSW South Africa Ltd. (JSWENRSAL), which had a direct impact on the interest repayment nt capability of JSWEMML to JSWEL of not more than LIBOR.
Further, the assessee submitted that with respect to cross border transactions, the interest rate is determined by using foreign currency rate (LIBOR/EURIBOR) and the same has JSW Energy Ltd 26 ITA Nos. 3714 & 3713/MUM/2024 been upheld as an appr appropriate opriate benchmarking rate in variolous judicial decisions which have been mentioned above.
Thus, considering the above view taken by the appellant and the view taken by the TPO in appellant's own case for later years i.e. AY 12-13 12 & AY 13-14, the transaction on of interest on loan has been benchmarked using the LIBOR Rate and also it is a well settled law that with respect to the cross border transactions, LIBOR has been considered as an appropriate benchmarking and thus, this ground of appeal raised by the assessee sessee is allowed.
Aggrieved as aforesaid, the revenue is in further appeal before us."
8.2 The Tribunal(supra) rejected the benchmarking applying fixed rate, of interest for the reason that in succeeding assessment years the learned TPO himself carried out benchmarking on the basis of LIBOR plus some spread over of basis points. But the Ld. CIT(A) benchmarked the transaction applying only the LIBOR. Though, the Tribunal supported the finding of the Ld. CIT(A) relying on the decision of the Hon'ble Delhi High Court in the case of CIT Vs Cotton Naturals (I) P Ltd(supra), but directed to determine the ALP on the basis of LIBOR plus some spread over points, because the LIBOR represents interbank rates which are applicable in case of entities having highest credit cre ribunal noted that the rating. The Tribunal assessee itself has assigned a rating of Baa1 /BBB+ to its AE, while benchmarking the international transaction. The sai said rating being of 'lower lower medium investment ribunal directed to investment-grade' rating, the Tribunal adopt certain spread over the LIBOR.
LIBOR. The relevant finding of the Tribunal ribunal is reproduced as under:
JSW Energy Ltd 27 ITA Nos. 3714 & 3713/MUM/2024 "2.14 2.14 Now the only question that survives for our determination of ALP rate keeping in view consideration is the determination the facts and circumstances of the case. The Ld. first appellate authority has confirmed the determination of ALP on the basis of LIBOR only without any spread-over.
spread over. However, the said rate, in our opinion, represent inter-bank in bank rates which are applicable in case of entities having highest credit rating. The same is also fortified by the fact that the assessee, itself, has assigned a rating of Baa1/BBB+ to its AE while benchmarking the transactions. The said rating represents represents 'lower medium investment grade rating. Therefore, the determination of ALP merely on the basis of LIBOR, in our considered opinion, would not be justified. During the course of proceedings before Ld. TPO, the assessee had arrived at mean spread of 243.83 243 basis points over LIBOR which is evident from page nos. 5-65 of Ld. TPO's order. The computation of the same has nowhere been disputed by the revenue. Applying LIBOR + spread-over, spread ALP interest has been worked out to be Rs.1,64,13,241/-.
Rs.1,64,13,241/ We considered opinion that this spread over as are of the considered computed by the assessee was undisputed, quite fair and reasonable and the same was to be accepted. Accordingly, we confirm the ALP rate of LIBOR + 2.4383% as computed by the assessee in the alternative submissions submissions made before Ld. TPO.
The impugned order stand modified to that extent. The Ld. TPO/Ld. AO is directed to recompute the income of the assessee in terms of our direction. Accordingly, Ground Nos. 1 & 2 stands dismissed. Ground No.3 stand allowed. Ground No.. 4 stands partly allowed."
allowed.
8.3 ased on the above finding for assessment year 2011-12,
Based 2011 the
Tribunal 2012 13 also accepted the floating rate
ribunal in assessment year 2012-13
of interest i.e. LIBOR with certain spread over of basis points as interest adopted by the learned TPO. The against the fixed rate of interest relevant finding of the Tribunal 2012 ribunal for assessment year 2012-13 is reproduced as under:
JSW Energy Ltd 28 ITA Nos. 3714 & 3713/MUM/2024 "3.7.4 3.7.4 Upon careful consideration, we find that the facts of this year are pari-materia pari- with the facts of AY 2011-12.12. The loan transactions ctions arise out of same contractual terms and conditions. We also find force in the submissions that learned TPO proceeded on the basis of wrong parameters as pointed out by the assessee before lower authorities, completely disregarding the contractual terms.
terms. It is settled position that the contractual terms agreed to between the parties could not be rewritten or obliterated and reclassification or substitution of the transaction was not permitted. Nothing on record rebut the facts that as per the terms of the contract, the borrower had agreed to pay the lender interest at rates equal to 3 months' LIBOR prevailing on the date of each interest payment up to 31/03/2012. The said fact has also been noted by Ld. DRP at para 2.29 of its directions. The only allegation allegation is that the original agreement dated 26/07/2010 was not produced before Ld. DRP. However, the same would not make much difference since we have already confirmed the application of 2011 12. Since in AY 2011-12, floating rates of interest for AY 2011-12. 2011 we have ave upheld the working made by assessee, taking the same view, we upheld the workings made by the assessee during proceedings before learned TPO. Accordingly, we direct lower authorities to accept alternative TP adjustment of Rs.491.07 Lacs as worked out by by the assessee during proceedings before Ld. TPO based on LIBOR + spread of 243.88 bps/163.8 bps for AYs 2011-12 2011 12 & 2012-13 2012 respectively. The interest already charged by the assessee would be adjusted from the same and the net amount shall be the amount of TP adjustment for the impugned AY. Ground No.1 stand partly allowed."
allowed.
8.4 Thus, Tribunal (supra) has mainly applied the floating rate of the interest in assessment year 2012 2012-13 13 for the reason that there was no change in the contractual terms in AY 2012--13 as compared to assessment year 2011-12.
2011 The Tribunal(supra) has particularly noted the terms of the contract that borrower had agreed to pay the JSW Energy Ltd 29 ITA Nos. 3714 & 3713/MUM/2024 lender interest rates equal to 3 months LIBOR prevailing on the date of the interest payment of two 31/03/2012.
8.5 Before us, the Ld. DR however submitted that facts and circumstances in the year under consideration has under gone substantial change as compared to the assessment year 2011-12 2011 and 2012-13.
13. We find that in the beginning, the assessee and its ated enterprises agreed for a quarterly and six monthly associated interest payments with limited tenure of loan. Thereafter, assessee as amended agreement at least 10 times and extended the first has installment of payment of the interest from six months to 31.03.2019. The ld DR submitted that tthe floating rate of the interest i.e. LIBOR is charged in case of loan of small tenure like the case of assessee in earlier years, where parties agreed for tenure up to three years at the time of entering the loan agreement for the first time. However in the current assessment year under consideration, the loan amount has consistently increased and the tenure of the loan has got substantially changed and first installment has been made payable only on 31.03.2019 i.e. almost nine year after the first tranche of the loan agreement dated 26.07.2010. Therefore, all practical purposes,, the loan extended to the associated enterprises is in the nature of long term loan.
loan 8.6 Therefore, the facts and circumstances of the year under ideration consideration being altered as compared to the facts and circumstances in asses 12 and 2012-13, assessment year 2011-12 2012 the ratio JSW Energy Ltd 30 ITA Nos. 3714 & 3713/MUM/2024 of the decision of the Tribunal (supra) is not applicable over the facts of the instant case. Accordingly, we reject the first contention of the assessee.
8.7 The next objection of the assessee is considering the Mauritius entity as the country of the loan borrower, the Ld. TPO has held that loan was availed by the AE in Mauritus even though it was used in South Africa. We are of the opinion that the Ld. TPO has correctly considered the Mauritius entity and the country of the borrower as Mauritius as the loan has been availed as part of the agreement between the assessee and the Mauritius entity. Accordingly, we reject the contention of the assessee assessee in this rega 8.8 Next contention of the assessee is against application of the fixed rate of the interest by the Ld. TPO, Bloomberg' data TPO using 'Bloomberg base applying 'Swap Swap Manager M tool', converting the floating rate into fixed rate of the interest. In our opinion, the loans granted by the assessee to its associated enterprises might be temporary or short term period loan in the beginning years, but in view of subsequent nd adding of the further loans, ,by amendments from time to time and way of conduct of the parties, the t loans have become long term nature Further, nonpayment of the interest or delay period loans in nature.
loans being in the in repayment of installments has made the loan loans In such circumstances, comparability of nature of high risk loans.
transaction under CUP method invoking only assessee's loan transactions LIBOR rate i.e. floating rate of the interest, may not be correct as JSW Energy Ltd 31 ITA Nos. 3714 & 3713/MUM/2024 the LIBOR interest rate is applied in interbank loan transactions of short term nature, where party's credit score is very high. In the case, the assessee itself has mentioned credit score of the Mauritius Baa1/BBB which is a 'lower medium investment AE as below Baa1/BBB+, grade'. The assessee itself has also accepted the change in facts and stances as compared to the assessment year 2011 circumstances 2011-12 and itself has included 300 basis points to the LIBOR along with certain additional spread over points to compensate high risk nature of the loan.
8.9 But, no instance of any loan transaction of long term nature between two independent parties where floating rate of interest has been applied was brought to our notice by the assessee.
assessee Thus, the question is whether the assessee has relied on any of the CUP nature of loan where transaction from database of long term nature floating rate with appropriate spread has been applied by parties in an independent transaction.
transaction The answer is in negative. The ld TPO has also not compared transactions of assessee with any transaction of long term loan between two independent ndependent parties relying on CUP method. The ld AO/TPO is bound to follow the methods prescribed under the law for determination of arms length price and can't adopt arbitrary method of converting floating rate of interest into fixed rate of interest.
8.10 In above, we feel it appropriate to restore the matter n view of above back to the file of the ld AO/TPO for benchmarking of the loan JSW Energy Ltd 32 ITA Nos. 3714 & 3713/MUM/2024 transaction of the assessee using appropriate method provided under the law treating ng the transaction of the assessee as long term loan transaction with appropriate risk involved. Accordingly, Accordingly we the ground No. 1 of the appeal is allowed for statistical puposes.
puposes
9. The ground No. 2 and additional ground of the appeal of the assessee relates to disallowance of Rs.41,81,59,866/ Rs.41,81,59,866/- u/s 14A of the Act. The brief facts qua the issue in dispute are that the Assessing Officer noted investment of Rs.5416.80 crores as on 31.03.2020 in exempt income yielding assets and dividend income of Rs.28,71,57,235/-- earned during the year under consideration, which was claimed as exempt. But against the said exempt income earned the assessee made disallowance of Rs.4,43,134/ Rs.4,43,134/- on account of expenses incurred for carrying out the activity of the investment. The Assessing Officer however was not satisfied sa with the suo-motu disallowance by the assessee and therefore, he rejected the suo-mot motu disallowance ance by the assessee and invoking tax Rules, 1962( in short the 'Rules'),computed Rule 8D of Income-tax 'Rules'), disallowance of Rs.41,86,03,0 Rs.41,86,03,000/- and after reducing the suo-motu disallowance of Rs.4,43,134/-, Rs.4,43,134/ he made addition of Rs.4,181,59,866/-. Before the Ld. DRP, the the assessee submitted that disallowance should be restricted to the extent of exempted income. However, the Ld. DRP rejected the contention in view of amendment introduced to section 14A from financial year 2001. The said amendment was treated by the Ld. DRP as clarificatory amendment clarificato JSW Energy Ltd 33 ITA Nos. 3714 & 3713/MUM/2024 necessitated due to wrong use and misinterpretations. Accordingly, misinterpretation the Ld. DRP upheld the action o of the Ld. AO.
9.1 Before us, the Ld. counsel for the assessee assailed the finding on the issue in dispute primarily on the ground that no dissatisfaction was recorded by the Assessing Officer qua the suo- motu disallowance computed based by the assessee. But the Ld. DR referred to the para 4.10 and 4.11 of the impugned assessment order and submitted that Assessing Officer has referred to issatisfaction on financials of the company and duly expressed his dissatisfaction the suo-motu computation of disallowance by the asse assessee. For ready reference, relevant para of the assessment order is reproduced as under:
"4.10 4.10 Further, it is also pertinent to mention that a company cannot make such huge investment without existence of a prudent management. Investment decisions are very complex in nature. They require substantial market research, day-to-day day day analysis of market trends and decisions with regard to acquisition, retention and sale of shares at the most appropriate time. It is therefore, not correct to say that investments are made without incurring no or nominal expenditure. It is difficult to accept that a company can make investment without incurring any expenses whatsoever including management or administrative expenses as investment meetings of the Board of decisions are generally taken in the meetings Directors for which administrative expenses are incurred. The term "expenditure" occurring in section 14A would take in its sweep not only direct expenditure but also all forms of expenditure regardless of whether they are fixed, variable, vari direct, indirect, administrative, managerial or financial. Assessee failed to consider all such expenses while calculating the disallowances made under section 14A of the Act.
4.11 On perusal of the Financial of the assessee company, it is noted that Assessee has borrowed funds of Rs. 1333.08 crore and also has incurred interest expenses & other borrowing cost on the JSW Energy Ltd 34 ITA Nos. 3714 & 3713/MUM/2024 same amounting to Rs. 321.95 crore Ae the assessee has not provided any nexus of source between borrowed funds and direct or indirect expenses, penses, therefore, it can be considered that assessee has invested the funds out from common pool only. Hence, the weighted average cost of funds i.e. interest expense is also related to the exempt income yielding investments. But assessee failed to consider consid the interest expenses while calculating the disallowances made under section 14A of the Act.
4.12 In view of the aforesaid discussion and having regard to the accounts of the assesses of the previous year relevant to A.Y. 2020- 2020 21, the undersigned is not satisfied with the action of the assessee for not offering disallowance accordance to section 14A of the Act r.w. Rule 8D of the Rules. For better clarity, Rule 8D is reproduced as under:
8D. (1) Where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with--
with
(a) the correctness of the claim of expenditure made by the assessee; or
(b) the claim made by the assessee that no expenditure has been incurred, in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule sub (2).
I (2) The expenditure in relation to income which does not form part tal income shall be the aggregate of following amounts, of the total namely:--
(i) the amount of expenditure directly relating to income which does not form part of total income; and
(ii) an amount equal to one per cent of the annual average of the monthly (iaverage of the opening and closing balances of the value of investment. income from which does not or shall not form part of total income :
Provided that the amount referred to in clause (i) and clause (ii) shall not exceed the total expenditure claimed by the assess assessee.] In view of the above, the amount of expenditure disallowable u/s. 14A of the Act in relation to such income is hereby determined in accordance with the provisions of Rule 8D of the Income Tax Rules, JSW Energy Ltd 35 ITA Nos. 3714 & 3713/MUM/2024 1962. Further, in absence of the average of monthly investments provided by the assessee, when specifically asked in the show cause notice, the details of exempt yielding investment has been prepared on the basis of submission of the assessee and financial statements, which are as under:
Figure in crore
Sr. Nature of Investment Name of the Company As on 31st As on 31st
No. March 2020 March 2019
1 Unquoted Investment JSW Energy (Barmer) Ltd 1726.05 1726.05
(Formerly known as Raj
Westpower Ltd)
2 Unquoted Investment Jaigad Power Transco Ltd 101.75 101.75
3 Unquoted Investment JSW Energy (Raigarh) Ltd 115.16 115.16
4 Unquoted Investment JSW Power Trading Co. Ltd 70.05 70.05
(formerly known as JSW
Green Energy Ltd)
5 Unquoted Investment JSW Energy (Kutehr) Ltd 0
6 Unquoted Investment JSW Hydro Energy Ltd 2046.01 2046.01
(Formerly known as Himachal
Baspa Power Company Ltd)
7 Unquoted Investment JSW Solar Ltd 0.12 0.01
8 Unquoted Investment JSW Electric Vehicles Pvt Ltd 0.26 0.01
10 Unquoted Investment Toshiba JSW Power systems 100.23 100.23
Pvt Ltd
11 Unquoted Investment Power Exchange India Ltd 1.25 1.25
12 Unquoted Investment MJSJ Coal Ltd 6.52 6.52
13 Unquoted Investment JSW Power Trading Co. Lt 2.87 2.24
14 Unquoted Investment JSW Realty & Infrastructure 2.54 2.29
Pvt Ltd
Total 4172.81 4199.26
The amount of expenditure disallowance u/s 14A of the Act in ch income is hereby determined in accordance with the relation to such provisions of Rule 8D of the Income Tax Rules, 1962.
JSW Energy Ltd 36
ITA Nos. 3714 & 3713/MUM/2024
Particulars Amount (Rs.)
Any amount of expenditure which is directly relating to exempt NIL
income
Amount equal to 1% of annual average of opening and closing 41,86,03,000
balances of value of investment whose income is or shall be exempt as discussed above Month Opening yearly Closing yearly Average value value 4172.81 cr. 4199.26 cr. 4186.03 cr.
Total monthly average Not available
14A disallowance 41,86,03,000
Total amount disallowed under section 14A r.w. Rule 8D 41,86,03,000
9.2 Accordingly, this contention of the Ld. counsel for the assessee for relying on the decision of the Hon'ble Bombay High Court in its own case (ITA No. 669 of 2018) cannot be considered being facts of the instant year distinguishable.
9.3 The next argument advanced by the Ld. counsel for the assessee is that only those investment which has yielded exempt investment income need to be considered for the purpose of disallowance under rule 8D(2) (2) of the Rules. In support of Ld. counsel relied on the decision of the Special Bench in the case of Vireet Investment Pvt.
Ltd. (82 taxmann.com 415)
415). In said case the he core issue was whether investments that did not yield exempt income should be considered while computing disallowance under Rule 8D of Section 14A of the Income Tax Act. The Special Bench referred to the decision of Hon'ble Delhi High Court in CIT vs. Holcim India (P) Ltd (ITA No. 486/2014 and 299/2014), wherein it is ruled that if no JSW Energy Ltd 37 ITA Nos. 3714 & 3713/MUM/2024 exempt income (such as dividend) is earned in a financial year, Section 14A cannot be invoked.
invoked The Special Bench of Tribunal acknowledged conflicting views, particularly the Special Bench views, decision dated 5th August, 2009 in Cheminvest Ltd., Ltd. which had relied on CIT v. Rajendra Prasad Moody [1978] 115 ITR 519 (SC) to hold that even if no income was earned, expenses could still be disallowed. However, the Tribunal followed the Hon'ble Delhi High Court's ruling in Holcim India (P) Ltd (supra), as per the principle of judicial hierarchy,, making it binding within its jurisdiction. The Hon'ble Supreme Court's dec decision ision in Rajendra Prasad Moody was distinguished, as it related to Section 57(iii) (deductions under "Income from Other Sources") and not Section 14A 14A, which has different language and intent. The Speciall Bench noted that Several High Court rulings (Punjab & Haryana, Gujarat, and Allahabad) supported the position that disallowance under Section 14A cannot nd accordingly the be made if no exempt income is earned and t Assessing Officer's stance that investments could have yielded exempt income was rejected because dividend income is not guaranteed and depends on company decisions. The Special Bench Tribunal reaffirmed that business expenditure incurred for investment purposes cannot be disallowed under Section 14A generated The Special Bench of unless actual exempt income is generated. Tribunal accordingly, ruled in favor of the assessee, stating that investments that did not yield exempt income should not be JSW Energy Ltd 38 ITA Nos. 3714 & 3713/MUM/2024 considered for disallowance under Rule 8D of Income Income-tax Rules, 1962.
10. We have heard rival submission of the parties parties in relation to this argument, the Ld. DR submitted that this argument is contrary to the letter and spread of law clarified by way of Circular No. 1 of 2014 of the CBDT and more recently by way of amendment brought inserted in the Explanation to in Finance Act, 2022 which was inserted section 14A. The Ld. DR submitted that said explanation was inserted to clarify that the provisions of section 14A have always applied to the entire investment portfolio not merely to those investments that have yielded exempt in income come during the year. The Ld. DR referred to the decision of the Guwahati Bench in the case of ACIT v. Williamson Financial Services Ltd. reported in 140 taxmann.com 164 and held the amendme nt by way of Finance Act, amendment 2022 is having retrospective effect. But we find that Hon'ble Delhi High Court in the case of Era Infrastructure Pvt. Ltd. 448 ITR 674 has held that the explanation inserted by way of Finance Act, 2022 is prospective in nature and therefore, ratio in the decision of the ACIT v. Williamson Financial Services (supra) being inconsistent with the higher judicial forum cannot be applied over the facts of the instant case.. Accordingly, respectfully following the decision of the Hon'ble Special Bench in the case of Vireet Investment Pvt. Ltd. (supra), we direct the Assessing Officer to restrict the disallowance investment only which had yielded u/s 14A of the Act in respect of investments JSW Energy Ltd 39 ITA Nos. 3714 & 3713/MUM/2024 exempted income. The ground No. 2 and additional ground of the appeal of the assessee is accordingly allowed partly for statistical purposes.
11. The ground No. 3 of the appeal of the assessee relate to disallowance of expenses u/s 14A of the Act amounting to Rs.41,81,59,866/- while computing computing the book profit u/s 115JB of the Act.
12. We have heard rival submissions of the parties and perused the relevant materials on record record. We find that an identical dentical issue has been allowed in favour of the assessee by the Tribunal in assessment year 2008-09 2008 in ITA No. 1334/Mum/2015 dated 02.06.2017. Relevant finding of the Tribunal is reproduced as under:
7. Next Ground is about computation of book profit u/s. 115JB "7.
of the Act. It was brought to our notice that the Tribunal in assessee's own case in 2006-07 2006 had decided the issue in favour of the assessee, that the appeal filed by the department before the Hon'ble Bombay High Court (ITA No.1468 of 2013 dt. 30/4/2015) was dismissed. In these circumstances, we are of the opinion that the order of the FAA has to be confirmed. Respectfully following the order of the Tribunal for AY 2006 2006-07, we decide the fifth Ground against the AO."
12.1 A similar view has been taken in the assessment year 2010-11 2010 in ITA No. 1336/Mum/2015. Relevant finding of the Tribunal is reproduced duced as under:
"7.
7. In so far as the second Ground is concerned, the same relates to computation of 'book profit' in terms of section 115JB of the Act. The Assessing Officer, while computing book profit under JSW Energy Ltd 40 ITA Nos. 3714 & 3713/MUM/2024 section 115JB, added the amount of disallowance computed under section 14A of the Act. The assessee contended before the Assessing Officer that there was no justification for taking into consideration the disallowance under section 14A of the Act, while computing book profit under section 115JB of the Act. The CIT(A) has disagreed with the stand of the Assessing Officer on two counts Firstly, according to the CIT(A), in assessment year 07, the Tribunal in assessee's own case vide ITA 2006-07, No.244/Banga/2010 dated 22/2/2013 has considered a similar issue and upheld the stand of the assessee following an earlier decision of the Tribunal in the case of Essar Teleholdings Ltd. vs. DCIT, ITA No.3850/Mum/2010 dated 27/07/2011. Secondly, the CIT(A) noticed that in this year, assessee has not earned any ncome and, therefore, no such income was credited to exempt income the P&L Account. As a consequence, no corresponding expenditure can be identified and, thus, the provisions were unworkable. In this manner, the addition made by the Assessing Officer has been deleted.
8. Before us, it was a common point between the parties that the decision of the Tribunal in assessee's own case for assessment year 2006-0707 dated 22/2/2013(supra) which has relied upon by the CIT(A), continues to hold the field as it has not been altered by any higher authority. As a consequence, we find no error on the part of the CIT(A) in relying upon the precedent and deleting the impugned addition. Moreover, even the factual aspect brought out by the CIT(A) is unexceptional and deserves to be upheld. We hold so. Thus, on Ground of Appeal No.2 also, the decision of the CIT(A) is affirmed affirmed."
12.2 Respectfully following the same, the ground of appeal of the assessee is allowed and the Assessing Officer is directed to delete the disallowance while computing the book profit u/s 115JB of the Act. The ground No. 3 of the appeal is accordingly allowed.
13. The ground No. 4 of the appeal relate to disallowance of Rs.53,10,000/- u/s 37 of the Act holding that expenditure incurred for abandoned project was in the nature of the capital expenditure. The brief facts qua the issue in dispute are that the Assessing Rs.51,10,000/ on the project which Officer observed expenditure of Rs.51,10,000/-
JSW Energy Ltd 41 ITA Nos. 3714 & 3713/MUM/2024 d.. In response to the query of the Assessing was not materialized Officer er as why the said expenditure may not be treated as capital expenditure, the assessee responded that said expense was incurred for obtaining feasibility report for use of low calorific feasibility value(CV) coal in its existing high CV coal based power generation nt to reduce dependency on high CV coal which could not be plant implemented due to some technical reasons. The Ld. Assessing Officer rejected the contention of the assessee for two reasons. Firstly,, the assessee itself has treated the same as capital capi work-in-
progress in its books of accounts and therefore, it was capital in nature though due to some technical reasons said feasibility report was not implemented. The Assessing Officer accordingly distinguished the decision of the Hon'ble Madras High Court in the case of Tamilnadu Magesite Ltd. v. ACIT (supra) relied upon by the assessee. Secondly,, according to the Assessing Officer writing off of the expenditure being in the nature of capital expenditure was not the contention of allowable u/s 37 of the Act. The Ld. DRP rejected the the assessee firstly on the ground that expenses incurred on feasibility reports could be considered u/s 35D introduced w.e.f.
1/10th expenditure could be amortized subject 01.04.2013 wherein 1/ to the fulfillment of the conditions prescribed but the assessee did not meet those conditions and attempted to get benefit u/s 37 of the Act, which is not allowable as the expenses was incurred wholly business Secondly and exclusively for the purpose of business. Secondly, the Ld. DRP also rejected the alternative claim claim of the said expenses as short JSW Energy Ltd 42 ITA Nos. 3714 & 3713/MUM/2024 term capital loss on the ground that in view of project for which feasibility report was prepared, was abandoned, no capital asset came into existence and therefore, there could not be transfer of any capital asset, hence the treatment of item appearing in the capital cannot be treated as short term capital loss. The Ld. counsel observed that capital expenditure as per accounting treatment and capital loss as per the Act are altogether different. According to the Ld.. DRP while any expenditure which creates assets of the enduring value comes under capital expenditure whereas capital loss is triggered when there is a loss consequent to the transfer of asset. Before us, the ld. counsel for the assessee relied on the dec decision of the Hon'ble Madras High Court in the case Tamilnadu Magesite Ltd. (supra) and decision of the Hon'ble High Court of Gauhati in the case of Deputy Commissioner of Income-tax Income v. Assam Asbestos Ltd.
(2003) 263 ITR 357 wherein it is held that such expenses ex are revenue in nature. On the contrary, the Ld. DR relied on the finding of the Ld. DRP and submitted that expenses incurred on feasibility reports are governed by the specific provision u/s 35D of the Act and therefore, not eligible u/s 37 of the A ct which explicitly express Act that expenses must be wholly and exclusively for the purpose of business and not to be capital or personal in nature. The Ld. DR submitted that the expenditure was intended for enduring benefit purposes and hence capital in nature because the assessee was evaluating new business opportunity aimed to create long term benefit for the business. The Ld. DR submitted that feasibility JSW Energy Ltd 43 ITA Nos. 3714 & 3713/MUM/2024 report in question was obtained with the objective of evaluating the viability of an investment that would result esult in the acquisition of low (CV) coal which would direct impact on increasing profitability and thus the expenditure confers upon the enduring benefit to the assessee's trade for securing long term advantage by reducing operational costs and therefore, the such expenditure was aimed as creating enduring benefit, benefit therefore, it was capital in character. The Ld. DR relied on the decision of the Hon'ble Bombay High Court in the case of CIT v. J.K. Chemicals Ltd. reported in (1994) 207 ITR 985 and decision n of the Hon'ble Gujarat High Court in the case of CIT v. Shri Digvijay Cement Co. Ltd. (1986) 53 CTR 274 (Gujarat).
14. We have heard rival submissions of the parties and perused the relevant materials on record record.. The section 37 of the Act clearly provide for allowing the expenses as incurred wholly and exclusively for the purpose of the business and not being in the nature of capital or personal expenditure. Thus, Thus if expenditure is in the nature of capital or personal nature, it will go out of ambit of section ction 37 of the Act. Therefore, in the case we have to examine whether the expenditure incurred on feasibility report is in the nature of the capital expenditure or not. The Ld. counsel for the assessee has filed a copy of the said feasibility report before befor us. On perusal of the same, we find that purpose behind obtaining report was to replace the raw material used for the power plants. In the existing plants, the assessee was using high calorific value (CV) coal JSW Energy Ltd 44 ITA Nos. 3714 & 3713/MUM/2024 and said feasibility report has been obtained for substituting raw material as low calorific value and necessary changes in the entire plant and machinery for power generation smoothly. In view of change of the raw material various components of the power plant were required to be changed. Thus the feasibility/project report was intended for long term enduring benefit to the assessee and therefore, the expenditure incurred on the same is in the nature of capital expenditure.
14.1 Now, we find that the legislature has specifically allowed expenditure incurred on such feasibility/project report u/s 35D of the Act subject to fulfilling fulfill certain conditions. The ld DRP has rejected the eligibility of the assessee u/s 35D without examining or providing an opportunity of being heard on the issue. Therefore, we restore this matter back to the file of the Assessing Officer with the direction to the assessee to file necessary documents in support of its eligibility u/s 35D of the Act and the Assessing Officer after due verification may allow the deduction in accordance with law.
accordance 14.2 The alternative claim of the assessee raised in ground no. 5 of the appeal for allowing short capital loss is also not allowable as by way of feasibility report, no capital asset came into existence. We agree with the finding of ld DRP on the issue in dispute, accordingly we uphold the same. The ground No. 4 of the appeal of the assessee llowed for statistical purposes, whereas the ground are accordingly allowed no. 5 of the appeal is dismissed.
JSW Energy Ltd 45 ITA Nos. 3714 & 3713/MUM/2024
15. The ground No. 6 of the appeal relates to deduction of Rs.69,30,25,027/- claimed u/s 80IA of the Act disallowed by the lower authorities. The facts in brief qua the issue in dispute are that assessee claimed deduction of Rs.69,30,25,027/-
Rs.69,30,25,027/ u/s 80IA of the Act. The Assessing Officer further obser observed ved that assessee was having four units i.e. Unit No. 1, Unit No. 2, Unit No. 3 and Unit No. 4 eligible for claiming deduction u/s 80IA of the Act. The Assessing Officer noticed from the details of computation of deduction that earned income from three uni ts i.e. income of Rs.32,22,78,846/-
units Rs.32,22,78,846/
from Unit No. 2 ; Rs.33,54,25,991/
Rs.33,54,25,991/- from Unit No. 3 ;
Rs.35,75,99,035/- from Unit No. 4 and incurred loss of
Rs.92,11,43,970/- from Unit No. 1. The aggregate profit from all eligible SBU Units of Rs.9,41,59,903/- n shown from the Rs.9,41,59,903/ has been profit and loss account and therefore, according to the Assessing Officer only said profit was eligible for deduction u/s 80IA of the Act as against the deduction of Rs.69,30,25,027/-
Rs.69,30,25,027/ claimed for deduction in respect from the profit from Unit No. 3 and Unit No. 4 Unit without taking into consideration loss incurred from Unit No. 1. Thus, according to the Assessing Officer, the assessee has not set off losses incurred from Unit No. 1 amounting to Rs.92,11,43,970/ Rs.92,11,43,970/-
. In response to the show cause notice, the assessee relied on various decisions which have been cited in the submission of assessee reproduced by the Assessing Officer. After considering the submission, the claim of the assessee was rejected mainly on the ground round that according to the Assessing Officer deduction u/s 80IA JSW Energy Ltd 46 ITA Nos. 3714 & 3713/MUM/2024 is in respect of eligible business, the Ld. Assessing Officer referred to 80AB of the Act and according to which deduction has to be allowed with reference to income included in the gross total tot income.
the gross total income includes According to the Assessing Officer ,the net income after setting off of losses. Therefore, assessee is eligible for deduction in respect of aggregate profit from all the units after setting off loss of Unit No. 1
1. The Assessing Officer relied on the decision of the Hon'ble High Court Punjab & Haryana High Court in the case of Bajaj Motors Pvt. Ltd. (supra) and decision of the Hon'ble Supreme Court in the case of Synco Industries Ltd. (supra). The Assessing Officer also relied on the other decisions also cited in the impugned order. The Ld. DRP also upheld the finding of the Assessing Officer and rejected the objection of the assessee.
16. We have heard rival submissions of the parties and perused the relevant materials on record.. Before us, the Ld. counsel for the assessee has relied on the decision which was cited before the lower authorities. The core issue in dispute is whether the deduction is to be computed in respect of profit of each undertaking engaged in usiness or deduction has to be computed on aggregate eligible business profit of all the units engaged in eligible business. Fore ready reference, the he relevant provisions of section 80IA of the Act are extracted as under:
Deductions in respect of profits and gains from "Deductions ustrial undertakings or enterprises engaged in industrial infrastructure development, etc. JSW Energy Ltd 47 ITA Nos. 3714 & 3713/MUM/2024 80-IA. [(1) Where the gross total income of an assessee includes any profits and gains derived by an undertaking or an enterprise from any business referred to in sub-section sub section (4) (such business being hereinafter referred to as the eligible business), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of an amount equal to hundred per cent of the profits and gains derived from such business for ten consecutive assessment years.] sub section (1) may, at the option (2) The deduction specified in sub-section of the assessee, be claimed by him for any ten consecutive assessment years out of fifteen years beginning from the year in which the undertaking or the enterprise develops and begins to operate any infrastructure facility or starts providing telecommunication service or develops an industrial park 47[or develops 48[***] a special economic zone referred to in clause (iii) section (4)] or generates power or commences of sub-section transmission or distribution of power [or undertakes substantial existing transmission or renovation and modernisation of the existing distribution lines [***]] :
[Provided that where the assessee develops or operates and maintains or develops, operates and maintains any infrastructure facility referred to in clause (a) or clause (b) or section (4), the clause (c) of the Explanation to clause (i) of sub-section sub section shall have effect as if for the provisions of this sub-section words "fifteen years", the words "twenty years" had been substituted.] substituted.]"
(3).................
(4).................
(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 sub-section purposes of determining the quantum of deduction under that section for the assessment year immediately succeeding sub-section the initial assessment year or any subsequent assessment year, be computed comput as if such eligible business were the only source of income of the assessee during the previous year year90 and to every ar relevant to the initial assessment year subsequent assessment year up to and including the assessment y ear for which the determination is to be made.
year JSW Energy Ltd 48 ITA Nos. 3714 & 3713/MUM/2024 16.1 The section 80IA(5) clearly specify that for the purpose of determining quantum of deduction , the computation has to be made as if the eligible business is the only source of income. In the ssessee, all the three units are engaged in the 'eligible case of the assessee, business' of generating electricity, therefore we are of the opinion that for the purpose of computation of deduction u/s 80IA of the Act in the case of assessee, the aggregate profit of the eligibl eligible business i.e. all the three units have to be taken. Certainly, loss set off against the aggregate from non eligible business can't be set-off profit of eligible business for computing deduction u/s 80IA of the Act. The purpose of allowing deduction is for promo promotion of the manufacturing or generation of the particular products and promotion of business of those products and not promotion of an undertaking , therefore, aggregate profit of different undertaking of sho the assessee is eligible for deduction u/s 80IA should only be considered for the purpose of deduction. In support , we also rely on the decision of Hon'ble Supreme Court in the case of Tax-II vs M/S Reliance Energy Ltd Commissioner Of Income Tax (Formerly Bses Ltd) on 28 April, 2021 in Civil Appeal No. 1328 of 2021, relevant der:
evant part of which is reproduced as und sub section (5) of Section
13. The other contention of the Revenue is that sub-section 80-IA refers to computation of quantum of deduction being limited from fro 'eligible business' by taking it as the only source of income. It is sub section (5) makes it clear that contended that the language of sub-section sub section (1) is only with respect to the deduction contemplated in sub-section income from 'eligible business' which indicates that there is a cap in sub-
sub section (1) that the deduction cannot exceed the 'business income'. On the JSW Energy Ltd 49 ITA Nos. 3714 & 3713/MUM/2024 other hand, it is the case of the Assessee that sub-section sub section (5) pertains only to determination of the quantum of deduction under sub-section sub (1) by treating ng the 'eligible business' as the only source of income. It was submitted by Mr. Vohra, learned Senior Counsel, that the final computation of deduction under Section 80-IA for the assessment year 2002-03 3 as accepted by the Assessing Officer, was arrived at by taking into account the profits from the 'eligible business' as the 'only source of income'. He submitted that, however, sub-section sub section (5) is a step antecedent to the treatment to be given to the deduction dedu under sub- section (1) and is not concerned with the extent to which the computed deduction be allowed. To explain the interplay between sub section (5) and sub-section sub-section sub will be useful to refer to the facts of this Appeal. (1) of Section 80-IA,, it will The amount of deduction from the 'eligible business' computed under Section 80--IA for the assessment year 2002-03 2002 is Rs. 492,78,60,973 /-.. There is no dispute that the said amount represents income from the 'eligible business' under Section 80-IA and is the only source of income for the purposes of computing deduction under Section 80-IA.. The question that arises further with reference to allowing the deduction so computed to arrive at the 'total income' of the Assessee cannot be determined by resorting to interpretation of sub-
sub section (5).
14. It will be useful to refer to the judgment of this Court relied upon by the Revenue as well as the Assessee. In Synco Industries (supra), this Court was concerned with Section 80-I of the Act. Section 80-I(6), 80 which is in pari materia to Section 80-IA(5), is as follows:
" 80-I(6) I(6) Notwithstanding anythi ng contained in any other provision of anything this Act, the profits and gains of an industrial undertaking or a ship or the business of a hotel or the business of repairs to ocean-going ocean vessels sub section (1) apply or other powered craft to which the provisions of sub-section app shall, for the purposes of determining the quantum of deduction under sub- section (1) for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such industrial undertaking or ship or the business of the ocean going vessels or other powered hotel or the business of repairs to ocean-going craft were the only source of income of the assessee during the previous years 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." It was held in Synco Industries (supra) that for the purpose of calculating the deduction under Section 80-I, 80 loss sustained in other divisions or units cannot be taken into account as sub-
sub JSW Energy Ltd 50 ITA Nos. 3714 & 3713/MUM/2024 section (6) contemplates that only profits from the industrial undertaking shall be taken into account as it was the only source of income. Further, the Court concluded that Section 80-I(6) of the Act dealt with actual computation of deduction whereas Section 80-I(1) of the Act dealt with the treatment to be given to such deductions in order to arrive at the total income of the assessee. The Assessee also relied on the judgment of this Court in Canara Workshops (P) Ltd., Kodialball, Mangalore (supra) to emphasize the purpose of sub-section sub (5) of Section 80--IA. In this case, the question that arose for consideration before this Court related to computation of the profits for the purpose of deduction under Section 80- E,, as it then existed, after setting off the loss incurred by the assessee in the manufacture of alloy steels. Section 80-E of the Act, as it then existed, permitted deductions in respect of profits and gains attributable to the business of generation or distribution of electricity or any other form production of any one or more of power or of construction, manufacture or production of the articles or things specified in the list in the Fifth Schedule. It was argued on behalf of the Revenue that the profits from the automobile ancillaries industry of the assessee must be reduced by the loss suffered by the assesseesee in the manufacture of alloy steels. This Court was not in agreement with the submissions made by the Revenue. It was held that the profits and gains by an industry entitled to benefit under Section 80- E cannot be reduced by the loss suffered by any other industry or industries owned by the assessee.
15. In the case before us, there is no discussion about Section 80- nor the Tribunal and the High Court.
IA(5) by the Appellate Authority, nor However, we have considered the submissions on behalf of the Revenue as it has a bearing on the interpretation of sub section (1) of Section 80- sub-section section (5) of Section IA of the Act. We hold that the scope of sub-section 80- IA of the Act is limited to determination of quantum of deduction under sub-section sub (1) of Section 80-IA of the Act by treating 'eligible business' as the 'only source of income'.
income' section (5) cannot be pressed into service for reading a limitation of Sub-section sub section (1) only to 'business income'. An attempt the deduction under sub-section was made by the learned Senior Counsel for the Revenue to rely on the phrase 'derived ... from' in Section 80-IA (1) of the Act in respect of his submission that the intention of the legislature was to give the narrowest possible construction to deduction admissible under this sub sub-section. It is not necessary for us to deal with this submission in view of the findings JSW Energy Ltd 51 ITA Nos. 3714 & 3713/MUM/2024 recorded above. For the aforementioned reasons, the Appeal is dismissed qua the issue of the extent of deduction under Section 80-IA 80 of the Act.
16.2 The Hon'ble Supreme Court has rejected the plea of Revenue to take business income of the assessee i.e. income under the head profit and gain of the business or profession, instead directed to take profit of eligible business as a single source of income.
business 16.3 Accordingly, we do not find any infirmity in the order of the Ld. CIT(A) in the issue in dispute and accordingly we uphold the same. The ground No. 6 of the appeal of the assessee is accordingly dismissed.
17. The ground No. 7 of the appeal relate to claim of the assessee moving stores and spares to Rs.29,48,977/-. of write off non-moving Rs.29,48,977/ The brief facts qua the issue in dispute are that it had debited actual write off Rs.2.01 crores towards write off of non-moving non moving sto stores and spares and reduced Rs.1.71 crores being provision of non-moving spare recognized in earlier years. Hence, net expenses debited to Rs.29,48,977/ only. The assessee profit and loss account was of Rs.29,48,977/-
w submitted during the assessment proceedings that it was by mistake added while computing taxable income under the normal provisions of the Act and requested to reduce the said amount of Rs.29,48,977/- out of total income. But said contention of the assessee was rejected by the Assessing Officer as same was not n claimed by way of filing revised return. The Ld. DRP also rejected the contention of the assessee. Before us, the Ld. counsel for the JSW Energy Ltd 52 ITA Nos. 3714 & 3713/MUM/2024 assessee relied on the decision of the Hon'ble Bombay High Court in the case of Pruthvi Brokers and Shareholders report reported in (2012) 23 taxmann.com 23 (Bombay) and decision of the Hon'ble Delhi High Court in the case of International Tractor Ltd. v. DCIT (ITA No. 35/2019).
18. We have heard rival submissions of the parties and perused record. The claim of the assessee has been the relevant materials on record rejected by the Assessing Officer mainly for the reason that said claim was not filed by way of revised return. We are of the opinion op bonafide and within the provisions of the law that if the claim is bonafide same should be examined by the Assessing Officer and allowed subject to provisions of law. Therefore, we set aside the finding on the issue in dispute and restore the matter back to the Assessing Officer for examining the claim of the assessee of Rs.29,48,977/-
Rs.29,48,977/ on account of write non moving stores and spares. Ground No. 7 of te off non-moving the appeal is accordingly allowed for statistical purposes.
19. In ground No. 8 also the assessee is aggrieved with not allowing the claim of gratuity amounting to Rs.109,98,529/-
Rs.109,98,529/ which was inadvertently y offered twice in the computation income.
19.1 We have heard rival submissions of the parties and perused record.. The issue in dispute being the relevant materials on record identical to issue decided in ground No. 7 and therefore, this issue ack to the file of the Assessing Officer for deciding is also restored back JSW Energy Ltd 53 ITA Nos. 3714 & 3713/MUM/2024 afresh. Ground No. 8 of the appeal is accordingly allowed for statistical purposes ITA No. 3713/MUM/2024
20. The grounds raised by the assessee in its appeal are reproduced as under:
1. On the facts and circumstances of the case as well as in law, the Hon'ble Disputed Resolution Panel has erred in confirming the action of the Ld. Assessing Officer in making an upward adjustment of Rs. 32.51,731/-
32.51,731/ on account of alleged transaction of purch purchases of steel from the Associate facts and circumstances Enterprises, without considering the facts of the case.
2. On the facts and circumstances of the case as well as in law, the Hon'ble Disputed Resolution Panel has erred in not the profit of the appellant is exempt appreciating the fact that the w/s.801A and making any upward adjustment will not have any effect on the Tax
3. On the facts case as well as in acts and circumstances of the case law, the Hon'ble Disputed Resolution Panel has erred in he Learned Assessing Officer in confirming the action of tthe Rs.9,80.000/ u/s. 14A of the making a disallowance of Rs.9,80.000/-
Income Tax Act 1961. without considering the facts and circumstances of the case.
4. On the facts and circumstances of the case as well as in law, the Hon'ble Hon' Disputed Resolution esolution Panel has erred in not appreciating the fact that during the year under consideration the appellant has not earned any exempt income und amendment made in Finance Act, 2022 has not having any retrospective effect.
circumstances of the case as well as in
5. On the facts and circumstances law, the Hon'ble Disputed Resolution Panel has erred in confirming the action of the Ld. Assessing Officer in making an addition of Rs.9,80,000/- on account of alleged disallowance of expenses us. 14A of the Income Tux Aet. -
JSW Energy Ltd 54 ITA Nos. 3714 & 3713/MUM/2024 1961, 61, while computing the book profit w/s. 115J3 of the Act, without appreciating the fact no such addition is to be made in computing the book profit us. 115JB of the Income T Tax Act, 1961. The appellant craves leave to add,add, amend, alter or delete the said id g ground of appeal."
20. The briefly stated facts of the case are that the assessee was engaged in generation of power through power plants. The return of income filed by the assessee was subjected to scrutiny assessment.
proceedings, a specified domestic In the course of scrutiny proceedings transaction of purchase of steel was sent to the Ld Transfer Pricing Officer (ld TPO) for arm's length price determination. The adjustment made by the Ld. TPO was included by the Assessing Officer in the draft assessment order. The Ld. Ld. DRP upheld the said transfer pricing adjustment. Further, the Assessing Officer also made disallowance u/s 14A of the Act amounting to Rs.9,80,000/-
Rs.9,80,000/ in regular income as well as in book profit.
20.1 The ground Nos s.. 1 and 2 of the appeal relates to the transfer pricing adjustment to the specified domestic transaction of the purchase of steel. The brief facts qua the issue in dispute are that assessee operates eight numbers of power plants which comprises 135 MW each that produced 1008 MW power by using lignite as the fuel. During g the year under consideration, the the assessee claimed tax exemption benefit in respect of eight power generating units u/s 80IA of the Act. The assessee explained that for maintenance of those powerr plants, the assessee purchased steel from its or the purpose of benchmarking these associated enterprises (AE). For JSW Energy Ltd 55 ITA Nos. 3714 & 3713/MUM/2024 transactions,, the assessee has submitted a comparison chart between price of associated enterprises and ALP for purchase of the nt. The assessee applied other method for benchmarking steel plant.
using quotation from the independent 3rd parties. The assessee had claimed that it accepted accept the lowest quotation which was from its associated enterprises and therefore, steel was purchased from the associated sociated enterprises instead from the independent parties. The Ld. TPO noted that the profit of the assessee was inflated resulting into higher deduction u/s 80IA of the Act. Before the Ld. TPO, the assessee submitted that being a prudent businessman goods are always purchased at the lower quotation and thus the allegation of the Ld. TPO/AO that assessee has earned more than ordinary profit was baseless by increasing the purchase price of the steel. The increase in expenses will reduce the gross total incom income and corresponding deduction u/s 80IA of the Act but the entire transaction is tax neutral and therefore, no adjustment to purchase price of the steel was required. The Ld. TPO however rejected the contention of the assessee. The Ld. DRP also upheld the same.
s The relevant observation of the Ld. DRP is reproduced as under:
"The assessee's argument that a prudent businessman will always purchase goods at the least possible cost can be accepted in a situation when related party transaction is not there. In this case, the transaction is with a related party which is enjoying ta x holiday. In this case, the AE will be selling tax goods to tax holiday units at a lower cost reducing their revenue and consequently their profits leading to lower taxes. Further, the tax holiday units will show higher than ordinary profits and thus claiming greater deduction. Hence, as per the JSW Energy Ltd 56 ITA Nos. 3714 & 3713/MUM/2024 mandate of Section 80 80-IA IA (10), the transaction price for an entity enjoying tax holiday should be the arm's length price. Also since only one unit is enjoying tax holiday, any sale by the non-eligible ower than the arm's length price eligible unit at a price llower would decrease its profit and consequently its profit. Thus it is not tax neutral.
In the considered view of the panel, the Ld. TPO has taken the right recourse in determining the ALP and making the relevant adjustment."
21. We have heard rival submissions of the parties and perused record. In the case the purchase of the the relevant materials on record.
steel made from the associated enterprises is below the independent party. The Ld. AO and TPO observed that by quotation from third party way of reducing purchase price, the assessee has increased profit which is exempted u/s 80IA of the Act and therefore, upward adjustment had been made on the basis of the data of the quotations received from the other parties. The purpose behind ferring the goods from the related party to the assessee is for transferring increasing the profit in the hands of the entity i.e. the assessee which is tax exempt. The assessee has not able to controvert as why the goods have been transferred at price lower than the p price quoted by the independent party. But we find that the ld TPO has veracity of the independent parties as the TPO not examined the veracity should have examined the independent steel purchase transactions actually happened during the relevant period between independent inde parties and therefore, after applying the CUP method, arms length price/ adjustment should have worked out rather than relying on data provided by the assessee using the other method. Therefore, JSW Energy Ltd 57 ITA Nos. 3714 & 3713/MUM/2024 the approach of the AO and the TPO which has been upheld uph by the Ld. DRP is fallacious and not reliable and accordingly accordingly, we set aside the finding of the Assessing Officer and restore the matter back to the AO/TPO for analyzing the transfer pricing adjustment using the CUP method by way of quoting data of the independent transactions for the sale of steel during relevant period. The ground Nos.. 1 and 2 of the appeal of the assessee are accordingly allowed for statistical purposes.
22. The ground No. 3 and 4 of the appeal relates to disallowance Rs.9,80,000/-.. Undisputedly, u/s 14A of the Act amounting to Rs.9,80,000/ there is no exempt income earned during the year under consideration by the assessee. Respectfully following the decision of Hon'ble Delhi elhi High Court in the case of Chem invested ltd 378 ITR 33 , we hold that no addition could be made if no exempt income was by the assessee in year under consideration. Therefore, the ground No. 3 and 4 of the appeal are accordingly allowed.
23. The ground No. 5 of the appeal relates to making disallowance for earning exempted income u/s 14A while computing book profit u/s 115JB of the Act. The identical issue has been decided by the in ITA No. 3714/Mum/2024 in the case of JSW Energy Ltd.
e, this ground is allowed in favour of the assessee. therefore, JSW Energy Ltd 58 ITA Nos. 3714 & 3713/MUM/2024
24. In the result, both the appeals are allowed partly for statistical purposes.
Order pronounced unced in the open Court on 26/03/2025.
/03/2025.
Sd/
Sd/- Sd/
Sd/-
(KAVITHA RAJAGOPAL)
RAJAGOPAL OM PRAKASH KANT)
(OM KANT
JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai;
Dated: 26/03/2025
Rahul Sharma, Sr. P.S.
Copy of the Order forwarded to :
1. The Appellant
2. The Respondent.
3. CIT
4. DR, ITAT, Mumbai
5. Guard file.
BY ORDER,
//True Copy//
(Assistant Registrar)
ITAT, Mumbai