Income Tax Appellate Tribunal - Mumbai
Reliance Industries , Mumbai vs Assessee
ुं ई यायपीठ "के" मब आयकर अपील य अ धकरण, मब ुं ई IN THE INCOME TAX APPELLATE TRIBUNAL "K" BENCH, MUMBAI BEFORE S/SHRI B.R.MITTAL,(JM) AND RAJENDRA SINGH(AM) सव ी बी.आर. म तल, या यक सद य एवं राजे संह, लेखा सद य के सम आयकर अपील सं./I.T.A. No.4475/Mum/2007 ( नधारण वष / Assessment Year : 2003-04) Reliance Industries Limited, बनाम/ Addl. Commissioner of Income Tax, Maker Chamber-IV, Vs. Range 3 (3), 3rd Floor, 222, Room No.617, Nariman Point, Aayakar Bhavan, M.K.Road, Mumbai-400021 Mumbai-400020.
(अपीलाथ /Appellant) .. ( यथ / Respondent) ITA No.4537/Mum/2007 ( नधारण वष / Assessment Year : 2003-04) Dy. Commissioner of Income बनाम/ M/s Reliance Industries Limited, Tax, Vs. Maker Chamber-IV, Circle 3 (3), 3rd Floor, 222, Room No.609, Nariman Point, Aayakar Bhavan, M.K.Road, Mumbai-400021 Mumbai-400020. (अपीलाथ /Appellant) .. ( यथ / Respondent) ITA No.884 & 885/Mum/2009 ( नधारण वष / Assessment Years : 2004-05 & 2005-06) M/s Reliance Industries बनाम/ Assitt. Commissioner of Income Tax, Limited, Vs. Large Tax Payer Unit, Maker Chamber-IV, 29th Floor, Centre No.1, 3rd Floor, 222, World Trade Centre, Nariman Point, Cuff Parade, Mumbai-400005 Mumbai-400021. (अपीलाथ /Appellant) .. ( यथ / Respondent) ITA No.1724 & 1725/Mum/2009 ( नधारण वष / Assessment Year : 2004-05 & 2005-06) Assitt. Commissioner of बनाम/ M/s Reliance Industries Limited, Income Tax, Vs. Maker Chamber-IV, Large Tax Payer Unit, 3rd Floor, 222, 29th Floor, Centre No.1, Nariman Point, World Trade Centre, Mumbai-400021 Cuff Parade, Mumbai-400005 (अपीलाथ /Appellant) .. ( यथ / Respondent) I.T.A. No.4475/Mum/2007 2 and 7 other appeals ITA No.1559/Mum/2009 ( नधारण वष / Assessment Year : 2006-07) Reliance Industries Limited, बनाम/ Assitt. Commissioner of Income Tax, Maker Chamber-IV, Vs. Large Tax Payer Unit, 3rd Floor, 222, 29th Floor, Centre No.1, Nariman Point, World Trade Centre, Mumbai-400021 Cuff Parade, Mumbai-400005. (अपीलाथ /Appellant) .. ( यथ / Respondent) ITA No.2813/Mum/2009 ( नधारण वष / Assessment Year : 2006-07) Assitt. Commissioner of बनाम/ Reliance Industries Limited, Income Tax, Vs. Maker Chamber-IV, Large Tax Payer Unit, 3rd Floor, 222, th 29 Floor, Centre No.1, Nariman Point, World Trade Centre, Mumbai-400021 Cuff Parade, Mumbai-400005. थायी ले ख ा सं . /जीआइआर सं . /PAN/GIR No. : AAACR5055K (अपीलाथ /Appellant) .. ( यथ / Respondent) अपीलाथ ओर से / Assessee by : Shri F.V.Irani यथ क ओर से/Revenue by : Shri Ajeet Kumar Jain सन ु वाई क तार ख / Date of Hearing : 04 &11.7.2013 घोषणा क तार ख /Dat e of Pronouncement : 13.09.2013 आदे श / O R D E R PER BENCH:
These Cross-appeals are filed by assessee as well as department against order of ld. CIT(A) dated 30.3.2007 for assessment year 2003-04, dated 31.10.2008 for assessment years 2004-05 and 2005-06 and dated 27.1.2009 for assessment year 2006-
07.
2. At the time of hearing, it was submitted that most of the grounds and the facts in respect of all these appeals filed by assessee as well as by department for all the assessment years under consideration are common. Hence, we have heard these appeals together and dispose off by this common order, for the sake of convenience.
3. Firstly, we take up the appeals filed for assessment year 2003-04.
I.T.A. No.4475/Mum/2007 3 and 7 other appeals
4. The relevant facts giving rise to appeals for assessment year 2003-04 are that the assessee is a Public Limited Company. During the relevant assessment year, assessee company is engaged in the business of manufacturing and trading in petrochemicals, polyester, fiber intermediates, textiles, generation and distribution of power, operation of jetties, investments and oil exploration and refining crude oil. Assessee filed return of income on 1.12.2003 declaring an income of Rs.3057,94,65,355/- u/s 115 JB of the Income Tax Act, 1961 (the Act) and income of Rs.639,95,07,211/- under the normal provisions of the Act. Assessing Officer made assessment vide assessment order dated 30.1.2006 at Rs.2719,68,29,460/- under normal provisions of the Act and Rs.3879,08,06,960/- u/s 115JB of the Act. AO has stated that tax under the normal provisions is more than the tax under the provisions of section 115JB of the Act, hence, assessee-company is assessed under normal provisions of Act, i.e. u/s 143(3) of the Act at Rs.2719,68,29,460. Being aggrieved, assessee filed appeal before the ld.CIT(A) disputing the various additions/disallowances made by AO while computing the income. Ld. CIT(A) vide impugned order dated 30.3.2007 has allowed the appeal of the assessee in part. Hence, assessee as well as department are in appeal before the Tribunal.
5. First we shall take up the appeal of assessee being I.T.A. No.4475/Mum/2007 for our consideration.
I.T.A. No.4475/Mum/2007 Since there are certain grounds in the appeal of department connected with grounds of assessee's appeal, we shall also dispose off those grounds as well with the appeal of assessee.
6. Ground No.1 of appeal of assessee reads as under :
"1. The ld. CIT(A) erred in rejecting the appellant's alternative plea that there is a deemed payment of sales tax and therefore the amount of Rs.1252,83,84,360/- is allowable as per the provisions of section 43B of the Income Tax Act, 1961, The appellant submits that there is a deemed payment of Sales tax which is allowable u/s 43B of the Act and the CIT(A) ought to have given a decision on this issue in favour of the appellant"
6.1 This ground of appeal of assessee is connected with Ground No.1 of appeal taken by the department, which reads as under :
I.T.A. No.4475/Mum/2007 4 and 7 other appeals
1. On the facts and in the circumstances of the case and in law, the ld.
CIT(A) erred in deleting the addition on the notional sales tax of Rs.1252,83,84,360/- which has been treated as revenue receipt by the AO."
6.2 AO has stated that the assessee claimed deduction of notional sales tax of Rs.1009,39,69,517/- as capital receipt, which was received under various schemes of Government of Maharashtra and Government of Gujarat in respect of assessee's units at Patalganga, Jamnagar and Hazira. Assessee claimed the said notional sales tax so received as capital receipt not liable to tax. During the course of assessment proceedings, assessee filed details and claim of deduction of sales tax subsidy of Rs.1252,83,84,360/-, the details of which are given by AO at page 4 of the assessment order. AO held it to be a revenue receipt liable to tax. It is relevant to state that AO has stated that the addition of Rs.1252,83,84,360/- shall be made to the total income. However, in the return of income, assessee has made the claim of Rs.1009,39,69,517/- and extra claim is made during the assessment proceedings. Therefore, AO while computing the total income has made addition of Rs. 1009,39,69,517/- stating that the computation starts with the business income as per computation of income. Being aggrieved, assessee filed first appeal before the First Appellate Authority.
6.3 Ld.CIT(A) considering the fact that the said issue was decided by ITAT Special Bench Mumbai, in assessee's own case for the assessment year 1986-87 reported in 88 ITD 273 (SB) and the Tribunal confirmed its earlier decision in assessee's own case for assessment years 1984-85 and 1986-87 that the sales tax subsidy granted to the assessee is in the nature of capital receipt not liable to tax. That in subsequent year, ITAT has allowed similar claim of assessee and even in the preceding assessment year i.e. assessment year 2002-03, the claim of deduction of notional sales tax was held in the nature of capital receipt not liable to tax. Ld. CIT(A) has accepted the contention of the assessee and held that the claim of deduction of notional sales tax of Rs.1252,83,84,360/- is a capital receipt not liable to tax. It is relevant to state that assessee took alternative submissions before ld. CIT(A) that if the amount of subsidy is regarded as revenue receipt then such sales tax incentives received should be allowed as a deduction under section 43B of the Act while computing the total income of the assessee. It is relevant to state that the ld. CIT(A) has stated that the main contention of the assessee regarding notional sales tax being capital receipt not liable to tax has been allowed, it is not considered necessary to go into the alternative plea of the assessee claiming notional sales tax as deductible under section 43B of the Act. He has also stated that a similar alternative plea taken by the assessee in A.Y 2001-02 had been I.T.A. No.4475/Mum/2007 5 and 7 other appeals rejected by his predecessor for the reason that CBDT Circular No.496 dated 25/9/1987 clarified the position regarding applicability of the provisions of section 43B only to sales tax deferred scheme. This circular did not apply to the sales tax exemption scheme availed by the assessee. Hence, the assessee as well as department are in appeal before the Tribunal.
6.4 At the time of hearing, the ld. Representatives of both parties conceded that deletion of addition on account of sales tax incentives holding the same to be a capital receipt is covered in favour of the assessee by the Special Bench decision of the Tribunal in assessee's own case reported in 88 ITD 273. In the light of the said decision of the Special Bench in assessee's own case, the order of ld. CIT(A) to hold that the claim of deduction of the assessee of notional sales tax of Rs.1252,83,84,360/- is to be held as capital receipt not liable to tax. It was further submitted that similar issue was considered by Mumbai Benches of the Tribunal in assessee's own case in ITA Nos.3082/Mum/2006 and 3420/Mum/2006 (AY-2002-03) vide order dated 28.5.2012 and the Tribunal held that the claim of deduction of assessee of notional sales tax is capital receipt not liable to tax.
6.5. We have considered submissions of the representatives of the parties and the orders of authorities below as well as earlier order of ITAT dated 28.5.2012 (supra). We consider to reproduce paras 4.2 to 4.7 of earlier order which are as under :
"4.2 The assessee claimed deduction of notional sales tax of Rs. 1024,34,61,999/- as capital receipt which was received under various schemes of Government of Maharashtra and Government of Gujarat in respect of assessee's project at Patalganga, Jamnagar and Hazira. The said notional sales tax so received by the assessee was treated as capital receipt not liable to tax. The AO relying upon the decision of ITAT, Mumbai Bench in the case of Bajaj Auto Ltd., in ITA No.49 & 1101/Bom/91 for assessment year 1987-88 treated the said notional sales tax as revenue receipt liable to tax on the ground that such sales tax subsidy is an operational subsidy. The AO also placed reliance on the decision of the Hon'ble Apex Court in the case of Sahani Steel and Press Works Ltd. 228 ITR 253. Being aggrieved the assessee filed appeal before the first appellate authority.
4.3 On behalf of the assessee it was contended that the sales tax exemption given under the schemes by the Government of Maharashtra and Government of Gujarat are towards the objective of dispersal of industry, development of backward area and generating employment opportunities, hence, the same is in the nature of capital receipt not liable to tax. It was contended that the subsidy is not in the nature of operational subsidy intended and supplementing profit of the assessee nor it is in the nature of grant for meeting the cost of plant and machinery. Such subsidy I.T.A. No.4475/Mum/2007 6 and 7 other appeals is in the nature of capital receipt not liable to tax. It was contended that the said issue was considered by Special Bench of ITAT, Mumbai in assessee's own case for A.Y 1986-87 reported at 88 ITD 273(SB) and the Tribunal confirmed its earlier decision in assessee's own case for assessment years 1984-85 and 85-86 that the sales tax subsidy granted to the assessee is in the nature of capital receipt not liable to tax. It was contended that the Tribunal also considered the decision of the Hon'ble Apex Court in the case of Sahney Steel and Press Works Ltd.(supra). He submitted that the Special Bench while deciding the issue in favour of the assessee also considered the decision of another Bench of ITAT Mumbai in the case of Bajaj Auto Limited (supra) which had taken a contrary view that the subsidy is revenue receipt. It was contended that in subsequent assessment years ITAT has allowed similar claim of the assessee and even in the just preceding assessment year 2001-02 the claim for deduction of notional sales tax was held in the nature of capital receipt not liable to tax. The ld. CIT(A) accepted the above contention of the assessee and held that the claim for deduction of notional sales tax of Rs. 1024,34,61,999/- should be allowed as deduction as it is in the nature of capital receipt not liable to tax.
4.4 The assessee has also taken an alternative submission before the ld. CIT(A) that if the amount of subsidy is regarded as revenue receipt then such sales tax incentives received should be allowed as a deduction under section 43B of the Act while computing the total income of the assessee. It is relevant to state that the ld. CIT(A) has stated that the main contention of the assessee regarding notional sales tax being capital receipt not liable to tax has been allowed, it is not considered necessary to go into the alternative plea of the assessee claiming notional sales tax as deductible under section 43B of the Act. He has also stated that a similar alternative plea taken by the assessee in A.Y 2001-02 had been rejected by his predecessor for the reason that CBDT Circular No.496 dated 25/9/1987 clarified the position regarding applicability of the provisions of section 43B only to sales tax deferral scheme. This circular did not apply to the sales tax exemption scheme availed by the assessee.
4.5 Hence, the assessee as well as department are in appeal before the Tribunal.
4.6 At the time of hearing of the appeal, the ld. Representatives of both the parties conceded that deletion of addition on account of sales tax incentives holding the same to be a capital receipt is covered in favour of the assessee by the Special Bench decision of the Tribunal in assessee's own case reported in 88 ITD 273. In the light of the said decision of the Special Bench in assessee's own case, the order of ld. CIT(A) to hold that the claim of deduction of the assessee of notional sales tax of Rs. 1024,34,61,999/- is to be held as capital receipt not liable to tax.
4.7 Respectfully following the above decision of the Special Bench of ITAT in assessee's own case we uphold the order of ld. CIT(A) that the claim for treatment of notional sales tax of Rs. 1024,34,61,999/- is capital receipt. Hence, we uphold the order of ld. CIT(A) on this issue and ground No.1 of the appeal taken by the department is rejected. Since ground No.1 I.T.A. No.4475/Mum/2007
7 and 7 other appeals in assessee's appeal is an alternative ground, we hold that ld. CIT(A) has rightly held that it is not necessary to go into the alternative plea of the assessee as claiming the notional sales tax as deductible under section 43B of the Act. Therefore, ground No.1 of the appeal taken by the assessee is rejected."
6.6 In view of above we agree that issue involved and facts are identical and respectfully following the decision of the Special Bench of ITAT in assessee's own case and the order of Mumbai Bench of the Tribunal in assessee's own case for assessment year 2002-03 dated 28.5.2012 (supra), we uphold the order of ld. CIT(A) that the claim for treatment of notional sales tax is capital receipt. Hence, ground No.1 of the appeal taken by the department is rejected. Since ground No.1 in assessee's appeal is an alternative ground, we hold that ld. CIT(A) has rightly held that it is not necessary to go into the alternative plea of the assessee claiming the notional sales tax is deductible under section 43B of the Act. Therefore, ground No.1 of the appeal taken by the assessee is rejected.
7. In Ground No.2 of appeal, assessee has disputed the order of ld. CIT(A) in confirming the disallowance of interest of Rs.4,39,20,619/- being interest referable to interest free loans and advances given to subsidiary companies.
7.1 At the time of hearing, ld. Representative of assessee submitted that this issue is covered in favour of assessee by the earlier order of the Tribunal, Mumbai Bench dated 28.5.2012 for assessment year 2002-03 (supra). He submitted that even additional loans are within own funds of the assessee which are far in excess than the advances made by the assessee. Ld. DR did not dispute above contention of assessee save and except relying on the orders of authorities below.
7.2 We have carefully considered the submissions of ld. Representatives of the parties and orders of authorities below as well as earlier order of the Tribunal in assessee's own case for assessment year 2002-03, dated 28.5.2012 (supra). We observe that the assessee had given interest free loans to its subsidiaries aggregating to Rs.6,716.12 crores as on 31.3.2003 and the corresponding figures of such interest free loans as on 31.3.2002 stood at Rs.2988.98 crores. Thus, incremental loans given to subsidiaries during the year under consideration were Rs.3,727.14 crores. We observe that net profit after tax and before depreciation stood at Rs.7565.40 crores which exceeded not only the incremental loan given to subsidiaries during the year but also exceeds the total interest free loans of Rs.6,716.12 crores given to the I.T.A. No.4475/Mum/2007 8 and 7 other appeals subsidiaries as on 31.3.2003. Considering the above facts and the facts that similar issue was considered by the Tribunal in assessment year 2002-03 in assessee's own case vide para 5.6, we find merit in the contention of ld. AR. We consider it prudent to reproduce para 5.6 of the said order which reads as under :
"5.6 We have carefully considered the submissions of the ld. representatives of the parties and orders of the authorities below. We have also considered the cases relied upon by the authorities below as well as the cases cited by ld. A.R (supra). There is no dispute to the fact that the assessee's own funds are far in excess of the interest free loans and advances given by the assessee to its subsidiary companies . The Hon'ble Bombay High Court has held in the case of Reliance Utilities & Power Ltd.(supra) that if there were funds available both interest free and overdraft / or loans taken, then presumption would arise that investment would be out of interest free funds generated or available with the company. It was held that if interest free funds were sufficient to meet the investments made, in that case a presumption is established that the borrowed capital was used for the purpose of business and the interest expenditure is deductible under section 36(1)(iii) of the Act. The similar view has also been considered by the Hon'ble Calcutta High Court in Wool Combers of India Ltd., 134 ITR 219 (Cal), wherein it was held that if there were sufficient profits available to meet the advance tax liability and the profits were deposited in the overdraft account of the assessee; in such a case it should be presumed that the taxes were paid out of profits of the year and not out of the overdraft account for the running of the business. Considering subsequent decision of the Hon'ble Jurisdictional High Court in the case of Reliance Utilities & Power Ltd.(supra), wherein it was specifically held that if interest free funds available to an assessee is sufficient to meet its investment, it can be presumed that the investments were made from the interest free funds available with the assessee. Therefore, considering the fact that the assessee had its own funds more than the loans given to its subsidiaries and also in the absence of any nexus establishing that the interest bearing borrowed funds were given as interest free to its subsidiaries, we hold that the disallowance of interest is not justified. Therefore, interest is allowable under section 36(1)(iii) of the Act. Hence, ground No.2 of the appeal taken by the assessee is allowed."
7.3 Considering the facts and the reasoning as given by the Tribunal in the preceding assessment year for AY 2002-03 (supra), we hold that the disallowance of interest is not justified. Hence Ground No.2 of appeal taken by assessee is allowed.
8. Ground No.3 of appeal of assessee relates to confirmation of addition made by AO of Rs.4,05,97,194/- on account of interest on income tax refund granted to the assessee.
8.1 At the time of hearing, ld. AR submitted that above issue was considered by the Tribunal in assessee's own case for assessment year 2002-03 (supra) and was decided against the assessee. Hence, above ground is not press for. In view of above, we reject Ground No.3 taken by the assessee.
I.T.A. No.4475/Mum/2007 9 and 7 other appeals
9. In Ground No.4, the assessee has disputed the order of ld. CIT(A) in confirming proportionate disallowance of Rs.22,25,00,000/- out of interest paid by the assessee and Rs.4,63,00,000/- out of administrative expenses u/s 14A of the Act by holding the said expenditure as having been incurred in relation to earning the interest income exempt u/s 10(23G) of the Act while computing the total taxable income under the normal provisions of the Act as well as book profit u/s 115JB of the Act.
9.1 This ground of appeal of assessee is connected with Ground No.4 of the appeal of the department which reads as under :
"4. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in deleting the disallowance u/s 14A of Rs.105.10 crores incurred for earning exempted income."
9.2 The relevant facts are that the assessee had earned interest income of Rs.345,69,24,696/- which is exempt u/s 10(23G) of the Act. Assessee reduced the said amount while computing the total income, both under the normal provisions of the Act as well as u/s 115JB of the Act. The assessee stated that it had not incurred any expenditure towards earning of the said exempt income. AO however, estimated the amount of Rs.100.47 crores being proportionate interest on borrowed funds and Rs.4.63 crores being proportionate administrative and other expenses towards earning the exempt income and disallowed the same u/s 14A of the Act. Being aggrieved, assessee filed appeal before the First Appellate Authority.
9.3 On behalf of the assessee, it was contended that interest, administrative and other expenses were incurred by assessee in the normal course of carrying on its business activity and for maintaining its corporate status. It was also contended that assessee had not incurred any part of such interest, administrative and other expenses towards earning of exempt income. That such income was incidental to the investments made by the assessee-company out of its surplus funds. It was also contended that AO had not established any nexus between incurring of the expenses and the earning of exempt income. That the interest bearing borrowed funds were invested in the normal course of carrying on the business, and assessee's own funds being far greater than investment and interest free advances given. Hence, it could not be said that a part of borrowed funds had been utilized for making investments. That where the own funds including profit generated and borrowed funds are pooled together and the net cash I.T.A. No.4475/Mum/2007 10 and 7 other appeals inflow of the assessee far exceeded the investments and interest free advances given, no part of interest or administrative and other expenses can be disallowed.
9.4 In the alternative, assessee also submitted before ld. CIT(A) that in the absence of any specific details concerning expenditure incurred towards earning of exempt income, an estimated amount of the administrative expenses alone may be disallowed to meet the ends of justice. It was contended that in the preceding years, on identical facts, AO had disallowed an estimated amount of Rs.20,00,000/- out of administrative expenses relating to the earning of the exempt income which was confirmed by the First Appellate Authority. Therefore, the disallowance out of administrative expenses in the assessment year under consideration viz Assessment Year 2003-04 should not exceed Rs.20,00,000/- while computing total income both under the normal provisions of the Act as well as for computing book profits under section 115JB of the Act. However, ld. CIT(A) has held that as per section 14A of the Act, no deduction should be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under Income Tax Act. The ld. CIT(A) has held that the action of AO in making disallowance of Rs.4,63,00,000/- out of the administrative and general expenses on proportionate basis is in order. As regards apportionment out of the interest expenditure, ld. CIT(A) has stated that the AO has applied some formula to work out interest expenditure towards the exempt income. Ld. CIT(A) has stated that formula adopted by AO is not correct. The ld. CIT(A) has stated that for working out the percentage of borrowed funds utilized for general purposes, AO should have considered total availability of funds and not only borrowed funds. The ld. CIT(A) has stated that amount of interest allocable towards the exempt income on proportionate basis comes to Rs.22,25,00,000/- and accordingly, has restricted the disallowance of interest to Rs.22.25 crores as against Rs.100.47 crores made by AO. Therefore, assessee as well as the department are in appeal before the Tribunal.
9.5 At the time of hearing, ld. AR submitted that total investment made is of Rs.6722.72 crores which includes investment on which assessee has earned exempt income u/s 10(23G) of Rs.345.69 crores. Ld.AR submitted that the assessee has net own funds of Rs.27638.60 crores besides net profit after tax and before depreciation stood at Rs.7565.40 crores. Hence, its investment cannot be said to be part of the borrowed funds which had been utilized for making investment. Ld. AR submitted that similar disallowance were made by AO in the preceding assessment year 2002-03. However, ld. CIT(A) deleted the disallowance made by AO u/s 14A of the Act I.T.A. No.4475/Mum/2007 11 and 7 other appeals being proportionate interest on borrowed funds. That the appeal filed by department before the Tribunal on this issue was dismissed vide para 7.7 of its order dated 28.5.2012 (supra) and confirmed the order of ld.CIT(A) after observing that assessee's own funds were far in excess than the investments made by the assessee giving exempt income and the disallowance of the interest made by the AO was not justified, as it has to be presumed that the investments had come from the interest free funds available with the assessee. He submitted that in regard to disallowance of administrative expenses u/s 14A of the Act, the Tribunal restricted the disallowance at 1% of exempt income after considering the disallowances made in the preceding assessment years 2000-01 and 2001-02. Ld. AR submitted that in view of earlier orders of ld. CIT(A) on similar facts and circumstances, the disallowance was restricted u/s 14A of the Act towards administrative expenses at 1% of exempt income for the purpose of computation of income under normal provisions of Act and also for computing book profit u/s 115JB of the Act. He submitted that the assessee in the preceding assessment year did not press aforesaid disallowance in the appeal filed by assessee and referred para 7.5 of the order of Tribunal to substantiate his submissions. However, ld. DR in his submissions relied on the order of AO for making disallowance u/s 14A of the Act of interest for making investment to earn exempt income. However, for making disallowance of administrative expenses, ld. DR relied on the order of ld. CIT(A).
9.6 We have carefully considered the orders of authorities below and the submissions of ld. Representatives of the parties. We have also considered the earlier order of the Tribunal dated 28.5.2012 in the assessee's own case for preceding assessment year 2002-03. We observe that AO disallowed an estimated proportionate interest on borrowed funds in respect of investment made by assessee as income was exempt u/s 10(33) and 10(23G) of the Act. However, ld. CIT(A) deleted the said disallowance after stating that it had not been shown by the AO that borrowed funds were employed for making investment which yielded exempt interest income and in the absence of any nexus, disallowance made out of the interest expenses could not be sustained, particularly when own funds of the assessee company were far in excess of the total amount of investment made. We are of the considered view that similar facts are applicable in the assessment year under consideration and also for the reasons stated hereinabove in paras 7.2 and 7.3, we hold that proportionate disallowance of interest of Rs.22.25 crores made by ld. CIT(A) is not justified as the assessee's own I.T.A. No.4475/Mum/2007 12 and 7 other appeals funds are far in excess than the interest free advance given by assessee and the investment made, which is giving exempt interest income to the assessee.
9.7 In so far as disallowance of administrative expenses u/s 14A of the Act is concerned for earning exempt income of Rs.345,69,24,696/-, we are of the considered view that by following the order of ld. CIT(A) for the preceding assessment year i.e. Assessment Year 2002-03, it will be fair and reasonable to restrict the disallowance to 1 % of the exempt income which works out to Rs.3,45,69,250/-. However, in regard to disallowance u/s 14A for computing book profit u/s 115JB of the Act, we observe that similar issue had come up before the Tribunal, Mumbai Bench in the case of Reliance Industrial Infrastructure Ltd V/s Addl. CIT in ITA Nos.69 and 70/Mum/2009 (AY-2005- 06 and 2006-07) and Tribunal vide order dated 5.4.2013 after following the decision of Delhi Bench of Tribunal in Goetze (India) Ltd (32 SOT 101) (Del) and the decision of Mumbai Bench of the Tribunal in M/s Bengal Finance and Investment P.Ltd. in ITA No.5620/Mum/2010, dated 31.7.2012 has held that while computing book profit u/s 115JB of the Act, provisions of section 14A cannot be imported. Therefore, amount disallowed u/s 14A of the Act cannot be considered while computing book profit u/s 115JB of the Act. Accordingly, the issue was decided in favour of the assessee.
9.8. In view of above Ground No.4 of the appeal taken by the assessee is allowed in part by restricting the disallowance to Rs.3,45,69,250/- towards administrative and general expenses u/s 14A of the Act towards earning of exempt income u/s 10(23G) of the Act while computing total taxable income under the normal provisions of Act. However, no disallowance under section 14A be considered while computing book profit u/s 115JB of the Act. Consequently, Ground No.4 taken by the department is rejected.
10. Ground No.5 relates to disallowance u/s 80HHC of the Act in assessee's appeal comprises of five parts. Further, this ground is also connected with Ground Nos.5, 6 and 7 of the appeal of department.
10.1 The relevant facts are that the assessee has claimed deduction u/s 80HHC of the Act of Rs.168,72,28,721/- under normal provisions of the Act and Rs.954,87,34,407/- for the purpose of section 115JB of the Act. AO computed the deduction for the normal provisions of Act at Rs.243,59,48,067/- and stated that the I.T.A. No.4475/Mum/2007 13 and 7 other appeals said deduction will also be taken for computation u/s 115JB of the Act as well. AO has computed the claim u/s 80HHC of the Act stating as under :
A) (i) Excluding 90% of the following amounts :
(a) Miscellaneous expenses of Rs.51,67,11,000/- in view of provision contained in Explanation (baa) to Section 80HHC of the Act;
(b) Gross interest of Rs.705,60,40,766/-; (c) Rent of Rs.14,04,19,575/-;
(ii) Excluded total deduction allowable u/s 80IA/80IB of the Act relating to all the Units of the assessee and B) Considered the sales including excise duty in the total turnover.
10.2 In respect of miscellaneous income, the details of which are given at page 23 of the impugned order, assessee contended that the said incomes form part of profits of business and therefore 90% thereof cannot be reduced for computing the profit for deduction allowable under section 80HHC of the Act. AO did not agree with the assessee and excluded 90% of miscellaneous income by invoking Explanation (baa) to Section 80HHC(4C) of the Act. In appeal, before ld. CIT(A) he has stated that none of the items of income detailed at page 23 of the impugned is in the nature of operational income and accordingly confirmed the action of AO in excluding 90% of the said receipts under Explanation (baa) for computing deduction u/s 80HHC of the Act. Hence, assessee has disputed the above order of ld. CIT(A) as ground No. 5(a) of the appeal before the Tribunal, which reads as under :
"5.(a) The ld. CIT(A) erred in confirming the reduction of profit of the business by 90% of Miscellaneous income of Rs.51,67,11,270/- while computing deduction u/s 80HHC of the Act The appellant submits that on the facts and circumstances of the case the Miscellaneous income is in the nature of profit of business eligible for deduction u/s 80HHC of the Act.
10.3 AO did not accept the contention of the assessee that 90% of only net interest expenses should be considered while reducing from the profits of business for computing deduction u/s 80HHC of the Act. Ld. CIT(A) also confirmed action of AO. The ld. CIT(A) stated that deduction u/s 80HHC is allowable only on profits derived by the assessee on the export of goods or merchandise. That interest earned by the assessee is not derived from the export of goods or merchandise and therefore, immediate source of interest is the deposits and not the business or export. It is relevant to state that the ld. CIT(A) has also not agreed with the contention of the I.T.A. No.4475/Mum/2007 14 and 7 other appeals assessee that 90% of only of net interest received should be reduced from the profits of the business. Hence assessee has disputed the above order of ld. CIT(A) before the Tribunal in Ground No.5(b) and (c) as under:
"5.(b) The ld. CIT(A) erred in confirming the reduction of profit of the business by 90% of gross interest received of Rs.705,60,40,766/- while computing deduction u/s 80HHC of the Act The appellant submits that on the facts and circumstances of the case the interest income is in the nature of profit of business eligible for deduction u/s 80HHC of the Act.
5(c ) In the alternative and without prejudice to Ground No.5(b), the CIT(A) erred in not considering interest income net of interest expenses while computing profit of business under section 80HHC of the Act."
10.4 In respect of treating the excise duty as part of the total turnover for computing deduction u/s 80HHC of the Act, ld. CIT(A) has stated that this issue stands covered in favour of the assessee by the decision of the Hon'ble Bombay High Court in the case of CIT V/s Sudarshan Chemicals Industries ( 2000) 245 ITR 769 (Bom) and accordingly directed to exclude excise duty from total turnover for computing deduction u/s 80HHC of the Act. The department has disputed the above order of ld. CIT(A) before the Tribunal as Ground No.5 of the appeal filed by it, which is as under :
"5. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in deleting the inclusion of excise duty as part of total turnover for computing deduction u/s 80HHC of the IT Act"
10.5 The AO in reducing profit eligible for deduction u/s 80HHC also reduced the deduction allowed to the assessee under section 80IA of the Act by invoking provisions contained in section 80IA(9) read with section 80IB(13) of the Act. In the first appeal, the ld. CIT(A) after considering the submissions of the assessee stated that restriction contained in section 80IA(9) is referable to a specific undertaking, the profit of which are deductible u/s 80IA/80IB and also eligible for deduction under another section in Chapter -VI-A of the Act. That the restriction under this sub-section will apply where one unit got deduction u/s 80IA and the same unit gets deduction under the other section. Ld. CIT(A) has stated that the deduction u/s 80HHC had been claimed and allowed to the assessee only with reference to exporting units, the details of which are mentioned at page 27 of the impugned order. He further stated that the deduction u/s 80IA/80IB has been allowed with reference to 9 other units engaged in power generation and infrastructure activity, details of units are stated by the ld. CIT(A) at I.T.A. No.4475/Mum/2007 15 and 7 other appeals page 27 of the impugned order. The ld. CIT(A) has stated that he agrees with the assessee that for computation of deduction u/s 80HHC with reference to the exporting unit, profits allowed as deduction u/s 80IA/80IB with reference to those exporting units allowed may be reduced and not entire claim u/s 80IA/80IB of the assessee in respect of all the units. The ld. CIT(A) has stated that from the information as submitted, it is clear that there is no unit in respect of which both the deduction u/s 80IA/80IB as well as under section 80HHC had been claimed. Therefore, the action of the AO in reducing deduction u/s 80IA/80IB from the profit of the business for computing the deduction u/s 80HHC is not in order and directed the AO to compute deduction u/s 80HHC without reducing deduction allowed u/s 80IA and 80IB to the assessee from the profit of business. In view of above order of ld. CIT(A), the department has filed the appeal before the Tribunal as ground No.6 of the appeal which reads as under :
"6. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in directing the AO to exclude the profit allowed as deduction u/s 80IA/80IB in respect of three exporting units only for the purpose of computing deduction u/s 80HHC of the IT Act, 1961."
10.6 AO has stated that the assessee has claimed different amount of deduction u/s 80HHC for the purpose of normal computation of income and that for the computation of book profit u/s 115JB of the Act. AO has stated that as per Clause (iv) of Explanation to Sub-section (2) to Section 115JB allows deduction of the amount computed u/s 80HHC (3) on the basis of profits and gains of business computed as per Chapter -VI-A of the Act that the amount of deduction u/s 80HHC computed on the basis of only business profit as per normal provisions of Act has to be allowed as deduction while computing book profit u/s 115JB of the Act. Further, AO restricted the deduction to 50% of the deduction computed u/s 80HHC (3) of the Act by invoking the provisions as contained u/s 80HHC (IB) of the Act. Thus, the AO restricted the assessee's claim for deduction u/s 80HHC for computing book profit of Rs.243,59,48,067/- as against the claim of assessee of Rs.954,87,39,407/-. The assessee disputed the above finding of the AO before the ld. CIT(A).
10.7 Ld. CIT(A) confirmed the action of AO in applying the provisions of section (IB) of section 80HHC while computing deduction allowable u/s 80HHC of the Act for computing book profit u/s 115JB of the Act. It is also relevant to state that the ld. CIT(A) directed the AO to compute deduction u/s 80HHC while working out the tax liability u/s 115JB of the Act on the basis of book profit and not on the basis of business profit worked out under normal provisions of Act. In view of above, the I.T.A. No.4475/Mum/2007 16 and 7 other appeals assessee has disputed the order of ld. CIT(A) by taking Ground No.5(d) and (e) of the appeal and the department has taken Ground No.7 of the appeal before the Tribunal. The said grounds read as under :
"5.(d) The ld. CIT(A) erred in confirming the restriction of the eligible export profit u/s 80HHC(3) of the Act by applying the provisions of section 80HHC(1B) of the Act for computing book profit u/s 115JB of the Act.
"5.(e) The ld. CIT(A) erred in holding that all the provisions of section 80HHC of the Act applied while reducing the book profits by eligible amount of export profit u/s 115JB of the Act.
Ground No.7 by department:
"7. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in directing the AO to compute the deduction u/s 80HHC under the provisions of section 115JB with reference to profit and per profit and loss account."
10.8 In respect of Ground No.5(a) taken by assessee, we have heard ld. Representatives of the parties and have carefully considered the orders of authorities below. During the course of hearing ld.AR submitted that Miscellaneous Income of Rs.51,67,11,000/-, details are given at page 23 of impugned order of ld. CIT(A), is a part of business income of assessee and therefore, assessee is entitled for deduction u/s 80HHC of the Act. We consider it prudent to reproduce the details of said miscellaneous income from page 23 of the impugned order of ld. CIT(A) which is as under :
Details of Miscellaneous Income Particulars Amount (Rs.) Nature Cash Discount Received 727502 Discount received on purchase of cars etc. Lease Income Received 180596989 For assets given on lease.
Commission Received 2017472
Royalty Income 25000
Recovery from GAIL for using 79683668 Infrastructure facility at
infrastructural facilities Jamnagar
Recovery from Petronet VK Limited for 37853518 Infrastructure facility at
using infrastructural facilities Jamnagar
Sub-Brokerage received from Karvy 1954976 "-
Consultants Limited
Upfront fee received for Investments in 29343140
Asset Backed Notes
Refund off Brokerage from RSSBL 106279884
Guarantee Commission @ 1.75% on 38699011
Rs.213.40 crs - Reliance Telecom Limited
I.T.A. No.4475/Mum/2007
17 and 7 other appeals
Refund of Cyclone damage insurance 4501 936
Secondees Salary of Oil & Gas Division 2398598
Admin Services charges @ 10 Lacs - 12000000
DDebitNote raised on RllL,
Debit
Admin Services charges @ Rs.5 Lacs p.a. 6000 000 For Patalganga
Debit Note raised on RIIL facalities
Facilities
Purging Charges 13966065
Other Miscellaneous Income 663 510
Total Miscellaneous Income 516711270
However, ld. DR supports orders of authorities below.
10.9 During the course of hearing, ld. AR was requested to furnish a write up as to
how the aforesaid Miscellaneous Income is having direct nexus with the export
business of the assessee and thus eligible for deduction u/s 80HHC of the Act. Ld. AR could not establish that aforesaid miscellaneous income has direct nexus with the Industrial undertaking and in the absence of any material on record to establish that this income has arisen out of industrial undertaking, we uphold the action of AO that none of the aforesaid items of income is in the nature of operational income. Therefore, we confirm the order of ld. CIT(A) that these items of income are covered by Explanation (baa) to section 80HHC of the Act. Hence, we uphold his order in excluding 90% of said Miscellaneous income while computing deduction u/s 80HHC of the Act. Therefore, Ground No.5(a) of the appeal taken by assessee is rejected.
10.10 In respect of Ground Nos.5(b) and (c ) of the appeal taken by assessee in excluding 90% Gross interest receipt of Rs.705,60,40,765/- u/s 80HHC of the Act, ld.
AR submitted that above issue is now covered by the decision of the Hon'ble Apex Court in the case of M/s ACG Associated Capsules (P.) Ltd. v. CIT [2012] 247 CTR 382 (SC), wherein Their Lordships have held that 90% of net receipts are to be excluded under Explanation (baa) to Section 80HHC of the Act for determining the profits of business. Ld. DR has not disputed above contention of ld. AR.
10.11 In view of above submissions and considering the decision of the Hon'ble Apex Court in the case of M/s ACG Associated Capsules (P.) Ltd. (supra) and also the fact that similar issue was also considered by ITAT, Mumbai Bench in assessee's own case for assessment year 2002-03 vide order dated 28.5.2012 (supra), we direct that 90% of net interest receipt after reducing interest expenditure having nexus with earning of interest income have to be reduced while computing the deduction u/s 80HHC of the Act. Therefore, Ground No.5(b) of the appeal is rejected and whereas alternative ground viz Ground ( c ) of the appeal is allowed.
I.T.A. No.4475/Mum/2007 18 and 7 other appeals 10.12 In regard to Ground No.5(d) and 5( e ) of the Appeal taken by assessee. Ld. AR submitted that the said issue is covered in favour of assessee by the decision of the Hon'ble Apex Court in the case of Ajanta Pharma Ltd V/s CIT (2010) 327 ITR 305 (SC), wherein Their Lordships have held that section 115JB of the Act is a self- contained code, and reversed the order of the Hon'ble Bombay High Court but confirmed the order of the Tribunal to hold that Tribunal was right in holding that 100% export profit earned by the assessee as computed u/s 80HHC (3) was eligible for reduction under clause (iv) of the Explanation to section 115JB of the Act. Ld. DR has not disputed above contention of the ld.AR.
10.13 In view of above submissions and considering the decision of the Hon'ble Apex Court in the case of Ajanta Pharma Ltd (supra), we reverse the orders of authorities below and hold that 100% of export profit is eligible for reduction u/s 80HHC of the Act, has to be reduced under clause (iv) of Explanation to Section 115JB of the Act. Hence, Ground No.5(d) and 5(e) of the appeal taken by assessee are allowed.
10.14 In regard to Ground No.5 of the Appeal taken by the department. Ld AR submitted that similar issue was decided by the Tribunal in favour of assessee by considering the decision of the Hon'ble Apex Court in the case of CIT V/s Lakshmi Machine Works -
(2007) 290 ITR 667 (SC) vide para 8.17 of the order for assessment year 2002-03 (supra). Ld. DR has not disputed the above contention of the ld.AR save and except relying on orders of authorities below.
10.15 We have considered submissions of the Ld. Representatives of the parties and the orders of authorities below. We agree with ld. AR that the Tribunal confirmed the order of ld. CIT(A) in the appeal filed by the department in deleting inclusion of excise duty in the total turnover for the purpose of computation of deduction u/s 80HHC of the Act vide para 8.17 of its order dated 28.5.2012 for assessment year 2002-03. The said para reads as under :
"8.17 In respect of Ground No.6 of the appeal of the department to dispute the order of ld. CIT(A) in deleting the inclusion of excise duty and sales tax in the total turnover for the purpose of computing deduction under section 80 HHC of the Act, it was conceded that above issue is covered in favour of the assessee not only by the decision of the Hon'ble Jurisdictional High Court on which reliance has been placed by the ld. CIT(A) (supra) but is also covered by the decision of the Hon'ble Apex Court in the case of CIT I.T.A. No.4475/Mum/2007 19 and 7 other appeals vs. Laxmi Machine Works, 290 ITR 667. The Hon'ble Apex Court in the case of Laxmi Machines Works (supra), has been held that excise duty has to be excluded from the total turnover for the purpose of computing deduction under section 80 HHC of the Act. Further the Hon'ble Jurisdictional High Court as held in the case of Sudarshan Chemical Industries Ltd.(supra) that sales tax is not to be included in the total turnover for computing deduction under section 80 HHC of the Act. Hence, we uphold the order of the ld. CIT(A) and reject Ground No.6 of the appeal taken by the department."
10.16. In view of above, we uphold the order of ld.CIT(A) and reject Ground No.5 of the appeal taken by department.
11. In respect of Ground No.6 of the appeal taken by the department, Ld. DR relied on the order of AO and whereas ld.AR submitted that above issue was considered by Tribunal vide its order dated 28.5.2012 for assessment year 2002-03 (supra) and confirmed the order of ld. CIT(A) by rejecting the ground of appeal taken by department.
11.1 We have considered the orders of authorities below and the submissions of ld. Representatives of the parties. We agree with ld. AR that the similar issue was considered by the Tribunal in the assessee's own case for assessment year 2002-03, dated 28.5.2012 (supra) vide para 8.16 and rejected the ground of appeal taken by the department by confirming the action of ld. CIT(A). The said para 8.16 of the above order reads as under :
"8.16 In respect of Ground No.5 of the appeal of the department disputing order of ld. CIT(A) to exclude profit allowed as deduction under section 80 IA / 80 IB of the Act of those three exporting units only for the purpose of computing deduction under section 80 HHC of the Act and not excluding the amount of deduction allowed under section 80 IA / 80 IB of the Act for all the units of the assessee, we hold that this issue is covered in favour of assessee by the decision of the Hon'ble Jurisdictional High Court in the case of Associated Capsules Pvt. Ltd. vs. DCIT(supra) as discussed herein above and also the decision of ITAT Mumbai Benches in the case of ACIT vs. Grasim Industries Ltd., (2010) 35 SOT 249. Hence, we confirm the order of ld. CIT(A) and reject Ground No.5 of the appeal taken by the department."
11.2 In view of above, we confirm the order of ld.CIT(A) and reject Ground No.6 of the appeal taken by department.
11.3 In respect of Ground No.7 of the appeal taken by the department, Ld. DR relied on the order of AO and whereas ld.AR submitted that the similar issue was considered I.T.A. No.4475/Mum/2007 20 and 7 other appeals by the Tribunal in assessee's own case for assessment year 2002-03 and decided the issue in favour of assessee vide paras 8.18 and 8.19 of its order dated 28.5.2012.
11.4 We have considered the submissions of ld. Representatives of the parties and the orders of authorities below as well as earlier order of the Tribunal in assessee's own case dated 28.5.2012. We observe that the Tribunal decided the issue in favour of assessee by considering the decision of the Hon'ble Apex Court in the case of CIT vs. Bhari Information Tex System Pvt. Ltd., 340 ITR 549 and accordingly rejected the ground of appeal taken by the department. We consider it prudent to reproduce paras 8.18 and 8.19 of the order dated 28.5.2012 as under :
"8.18 In respect of ground No.7 of the appeal of the department disputing the order of ld. CIT(A) in directing the AO to compute the deduction under section 80 HHC of the Act under the provisions of section 115JB with reference to the profits as worked out on the basis of adjusted book profits, it was submitted by ld. A.R that this issue is now covered in favour of the assessee by the decision of the Hon'ble Apex Court in the case of CIT vs. Bhari Information Tex System Pvt. Ltd., 340 ITR 549 and ld. D.R has not disputed the above contention of ld. A.R. 8.19 We agree with the ld. A.R that this issue is covered in favour of the assessee as the Hon'ble Apex Court in the case of Bhari Information Tex System Pvt. Ltd. (supra), after considering the decision of the Special Bench of ITAT, Mumbai in the case of DCIT vs. Syncome Formulations (India) Ltd. 108 TTJ 105 and has held that deduction under chapter VIA of I.T Act has to be worked out not on the basis of regular income tax profits but it has to be worked out on the basis of the adjusted book profits in a case where section 115JA is applicable. Since section 115JA is in para materia to section 115JB, we uphold the order of ld. CIT(A) of rejecting ground No.7 of the appeal taken by the department. "
11.5 In view of above, we uphold the order of ld.CIT(A) and reject Ground No.7 of the appeal taken by department.
12. Ground No.6 taken by assessee is in regard to disputing the order of ld. CIT(A) in confirming the disallowance of expenses on account of traveling of spouses of executives of assessee at Rs.23,80,628/-.
12.1 At the time of hearing, ld.AR conceded that above issue on similar facts had been considered by Tribunal in assessee's own case for assessment year 2002-03 and the Tribunal decided the same against the assessee.
I.T.A. No.4475/Mum/2007 21 and 7 other appeals 12.2 In view of above submissions of ld. AR and the fact that the assessee has not been able to establish that the above expenses pertaining to traveling of spouses of executives of assessee was necessary for the purpose of business of assessee, we uphold the order of ld. CIT(A) by rejecting Ground No.6 of appeal taken by assessee.
13. Ground No.7 of the appeal taken by assessee comprises of two parts, i.e.in part
(a), the assessee has disputed the order of ld. CIT(A) in confirming the action of AO of treating purchases of goods from Durga Iron and Steel Pvt.Ltd (hereinafter in short referred to as "Durga" and M/s Surajbhan Rajkumar Pvt Ltd. (hereinafter in short referred to as Surajbhan) to the extent of Rs.8,15,13,277/- as non genuine and part
(b), the assessee has disputed the order of ld. CIT(A) in confirming disallowance of depreciation of Rs.32,03,625/- on above purchases of goods (as mentioned hereinabove in part (a) on the capitalized value of goods.
13.1 The relevant facts giving rise to above ground of appeal are that the assessee stated to have purchased steel from various parties including Durga and Surajbhan for its refinery at Jamnager. AO stated that during the post search inquiry in the case of M/s Rajguru Bullion, it was noticed that M/s Laxmi Exports, M/s Swati International and M/s Rashi International were involved in giving accommodation entries only without supply of any material to its customers. The proprietor of these concerns is Mr.Vinayak M. Kokate. To verify the correct nature of transactions of these concerns, survey u/s 133A of the Act was carried on 6.1.2005 at the office premises of M/s Swati International. During the course of survey action, Mr. Vinayak M.Kokate, (V.M.Kokate) proprietor of these three concerns, stated on oath on 6.1.2006 that all his above concerns were opened for giving entries only and no business was conducted in these concerns. AO has stated that these three concerns of Mr.Kokate has allegedly supplied material to the following concerns of Shri Pawan Kumar Agarwal (Shri P.K.Agarwal):
i) M/s Bheeshma Iron and Steel Pvt. Ltd.
ii) M/s Deveshwar Steels Pvt. Ltd.
iii) M/s Hit Iron and Steel Pvt. Ltd.
iv) M/s Gulraj Ispat Pvt. Ltd.
v) M/s Singhal Bros
vi) M/s Surajbhan Rajkumar Pvt. Ltd.
vii) M/s Shree Durga Iron and Steel Pvt. Ltd.
viii) M/s Agarwal Corporation
AO has stated that aforesaid parties supplied material to assessee. Therefore,
assessee vide questionnaire dated 11.8.2005, was asked to furnish details and
supporting documents in support of genuineness of transactions with aforesaid
I.T.A. No.4475/Mum/2007
22 and 7 other appeals
P.K.Agarwal Group concerns during the year under consideration. AO has stated that meanwhile inquiries were also conducted with P.K.Agarwal Group of concerns to verify genuineness of transaction. That statements of Shri P.K.Agarwal were recorded on 6.1.2005 u/s 133A, on 23.12.2005, and 27.12.2005 u/s 131 of the Act. That the said concerns of P.K.Agarwal Group of Companies have shown purchases of steel material from M/s Laxmi Exports, whose proprietor is Mr. Kokate. That inquiries made with Regional Transport Office (RTO) and transporters who allegedly delivered goods purchased by group concerns of M/s P.K.Agarwal Group of Companies, it was found that many vehicles claimed to be trucks were actually scooters, motorcycles, Maruti 1000, Van, Cars etc. That many owners of trucks denied the movement of trucks from the places mentioned in the bills to the place of delivery. AO has stated that it leds to the conclusion that no material was supplied to the aforesaid concern of M/s P.K.Agarwal, who in turn allegedly sold the aforesaid steel material to assessee.
13.2 However, assessee vide letter dated 30.12.2005 claimed genuineness of purchases and also submitted supporting documents. It was also contended by the assessee that assessee at any stage was not involved as regards the parties from whom the materials had been sourced by its vendors. Since material, as required by assessee were supplied, it confirmed the receipt of material to its vendors and thereafter made payments by cheques on the invoices raised by them for such material. It is relevant to state that the said letter dated 30.12.2005 is also placed at pages 221 to 224 of the paper book. The assessee also stated in the said letter that its vendor viz Durga and Surajbhan stated to be interacted with Shri Hiten K.Desai, who in turn had procured materials from the open market from other manufacturers/producers for supplying to assessee. That the transporters are selected and payments to them are made by the vendors for transporting goods to assessee's site. That it is a business practice in steel trade to procure the requisite materials from manufactures/other traders in the market and supply to the purchaser. It was stated by assessee that there is no reason to state that purchases have not been made. It was contended that substantial part of the material, which had been consumed during the year under consideration, was forming part of the capital work-in-progress (WIP) and it was appearing as a part of the Balance-sheet item. That part of the material had been consumed during the financial year and capitalized as well. The assessee also enclosed the details of assets for which material had been utilized, its quantum and its value forming part of plant and machinery and claimed depreciation @25% in the relevant previous year. It was contended that material had been properly accounted for in its I.T.A. No.4475/Mum/2007 23 and 7 other appeals books of account and its treatment is recorded in the accounts. It was stated that out of the total purchases of Rs.895,13,277/-, a sum of Rs.256,29,005/- has been capitalized in the latter half of the previous year relevant to the assessment year 2003- 04 as part of plant and machinery and assessee has claimed depreciation of Rs.32,03,626/-. On behalf of the assessee, it was also contended that the beneficiary of such payment is non other than vendor i.e. suppliers and vendors have confirmed having sold goods to the assessee and received payments against such purchases. That there is no allegation by any party to the transaction that money have been given back to the assessee. AO did not accept the contention of the assessee and treated the transaction non-genuine. AO disallowed the claim of depreciation, as claimed by the assessee. Assessee filed appeal before ld. CIT(A).
13.3 Ld. CIT(A) after considering the submissions of assessee made on the lines of submissions made before AO, has held that the said purchases are not genuine. He has stated that M/s Laxmi Exports was in the business of issuing bogus bills. That Shri P.K. Agarwal stated in his statement that he had dealt with one Shri Hiten K.Desai of M/s Laxmi Exports who supplied goods to the assessee and Telephone No. of Shri Hiten K.Desai referred as HKD was found recorded in the mobile of Shri Vinayak Kokate. That Shri P.K.Agarwal in his reply to question No.32 stated that at the time of loading of goods or unloading thereof his men or employees were never present at the site. Shri P.K.Agarwal stated that its vendors and manufactures supplied the steel directly to the assessee. Ld. CIT(A) has concluded that in the entire transaction, role of Surajbhan and Durga was that of getting sales bills from M/s Laxmi Exports and sending the sale bills to the assessee. That Shri P.K.Agarwal stated that when both the suppliers i.e. M/s Laxmi Exports and the customers viz assessee company confirmed the dispatch and receipt of goods, he prepared the bills for his customers and payments were also made and received accordingly 13.4 Ld. CIT(A) has confirmed the action of AO vide paragraph 16.3 of the impugned order as under :
"16.3 I have carefully the submissions made by the appellant. In this case the appellant had claimed to have purchased steel from M/s Surajbhan Raj Kumar Pvt. Ltd and M/s Shri Durga Iron & Steel Co. Ltd. These two companies had in turn claimed to have made the purchases from M/s Laxmi Exports, the proprietary concern of one Shri Vinayak M Kokate. Survey operations u/s 133A were conducted at the premises of Shri Kokate on 06.01.2005. During the course of survey, statement of Shri Kokate was recorded U/S 133A. In his statement, it was admitted by him that he was only engaged in the issue of bogus bills I.T.A. No.4475/Mum/2007 24 and 7 other appeals without supplying any corresponding material. According to him, the money deposited in his bank account through Cheques/demand drafts received from the purchasers was withdrawn in cash and handed over to the intermediary. According to him, he received only remuneration of Rs. 20,000/- per month for these services. The statement of Shri P.K. Agarwal, Director of M/s Shri Durga and M/s Surajbhan was also recorded u/s 131 of the I.T.Act. In his statement, he confirmed of having supplied the material to the appellant company. However, in view of the confession made by Shri V.M. Kokate, proprietor of M/s Laxmi Exports which was shown to have supplied the goods to Surajbhan and Shri Durga, the statement of Shri P.K. Agarwal carries no weight. It was the claim of Shri P.K. Agarwal that M/s Laxmi Exports had directly supplied the materials to the appellant company on behalf of Surajbhan and M/s Shri Durga. He also admitted that neither he nor any other representative of the two companies were present at the time of loading or unloading of the material claimed to be supplied to the appellant company through Laxmi Exports. When M/s Laxmi Exports has not supplied any material, the claim of Shri Agarwal of supplying material to the appellant company remains unsubstantiated. Moreover, some other companies of Shri P.K. Agarwal had also claimed to have supplied certain material to the appellant company in F.Y. 2004-05. This material was claimed to have been purchased by P.K. Agarwal Group of Companies from M/s Rashi International, another proprietary concern of Shri Kokate. However, when the department made enquiries regarding the transportation of these goods, it was found that most of the vehicles through which the material was claimed to have been transported to the appellant company were in fact autorickshaws or vans or scooters or cars or motor cycles. This proves that Shri Kokate is in fact engaged in the business of issuing only bills without delivering any corresponding material. In view of these facts, I uphold the action of the AO in treating the purchases made by the appellant from M/s Durga Iron & Steel Co. Ltd and M/s Surajbhan to be in genuine. Out of the total purchases of Rs.8,95,13,227/-, the appellant has capitalized the amount of Rs. 2,56,29,005/ on which depreciation of Rs. 32,03,626/- has been claimed by the appellant. In view of the above discussion, the action of the AO in disallowing depreciation amounting Rs.32,03,626/- in respect of these purchases is held to be in order."
Being aggrieved, assessee is in appeal before the Tribunal.
13.5. On behalf of the assessee it was contended that AO and ld. CIT(A) while confirming the action of AO have merely relied on the statement of Shri Kokate with whom the assessee had not entered into any transaction. Ld. AR submitted that the assessee was concerned only with Shri P.K.Agarwal who was the director of M/s Surajbhan Rajkumar Pvt. Ltd. And M/s Shree Durga Iron and Steel Pvt. Ltd. and Shri Agarwal stated in his statement that he dealt with one Shri Hiten Desai of M/s Laxmi Exports and was not concerned with Shri Kokate for purchases of steel, which was supplied to the assessee. Ld.AR submitted that AO did not examine Shri Hiten Desai. It was also contended that allegation that the vehicles used were not trucks is not factually correct and referred pages 316 to 318 of the paper book and submitted that many of the vehicles mentioned therein are trucks which were used for supply of steel I.T.A. No.4475/Mum/2007 25 and 7 other appeals to the assessee by assessee's vendor. He submitted that these details forms part of the statement of Shri P.K.Agarwal recorded u/s 131 of the Act. Copy placed at pages 304 to 322 of the paper book. Ld. AR referred question Nos.6 and 7 of the statement of Shri P.K.Agarwal and submitted the he specifically told that his concerns sold iron and steel goods to the assessee. Ld. AR also referred question No.19 of the statement of Shri P.K.Agarwal wherein he stated that said firms stated to be belonging to Shri Kokate, were represented by one Shri Hitesh K.Desai. That Shri P.K.Agarwal stated, he did not know Shri Vinayak M.Kokate. Ld. AR also referred page 225 of the paper book, which contains description/details of assets and items, and stated that the same had been accounted to plant on which the assessee has claimed depreciation in the various assessment years and in the assessment year under consideration, the assessee has capitalized only Rs.256,29,005/- as WIP, on which depreciation of Rs.32,03,625/- is claimed. Ld.AR submitted that the assessee made payments by account payee cheques in settlement of purchase bills and there is no evidence that money paid by cheque has ever been paid back to the assessee. AR submitted that all the material purchased from Durga ansd Surajbhan were dully accounted for in the books of account. Merely, that there was a denial by a third person, with whom assessee has no concerned, the purchases cannot be treated as non-genuine. AR submitted that the disallowance of depreciation should be deleted.
13.6 On the other hand, ld. DR made his submissions justifying the orders of authorities below. He referred to pages 324 to 356 of the paper book which is a copy of statement of Shri Vinayak M Kokate. He referred question No.12 of the statement (page 327 of the paper book) and submitted that Shri Kokate in his statement categorically stated that his three concerns viz M/s Laxmi Exports, M/s Swati International and M/s Rashi International are his concerns which were only providing accommodation entries and no genuine business was conducted in these concerns. Ld. DR submitted that Durga and Surajbhan purchased alleged steel from M/s Laxmi Exports to supply to assessee. Ld. DR referred to the assessment order and submitted that AO on an inquiry found that the trucks No. through which alleged supplies were made were not-genuine. He referred to para 18.13 of the assessment order and submitted that the AO has stated that out of 76 vehicles three were not allotted numbers by respective transport offices, 20 vehicles were either auto rickshaws or van or scooter or car or motor cycles. Two truck owners denied the entry of their trucks into Gujarat. Letters to 20 truck owners could not even be served. That no truck owner confirmed delivery of goods to its destination. Ld. DR submitted that the said I.T.A. No.4475/Mum/2007 26 and 7 other appeals expenditure claimed by assessee on account of purchases of steel is not genuine and therefore, authorities below were justified in denying the depreciation claimed by the assessee.
13.7 We have carefully considered the orders of authorities below and submissions of Ld. representatives of the parties. We have also carefully perused the statements of Shri P.K.Agarwal as well as Shri Kokate respectively placed at pages 304 to 323 and 327 to 368 of the paper book. We observe that the assessee is stated to have purchased steel for setting up its plant at Jamnagar, through concerns of Shri P.K.Agarwal for aggregating sum of Rs.895,13,227/- and out of it an amount of Rs.2,56,29,005/- has been capitalized in the assessment year under consideration viz assessment year 2003-
04. We also observe that Shri P.K.Agarwal stated in his statement that he purchased alleged goods from M/s Laxmi Export. Shri P.K.Agarwasl stated in his statement that for purchase of said material he interacted with Shri Hitesh K Desai and did not have any dealing with Shri Kokate who is stated to be proprietor of M/s Lasxmi Exports. It is a fact that the department had not made any inquiry from Shri Hitesh Desai, though full details of Shri Hitesh Desai were furnished to AO. We also observe that the department has not disputed the fact that the assessee made payment by account payee cheques to Shri P.K.Agarwal and there is no evidence on record that after encashment of those cheques the said amount was returned back to the assessee. On the other hand, we have considered the statement of Shri P.K.Agarwal. He has stated that goods were transported by suppliers and manufactures to the customers directly including the assessee and goods were never sent to his premises. He further stated that on getting confirmation of dispatch/receipt of goods, the bills were raised. We observe that in the financial year relevant to the assessment year under consideration Shri P.K.Agarwal stated that M/s Laxmi Exports supplied iron and steel goods to the assessee and his concern made bills on receipts of confirmation of dispatch /receipt of goods. AO made inquiries and found that the trucks through whom goods were supplied at the premises of assessee are the numbers of scooter, van, Maruti-800. The above findings of the AO validly raise doubt and create suspicion that the invoices/bills relied upon for transporting the goods at the assessee's premises are not genuine because steel admittedly could not be supplied through Van or scooters or motorcycles. It is a fact that the entire addition has been made on the basis of the statement of Shri Kokate and no opportunity was given by the department to Shri Kokate. Shri Kokate was not a person with whom the assessee was having any dealing. Assessee has dealt with concerns of Shri P.K.Agarwal for the purchase of alleged material and Shri P.K.Agarwal I.T.A. No.4475/Mum/2007 27 and 7 other appeals categorically stated that he had actually supplied goods to the assessee and raised bills. However, Shri P.K.Agarwal admitted that neither he nor any other representative of his concerns viz Durga and Surajbhan were present at the time of loading or unloading of material claimed to be supplied to the assessee through M/s Laxmi Exports and M/s Laxmi Exports is stated to be engaged in providing only accommodation entries and not doing any business. Therefore, the claim of Shri P.K.Agarwal of supplying material to the assessee cannot be accepted to be genuine on consideration of facts and circumstances on entirety. Hence ld. CIT(A) has rightly held that supplying of material to the assessee-company remains unsubstantiated. Considering the facts, we are of the considered view that the AO has rightly held that the assessee has not been able to prove total purchases of Rs.895,13,227/- in connection with setting up of its factory at Jamnagar in the assessment year under consideration i.e. assessment year 2003-04 and accordingly, we confirm the order of ld. CIT(A) not to accept the capitalized value of WIP in the assessment year under consideration of Rs.256,29,005/- and to disallow claim of depreciation of Rs.32,06,325/- thereon. Hence, Ground No.7 of the appeal taken by assessee is rejected by upholding the order of ld. CIT(A).
14. Ground No.8 of appeal taken by the assessee is as under :
"8. The ld. CIT(A) erred in confirming the disallowance u/s 92C of the Act of Rs.1,95,00,000/- out of the charter hire charges paid to its associate enterprise M/s Reliance Europe Limited (REL) by your appellant;
The appellant submits that the charter hire charges paid by the appellant to REL are at arm's length price and no adjustment is called for to such payments"
14.1 This ground is connected with Ground No.10 of the appeal by the department which is as under :
"10. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in reducing the adjustment made by AO of Rs.389,78,979/- to 50% to the extent of Rs.1,94,89,489/- on account of chartered hire charges paid to associate enterprise viz Reliance Europe Limited".
14.2 The relevant facts are that AO made adjustment of Rs.389,78,979/- on account of charter hire charges paid by the assessee to its associate Enterprises M/s REL as per order of TPO. However, ld. CIT(A) by following his order for assessment year 2002-03, upheld the adjustment made by TPO to the extent of 50% i.e. by confirming adjustment of Rs.1,95,00,000/- out of Rs.389,78,979/- and thus giving relief of Rs.194,78,979/-.
I.T.A. No.4475/Mum/2007 28 and 7 other appeals 14.3 At the time of hearing, ld. Representatives of both the parties submitted that this issue is covered by earlier order of the Tribunal dated 28.5.2012 for assessment year 2002-03 and the Tribunal restored the matter to the file of the AO for his fresh adjudication. It was submitted that since facts are identical in this year, matter may be restored to AO.
14.4 We have considered orders of authorities below and submissions of ld. Representatives of both parties. We have considered order of the Tribunal dated 28.5.2012 (supra). We observe that the Tribunal in its order dated 28.5.2012 (supra) has held that neither the assessee, nor the TPO, nor the AO or the CIT(A) have followed any of the method prescribed in the Act and Rules for arriving at Arm's Length Price (ALP). The assessee's case was that the charter hire charges were approved by the D.G.(Shipping) and , hence, it is comparable under "CUP" method. That the TPO took average of the rate published by shipping Intelligence weekly and Drewry Monthly, the rates which are in the public domain and without making any adjustment for variation in capacity, cost, finance, risk etc. computed the ALP. That the ld. CIT(A) took mean of ALP determined by the TPO and the price actually paid by the assessee and determined ALP. Thus, the assessee as well as authorities below have not computed the ALP in accordance with law, and the Tribunal did not accept the ALP determined by all the parties concerned. In view of above, the Tribunal restored this issue to the file of AO with a direction to make a reference to TPO to determine the ALP afresh in respect of the hire chartered -vessel Relchem Isha by a speaking order, after considering such documents that may be filed by the assessee and after giving due opportunity of hearing and after considering special features and capital cost incurred by REL.
14.5. In view of above submissions of the ld. Representatives of the parties and the earlier order of the Tribunal dated 28.5.2012 for assessment year 2002-03(supra) in assessee's own case, we set aside the orders of authorities below and restore the matter to the file of AO with a direction to make a reference to the TPO to determine the ALP in respect of hire charges of Chartered-vessel Relchem Isha by a speaking order after considering such documents as may be filed by the assessee and considering special features and capital cost incurred by REL. Hence, Ground No.8 of the appeal taken by assessee as well as Ground No.10 of the appeal of the department are allowed for statistical purposes.
15. Ground No.9 of appeal taken by the assessee is as under :
I.T.A. No.4475/Mum/2007 29 and 7 other appeals "9. The ld. CIT(A) erred in confirming the disallowance u/s 92C of the Act of Rs.12,69,944/- in respect of the commission paid to its associate enterprises, Reliance Infocom B.V.(RIB) The appellant submits that it has rightly calculated the value of international transaction by applying the method prescribed u/s 92C(1) of the IT Act and supported by the documentary evidence and hence the disallowance made by AO shall be deleted"
15.1 The relevant facts are that the assessee has made payment of export commission of Rs.55727.45 EUROS equivalent to Rs.28,64,536/- to its associate entity namely M/s REL Infocom B.V, Netherlands (hereinafter referred to as RIB) for providing assistance in negotiating and obtaining export orders from European countries for its petro chemical products in terms of agreement dated 1.4.2002 entered into between the assessee and RIB. The assessee company paid commission at the rate of 3% of FOB value of the export orders obtained by RIB for the assessee for exporting petro chemical products to Europe. The TPO has stated that the assessee has paid commission in the range of 1.5% to 3% of FOB value of exports of other petrochemical products through its commission agents to unrelated parties. The TPO stated that in his view the average rate of commission 1.67 % can be considered as ALP of the commission payable by assessee to RIB and accordingly worked out the commission payable at ALP by the assessee to RIB at Rs.15,94,592/- and suggested the adjustment of Rs.12,69,944/- (Rs.2864536 - Rs.1594592). The assessee disputed the said adjustment before the First Appellate Authority. However, the ld. CIT(A) has confirmed the action of the AO for making the said adjustment of Rs.12,69,944/- made by AO. Hence this appeal by the assessee.
15.1(i) Ld. AR submitted that the assessee is paying commission to unrelated parties at the rate of 3% and referred pages 603 to 621 of the paper book which contain details of commission paid to various parties. He submitted that even the payment of commission to some of the unrelated parties is more than 3%. Hence, question of applying average rate of commission to consider ALP does not arise particularly when internal Comparable Uncontrolled Price (CUP) can be applied. He submitted tht the said disallowance should be deleted as it is not based on any method as provided in the Law.
15.2 On the other hand, ld. DR relied on the orders of authorities below.
I.T.A. No.4475/Mum/2007 30 and 7 other appeals 15.3 We have carefully considered the submissions of ld. Representatives of the parties and orders of authorities below as well as have perused the details of payments of commission place at pages 603 to 621 of paper book. We observe that section 92C (2) of the Act provides that when one of the most appropriate method referred to in sub-section (1) is applied for determination of ALP, and more than one price of uncontrollable transaction is available, ALP is to be taken at arithmetic mean of such price. Since the authorities below have applied arithmetic mean of the commission paid to the unrelated parties, we hold that the payment of commission to AE of the assessee at the 3% is not justified. Accordingly, the adjustment as suggested by authorities below is in order. Hence, the disallowance made by the authorities below is confirmed.
Therefore, Ground No.9 of the appeal taken by assessee is rejected.
16. Now we take up Additional Grounds taken by assessee.
16.1 The assessee has taken the first additional ground regarding charging of interest u/s 234D of the Act while passing order u/s 250 dated 1.6.2007 of the Act giving effect to the order of ld. CIT(A).
16.2 At the time of hearing, ld. AR conceded that in view of amendment by Finance Act 2012, by inserting Explanation-2 to Section 234D (2) of the Act with retrospective effect from 1.6.2003, the said ground be decided against the assessee. Hence above additional ground taken by the assessee is rejected.
17. The assessee vide letter dated 8.10.2010 has also filed an additional ground of appeal which reads as under :
"The AO erred in not allowing exemption u/s 10(23G) of the Income Tax Act, 1961 in respect of interest amounting to Rs.10,81,84,252/- on Deep Discount Bonds of Reliable Internet Services Limited while computing total income under the normal provision of the Income Tax Act and book profit u/s 115JB of the Act"
The appellant submits that AO ought to have allowed exemption u/s 10(23G) of the Income Tax Act, 1961 while computing total income under the normal provision of the Income Tax Act and book profit u/s 115JBj of the Income Tax Act, 1961"
17.1 In respect of admission of additional ground, the ld. AR conceded that it is a fact that assessee has not made the claim of exempt income of interest of Rs.10,81,84,252 I.T.A. No.4475/Mum/2007 31 and 7 other appeals on investment of Rs.70 crores in the Deep Discount Bonds of Reliable Internet Services Limited before the AO as well as before the CIT(A). However, he submitted that all the relevant facts are on record and relevant Schedule "F" of Printed Account also proves that the assessee made investment of Rs.345.69 cr. on which interest income is exempt u/s 10(23G) of the Act. He also referred paragraph 12.2 of the assessment order to substantiate his above submissions. He further submitted that it was also certified by the Auditor of the assessee that assessee invested Rs.70 crores in Deep Discount Bonds issued by Reliable Internet Services Limited. The ld. AR relied on the decision of the Hon'ble Apex Court in the case of National Thermal Power Co. Ltd. V/s CIT(1998) 229 ITR 383 (SC) and the decision of Hon'ble Bombay High Court in the case of Pruthvi Brokers and Share Holders Pvt Ltd. (349 ITR 336) and submitted that when relevant facts are on record, and assessee has not made a claim which he could claim as per law, the said claim be considered and be allowed as per law. Ld. DR submitted that he has no objection to restore the issue to the file of the AO for his consideration after admitting the additional ground.
17.2 We have carefully considered the submissions of ld. Representatives of the parties and the cases relied upon before us. We have also perused para 12.2 of the assessment order as well as auditor's certificate which is mentioned at page 66 of the assessment order. We agree that interest on Deep Discount Bonds issued by Reliable Internet Services Limited is exempt u/s 10(23G) of the Act subject to fulfillment of conditions as mentioned in the secton. Hence, it appears to be inadvertent mistake committed by the assessee in not claiming the said interest income as exempt before the AO/CIT(A). Therefore, considering the decision of the Hon'ble Apex Court in the case of National Thermal Power Co. Ltd. (supra) and also the decision of the jurisdictional High Court in the case of Pruthvi Brokers and Share Holders Pvt Ltd. (supra) that if the claim has not been made by the assessee in the return of income due to inadvertent mistake but the relevant facts are on record, the said claim could be considered by the appellate authority. Hence, we admit the additional ground taken by the assessee. Since, the said claim made by assessee needs verification at the end of AO, we agree with ld. DR that the matter be restored to AO and subject to verification same should be considered as per law. Hence, Additional Ground No.2 of the appeal taken by assessee is allowed in part for statistical purposes with the above direction.
Now, we take up remaining grounds of appeal taken by the Department for the assessment year 2003-04 being ITA No. 4537/Mum/2007 I.T.A. No.4475/Mum/2007 32 and 7 other appeals
18. Ground No.2 of the appeal taken by department reads as under :
"2. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in restricting the allowance of depreciation to Rs.39,03,53,90,481/- to Rs.4977,74,24,949/- as against the appellant claim of Rs.4977,74,24,949/- and thus granting relief of Rs.1074,20,34,468/-"
19. Brief facts giving rise to the above ground of appeal are that the assessee had not claimed depreciation in earlier years on various plants /units on the ground that depreciation was optional as per decision of the Hon'ble Apex Court in the Mahendra Mills (2000) 243 ITR 56 (SC). AO allowed depreciation relating to those plants/units to the assessee in earlier years and accordingly reduced written down value (WDV) of the said plants/units. During the assessment year under consideration, the assessee claimed depreciation on the said plants/units in view of amendment made of granting of depreciation compulsory in terms of Explanation-5 to Section 32 (1) of the Act. The depreciation so claimed was on the basis of WDV as per assessee's record i.e. WDV of the year after which the deprecation had not been claimed by assessee. However, AO allowed depreciation on the basis of reduced WDV arrived at after allowing depreciation to the assessee in the preceding years. Thus, the AO computed the amount of allowable depreciation of Rs.3903,53,90,481/- as against the claim of assessee of Rs.4977,74,24,949/-. The assessee filed appeal before the First Appellate Authority.
19.1 Ld. CIT(A) stated that the legal position as it stood prior to 1.4.2002 i.e. prior to assessment year 2002-03, the claim for depreciation was optional. The amendment made by insertion of Explanation 5 to section 32(1) of the Act is prospective whereby the statute made the granting of depreciation mandatory. Ld. CIT(A) has stated that in the earlier years, the assessee did not claim any depreciation on the said plants/units. Hence, it was eligible for the claim of depreciation on the original WDV and not on the reduced WDV. Thus, the ld. CIT(A) stated that the said issue had been considered in the assessee's own case in the preceding years including assessment years 2001-02 and 2002-03 and view has been taken that the claim for depreciation cannot be thrust upon the assessee and the issue was decided in favour of assessee. The ld. CIT(A) directed the AO to adopt WDV of the assets as on 1.4.2002 on the basis of effect given to the order of ld. CIT(A) for the preceding assessment year and allow depreciation accordingly. Hence, this appeal filed by the department.
I.T.A. No.4475/Mum/2007 33 and 7 other appeals 19.2 At the time of hearing, ld. DR relied on the order of AO. Whereas, ld.AR submitted that the said issue was considered by the Tribunal in the assessee's own case in assessment year 2002-03 and the Tribunal vide order dated 28.5.2012 confirmed the order of ld. CIT(A) stating that WDV as on 31.3.2001 had to be taken for considering the depreciation to be allowed to the assessee in the assessment year 2002- 03 as the claim for depreciation prior to insertion of Explanation 5 to section 32(1) of the Act inserted with effect from 1.4.2002 as applicable from assessment year 2002-03, the claim for depreciation was optional in view of the decision of the Hon'ble Apex Court in the case of Mahendra Mills(supra).
19.3 In view thereof, we uphold the order ld. CIT(A) and reject Ground No.2 of appeal taken by department.
20. In Ground No.3 of the appeal, the department has disputed the order of ld. CIT(A) in deleting disallowance of preoperative expenses of Rs.3,99,96,448/-.
20.1 Assessee capitalized in its books of accounts pre-operative expenses of Rs.3,99,96,448/- but claimed as revenue expenses while computing the total income. AO disallowed the claim for deduction on the ground that such expenses were incurred on the erection of plant and machinery in units which had not commenced production during the year under consideration. It is relevant to state that the details of expenses are stated by the ld. CIT(A) at pages 10 to 12 of the impugned order. Being aggrieved, assessee filed appeal before the First Appellate Authority.
20.2 Ld. CIT(A) after considering the submissions of the assessee has interalia stated that the expenditure in question had been incurred by assessee on expansion of the existing business of the assessee-company. Therefore, the said expenditure has to be considered as regular business expenditure of revenue in nature. He has stated that the various items of expenditure claimed are mainly on employee's cost, utilities, repairs and maintenance, travelling, printing and stationary and other administrative expenses. These expenses are primarily in the nature of revenue expenditure. He has further stated that the expenditure have not been incurred on altogether to a new business but were incurred on expansion /extension of the existing business where there is common management, common office and common control. He has further stated that identical issue was considered in the assessee's own case for preceding assessment year i.e. AY-2002-03 and after due consideration the claim for deduction for similar pre-
I.T.A. No.4475/Mum/2007 34 and 7 other appeals operational expenses was allowed in the preceding assessment year. Therefore, the ld. CIT(A) has held that pre-operative expenses of Rs. 3,99,96,448/- are allowable as revenue expenditure. Hence, this appeal by the department.
20.3 During the course of hearing, ld. DR relied on the order of AO. However, ld. AR submitted that similar issue had been considered in the preceding assessment year in assessee's own case including the assessment year 2002-03 vide order dated 28.5.2012 and the Tribunal confirmed the order of the ld. CIT(A) by rejecting the ground of appeal taken by department.
20.4 We have carefully considered the orders of authorities below and the submissions of ld. Representative of the parties. We have also considered the earlier order of the Tribunal for the assessment year 2002-03 dated 28.5.2012 (supra). We observe that the Tribunal has observed that the similar issue on similar facts came up before it in assessee's own case for assessment year 1997-98 in ITA No.6118/Mum/2003 and the Tribunal vide its order dated 19.12.2006 after discussing all the case laws, decided the issue in favour of assessee. The Tribunal also observed that similar issue again came up in subsequent assessment years and after considering its earlier orders, upheld the order of ld. CIT(A) and rejected the ground of appeal taken by department.
20.5 Since, ld. Representatives of both parties agreed that the facts in the assessment year under consideration are identical, we, respectfully following the earlier order of the Tribunal for the preceding assessment year 2002-03, dated 28.5.2012 (supra) read with order of Tribunal for assessment year 1997-98 (supra), uphold the order of ld. CIT(A) by rejecting Ground No.3 of appeal taken by the department.
21. In Ground No.8 of the appeal, the department has disputed the order of ld. CIT(A) in deleting the disallowance made by AO by increasing the book profit u/s 115JB of the Act by the provisions of doubtful debt of Rs.4,75,50,260/-.
21.1 Relevant facts are that the AO while computing book profit u/s 115JB of the Act added a sum of Rs.475,50,260/- being provision for doubtful debts by relying upon provisions of Clause (c ) to explanation (1) of Section 115JB(2) of the Act on the ground that it represented unascertained liability. It is relevant to state that the assessee had added such provisions while computing taxable income under normal I.T.A. No.4475/Mum/2007 35 and 7 other appeals provisions of Act. Being aggrieved, assessee filed appeal before the First Appellate Authority and contended that the provisions for doubtful debts was made with reference to ascertained non-recoverable amounts. It was also contended that provision for doubtful debts could not be termed as unascertained liability and no adjustment was required to be made to the book profit on that account. Reliance was also placed on the decision of Hon'ble Bombay High Court in the case of CIT V/s Echjay Forgings Pvt. Ltd (251 ITR 15) wherein it was held that provision for doubtful debts did not constitute unascertained liability. Ld. CIT(A) after considering the submissions of assessee and the decision of Hon'ble jurisdictional High Court (supra) directed AO not to add back provision for doubtful debt amounting to Rs.475,50,260/- to the profit shown in the profits and loss account while computing the book profit u/s 115JB of the Act. Hence, this appeal by the department.
21.2 At the time of hearing, ld. DR submitted that above issue was considered by the Tribunal in the preceding assessment year i.e. assessment year 2002-03 and decided the issue in favour of department in view of amendment made by the Finance (No.2) Act 2009 with retrospective effect from 1/4/2001 by inserting clause (i) in Explanation -1 to section 115JB of the Act by reversing the order of ld. CIT(A) and confirmed the action of AO to make addition of the provision for doubtful debts while computing deduction u/s 115JB of the Act. Ld. DR referred para 15.4 of the order of Tribunal dated 28.5.2012. However, ld. AR submitted that similar issue has since been considered by the Hon.Karnataka High Court in the case of CIT V/s Yokogawa India Ltd. 204 Taxman 305 and even after the amendment, the provision for doubtful debt could not be added while computing book profit for the purpose of section 115JB of the Act.
21.3 We have carefully considered the submissions of ld. Representatives of the parties and the order of the Hon'ble Karnataka High Court in the case of Yokogawa India Ltd (supra) as well as amendment made in Finance (No.2) Act,2009 by which clause (i) to Explanation (1) to section 115JB with retrospective effect from 1.4.2001 has been inserted. At the time of hearing, it was brought to the notice of ld. Representatives of the parties that similar issue has been considered by ITAT, Mumbai Bench in the case of M/s Kamat Hotels (India) Ltd.in I.T.A. No.708/Mum/2011(AY-2005-06) dated 19.6.2013 to which one of us is a party (JM) and the issue was decided after considering the decision of the Hon'ble Karnataka High Court (supra) that in view of above amendment provision made for doubtful debt I.T.A. No.4475/Mum/2007 36 and 7 other appeals if debited to profit and loss account have to be added while computing book profit for the purpose of section 115JB of the Act. We state the relevant paras i.e para 8 to 12 of the said order which are as under :
"8. Now, we take up the issue before us as to whether the provisions made for doubtful loans and advances can be added back or not while ascertaining the book profit for the purpose of levy of MAT u/s 115JB of the Act.
9. Section 115JB of the Act provides for levy of MAT on the basis of book profit of the company. As per Explanation (1), after sub-section (2), the expression "book profit" means net profit as shown in the profit and loss account in previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 as increased or reduced by certain adjustments, as specified in that section. We observe that by the Finance (No.2) Act, 2009 a new clause (i) in Explanation (1) to sub-section(2) of the said Section has been inserted with retrospective effect from 1.4.2001 so as to provide that if any provisions for diminution in the value of any assets has been debited to the profit and loss account, it is to be added to the net profit as shown in the profit and loss account for the purpose of computation of book profit. It is relevant to state that similar amendment was also made by the said Finance Act with retrospective effect from 1.4.1998 in section 115JA of the Act by inserting a new clause (g) in the Explanation after sub-section (2) of the said Section. Thus, the said amendment to add back the provisions for diminution in the value of any assets is to be added to the net profit as shown in the profit and loss account for the purpose of computation of book profit has been made retrospective from 1st Day of April, 1998 as per section 115JA and whereas as per section 115JB it is made effective retrospectively from 1.4.2001. Since in the assessment year under consideration Section 115JB of the Act is applicable, the said amendment made by inserting a new clause (i) in Explanation (1) to Sub- section (2) of Section 115JB will apply in relation to from the assessment year 2001-02 and for subsequent assessment years while computing book profit for levy of Minimum Alternate Tax. In view of the above amendment it is relevant to state that the decision of the Hon'ble Apex Court in the case of CIT V/s HCL Comnet Systems & Services Limited[2008]305 ITR 409(SC) was overruled wherein, Their Lordships of the Hon'ble Apex Court have held that provisions made for bad and doubtful debts are not for meeting liability; that provision for doubtful debts and doubtful advances did not fall within clause (c ) of the said Explanation (1) in as much as they amounted to provision in respect of diminution in the value of asset. Any provision made towards irrecoverability of a debt cannot be said to be a provision for liability. Hence provision for bad and doubtful debts could not be added back under clause (c) of Explanation (1) to Sub-section (2) of Section 115JA of the Act.
10. During the course of hearing, ld.AR submitted that amendment made by the Finance (No.2) Act, 2009 was considered by the Hon'ble Karnataka High Court in the case of Yokogawa India Ltd. (supra) and held that even after amendment no addition to book profit of the provision made for bad and doubtful debts could be made for MAT. We observe that the Hon'ble Karnataka High Court in the case of Yokogawa India Ltd. (supra) considered the issue in the light of Clause ( c ) of Explanation (1) to Section 115JB of the Act wherein it was held that the provisions for bad and doubtful debts cannot be added back while computing the net profit for the purpose of levy of MAT u/s 115JB of the I.T.A. No.4475/Mum/2007
37 and 7 other appeals Act. We also observe that the facts in the case of the assessee before us are not similar to the case of Yokogawa India Ltd. (supra) because in that case Their Lordships have categorically stated that the assessee simultaneously also reduced the amount from the loan and advances or the debtors from the assets side of the Balance Sheet to the extent of corresponding amount so that, at the end of the year, the amount of loans and advances/debtors is shown as net of the provisions for the impugned bad debts. Their Lordships also considered the genesis of amendment in the context of section 36(1)(vii) of the Act and therefore held that the amendment made retrospectively in that way will not effect the book profit.
11. However, in the case before us, it is not the case of the assessee that it has actually reduced the loans and advances or the debts and if it is so then there is no need to make provision for such bad and doubtful debts, and the assessee could write off the said amount instead of stating it as provision for bad and doubtful debts. On the one hand, the assessee has reduced the amount of Rs.75 Lakhs from the profit and loss account, but not write off/reduced the loans and advances in the Balance Sheet. Hence the decision of the Hon'ble Karnataka High Court does not apply to the case of the assessee before us.
12. In view of the Above, we hold that the decision of the ld. CIT(A) to place reliance on the decision of the ITAT, Mumbai Bench dated 12.2.2010 (supra) and to direct to AO to reduce the said amount by Rs.75 Lakhs while ascertaining the book profit for the purpose of levy of MAT is not justified and on the other hand, it is contrary to the provisions of Act. Moreover, the decision of the Mumbai Bench of the Tribunal dated 4.4.2012 as relied by the ld. DR in the case of M/s. Essar Steel Ltd. (supra), squarely apply to the case before us. Hence, we reverse the order of the ld. CIT(A) by allowing the ground of appeal taken by the Department."
21.4 We observe that recently, the Hon'ble Delhi High Court in the case of Whirlpool Of India Limited and another V/s Union of India (2013) 355 ITR 51(Delhi) has also considered the amendment made in section 115JB(2) by inserting Clause (i) to Explanation (1) by Finance (N0.2) Act, 2009 with retrospective effect from 1.4.2001 and has held that the said amendment has been made to nullify the decision of the Hon'ble Apex Court in the case of CIT V/s HCL Comnet Systems and Services Ltd 305 ITR 409 (SC), wherein the provisions for bad and doubtful debts was allowed for computing the book profit because it was held that such provision is for diminution in the value of assets and not covered by clause (c ) of Explanation (1) to Section 115 JB(2) of the Act. However, in view of above amendment, we hold that following earlier order of the Tribunal in the assessee's own case for assessment year 2002-03 (supra) and also the decision of Tribunal in M/s Kamat Hotels (India) Ltd (supra), the order of ld. CIT(A) is reversed by confirming the action of AO to make the said addition of Rs.475,50,260/- to the profits shown in the profit and loss account while computing the book profit u/s 115JB of the Act. Ground No.8 of the appeal taken by department is allowed.
I.T.A. No.4475/Mum/2007 38 and 7 other appeals
22. In ground No.9, the department has disputed the order of ld. CIT(A) in deleting the disallowance made by AO u/s 80M of the Act of Rs. 47,00,000/-
22.1 Relevant fact are that the assessee received dividend income of Rs.26,79,94,433/- in the assessment year under consideration. The assessee claimed deduction u/s 80M in respect of entire dividend income without apportioning any expenditure against the said income. AO apportioned administrative expenses of Rs.47,00,000/- towards dividend income while computing the deduction allowable u/s 80M of the Act. Being aggrieved, assessee filed appeal before the First Appellate Authority.
22.2 Ld. CIT(A) after considering the decision of Special Bench of ITAT in the case of Punjab State Industrial Development Corporation Ltd. V/s DCIT (102 ITD 1)(SB)(Chd) and the decisions of Hon'ble Bombay High Court in the case of CIT V/s Central Bank of India 264 ITR 522 (Bom), CIT V/s United Collieries Ltd (203 ITR 857 (Cal), Distributors (Baroda) Pvt Ltd V/s Union of India 155 ITR 120 (SC), State Bank of Indore V/s CIT 275 ITR 23 (MP) held that while computing the deduction u/s 80M, only actual expenses incurred for earning the dividend income should be taken into consideration and there is no question of taking expenditure on estimated or presumption basis. Therefore, Ld. CIT(A) has deleted the said addition of Rs.47,00,000/- made by AO. Hence this appeal by the department.
22.3 At the time of hearing, ld. DR relied on the order of AO and whereas ld. AR submitted that the above issue is covered in the assessee's own case vide order of the Tribunal dated 30.4.2008 for the assessment year 2001-02 and referred pages 54 to 62 of the paper book at which copy of the said order is placed.
22.4 We have considered the submissions of the ld. Representatives of the parties and the orders of authorities below. We have also considered the Tribunal order dated 30.4.2008 in assessee's own case (supra) placed at pages 54 to 62 of the paper book. We observe that the Tribunal has held by following its decision in assessee's sister concern in the case of DCIT V/s M./s Reliance Industrial Infrastructural Ltd in ITA Nos.6111/Mum/2003 (AY-1999-2000) dated 12.3.2007 and the decision of Special Bench of ITAT (supra) that estimation of expenditure for earning dividend income cannot be a subject matter of disallowance. Respectfully following the said order in the I.T.A. No.4475/Mum/2007 39 and 7 other appeals assessee's own case (supra), we confirm the order of ld. CIT(A) and reject Ground No.9 of the appeal taken by the department.
23. In Ground No.11, the department has disputed the order of ld. CIT(A) in deleting the adjustment of Rs.5,12,39,280/- made by AO on account of international taxation entered by assessee company for consultancy charges with its associated enterprises.
23.1 Relevant facts giving rise to the above ground of appeal are that the assessee entered into a Consultancy Services Agreement (CSA) on 19.4.1997 which was renewed on 23.8.2002. The assessee paid fee of US$3.75 million in the current year in 4 equal quarterly installments. The assessee used the Comparable Uncontrolled Price (CUP) method for determining the ALP of this transaction. The TPO stated that the nature of services being generally different, it was difficult to apply CUP method and therefore, TPO applied Cost Plus method and by his order suggested adjustment of Rs.512,39,280/- on account of Consultancy Service. Accordingly, AO made the said addition. Being aggrieved the assessee filed appeal before First Appellate Authority.
23.2 Ld. CIT(A) after considering the nature of services deleted the said adjustment of Rs.512,39,280/- by following his order for assessment year 2002-03. Hence this appeal by the department.
23.3 At the time of hearing, ld. DR relied on the order of AO and whereas, ld. AR submitted that similar issue was considered by the Tribunal in assessee's own case for assessment year 2002-03 and the Tribunal vide its order dated 28.5.2012 (supra) held that no adjustment is called for in the transfer pricing provision if the actual figures are replaced in the calculation made by the TPO. The order of ld. CIT(A) to delete the adjustment made by AO/TPO was confirmed for the reasons mentioned in para 12.15 of the said order. He submitted that the similar reasoning are applicable in the assessment year under consideration and the order of the ld. CIT(A) should be confirmed. The Ld. DR did not dispute above contention of ld. AR.
23.4 We have considered the submissions of ld. Representatives of the parties and the orders of authorities below. We have also considered the earlier order of the Tribunal dated 28.5.2012 (supra) and specifically para 12.15 (supra) thereof. In the I.T.A. No.4475/Mum/2007 40 and 7 other appeals absence of any other facts on record, we following earlier order of the Tribunal confirm the order of ld. CIT(A) by rejecting Ground No.11 of the appeal taken by department.
24. Ground No.12 of the appeal taken by the department reads as under :
"On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in deleting the commission of Rs.8,12,24,327/- paid by the assessee company to its associate viz. Reliance Europe ltd.
24.1 Relevant facts giving rise to this ground of appeal are that the assessee exported Paraxylene and Orthoxylene amounting to Rs.486 crores to its associated entity. The assessee applied, in respect of this exports CUP method to determine ALP. The assessee stated that its associated entity exported these goods to third party at the same price and for this purpose back to back invoices raised by the associated entity on the third party has been provided. The assessee furnished to TPO the list of transactions entered into. The assessee stated that the associated entity is paid a commission at a rate which may be in the range of 2.75 % to 3.75% on the FOB value. Thus, total commission payable in this regard is Rs.14,59,11,966/-. The TPO stated that the assessee was directed to furnish the transaction-wise details of commission paid, working analysis, interest rate and advance payments to the assessee by the associated entity of US $ 115 million , the third party comparable of sales commission. That the assessee furnished details of commission paid by the assessee to the associated entity, rate of interest and total interest paid by associated entity to Standard Chartered Bank in respect of loan of US $ 115 million taken from the bank to provide export advance to assessee. The TPO has stated that as per the said details, average rate of commission paid in respect of such exports is approximately 2.49% to agents other than associated entity for the relevant financial year. TPO did not accept the contention of the assessee that the interest cost of US$ 1618938.98 incurred by associated entity works out to approximately 1.41% of the total advance to US$115 million given to the assessee. If the said interest cost of 1.41% is taken in to account with the ALP on the basis of average rate of commission on third party export of 2.49% it works to 3.9%. Therefore the commission paid by the assessee to the associated entity in the range of 2.75% to 3.75% should be considered as ALP for the purpose of section 92C of the Act. TPO stated that average rate of commission of 2.49% included the commission paid to the associated entity and if the said commission paid to the associated entity was excluded, average rate of commission on other export in the polyester works out to 1.67%. Accordingly, TPO suggested adjustment of I.T.A. No.4475/Mum/2007 41 and 7 other appeals Rs.8,12,24,327/- by considering the average rate of 1.67%. Commission payable to the associated enterprises as against rate of commission paid of 3% by the assessee. Being aggrieved, assessee filed appeal before the First Appellate Authority.
24.2 Ld. CIT(A) after considering the submissions of assessee vide para 20.3 deleted the said adjustment after considering the interest cost to the associated enterprises for the amount of advance given to the assessee and the average rate of commission paid to the third party. The said para of ld. CIT(A)'s impugned order i.e. para 20.3 reads as under :
"20.3 I have carefully considered the facts of the case, submissions of the appellant and the order of the TPO. The admitted facts on record are that the appellant had paid commission to its AE at an average rate of 3%. The appellant has also used the Comparable Uncontrolled Price Method for arriving at the arms length price. The distinctive factors of this international transaction which materially affect the arms length price are:
i) The AE had made an upfront interest free advance payment of USD 115 million, to the appellant to be adjusted against the value of the exports made by appellant to AE;
ii) The AE had taken a loan of USD 115 million from Standard Chartered Bank, UK to provide the said export advance to the appellant and had incurred an interest cost @ 1.5% on the said loan taken;
iii) The AE undertook the risk of collection of export proceeds from the ultimate customers.
Rule 10B(1)(a)(ii) of the IT Rules provides that for determining the arm's length price of an international transaction using the Comparable Uncontrolled Price Method, the comparable uncontrolled price is to be adjusted to account for differences between the international transaction and the comparable uncontrolled transactions which could materially affect the price in the open market. In my considered opinion, the above factors do materially affect the rate of commission paid by appellant as the AE has to be compensated for the interest cost incurred by it exclusively for meeting the export obligation. The effective rate of commission payable to unrelated parties therefore comes at 3.12% (1.45% + 1.67%). Further, since all the risks involved are assumed by the AE, it has to be further compensated for such risks undertaken. After factoring in all these considerations, in my opinion, the rate of commission paid by the appellant to the AE becomes, by and large, comparable to that paid to unrelated parties. Accordingly, the arms length price of the international transaction as determined by the appellant is held to be appropriate and does not call for any adjustment. It is pertinent to note that similar adjustment made in the preceding assessment year has been deleted by the CIT(A) by his order dated 28.03.2006. Accordingly, the adjustment of Rs. 8,12,24,327/- made by the AO in respect of the transaction entered into by the appellant with REL is deleted. "
I.T.A. No.4475/Mum/2007 42 and 7 other appeals Hence this appeal by the department.
24.3 At the time of hearing, ld. DR relied on the order of TPO and supported the adjustment made by AO. On the other hand, ld. AR made his submission on the lines of submissions made before the ld. CIT(A) which are mentioned in paragraph 20.2 to 20.2.3 and submitted that the commission paid to associated enterprises at an average rate of 3 % should be considered as ALP as the effective rate of commission payable to unrelated parties comes to 3.12% after considering interest cost incurred by the associated enterprise REL of 1.45% of the sales made by the assessee through REL.. We reproduce paragraph 20.2 to 20.2.3 from pages 61 to 62 of the impugned order of ld. CIT(A) which are as under :
"20.2 Before me, it was contended that the commission paid to REL at an average rate of 3% was fair and reasonable and comparable to the commission paid @ 1.67% to the unrelated parties. The AR emphasized that in all the international transactions with unrelated parties where commission was paid at 1.67%, there was no advance payment received by the appellant in respect of the price of the goods. Besides, recovery and other related risks were on the appellant's account. In contrast, REL had made an upfront interest free advance payment of USD 115 million to the appellant which was adjusted against the value of the exports made by the appellant to REL from time to time. For the purpose of making the said advance payment, REL had taken a loan of USD 115 million from Standard Chartered Bank, UK and incurred an interest cost on the same. It was pointed out that as per the audited financial statement of REL for the financial year 31st December 2003, an interest cost of approximately USD 1.67 million was incurred by REL in respect of the said loan. This interest cost incurred by REL worked out to approximately 1.45% of the sales made by the appellant through REL. Since this interest cost was incurred by REL only for the purpose of providing export advance to the appellant under the Master Export contract dated 23rd January 2002, the said 1.45% should also be considered while examining reasonableness of the commission paid to REL vis-a-vis commission paid to unrelated parties.
20.2.1 According to the appellant, while determining the ALP of an international transaction using the Comparable Uncontrolled Price method the comparable uncontrolled price is to be adjusted to account for differences between the international transaction and the comparable uncontrolled transactions which could materially affect the price in the open market. It was urged that such adjusted price should be taken to be the arm's length price of the transaction. It was submitted that, in this way, the rate of commission to unrelated parties would come to 3.12% (1.45% + 1.67%). Further, since REL was also assuming the risk of collection of export proceeds from the ultimate customers, it would also have to be compensated on an arms' length basis for this risk undertaken under the Master Export contract.
20.2.2 It was further contended that the transfer pricing provisions were introduced to curb the tax avoidance by the abuse of transfer pricing i.e. manipulation of the prices charges and paid in international intra-group I.T.A. No.4475/Mum/2007 43 and 7 other appeals transactions, thereby, leading to erosion of tax revenue. Accordingly to the appellant, REL was bearing a substantially higher incidence of tax than the appellant. That being so, the case of the appellant was not covered by the mischief sought to be curbed by the Legislation, as there was no question of manipulating prices for obtaining any tax advantage.
20.2.3 For the above reasons it was contended that the commission paid to REL by the appellant at an average rate of 3% should be considered as the arms' length price for the purpose of section 92C of the Act."
24.4 We have carefully considered the orders of the authorities below and the submissions of the ld. Representatives of parties. The department has not disputed the fact that the average rate of commission paid by the assessee in respect of export to the third party is of 1.67% as against the commission paid by the assessee to its associated enterprises of 3% of the FOB value. It is also not in dispute that the associated entity REL has made an interest free advances to the assessee of US$115 Million and the interest cost on the said loan of US$ 115 Million taken from Standard Chartered Bank , UK is at 1.45% in the assessment year under consideration. If the said cost of interest and the average rate of commission paid by assessee to the third party is taken into consideration, effective rate of commission payable to unrelated parties comes at 3.12% as against 3% average rate of commission paid by the assessee to its associated enterprises REL on the export as per the agreement. We also observe that the similar adjustment made by AO in the preceding assessment year 2002-03 were deleted by ld. CIT(A) and the department did not dispute the said order of ld. CIT(A) in appeal before the Tribunal. Since above facts have not been disputed by the department, we observe that the ld. CIT(A) has rightly deleted the adjustment of Rs.8,12,24,327/- made by AO in respect of transaction entered into by the assessee with its associated enterprises REL. Hence Ground No.12 of the appeal taken by department is rejected.
25. Now we take up appeals for assessment year 2004-05 being ITA No.884/Mum/2009 filed by assessee and ITA No.1724/Mum/2009 filed by department.
26. First we first take up the appeal of assessee for our consideration.
27. Ground No.1 of appeal of the assessee reads as under :
"1. The ld. CIT(A) erred in rejecting the appellant's alternative plea that there is a deemed payment of sales tax and therefore the amount of Rs.1362,62,91,285/- is allowable as per the provisions of section 43B of the Income Tax Act, 1961, I.T.A. No.4475/Mum/2007 44 and 7 other appeals The appellant submits that there is a deemed payment of Sales tax which is allowable u/s 43B of the Act and the CIT(A) ought to have given a decision on this issue in favour of the appellant"
27.1 This ground of appeal is connected with Ground No.1 of appeal taken by department which reads as under :
"1. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in deleting the notional sales tax of Rs.1362,62,91,285/- which has been treated as revenue receipt by the AO."
27.2 At the time of hearing, ld. Representatives of both the parties submitted that the facts and the issue are identical with ground No.1 of the appeals filed by the assessee as well as by the department for assessment year 2003-04 and whatever decision is taken therein will ipso facto be applicable to these grounds.
27.3 On consideration of orders of the authorities below and in view of above submissions of the ld. Representatives of both parties, we agree with them. Since we have heard these appeals alongwith appeals for assessment year 2003-04 and the above issue has been considered by the Tribunal in paras 6.2 to 6.6 of this order and following the reasoning given in paras 6.5 to 6.6 , we uphold the order of ld. CIT(A) that the claim of treatment of notional sales tax is capital receipt. Hence, Ground No.1 of the appeal taken by department is rejected. As mentioned in para 6.6 and the facts that Ground No.1 in assessee's appeal is an alternative ground, we hold that ld. CIT(A) has rightly held that it is not necessary to go into the alternative plea of the assessee claiming the notional sales tax is allowable u/s 43B of the Act. Hence Ground No.1 of the appeal taken by assessee is also rejected.
28. In ground No.2 of appeal, assessee has disputed the order of ld. CIT(A) in confirming the disallowance of Rs.3,21,079/- being interest payment referable to interest free loans and advances given to subsidiary companies.
28.1 At the time of hearing, ld. Representatives of both the parties submitted that the facts and the issue are identical with ground No.2 of the appeal filed by the assessee for assessment year 2003-04 and whatever decision is taken in respect thereof, the same will ipso facto be applicable to this ground of appeal of the assessee.
I.T.A. No.4475/Mum/2007 45 and 7 other appeals 28.2 We have considered the orders of authorities below and the submissions of ld. Representatives of the parties. We observe that during the year under consideration viz assessment year 2004-05, the assessee has given interest free loans to its subsidiaries aggregating to Rs.7121.94 crores as on 31.3.2004. The corresponding figure of such interest free loans to subsidiaries as on 31.3.2003 stood at Rs.6716.12 crores. Thus, the incremental loans given to subsidiaries during the year under consideration is to the extent of Rs.405.82 crores. AO has stated that, during the assessment proceedings the assessee stated that the assessee had given loans and advances of Rs.7121.94 crores to its subsidiaries as on 31.3.2004 out of its own funds and internal accruals except to the extent of Rs.65,10,77,116/- as per auditor's report filed. The amount of interest on the advances of Rs.65.11 crores works to Rs.3,21,079/-. Accordingly, AO disallowed the said interest. In the first appeal, the assessee contended that the assessee's own funds as on 31.3.2004 stood at Rs.31718.92 crores and the assessee had not taken any specific interest bearing loans for advancing interest free loans to its subsidiaries. The assessee's own funds being far in excess of interest free loans given to subsidiaries and such loans should be considered having been given out of its own funds. It was also contended that the net profit after tax and before depreciation stood at Rs.9197.16 crores. Thus, net profit for the year under consideration is exceeding not only the incremental loans given to the subsidiaries during the year but even far exceeding the total interest free loans of Rs.7121.94 crores given to the subsidiaries as on 31.3.2004. It was contended that in the absence of any direct nexus between the interest bearing borrowed funds and interest free loans given to subsidiaries and considering the fungibility of funds and the fact that own funds far exceeded such loans, it is to be presumed that such interest free loans have been given out of own funds. Ld. CIT(A) did not accept the contention of the assessee and has confirmed the action of AO. Hence this appeal by the assessee.
28.3 We observe that in the assessment year 2003-04, similar issue has been considered on identical facts, save and except the amount varies, in para 7.2 hereinabove. We, after considering the Tribunal's decision in assessment year 2002-03 dated 28.5.2012 (supra) have held that disallowance of interest is not justified vide para 7.3 hereinabove. Following the reasonings given in paras 7.2 and 7.3 hereinabove, we allow Ground No.2 of the appeal taken by assessee by deleting the disallowance of interest of Rs.3,21,079/-.
I.T.A. No.4475/Mum/2007 46 and 7 other appeals
29. Ground No.3 of assessee's appeal comprises of three parts vide which the assessee has disputed the order of ld. CIT(A) in disallowing Rs.92.27 crores u/s 14A of the Act read with Rule 8D of Income Tax Rules being expenditure incurred in relation to earning the income exempt u/s 10(23G) and 10(34) of the Act while computing the book profit as well as under the normal provisions of the Act. The assessee has also stated that in the alternative and without prejudice to above, the disallowance made by AO is excessive and unreasonable.
29.1 At the time of hearing, ld. Representatives of both the parties submitted that the above ground is similar to Ground No.4 of the appeal for assessment year 2003-04 and the submissions made in regard thereto and the decision that may be taken, will ipso facto apply to this ground of appeal.
29.2 We observe that the above ground has been considered by the Tribunal vide paras 9.1 to 9.8 hereinabove. The Tribunal vide para 9.6 by following its earlier order dated 28.5.2012 in assessee's own case for preceding assessment year 2002-03 on similar facts has held that proportionate disallowance of interest is not justified as the assessee's own fund are far in excess than the interest free advances given by assessee and the investment made which is giving exempt income to the assessee.
29.3 At the time of hearing, ld. Representatives of the parties have categorically stated the findings given in assessment year 2003-04 will be applicable for the assessment year 2004-05 as well. Since, we have held vide para 9.6 that ld. CIT(A) is not justified to make proportionate disallowance of interest as assessee's own funds are far in excess interalia than the investment made which is giving exempt interest income to the assessee, and have held that the disallowance of interest as computed by ld. CIT(A) by applying Rule 8D read with section 14A of the Act is not justified.
29.4 In so far as disallowance of administrative expenses u/s 14A of the Act, we have held vide para 9.7 that it is fair and reasonable to restrict the disallowance to 1% of the exempt income. Since in the assessment year under consideration, the assessee has earned interest income of Rs.451,40,86,320/- which is exempt u/s 10(23G) of the Act and Rs.25,84,41,460/- being dividend income exempt u/s 10(34) of the Act aggregating to Rs.477,25,27,780/-, we restrict disallowance to 1% of the said exempt income which works out to Rs.4,77,25,280/- for the purpose of computing the total income under the normal provisions of Act. In regard to I.T.A. No.4475/Mum/2007 47 and 7 other appeals disallowance u/s 14A for computing the book profit u/s 115JB of the Act, we have held hereinabove in para 9.7 that while computing the book profit l u/s 115JB of the Act, the provisions of section 14A cannot be imported and therefore no disallowance u/s 14A of the Act can be considered while computing the book profit u/s 115JB of the Act.
29.5 In view of above ground No.3 of the appeal of assessee is allowed in part by restricting the disallowance to Rs.4,77,25,280/- u/s 14A of the Act while computing total taxable income under the normal provisions of Act, but no disallowance under section 14A be considered while computing the book profit u/s 115JB of the Act.
30. Ground No.4 of appeal filed by assessee relates to disallowance u/s 80HHC of the Act. It comprises of 6 parts as under :
"4.(a) The ld. CIT(A) erred in confirming the reduction of profit of the business by 90% of Miscellaneous income of Rs.35,74,96,607/-while computing deduction u/s 80HHC of the Act The appellant submits that on the facts and circumstances of the case the Miscellaneous income is in the nature of profit of business eligible for deduction u/s 80HHC of the Act.
4(b) The ld. CIT(A) erred in confirming the reduction of profit of the business by 90% of gross interest received of Rs.430,00,10,578/- and interest received u/s 244A of Rs.46,56,84,284/- while computing deduction u/s 80HHC of the Act The appellant submits that on the facts and circumstances of the case the interest income is in the nature of profit of business eligible for deduction u/s 80HHC of the Act.
4( c ) In the alternative and without prejudice to Ground No.4(b), the ld. CIT(A) erred in not considering interest income net off interest expenses while computing profit of business u/s 80HHC of the Act.
4(d) The ld. CIT(A) erred in holding that full amount of claim for deduction u/s 80IA/80IB of the Act shall be reduced from eligible export profits u/s 80HHC of the Act as provided in section 80IA(9) of the Act.
The appellant submits that the restrictions for deduction u/s 80IA(9) of the Act shall be directed to be worked out in proportion of export turnover to total turnover of the eligible units u/s 80HHC of the Act.
4(e) The ld. CIT(A) erred in confirming the decision of the AO in restricting the profits eligible for deduction u/s 80HHC(3) to 30% thereof by invoking sub- section (1B) of section 80HHC of the Act while computing book profits u/s 115JB of the Act;
I.T.A. No.4475/Mum/2007 48 and 7 other appeals The appellant submits that the "book profits" shall be reduced by amount of eligible export profit computed u/s 80HHC(3) without considering the provisions of sub-section (1B) of Section 80HHC of the Act;
4(f) The ld. CIT(A) erred in holding that all the provision of section 80HHC of the Act applied while reducing the book profits by eligible amount of export profit u/s 115JB of the Act."
30.1 However, these Grounds of appeal are also connected with Ground Nos.5 and 6 of the appeal taken by department.
"5. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in directing the AO to exclude the profit allowed as deduction u/s 80IA/80IB in respect of three exporting units only for the purpose of computing deduction u/s 80HHC of the IT Act, 1961."
"6. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in directing the AO not to exclude the net income from the telecommunication services from profits of business while computing deduction u/s 80HHC.
30.2 At the time of hearing, it was submitted by ld. Representatives of both the parties that Ground No.4(a) is similar to Ground No.5(a), Ground No.4(b) is similar to Ground No.5(b), Ground No.4( c ) is similar to Ground No.5( c ),Ground No.4(e) is similar to Ground No.5(d) and Ground 4(f) is similar to Ground No. 5(e) of the appeal filed by assessee for the assessment year 2003-04. It was further submitted that Ground No.4( d ) of assessee's appeal and Ground No.5 of appeal of the department's appeal are similar to Ground No.6 of the appeal of the department for assessment year 2003-04. Therefore, whatever decisions are taken in respect of the grounds of appeal for assessment year 2003-04, the same will ipso facto will apply to above grounds taken by assessee and the department for the assessment year 2004-05.
30.3 In view of above submissions of ld. Representative of both the parties, we have considered the orders of authorities below. We observe that the above issues have been considered by the Tribunal for assessment year 2003-04 vide paras 10.1 to 10.16 and 11.1 to 11.5 of the above order and following the reasonings given therein, we hold as under :
i) that Ground No.4(a) of the appeal of assessee is rejected by confirming the order of ld. CIT(A) in excluding 90% of miscellaneous income while computing deduction u/s 80HHC of the Act for the reasons mentioned in para 10.9 hereinabove;
I.T.A. No.4475/Mum/2007 49 and 7 other appeals
ii) that Ground No.4(b) and Ground No.4( c ) of the appeal of assessee are taken together. In view of para 10.11 of this order, we reject Ground No.4(b), but we allow Ground No.4 ( c ) of the appeal taken by the assessee. We may state that the interest received u/s 244A of Rs. of Rs.46,56,84,284/- is also not to be considered while considering the net interest expenses for computing the profit of business u/s 80HHC of the Act. In the assessment year 2003-04, the assessee did not press this ground, in view of the fact that similar issue was decided against the assessee in the assessment year 2002-03, as stated in para 8.1 hereinabove.
iii) In respect of Ground Nos.4(e) and 4(f) of the appeal taken by assessee, we have considered this issue vide paras 10.12 and 10.13 and by following the decision of the Hon'ble Apex Court in the case of Ajanta Pharma Ltd (supra), it is held that 100% of export profit is eligible for deduction u/s 80HHC of the Act and has to be reduced under Clause (iv) of Explanation to Section 115JB of the Act and accordingly Ground Nos.4(e) and 4(f) of the appeal of assessee are allowed in favour of assessee.
iv) In respect of Ground No.4(d) of the appeal of assessee read with Ground No.5 of the appeal of department, the Tribunal by following its order for assessment year 2002-03 dated 28.5.2012 in assessee's own case (supra) has held in para 11.1 hereinabove to exclude profits allowed as deduction under section 80 IA / 80 IB of the Act of those three exporting units only for the purpose of computing deduction under section 80 HHC of the Act and not to exclude the amount of deduction allowed under section 80 IA / 80 IB of the Act for all the units of the assessee by following the decision of the Hon'ble Jurisdictional High Court in the case of Associated Capsules Pvt. Ltd. vs. DCIT (332 ITR 42), wherein it has been held that section 80IA(9) is not applicable at the stage of computation of deduction u/s 80HHC (3) but is applicable at the stage of allowing deduction u/s 80HHC (1). Hence, the entire deduction allowed u/s 80IA/80IB should not be reduced while computing the deduction u/s 80HHC of the Act in proportionate of export turnover to total turnover.
In view of above Ground No.4(d) of the appeal taken by the assessee is allowed and whereas Ground No.5 of the appeal taken by department is rejected.
31. In respect of Ground No.6 of the appeal taken by department, the relevant facts are that during the previous year relevant to assessment year 2004-05, the assessee included the income from Telecom Marketing Services in its profit of business for the I.T.A. No.4475/Mum/2007 50 and 7 other appeals purpose of calculation of deduction u/s 80HHC of the Act amounting to Rs.40,44,65,878/-. That the assessee contended that Telecom Marketing Services is a part of regular business activity carried on by the assessee therefore it is considered as part of total turnover and the profit of the business u/s 80HHC (3) read with Explanation (ba) and (baa) of the Act. AO has stated income and expenses of Telecom Marketing Services at page 100 of the assessment order as under:
Income and expenses of Telecom Marketing Services for the year ended 31.3.2004 Income Processing charges received 2,09,10,702 Service Tax bills 22,59,42,592 Telecom Marketing Services 1485,51,24,855 510,19,78,149 Expenditure Purchase (cost of handsets against club membership) Selling expenses including 244,92,99,404 advertisement, commission, salaries, rebate, maintenance of BTS Tower, Sales establishment etc 1202,31,55,421 Interest Depreciation 1,52,747 1469,75,12,272 22,49,04,698 AO stated that activities of Telecom Marketing Services are part of regular activity of the assessee but it has nothing to do with the export related activities of the assessee.
Hence, profit earned from this activity does not form part of operational income and has not been derived from manufacturing and other export related activities of the assessee. AO stated that 90% of Rs.40.44 crores shall be reduced from the profit of business for the purpose of claim of deduction u/s 80HHC of the Act. Being aggrieved, assessee filed appeal before the First Appellate Authority.
31.1 Ld. CIT(A) vide para 8.5.2 of the impugned order has held that Telecom Marketing Services is a part of business activity carried on by assessee like other business activities of Oil and Gas Exploration, Refining of Crude Oil, Manufacturing and Trading of Petrochemicals, Polyester, Fiber Intermediates, Textiles, Generation and I.T.A. No.4475/Mum/2007 51 and 7 other appeals Distribution of Power, Operation of Jetties and related infrastructure etc. The activity of Telecom Marketing Services has been considered as a part of total turnover. He has stated that Telecom Marketing Services is a business activity whereby handsets were procured and sold, various units were setup and full fledged selling activity was carried out for marketing such telecom services. These services by their nature were an organized business activity and their receipts are not similar to the nature of brokerage, commission, interest, rent, charges referred in explanation (baa) of section 80HHC of the Act. Therefore, the telecom services have to be treated as part of the total turnover and no reduction from the profits of the business on this account is required to be made. In view of above, ld. CIT(A) has directed the AO not to exclude the income from telecommunication services (Net) of Rs.40,44,65,878/- from the profit of the business and to include the turnover of Telecommunication services business of Rs.1510,19,78,149/- in total turnover while computing the deduction u/s 80HHC of the Act. Hence this appeal by department.
31.2 During the course of hearing, ld. DR relied on the order of AO and whereas ld. AR supported the order of ld. CIT(A). He submitted that the AO has acknowledged that telecom services is a part of business income. Therefore reduction of 90% of the net income for computing deduction u/s 80HHC of the Act is not justified. Ld.AR submitted that this income does not fall under Explanation (baa) to Section 80HHC of the Act and the turnover of Telecom Service business has been included in total turnover, hence profit forms part of total profits of the assessee.
31.3 However, during the course of hearing, attention of ld. AR was drawn to page 100 of the assessment order which contains break-up of income and expenses of Telecom Marketing Services as on 31.3.2004 and same has also been reproduced hereinabove in para 31. During the course of hearing, ld. AR agreed that processing charges and Telecom Marketing Service charges could fall in Explanation (baa) to Section 80HHC of the Act and therefore, 90% of the income on account of processing charges and Telecom Marketing Services may be reduced for deduction u/s 80HHC of the Act. Further, we agree with ld. AR that trading profit on sale of hand sets do not fall in Explanation (baa) to Section 80HHC of the Act and it be considered as integral part of the business operation of the assessee for the purpose of computation of deduction u/s 80HHC of the Act. In view of above observations made at the time of hearing, ld. AR of the assessee agreed that the matter may be restored to the AO to I.T.A. No.4475/Mum/2007 52 and 7 other appeals compute deduction u/s 80HHC of the Act in respect of profit from Telecom Marketing Services and requisite details will be furnished by the assessee.
31.4 Hence, we set aside the orders of authorities below on this issue and restore the matter to the AO to allow deduction u/s 80HHC of the Act in respect of the income from Telecom Marketing Services shown by the assessee by considering our above observations and the details as may be furnished by the assessee before him. Hence, Ground No.6 of the appeal taken by department is allowed for statistical purposes.
32. Ground No.5 taken by assessee is in regard to disputing the order of ld. CIT(A) in confirming the disallowance of expenses on account of traveling of spouses of executives of assessee at Rs.31,02,294/-
32.1 At the time of hearing, ld.AR conceded that the above issue on similar facts had been decided against the assessee in the preceding assessment year i.e. AY-2002-03 by the Tribunal in assessee's own case. Ld. AR also conceded that the facts are identical in the assessment year under consideration.
32.2 In view of above submissions of ld. AR and following the earlier order of the Tribunal in the preceding assessment years i.e. assessment year 2002-03 and 2003-04, we confirm the order of ld. CIT(A) by rejecting Ground No.5 taken by assessee.
33. Ground No.6 of the appeal taken by assessee is as under :
"6 (a) The ld. CIT(A) erred in confirming the action of AO of treating purchase of goods by appellant from Durga Iron and Steel Ltd (Durga) and M/s Surajbhan Rajkumar Pvt Ltd. (Surajbhan) and M/s Singhal Brothers to the extent of Rs.26,19,32,855/- as non genuine on the basis that M/s Swati International who have supplied goods to them have denied having supplied any such goods.
The Appellant submit that it has received goods supplied by the above parties duly supported by documentary evidence and hence on the facts and circumstances of the case purchase of goods from the above two parties cannot be termed as non-genuine.
"6 (b) The ld. CIT(A) erred in confirming the disallowance of depreciation of Rs.56,05,345/- on the capitalized value of goods purchased from the above parties i.e. Durga and Surajbhan.
The Appellant submits that the cost of the goods purchased from the above parties were capitalized as plant and machinery and put to use during the year under consideration and hence depreciation u/s 32 of the IT Act on such capitalized values of the goods is allowable.
I.T.A. No.4475/Mum/2007 53 and 7 other appeals 33.1 During the course of hearing, ld. Representatives of both the parties submitted that this ground is similar to Ground No.7 of the appeal of assessee for assessment year 2003-04 and whatever decision is taken in regard thereto, the same will ipso facto apply to this year for above ground.
33.2 We have considered the orders of authorities below and submissions of ld. Representatives of the parties in respect of above ground for assessment year 2003-
04. The Tribunal after considering the facts and submissions of ld. Representatives of the parties as mentioned in paras 13.2 to 13.6 of this order, has confirmed vide para 13.7 hereinabove the order of ld. CIT(A) that claim of Shri P.K.Agarwal of supplying material to the assessee-company remains unsubstantiated. Therefore the supply of material to the assessee could not be proved and consequently has confirmed disallowance of depreciation claimed by assessee. Since the facts are identical in this assessment year i.e. assessment year 2004-05, we for the reasons stated in para 13.7 herein confirm the order of ld. CIT(A) to disallow the depreciation claimed by assessee on the capitalized value of goods purchased from Durga and Surajbhan. Hence. Ground No.6 of the appeal taken by assessee is rejected.
34. Ground No.7 of appeal taken by the assessee is as under :
"7. The ld. CIT(A) erred in confirming the disallowance u/s 92C of the Act to the extent of Rs.1,56,78,000/- out of the charter hire charges paid to its associate enterprise M/s Reliance Europe Limited (REL) by your appellant;
The appellant submits that the charter hire charges paid by the appellant to REL are at arm's length price and no adjustment is called for to such payments"
34.1 This ground is connected with Ground No.3 of the appeal by the department which is as under :
"3. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in reducing the adjustment made by AO of Rs.3,62,52,128/- on account of charter hire charges paid to associate enterprise viz Reliance Europe Limited".
34.2 At the time of hearing, ld. Representatives of both the parties submitted that this ground is similar to Ground No.8 of the appeal of assessee and Ground No.10 of the appeal of department for assessment year 2003-04 and whatever decision is taken therein will ipso facto apply to this assessment year as well.
I.T.A. No.4475/Mum/2007 54 and 7 other appeals 34.3 We have considered the submissions of ld. Representatives of the parties and the orders of authorities below. We agree with ld. Representatives of the parties that the facts and issue are identical to the assessment year 2003-04. The Tribunal has considered this ground of appeal in paras 14.2 to 14.5 and following the order of the preceding assessment year i.e. 2002-2003 as mentioned in para 14.5 hereinabove, we have set aside the orders of authorities below for the reasons mentioned therein and restore the matter to the file of AO with a direction to make a reference to TPO to determine ALP in respect of hire charges of charter-vessels Relchem Isha by a speaking order, after considering such documents that may be filed by the assessee and after giving due opportunity of hearing to the assessee. Hence, Ground No.7 of the assessee's appeal and Ground No.3 taken by department are allowed for statistical purposes.
35. Ground No.8 of appeal taken by the assessee is as under :
"8. The ld. CIT(A) erred in confirming the disallowance u/s 92C of the Act of Rs.22,10,698/- in respect of the commission paid to its associate enterprises, Reliance Infocom B.V.(RIB) The appellant submits that it has rightly calculated the value of international transaction by applying the method prescribed u/s 92C(1) of the IT Act and supported by the documentary evidence and hence the disallowance made by AO shall be deleted"
35.1 At the time of hearing, ld. Representatives of both the parties submitted that this ground is similar to Ground No.9 of the appeal of assessee for assessment year 2003-04 and whatever decision is taken therein will ipso facto apply to this assessment year as well.
35.2 We have considered the above submissions of ld. Representatives of the parties and the orders of authorities below. We agree with ld. Representatives of the parties that similar issue has been considered by the Tribunal in preceding assessment year in paras 15.1 to 15.3 of the above order in respect of assessment year 2003-04. Since the facts are identical , we for the reasons mentioned in para 15.3 hereinabove hold that payment of commission to associated enterprises of the assessee at the rate of 3% is not at ALP. Hence the adjustment /disallowance made by authorities below is confirmed. Therefore, Ground No.8 of the appeal taken by assessee is rejected.
I.T.A. No.4475/Mum/2007 55 and 7 other appeals
36. The assessee has taken an additional ground that AO erred in charging interest u/s 234B and 234C of the Act on the tax payable u/s 115JB of the Act, while passing order u/s 250 dated 29.01.2009 of the Act.
36.1 At the time of hearing, ld. AR conceded that the above issue is covered again the assessee by the decision of the Hon'ble Apex Court in the case of JCIT V/s Rolta India Limited (2011) 330 ITR 470 (SC) wherein Their Lordships have held that interest u/s 234B is payable on failure to pay advance tax in respect of tax payable u/s 115JA of the Act. It may be mentioned that section 115JA of the Act is in pari-materia to section 115JB of the Act. Hence, the Additional Ground of appeal taken by the assessee is dismissed.
37. Now we take remaining grounds of appeal taken by department in ITA No. 1724/Mum/2009( Assessment Year : 2004-05)
38. Ground No.2 taken by department reads as under :
"2. On the facts and in the circumstances of case and in law. The ld. CIT(A) erred in restricting the allowance of depreciation to Rs.3696,35,88,8236/- as against appellant's claim of Rs.4534,19,85,910/- and thus granting relief of Rs.8,37,83,97,084/-"
38.1 At the time of hearing, ld. Representatives of the parties submitted that this ground is similar to Ground No.2 of the appeal taken by department for assessment year 2003-04 and the decision taken therein will ipso facto apply to this ground of appeal.
38.2 We have considered the above submissions of ld. Representatives of the parties and the orders of authorities below. We observe that this issue has been considered in paras 19 to 19.2 hereinabove and the Tribunal has upheld the order of ld. CIT(A) by following its earlier order for Assessment year 2002-03 that claim of depreciation prior to insertion of Explanation 5 to section 32 (1) of the Act inserted w.e.f.1.4.2002 was optional. Therefore, for the reasons mentioned in para 19.2 hereinabove, we uphold the order of ld. CIT(A) and reject Ground No.2 of the appeal taken by department.
39. In Ground No.4, the department has disputed the order of ld. CIT(A) in deleting the adjustment of Rs.1,27,89,520/- made by AO u/s 92C on account of international taxation entered by assessee company for consultancy charges with its associated enterprises.
I.T.A. No.4475/Mum/2007 56 and 7 other appeals 39.1 At the time of hearing, ld. Representatives of the parties submitted that this ground is similar to Ground No.11 of the appeal taken by department for assessment year 2003-04 and whatever decision is taken therein will ipso facto apply to this ground of appeal.
39.2 We have considered the above submissions of ld. Representatives of the parties and the orders of authorities below. We agree with the ld. Representatives of the parties that the facts are identical to assessment year 2003-04 in respect of above ground taken by department. The Tribunal has considered this issue in paras 23.1 to 23.3 and vide para 23.4 by following the reasonings for AY 2002-03, has confirmed the order of First Appellate Authority by rejecting the Ground of appeal taken by department. In view thereof, we uphold the order of ld. CIT(A) and reject Ground No.4 of the appeal taken by department.
40. Ground No.7 of the appeal taken by department is as under :
"On the facts and in the circumstances of the case in law, the ld. CIT(A) erred in restricting guarantee commission at the rate of 0.38% in place of 2.5% of non funded guarantee given by the assessee for advancing loan to its associate concerns. "
40.1 At the time of hearing, ld. DR submitted that the above ground has been taken by wrongly by the department as it does not arise out of orders of authorities below.
40.2 We agree with the ld. DR that this issue is not arising out of the orders of authorities below in the assessment year under consideration i.e. assessment year 2004-
05. Hence Ground No.7 of the appeal taken by department is rejected.
41. The department has also taken additional Ground of appeal that ld. CIT(A) on the facts and in the circumstances and in law, has erred in holding that deduction u/s 80HHC for the purpose of computing income u/s 115JB has to be computed on the basis of "adjusted book profits" and not on the basis of profits computed under normal provisions of IT Act, 1961.
41.1 At the time of hearing, ld. Representatives of both the parties conceded that this issue is covered in favour of assessee by the decision of Hon'ble Apex Court in the case of CIT vs. Bhari Information Tex System Pvt. Ltd., 340 ITR 549, that deduction I.T.A. No.4475/Mum/2007 57 and 7 other appeals under Chapter-VI of the Act is to be worked out not on the basis of regular income but has to be worked out on the basis of adjusted book profit u/s 115JB of the Act. Accordingly, we uphold the order of ld. CIT(A) and reject additional ground of appeal taken by the department.
42. Now we take up the appeals for our consideration for the assessment year 2005-06 being ITA No.885/Mum/2009 filed by assessee and ITA No.1725/Mum/2009 filed by department.
43. Firstly, we take up the appeal of the assessee being ITA No.885/Mum/2009 for our consideration.
44. Ground No.1 of the appeal taken by assessee is as under :
"1. The ld. CIT(A) erred in rejecting the appellant's alternative plea that there is a deemed payment of sales tax and therefore the amount of Rs.2094,96,83,925/- is allowable as per the provisions of section 43B of the Income Tax Act, 1961, The appellant submits that there is a deemed payment of Sales tax which is allowable u/s 43B of the Act and the CIT(A) ought to have given a decision on this issue in favour of the appellant"
44.1 This Ground of appeal is connected with Ground No.1 of the appeal taken by department which reads as under :
1. On the facts and in the circumstances of the case and in law, the ld.
CIT(A) erred in deleting the notional sales tax of Rs.2094,96,83,925/-which has been treated as revenue receipt by the AO."
44.2 At the time of hearing, ld. Representatives of both the parties submitted that the facts and the issue are identical with ground No.1 of the appeals filed by the assessee as well as by the department for assessment year 2003-04 and whatever decision is taken therein will ipso facto be applicable to these grounds.
44.3 On consideration of orders of the authorities below and in view of above submissions of the ld. Representatives of both parties, we agree with them. Since we have heard these appeals alongwith appeals for assessment year 2003-04 and the above issue has been considered by the Tribunal in paras 6.2 to 6.6 of this order and following the reasoning given in paras 6.5 to 6.6 , we uphold the order of ld. CIT(A) that the claim of treatment of notional sales tax is capital receipt. Hence, Ground No.1 I.T.A. No.4475/Mum/2007 58 and 7 other appeals of the appeal taken by department is rejected. As mentioned in para 6.6 and the facts that Ground No.1 in assessee's appeal is an alternative ground, we hold that ld. CIT(A) has rightly held that it is not necessary to go into the alternative plea of the assessee claiming the notional sales tax is allowable u/s 43B of the Act. Hence Ground No.1 of the appeal taken by assessee is also rejected.
45. In Ground No.2 of appeal, assessee has disputed the order of ld. CIT(A) in confirming the disallowance of interest of Rs.33,05,426/- being interest referable to interest free loans and advances given to subsidiary companies.
45.1 At the time of hearing, ld. Representatives of both the parties submitted that the facts and the issue are identical with ground No.2 of the appeal filed by the assessee for assessment year 2003-04 and whatever decision is taken in respect thereof, the same will ipso facto be applicable to this ground of appeal of the assessee.
45.2 We have considered the orders of authorities below and the submissions of ld. Representatives of the parties. We observe that during the year under consideration viz assessment year 2005-06, the assessee has given interest free loans to its subsidiaries aggregating to Rs.7703.73 crores as on 31.3.2005. The corresponding figure of such interest free loans to subsidiaries as on 31.3.2004 stood at Rs.7121.94 crores. Thus, the incremental loans given to subsidiaries during the year under consideration is to the extent of Rs.581.79 crores. AO has stated that, during the assessment proceedings the assessee stated that the assessee had given loans and advances of Rs.7703.73 crores to its subsidiaries as on 31.3.2005 out of its own funds and internal accruals except to the extent of Rs.570 crores/- as per auditor's report filed. The amount of interest on the advances of Rs.570 crores works to Rs.33,05,426/-. Accordingly, AO disallowed the said interest. In the first appeal, the assessee contended that the assessee's own funds as on 31.3.2005 stood at Rs.37673.44 crores and the assessee had not taken any specific interest bearing loans for advancing interest free loans to its subsidiaries. The assessee's own funds being far in excess of interest free loans given to subsidiaries and such loans should be considered having been given out of its own funds. It was also contended that the net profit after tax and before depreciation stood at Rs.12087.18 crores. Thus, net profit for the year under consideration is exceeding not only the incremental loans given to the subsidiaries during the year but even far exceeding the total interest free loans of Rs.7703.73 crores given to the subsidiaries as on 31.3.2005. It was contended that in the absence of any direct nexus between the interest bearing borrowed funds and I.T.A. No.4475/Mum/2007 59 and 7 other appeals interest free loans given to subsidiaries and considering the fungibility of funds and the fact that own funds far exceeded such loans, it is to be presumed that such interest free loans have been given out of own funds. Ld. CIT(A) did not accept the contention of the assessee and has confirmed the action of AO. Hence this appeal by the assessee.
45.3 We observe that in the assessment year 2003-04, similar issue has been considered on identical facts, save and except the amount varies, in para 7.2 hereinabove. We, after considering the Tribunal's decision in assessment year 2002-03 dated 28.5.2012 (supra) have held that disallowance of interest is not justified vide para 7.3 hereinabove. Following the reasonings given in paras 7.2 and 7.3 hereinabove, we allow Ground No.2 of the appeal taken by assessee by deleting the disallowance of interest of Rs.33,05,426/-.
46. Ground No.3 of assessee's appeal comprises of three parts vide which the assessee has disputed the order of ld. CIT(A) in disallowing Rs.132.25 crores u/s 14A of the Act read with Rule 8D of Income Tax Rules being expenditure incurred in relation to earning the income exempt u/s 10(23G) and 10(34) of the Act while computing the book profits as well as profits under the normal provisions of the Act. The assessee has also stated that in the alternative and without prejudice to above, the disallowance made by AO is excessive and unreasonable.
46.1 At the time of hearing, ld. Representatives of both the parties submitted that the above ground is similar to Ground No.4 of the appeal for assessment year 2003-04 and the submissions made in regard thereto and the decision that may be taken, will ipso facto apply to this ground of appeal.
46.2 We observe that the above ground has been considered by the Tribunal vide paras 9.1 to 9.8 hereinabove. The Tribunal vide para 9.6 by following its earlier order dated 28.5.2012 in assessee's own case for preceding assessment year 2002-03 on similar facts has held that proportionate disallowance of interest is not justified as the assessee's own funds are far in excess than the interest free advances given by assessee and the investment made which is giving exempt income to the assessee.
46.3 At the time of hearing, ld. Representatives of the parties have categorically stated the findings given in assessment year 2003-04 will be applicable for the assessment year 2004-05 as well. Since, we have held vide para 9.6 that ld. CIT(A) is I.T.A. No.4475/Mum/2007 60 and 7 other appeals not justified to make proportionate disallowance of interest as assessee's own funds are far in excess interalia than the investment made which is giving exempt income to the assessee, we have held that the disallowance of interest as computed by ld. CIT(A) by applying Rule 8D read with section 14A of the Act is not justified.
46.4 In so far as disallowance of administrative expenses u/s 14A of the Act, we have held vide para 9.7 that it is fair and reasonable to restrict the disallowance to 1% of the exempt income. Since in the assessment year under consideration, the assessee has earned interest income of Rs.207.36 crores which is exempt u/s 10(23G) of the Act and Rs.20.40 crores being dividend income exempt u/s 10(34) of the Act aggregating to Rs.227.76 crores. Therefore, we restrict disallowance to 1% of the said exempt income which works out to Rs.2,27,76,000/- for the purpose of computing the total income under the normal provisions of Act. In regard to disallowance u/s 14A for computing the book profit u/s 115JB of the Act, we have held hereinabove in para 9.7 that while computing the book profit u/s 115JB of the Act, the provisions of section 14A cannot be imported and therefore no disallowance u/s 14A of the Act can be considered while computing the book profit u/s 115JB of the Act.
46.5 In view of above ground No.3 of the appeal of assessee is allowed in part by restricting the disallowance to Rs.2,27,76,000/- u/s 14A of the Act while computing total taxable income under the normal provisions of Act but no disallowance under section 14A be considered while computing the book profit u/s 115JB of the Act.
47. Ground No.4 of the appeal taken by assessee relates to disallowance u/s 80HHC of the Act which is as under :
"4.(a) The ld. CIT(A) erred in confirming the decision of the AO of disallowing deduction u/s 80HHC(3) by invoking sub-section (1B) of section 80HHC of the Act while computing book profit u/s 115JB of the Act.
The appellant submits that "book profit" shall be reduced by amount of eligible export profit computed u/s 80HHC(3) without considering the provisions of sub- section (1B) of section 80HHC of the Act.
"4.(b) The ld. CIT(A) further erred in holding that all the provisions of section 80HHC of the Act applied while reducing the book profits by eligible amount of export profit u/s 115JB of the Act."
47.1 Relevant facts are that the assessee has claimed deduction of Rs.3235,48,29,505/- u/s 80HHC of the Act on account of export profits. AO asked the I.T.A. No.4475/Mum/2007 61 and 7 other appeals assessee as to why computation of book profit u/s 115JB of the Act should not be considered after applying sunset clause (1B) to Section 80HHC of the Act. On behalf of assessee, it was contended that no such corresponding amendment as made in section 80HHC of the Act has been made in section 115JB of the Act. Section 115JB is a deeming provision and a self-contained code for computing an alternative profit which would be liable to tax in absence of taxable profit under normal provisions of the Act. It was contended that adjustment to book profit can be made only to the extent and in the manner as provided u/s 115JB of the Act. The assessee referred clause (iv) of the Explanation to section 115JB of the Act and submitted that book profit so computed in the manner laid down shall be reduced as per clause (iv) of the Explanation. Thus amount of profits eligible for deduction u/s 80HHC computed under clauses (a),(b) or
(c) of Sub-section (3) or Sub-section (3A) of Section 80HHC as the case may be has to be reduced while computing the book profit of assessee u/s 115JB of the Act. That sub-section (1B) of section 80HHC in no manner curtails the eligible deduction to be reduced from the book profit u/s 115JB of the Act.
47.2 AO did not accept the contention of assessee and stated that operation of section 80HHC itself is suspended from 1.4.2005. Hence there can be no question of considering any eligible amount to be deducted for computing book profit u/s 115JB of the Act, because as per sub-section (1B) of section 80HHC of the Act no deduction shall be allowed in respect of assessment year beginning from 1.4.2005 and in subsequent assessment years. Being aggrieved, assessee filed before the First Appellate Authority. Ld. CIT(A) has also confirmed the action of AO. Hence this appeal before the Tribunal.
47.3 At the time of hearing, ld. Representatives of the parties submitted that above grounds are similar to Ground No.5(d) and 5(e) of the appeal for assessment year 2003- 04 of the assessee.
47.4 We have considered submissions of ld. Representatives of the parties and the orders of authorities below. There is no dispute to the fact that these grounds are similar to Ground No. 5(d) and 5(e) of assessee's appeal for assessment year 2003-04. However, the finding given by us in respect of Ground No.5(d) and 5(e) of the appeal for assessment year 2003-04 and /or findings given in respect of Ground No.4(e) and 4(f) of the assessment year 2004-05 hereinabove will not be applicable to this assessment year i.e. 2005-06 in view of amendment made by Finance Act, 2011 with retrospective effect from 1.4.2005 by omitting clauses (iv) to (vi) to Explanation to section 115JB (2) of the Act. Therefore, the provisions of section 115JB of the Act has I.T.A. No.4475/Mum/2007 62 and 7 other appeals been brought at par with the provisions of section 80HHC (1B) of the Act in so far as no deduction is to be allowed to the assessee from assessment year 2005-06 even for computing book profit for the purpose of MAT u/s 115JB. In view of above, that clause
(iv) to Explantion-1 of sub-section (2) to section 115JB has been omitted by Finance Act, 2011 with retrospective effect from 1.4.2005, we hold that the authorities below are justified in not reducing the deduction allowable u/s 80HHC as claimed by assessee for the reasons stated hereinabove and not for the business as stated by the authorities below. Hence Ground No.4 of the appeal of assessee is rejected.
48. Ground No.5 taken by assessee is in regard to disputing the order of ld. CIT(A) in confirming the disallowance of expenses on account of traveling of spouses of executives of assessee at Rs.39,48,922/-
48.1 At the time of hearing, ld.AR conceded that the above issue on similar facts had been decided against the assessee in the preceding assessment year i.e. AY-2002-03 by the Tribunal in assessee's own case. Ld. AR also conceded that the facts are identical in the assessment year under consideration.
48.2 In view of above submissions of ld. AR and following the earlier order of the Tribunal in the preceding assessment year, we confirm the order of ld. CIT(A) by rejecting Ground No.5 of the appeal taken by assessee.
49. Ground No.6 of the appeal taken by assessee is as under :
"6 The ld. CIT(A) erred in confirming the disallowance of depreciation of Rs.42,04,759/- on the capitalized value of goods purchased from Durga and Surajbhan in AY-2003-04.
The Appellant submits that the cost of the goods purchased from the above parties were capitalized as plant and machinery in AY 2003-04 and were usd during the year under consideration and hence depreciation u/s 32 of the IT Act on such capitalized values of the goods is allowable.
49.1 During the course of hearing, ld. Representatives of both the parties submitted that this ground is similar to Ground No.7 of the appeal of assessee for assessment year 2003-04 and whatever decision is taken in regard thereto, the same will ipso facto apply to this year for above ground.
I.T.A. No.4475/Mum/2007 63 and 7 other appeals 49.2 We have considered the orders of authorities below and submissions of ld. Representatives of the parties in respect of above ground for assessment year 2003-
04. The Tribunal after considering the facts and submissions of ld. Representatives of the parties as mentioned in paras 13.2 to 13.6 of this order, has confirmed vide para 13.7 hereinabove the order ld. CIT(A) that claim of Shri P.K.Agarwal of supplying material to the assessee-company remains unsubstantiated. Therefore the supply of material to the assessee could not be proved and consequently has confirmed disallowance of depreciation claimed by assessee. Since the facts are identical in this assessment year i.e assessment year 2005-06, we for the reasons stated in para 13.7 herein confirm the order of ld. CIT(A) to disallow the depreciation claimed by assessee on the capitalized value of goods purchased from Durga and Surajbhan. Hence. Ground No.6 of the appeal taken by assessee is rejected.
50. Ground No.7 of appeal taken by the assessee is as under :
"7. The ld. CIT(A) erred in confirming the disallowance u/s 92C of the Act of Rs.83,25,876/- out of the charter hire charges paid to its associate enterprise M/s Reliance Europe Limited (REL) by your appellant;
The appellant submits that the charter hire charges paid by the appellant to REL are at arm's length price and no adjustment is called for to such payments"
50.1 This ground is connected with Ground No.3 of the appeal by the department which is as under :
"3. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in reducing the adjustment made by AO of Rs.1,66,51,753/- to 50% to the extent of Rs.83,25,877/- on account of chartered hire charges paid to associate enterprise viz Reliance Europe Limited".
50.2 At the time of hearing, ld. Representatives of both the parties submitted that this ground is similar to Ground No.8 of the appeal of assessee and Ground No.10 of the appeal of department for assessment year 2003-04 and whatever decision is taken therein will ipso facto apply to this assessment year as well.
50.3 We have considered the submissions of ld.Represent atives of the parties and t he orders of authorities below. We agree with ld. Represent atives of t he parties that the facts and issue are ident ical to the assessment year 2003-04. TheTribunal has considered this ground of appeal in paras 14.2 to 14.5 and following the order of the preceding assessment year i.e.2002-03 as mentioned in para 14.5 hereinabove, we have set aside the orders of authorities below for the reasons mentioned therein and restore the matter to the file of AO with a direction to make a reference to TPO to determine ALP I.T.A. No.4475/Mum/2007 64 and 7 other appeals in respect of hire charges of charter-vessels Relchem Isha by a speaking order, after considering such documents that may be filed by the assessee and after giving due opportunity of hearing to the assessee. Hence, Ground No.7 of the assessee's appeal and Ground No.3 of the appeal taken by department are allowed for statistical purposes.
51. Ground No.8 of appeal taken by the assessee is as under :
"8. The ld. CIT(A) erred in confirming the disallowance u/s 92C of the Act of Rs.39,31,461/- in respect of the commission paid to its associate enterprises, Reliance Infocom B.V.(RIB) The appellant submits that it has rightly calculated the value of international transaction by applying the method prescribed u/s 92C(1) of the IT Act and supported by the documentary evidence and hence the disallowance made by AO shall be deleted"
51.1 At the time of hearing, ld. Representatives of both the parties submitted that this ground is similar to Ground No.9 of the appeal of assessee for assessment year 2003-04 and whatever decision is taken therein will ipso facto apply to this assessment year as well.
51.2 We have considered the above submissions of ld. Representatives of the parties and the orders of authorities below. We agree with ld. Representatives of the parties that similar issue has been considered by the Tribunal in preceding assessment year in paras 15.1 to 15.3 of the above order in respect of assessment year 2003-04. Since the facts are identical , we for the reasons mentioned in para 15.3 hereinabove hold that payment of commission to associated enterprises of the assessee at the rate of 3% is not at ALP. Hence, the adjustment/disallowance made by authorities below is confirmed. Therefore, Ground No.8 of the appeal taken by assessee is rejected.
52. Ground No.9 of appeal taken by the assessee is as under :
"9.(a) The ld. CIT(A) erred in confirming the order of AO in treating the non- funded guarantee given by the appellant to Bank of America for giving loan to its associate concern Trivera Gmbh as International transaction within the meaning of section 92B r.w. s. 92(1) of the Income Tax Act.
9(b) The ld. CIT(A) erred in confirming the arms length price in respect of non funded guarantee given by the appellant for advancing loans to its associate concern to the extent of Rs.1,71,30,400/-
I.T.A. No.4475/Mum/2007 65 and 7 other appeals 52.1 This ground is connected with Ground No.6 of the appeal taken by department is as under :
"On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in restricting guarantee commission at the rate of 0.38% in place of 2.5% of non funded guarantee given by the assessee for advancing loan to its associated concerns."
52.2 Relevant facts giving rise to above grounds of appeal are that during the previous year, the assessee provided corporate guarantee to Bank of America in connection with loans of Euro 80 Million taken by its associated enterprises viz Trevira GmbH. TPO has stated that assessee has not charged any guarantee fee/commission to Trevira GmbH for providing said guarantee. The assessee stated that guarantees have been provided by it to Banks which are not its associated enterprises. That the assessee has not incurred any cost for providing guarantees and the same have been provided as part of normal commercial practice followed by bank of taking guarantee of parent company and /or directors. The assessee also contended that the transaction of providing guarantee does not fall within the definition of "international transaction"
under section 92B of the Act.
52.3 TPO did not accept above contention of the assessee. He stated that providing guarantee to its associated enterprises by assessee is a clear evidence of benefit being provided. That if Trevira GmbH had requested any bank or third party to provide such guarantee for its loans, it would have had to pay guarantee fee/commission.
52.4 The assessee cited an instance where it itself had paid guarantee commission of 0.25% per annum to ICICI in respect of guarantee provided to it. Without prejudice to the above contention, the assessee submitted to TPO that the same rate may be applied in the instant case also, as the above comparable relates to assessee's own loan transaction within India with the ICICI Bank, Mumbai.
52.5 TPO has stated that assessee has submitted only a comparable in which ICICI Bank, Mumbai granted loan to RIL which is a well established company with well established credentials in India. That the assessee's Associated Enterprises (AE) is based in Germany. That the details with regard to risk profile and the credit profile of its AE, Trevira GmbH with regard to the said loan transaction has not been submitted. Thus, TPO stated that assessee's contention that 0.25% guarantee fee should be applied cannot be accepted as it does not factor in certain essential variables such as place of the loan transaction and the normal range of guarantee fee charged there, the I.T.A. No.4475/Mum/2007 66 and 7 other appeals risk profile and the credit profile of the parties involved etc. Similarity of geographical region is one of the cardinal principles in application of CUP. Finally, TPO after considering that a public company with limited liability of 51% being held by Dutch State, FMO, (Nederlandse Financierings-Maastschappij Voor Ontwikkelingslanden N.V.) who charged 2.5% in a case of Rabo India Finance Pvt. Ltd. and stated that entities in Netherland and Germany belong to one common market, i.e. EU. Therefore, TPO considered the said rate as comparable uncontrolled price (CUP) for benchmarking this transaction. Accordingly, TPO considered the ALP of grantee fee at the rate of 2.5% on the guarantees of Euro 80 Million granted by assessee which works out to 11,27,00,000/- on this transaction. Since assessee has not charged any guarantee fee/commission, TPO suggested the said amount as adjustment payable to the assessee and the AO made the addition. Being aggrieved, assessee filed appeal before the First Appellate Authority.
52.6 On behalf of the assessee, it was contended that assessee provided guarantee to the Bank against the loan given by them to assessee's subsidiary as normal commercial practice in the capacity of parent company. The assessee reiterated its submissions as made before TPO that the transaction of providing guarantee by a parent company for the loan taken by its associated enterprises does not constitutes an "international transactions" as defined in section 92B read with section 92(1) of the Act. It was also contended that assessee had given non funded corporate guarantee to the bank which is not comparable with independent instances relied upon by the TPO/AO for computing ALP of 2.5% guarantee commission as comparable case. It was also contended that guarantee was given as a part of commercial exigency. Since such incidental benefit attributable solely to its being a part of a larger concern, it cannot be considered as providing any services or giving rise to any income which could be considered for application of transfer pricing provisions. The assessee also furnished details regarding guarantee commission charged by bank in India for giving non funded guarantees and it varies from 0.25% to 0.6%, the details thereof are given by ld. CIT(A) in table at page 43 of its impugned order as under :
S.No. Document date Name of Bank Name of company Guarantee providing guarantee fees/ commission payable 1 13.01.2005 HSBC Reliance Industries Ltd 0.25% pa 2 6.08.2007 HDFC Bank Ltd Reliance Industries Ltd 0.35% pa 3 4.10.2007 ICICI Bank Ltd Reliance Gas 0.25% pa Transportation Infrastructure Ltd I.T.A. No.4475/Mum/2007 67 and 7 other appeals 4 10.12.2007 Canara Bank Reliance Gas 0.50% pa Transportation Infrastructure Ltd 5 11.12.2007 ABN AMRO Bank Reliance Industries Ltd 0.60% pa 6 12.03.2005 Standard Chartered Reliance Industries Ltd 0.25% pa Bank 7 27.4.2005 Bank of America Reliance Industries Ltd 0.25% pa 8 18.12.2004 HSBC Reliance Industries Ltd 0.25% pa 9 5.2.2008 Bank of America Trevira GmbH 0.50% pa 10 6.2.2008 Commerzbank Trevira GmbH 0.65% pa 52.6 It was also contended in the alternative that guarantee commission in the given set of facts cannot be considered more than 0.25% p.a. which is comparable with the rates prevailing in the market in similar kind of guarantees given by bank.
52.7 Ld. CIT(A) considered the submissions of the assessee and vide paragraph 15.6.7 has directed the AO to take rate of 0.38% as guarantee commission payable and thus restricted the addition to Rs. 1,71,30,400/- and given relief of Rs. Rs.9,55,69,600/-
. The said para reads as under :
"15.6.7 I have considered the submission of the appellant. The appellant's contentions are not acceptable so far as the issue relating to the case that the transaction of providing guarantee by a parent company for the loan taken by its associated enterprise does not constitute an international transaction as defined in section 92B r.w. 92(1) of the Act. Since the guarantee has been provided by the appellant on behalf of its associate enterprise viz. Trevira GmbH, the international transaction therefore is between the two associated enterprises. In case of providing guarantees there is a clear evidence of a benefit being provided and therefore the above transaction clearly constitutes an International Transaction as defined in section 92B of the Act. However, I find that the TPO has grossly erred in applying the rate of 2.5% since as per the above cited table, from the 10 cases given the average rate on which the appellant has paid guarantee commission to third parties is 0.38%. Therefore, in my view the rate of 0.38% is the appropriate rate. In view of above discussion I direct the AO to take the rate of 0.38% as guarantee commission payable by the appellant. The addition is thus restricted to Rs.1,71,30,400/- and the appellant gets a relief of Rs.9,55,69,600/- (11,27,00,000 - 1,71,30,400)."
Being aggrieved the assessee as well as department, both are have raised this issue in their respective appeal before the Tribunal.
52.8 On behalf of the assessee, the ld. AR submitted that the assessee had given guarantee to the bank for the loan given to its associated enterprises because of business interest. Ld. AR submitted that the assessee has given guarantee to the bank I.T.A. No.4475/Mum/2007 68 and 7 other appeals and thus transaction is between the assessee and the bank, and it is unrelated party. It is not a transaction between the assessee and its associated enterprises and thus, cannot be termed as "international transaction" under section 92B of the Act. During the course of hearing the attention of the ld. AR was drawn to the amendment made by Finance Act, 2012 with retrospective effect from 1.4.2002 by way of Explanation to Section 92B whereby guarantee commission is now considered to be "international transaction", the ld. AR submitted that if any adjustment is to be made the guarantee commission could be considered at the lowest rate paid by assessee i.e. 0.25% and Rule 10B(1)(a) does not permit for taking the average rate while applying CUP method for making any adjustment on account of transactions with associated enterprises. Ld. AR submitted that rate of guarantee of 2.5% as considered by TPO is in respect of the parties where both are outside India and relates to furnishing guarantee in case of a finance company. He submitted that charging of guarantee commission depends on various factors. Ld. AR submitted that business strategy should be taken into consideration while making any Transfer Pricing adjustment in respect of such transaction. Hence, said rate of 2.5% is not comparable and the ld. CIT(A) should have taken the rate of guarantee commission at 0.25% as ALP which is comparable for similar kind of guarantee given by bank in India.
52.9 On the other hand, ld. DR while supporting the order of TPO submitted that the transaction of giving guarantee by the assessee to its Associate Enterprise is "International Transaction" and the same was not benchmarked by the assessee. He referred the amendment made by the Finance Act, 2012 with retrospective effect from 1.4.2002 by way of Explanation added in section 92B of the Act and submitted that payment of guarantee fee is included in the expression "international transaction" in view of Explanation-(i) (c ) to section 92B of the Act. He submitted that once guarantee fee falls within the meaning of "International Transaction", the methodology provided in the Rules becomes applicable. The ld. DR submitted that TPO has benchmarked the rate of guarantee commission by applying CUP method to take an incident of a company situated in Netherlands which is situated in same common market r.e. EU. Therefore, rate of TPO be confirmed as compared to the average rate taken by ld. CIT(A) of internal comparables of the guarantee commission paid by assessee to its bank for providing guarantee.
52.10 We have carefully considered the submissions of ld. Representatives of the parties and the orders of ld. CIT(A) as well as TPO. There is no dispute to the fact I.T.A. No.4475/Mum/2007 69 and 7 other appeals that for providing guarantee by the assessee to Bank of America against the financial assistance given to assessee's AE Trevira GmbH, the assessee has not charged any commission. In this regard, the assessee firstly contended that providing of guarantee by the assessee to the bank on behalf of its AE does not constitute an "international transaction" and the said transaction is between the assessee company and the bank, who are unrelated parties and not between the two associated enterprises. We are of the considered view that the above contention of the ld. AR has rightly been rejected by authorities below and particularly in view of the amendment made by Finance Act, 2012 with retrospective effect from 1.4.2002 by way of Explanation -(i) (c) of section 92B to include guarantee in the Expression "international transaction". Therefore, the contention of the ld. AR that providing of guarantee to the bank on behalf of its AE does not fall in the definition of "international transaction" has no merits. We agree with TPO that there is a benefit to assessee's AE by providing of guarantee by the assessee for the loan taken from bank by Trevira GmbH. The assessee has undertaken a risk on behalf of its AE, which in any case, of third party consideration, the same would not have been undertaken or would have charged a consideration for it by the assessee. Now, the question arises as to what should be the rate of guarantee commission at ALP. Ld. CIT(A) has given the details of guarantee commissions charged by bank in India for giving non-funded guarantees to third party and it varies from 0.25% to 0.6% per annum. On the other hand, TPO has compared the rate bearing risk at 2.5% by considering an external comparables of a finance company. However, it is a fact that while applying the external comparables, the TPO has not brought out any thing on record that under which terms and conditions and circumstances the said public company has charged 2.5% rate of guarantee commission for providing guarantee on behalf of the Finance Company. The charging of a guarantee commission depends upon transaction to transaction and mutual understanding between the parties. There may be a case where bank may not charge any guarantee commission, depending upon it's evaluation of relationship with a particular client. Therefore, universal application of rate of 2.5% for guarantee commission cannot be considered a market rate as it largely depends upon the terms and conditions on which loan has been given, risk undertaken, relationship between bank and the client, economic and business interest etc. In the case, before us when the assessee has itself paid guarantee commission at the rate varying from 0.25% to 0.6% per annum to third party and considering the fact that assessee has stated that it has not incurred any cost for providing guarantee to the bank for the loan given to its I.T.A. No.4475/Mum/2007 70 and 7 other appeals subsidiary, we are of the considered view that applying the rate of 2.5% by TPO based on external comparables is not justifiable and cannot be confirmed.
52.11 We also agree with ld. DR that the contention of the assessee that there could not be any cost or charge or guarantee fee for providing corporate guarantee on behalf of its AE to a bank cannot be accepted because there is always an element of benefit or cost by way of risk and the assessee itself has paid guarantee commission to the bank in India. That the rates varies from 0.25% to 0.6% as mentioned hereinabove.
52.12 We are of the considered view that the ld. CIT(A) on the facts and circumstances of the case has rightly taken average rate on which the assessee has paid guarantee commission to third party, which comes to 0.38%. Hence, we uphold the order of ld. CIT(A) to charge guarantee commission at the rate of 0.38% being ALP for the guarantee given by the assessee to Bank of America on behalf of its AE Trevira GmbH. In view of above, we reject Ground No.9 of the appeal taken by assessee as well as Ground No.6 of the appeal taken by the department.
53. The assessee has taken an additional ground that AO erred in charging interest u/s 234B of the Act on the tax payable u/s 115JB of the Act, while passing order u/s 250 dated 29.01.2009 of the Act.
53.1 At the time of hearing, ld. AR conceded that the above issue is covered again the assessee by the decision of the Hon'ble Apex Court in the case of JCIT V/s Rolta India Limited (2011) 330 ITR 470 (SC) wherein their Lordships have held that interest u/s 234B is payable on failure to pay advance tax in respect of tax payable u/s 115JA of the Act. It may be mentioned that section 115JA of the Act is in pari-materia to section 115JB of the Act. Hence, the Additional Ground of appeal taken by assessee is rejected.
54. Now we take up the appeal filed by the department being ITA No.1725/Mum/2009 to deal with the remaining grounds of appeal.
55. Ground No.2 taken by department reads as under :
"2. On the facts and in the circumstances of case and in law. The ld. CIT(A) erred in restricting the allowance of depreciation to Rs.30,39,12,73,741/- as against appellant's claim of Rs.36,80,84,20,643/- and thus granting relief of Rs.6,41,71,41,902/-
I.T.A. No.4475/Mum/2007 71 and 7 other appeals 55.1 At the time of hearing, ld. Representatives of the parties submitted that this ground is similar to Ground No.2 of the appeal taken by department for assessment year 2003-04 and the decision taken therein will ipso facto apply to this ground of appeal.
55.2 We have considered the above submissions of ld. Representatives of the parties and the orders of authorities below. We observe that this issue has been considered in paras 19 to 19.2 hereinabove and the Tribunal has upheld the order of ld. CIT(A) by following its earlier order for Assessment year 2002-03 that claim of depreciation prior to insertion of Explanation 5 to section 32 (1) of the Act inserted w.e.f.1.4.2002 was optional. Therefore, for the reasons mentioned in para 19.2 hereinabove, we uphold the order of ld. CIT(A) and reject Ground No.2 of the appeal taken by department.
56. In Ground No.4, the department has disputed the order of ld. CIT(A) in deleting the adjustment of Rs.5,18,15,517/- made by AO u/s 92C on account of international taxation entered by assessee company for consultancy charges with its associated enterprises.
56.1 At the time of hearing, ld. Representatives of the parties submitted that this ground is similar to Ground No.11 of the appeal taken by department for assessment year 2003-04 and whatever decision is taken therein will ipso facto apply to this ground of appeal.
56.2 We have considered the above submissions of ld. Representatives of the parties and the orders of authorities below. We agree with the ld. Representatives of the parties that the facts are identical to assessment year 2003-04 in respect of above ground taken by department. The Tribunal has considered this issue in paras 23.1 to 23.3 and vide para 23.4 by following the reasonings for AY 2002-03, has confirmed the order of First Appellate Authority by rejecting the Ground of appeal taken by department. In view thereof, we uphold the order of ld. CIT(A) and reject Ground No.4 of the appeal taken by department.
57. Ground No.5 of the appeal taken by department is as under :
"On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in allowing an amount of Rs.1,59,62,789/- u/s 40A(ia) of the Act by holding that no tax was deducted at source u/s 194C of the Act."
I.T.A. No.4475/Mum/2007 72 and 7 other appeals 57.1 The Assessing Officer passed two orders u/s. 201(1A) both dated 21.8.2006 holding that the assessee company paid an amount of Rs. 31,73,724/- and Rs. 1,27,89,065/- in F.Y. 2004-05 relevant to A.Y. 2005-06 towards transportation of gas to GAIL (I) Ltd., Baroda without deduction of tax u/s. 194C of the Income Tax Act. That the assessee company failed to comply with the provisions of section 194C by not deducting TDS and remitting in Government account. In view of above, the Assessing Officer disallowed the said amount of Rs. 31,73,724/- and Rs. 1,27,89,065/- aggregating to Rs. 1,59,62,789/- u/s. 40a(ia) of the Act. The Assessing Officer rejected the contention of the assessee that no TDS was deductible on transmission charges as it was accepted by the CIT(A), Baroda inter-alia considering that section 194C is not applicable in the case of the assessee because transmission charges are incidental to the goods supplied; on the ground that the Department had gone in second appeal against the said orders of CIT(A) and the said appeals were pending before the ITAT. Being aggrieved, the assessee filed appeal before the first appellate authority.
57.2 Learned CIT(A) after considering the submission of the assessee that learned CIT(A), Ahmedabad vide its two orders, both dated 9.5.2007 had held that transmission charges are incidental in the process of supplying goods and part of the purchase cost and not covered by section 194C of the Act. Accordingly the orders passed by ACIT, TDS Circle, Ahmedabad u/s. 201(1A) both dated 21.8.2006 were dismissed. Hence, learned CIT(A) directed the Assessing Officer to allow the payment made by the assessee of Rs. 1,59,62,782/- towards transportation of gas by GAIL (I) Ltd. as section 194C of the Act does not apply to the purchase of natural gas from GAIL (I) Ltd. by the assessee. Hence this ground of appeal by the department.
57.3 At the time of hearing learned Departmental Representative relied on the order of the Assessing Officer. Whereas learned AR supported the order of learned CIT(A). He submitted that on similar facts the identical issue in the case of Indian Petrochemicals Corporation Limited (Now merged with Reliance Industries Ltd.) Vs. Income Tax Officer, TDS-1 (ITA No. 3967 & 3968/Ahd/2008 for A.Y. 2005-06 & 2006-07 was considered by the Tribunal vide order dated 20.10.2010) and allowed the appeals of the assessee by holding that the assessee was not required to deduct TDS from the transmission charges paid to GAIL (I) Ltd. for purchase of natural gas, u/s. 194C of the Act. Learned AR furnished a copy of the said order to substantiate his submission and submitted that the order of learned CIT(A) may be confirmed.
I.T.A. No.4475/Mum/2007 73 and 7 other appeals 57.4 We have carefully considered the orders of the authorities below and submissions of the representatives of the parties as well as order of the Tribunal dated 20.10.2010(supra).
57.5 We observe that the Tribunal in the above case has considered similar issue on identical facts namely whether the assessee was liable to deduct TDS from the payment made for purchase of natural gas from GAIL (I) Ltd. u/s. 194C of the Act. We observe that the Tribunal considered the contract between the assessee and GAIL (I) Ltd. and particularly Article 4 of the said Agreement which provided for delivery and pressure of gas. The Tribunal has observed that the gas shall be delivered to the buyer at the Gas Metering Station located in the assessee's premises at Vadodara. That the gas will be transported from the point of delivery at the Gas Metering Station by means of pipeline to be provided and maintained by the assessee. That the Gas Metering Station and buildings shall be constructed and maintained by GAIL (I) Ltd. on the land provided by the assessee. It was open to GAIL (I) Ltd. to use the said location for effecting deliveries to any other parties in the area. That the assessee shall make proper and adequate arrangements for receiving the gas at the outlet of the Gas Metering Station at its own risk and cost. That for effecting deliveries of gas at the Gas Metering Station, GAIL (I) Ltd. shall install and maintain at its own cost the piping control regulation and metering equipment in the Gas Metering Station and all other accessories. Such equipment will remain the property of GAIL (I) Ltd., which shall have the right to remove the same within twelve months after the expiry of the contract. That the GAIL (I) Ltd. shall have the right to use of the assessee's land and utilities essentially required for the installation, operation and maintenance of the Gas Metering Station and allied equipment. For this purpose, all statutory approvals shall be obtained by GAIL (I) Ltd. That the title to the gas shall pass from GAIL (I) Ltd. to the assessee at the point of delivery of gas to the assessee. The delivery point is explained in the Article to be at the downstream flange of the pipeline at the outlet of the Gas Metering Station. That the cost of the gas as well as the transportation charges are to be fixed or determined by the Government of India which is likely to be market related in accordance with the current policy of the liberalization and the assessee shall pay to GAIL the price and transportation charges as determined by the Government.
I.T.A. No.4475/Mum/2007 74 and 7 other appeals 57.6 During the course of hearing it was submitted that similar agreement is applicable in the case before us i.e the agreement which had been considered by the Tribunal in its order dated 20.10.2010 (supra).
57.7 We observe that in the said case, the Assessing Officer took the view that the assessee ought to have deducted tax from the transmission charges in view of sub- clause (c) of Explanation (iv) below section 194C and since the assessee did not deduct the tax, the Assessing Officer treated the assessee in default u/s. 201(1) of the Act. The Assessing Officer also stated that the assessee was liable to pay interest u/s. 201(1A) of the Act. Accordingly the Assessing Officer passed the orders and confirmed by learned CIT(A). In further appeal before the Tribunal, the issue was whether the payment for transmission charges could be considered as payment for the carriage of goods within the meaning of sub-clause (c) of Explanation(iv) to section 194C of the Act. The Tribunal after considering the contents of the agreement, as stated hereinabove in para 57.5 the component of the price of the gas and also taking into account that the invoice includes and separately shows transmissions charges, has held by its order dated 20.10.2010 (supra) that what has been paid is only as price of the gas that price was simply measured with reference to the transmission charges as one of the components and that the measure of the payment does not determine its character. The Tribunal also considered the decision Hon'ble Apex Court dated 7.9.2010 in the case of M/s. India Meters Limited Vs. State of Tamil Nadu (2010-VIL-11-SC) and held that the assessee was under no obligation to deduct tax from the transmission charges paid to GAIL u/s. 194C of the Act. The Tribunal has stated that when the transfer of property in the goods is to be at the place of the buyer to which the seller is under an obligation to transport goods, the expenditure incurred by the seller on freight in order to carry the goods from the place of manufacture to the place at which he is required under the contract to deliver the goods, would become part of the amount for which the goods are sold by the seller to the buyer. The Tribunal has stated that the contract between the assessee and GAIL also provided that the title to the gas shall pass from GAIL to the assessee at the point of delivery of the gas to the assessee and the delivery point was at the downstream flange of the pipeline at the outlet of the Gas Metering Station. Therefore, though the assessee was separately charged the transportation charges in the invoice, in view of the fact that the property in the gas was transferred to the assessee only at his place, any expenditure incurred by GAIL on freight in order to carry the gas from the place of manufacture to the place at which it was required under the contact to deliver(i.e. at the downstream flange of the pipeline at the outlet of the Gas I.T.A. No.4475/Mum/2007 75 and 7 other appeals Metering Station in the assessee's premises), would become part of the amount for which the gas was sold by it to the assessee and would thus become price for the gas, from which no tax was deductible under section 194C of the Act.
57.8 In view of the above decision of the Tribunal (supra) and considering the facts of the case before us, we hold that the title to the gas has passed from GAIL to the assessee at the point of delivery of the gas to the assessee and the delivery point is at the downstream flange of the pipeline at the outlet of the Gas Metering Station and up to that point the entire risk in relation to the gas was on GAIL. Therefore the title passed to the assessee only after the gas crossed the downstream flange of the pipeline at the outlet of the Gas Metering Station. Hence transportation charges have to be incurred by GAIL in making the gas available to the assessee at the place of sale and that in the invoice the transmission charges are separately shown but it is an addition to the cost of the goods to GAIL. Hence transmission charges constitutes a component of the price of the gas to the assessee.
57.9 In view of the above and respectfully following the order of the Tribunal dated 20.10.2010 in assessee's own case (supra), we uphold the order of learned CIT(A) and reject ground No. 5 of the appeal taken by the Department.
58. Now we take up appeals for assessment year 2006-07 being ITA No.1559/Mum/2009 filed by assessee and ITA No.2813/Mum/2009 filed by department.
59. Firstly, we take up the appeal of the assessee being ITA No.1559/Mum/2009 for our consideration.
60. Ground No.1 of the appeal taken by assessee is as under :
"1. The ld. CIT(A) erred in rejecting the appellant's alternative plea that there is a deemed payment of sales tax and therefore the amount of Rs.2408,79,34,561/- is allowable as per the provisions of section 43B of the Income Tax Act, 1961, The appellant submits that there is a deemed payment of Sales tax which is allowable u/s 43B of the Act and the CIT(A) ought to have given a decision on this issue in favour of the appellant"
60.1 This Ground of appeal is connected with Ground No.1 of the appeal taken by department which reads as under :
I.T.A. No.4475/Mum/2007 76 and 7 other appeals
1. On the facts and in the circumstances of the case and in law, the ld.
CIT(A) erred in deleting the notional sales tax of Rs.2408,79,34,561/- which has been treated as revenue receipt by the AO."
60.2 At the time of hearing, ld. Representatives of both the parties submitted that the facts and the issue are identical with ground No.1 of the appeals filed by the assessee as well as by the department for assessment year 2003-04 and whatever decision is taken therein will ipso facto be applicable to these grounds.
60.3 On consideration of orders of the authorities below and in view of above submissions of the ld. Representatives of both parties, we agree with them. Since we have heard these appeals alongwith appeals for assessment year 2003-04 and the above issue has been considered by the Tribunal in paras 6.2 to 6.6 of this order and following the reasoning given in paras 6.5 to 6.6 , we uphold the order of ld. CIT(A) that the claim of treatment of notional sales tax is capital receipt. Hence, Ground No.1 of the appeal taken by department is rejected. As mentioned in para 6.6 and the facts that Ground No.1 in assessee's appeal is an alternative ground, we hold that ld. CIT(A) has rightly held that it is not necessary to go into the alternative plea of the assessee claiming the notional sales tax is allowable u/s 43B of the Act. Hence Ground No.1 of the appeal taken by assessee is also rejected.
61. Ground No.2 of assessee's appeal comprises of four parts vide which assessee has disputed the order of ld. CIT(A) in disallowing Rs. 56.88 crores u/s 14A read with Rule 8D of the Income Tax Rules, 1962 being expenditure incurred in relation to earning income exempt u/s 10(23G) and 10(34) of the Act while computing book profit as well as profit under the normal provisions of the Act. The assessee has also in the alternative ground disputed that the disallowance made by AO is excessive and unreasonable.
61.1 At the time of hearing, ld. Representatives of both the parties submitted that the above ground is similar to Ground No.4 of the appeal for assessment year 2003-04 and the submissions made in regard thereto and the decision that may be taken, will ipso facto apply to this ground of appeal.
61.2 We observe that the above ground has been considered by the Tribunal vide paras 9.1 to 9.8 hereinabove. The Tribunal vide para 9.6 by following its earlier order I.T.A. No.4475/Mum/2007 77 and 7 other appeals dated 28.5.2012 in assessee's own case for preceding assessment year 2002-03 on similar facts has held that proportionate disallowance of interest is not justified as the assessee's own funds are far in excess than the interest free advances given by assessee and the investment made which is giving exempt income to the assessee.
61.3 At the time of hearing, ld. Representatives of the parties have categorically stated the findings given in assessment year 2003-04 will be applicable for this assessment year 2006-07 as well. Since, we have held vide para 9.6 that ld. CIT(A) is not justified to make proportionate disallowance of interest as assessee's own funds are far in excess interalia than the investment made which is giving exempt income to the assessee, and have held that the disallowance of interest as computed by ld. CIT(A) by applying Rule 8D read with section 14A of the Act is not justified.
61.4 In so far as disallowance of administrative expenses u/s 14A of the Act, we have held vide para 9.7 that it is fair and reasonable to restrict the disallowance to 1% of the exempt income. Since in the assessment year under consideration, the assessee has earned interest income of Rs.88.01 crores which is exempt u/s 10(23G) of the Act and Rs.22.44 crores being dividend income exempt u/s 10(34) of the Act aggregating to Rs.110.45 crores, we restrict disallowance to 1% of the said exempt income which works out to Rs.1,10,45,000/- for the purpose of computing the total income under the normal provisions of Act. In regard to disallowance u/s 14A for computing the book profit u/s 115JB of the Act, we have held hereinabove in para 9.7 that while computing the book profit u/s 115JB of the Act, the provisions of section 14A cannot be imported and therefore no disallowance u/s 14A of the Act can be considered while computing the book profit u/s 115JB of the Act.
61.5 In view of above ground No.2 of the appeal of assessee is allowed in part by restricting the disallowance to Rs.1,10,45,000/- u/s 14A of the Act while computing total taxable income under the normal provisions of Act but no disallowance under section 14A be considered while computing the book profit u/s 115JB of the Act.
62. Ground No.3 taken by assessee is in regard to disputing the order of ld. CIT(A) in confirming the disallowance of expenses on account of traveling of spouses of executives of assessee at Rs.1,24,81,946/-
I.T.A. No.4475/Mum/2007 78 and 7 other appeals 62.1 At the time of hearing, ld.AR conceded that the above issue on similar facts had been decided against the assessee in the preceding assessment year i.e. AY-2002-03 by the Tribunal in assessee's own case. Ld. AR also conceded that the facts are identical in the assessment year under consideration.
62.2 In view of above submissions of ld. AR and following the earlier order of the Tribunal in the preceding assessment years i.e. assessment years 2002-03 and 2003-04, we confirm the order of ld. CIT(A) by rejecting Ground No.3 of the appeal taken by assessee.
63. Ground No.4 of the appeal taken by assessee is as under :
"4 The ld. CIT(A) erred in confirming the disallowance of depreciation of Rs.31,53,569/- on the capitalized value of goods purchased from Durga Iron and Steel Ltd and Surajbhan Rajkumar Pvt. Ltd. AY-2003-04.
The Appellant submits that the cost of the goods purchased from the above parties were capitalized as plant and machinery in AY 2003-04 and were used during the year under consideration and hence depreciation u/s 32 of the IT Act on such capitalized values of the goods is allowable.
63.1 During the course of hearing, ld. Representatives of both the parties submitted that this ground is similar to Ground No.7 of the appeal of assessee for assessment year 2003-04 and whatever decision is taken in regard thereto, the same will ipso facto apply to this year for above ground.
63.2 We have considered the orders of authorities below and submissions of ld. Representatives of the parties in respect of above ground for assessment year 2003-
04. The Tribunal after considering the facts and submissions of ld. Representatives of the parties as mentioned in paras 13.2 to 13.6 of this order, has concluded vide para 13.7 hereinabove the order ld. CIT(A) that claim of Shri P.K.Agarwal of supplying material to the assessee-company remains unsubstantiated. Therefore the supply of material to the assessee could not be proved and consequently has confirmed disallowance of depreciation claimed by assessee. Since the facts are identical in this assessment year i.e assessment year 2006-07, we for the reasons stated in para 13.7 herein confirm the order of ld. CIT(A) to disallow the depreciation claimed by assessee on the capitalized value of goods purchased from Durga and Surajbhan. Hence. Ground No.4 of the appeal taken by assessee is rejected.
64. Ground No.5 of appeal taken by the assessee is as under :
I.T.A. No.4475/Mum/2007 79 and 7 other appeals "5.(a) The ld. CIT(A) erred in confirming the order of AO in treating the non-
funded guarantee given by the appellant to Bank of America for giving loan to its associate concern Trivera Gmbh as International transaction within the meaning of section 92B r.w. s. 92(1) of the Income Tax Act.
5(b) The ld. CIT(A) erred in confirming the arms length price in respect of non funded guarantee given by the appellant for advancing loans to its associate concern to the extent of Rs.1,66,00,000/- being 0.385% of the guaranteed amount."
64.1 This ground is connected with Ground No.5 of the appeal taken by department is as under :
"On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in restricting guarantee commission at the rate of 0.38% in place of 2.5% of non funded guarantee given by the assessee for advancing loan to its associated concerns."
64.2 At the time of hearing, ld. Representatives of both the parties submitted that this ground is similar to Ground No.9 of the appeal of assessee and Ground No.6 of the appeal of department for assessment year 2005-06 and whatever decision is taken therein will ipso facto apply to this ground for this assessment year as well.
64.3 We have considered the above submissions of ld. Representatives of the parties and orders of authorities below. We agree with the ld. Representatives of the parties that similar issue has been considered by the Tribunal in preceding assessment year i.e. assessment year 2005-06 in paras 52.2 to 52.12 hereinabove. Since the facts and the issue in this assessment year i.e assessment year 2006-07 are identical to assessment year 2005-06, we for the reasons mentioned in paras 52.10 to 52.12 hereinabove uphold the order of ld. CIT(A) to charge guarantee commission at the rate of 0.385% being ALP for the guarantee given by the assessee to Bank of America on behalf of its AE Trivera GmbH. Hence Ground No.5 of the appeal taken by assessee as also Ground No.5 of the appeal taken by department, both are rejected.
65. Now we take up the appeal filed by the department being ITA No.2813/Mum/2009 to deal with the remaining grounds of appeal.
66. Ground No.2 taken by department reads as under :
"2. On the facts and in the circumstances of case and in law. The ld. CIT(A) erred in restricting the allowance of depreciation to Rs.26,38,22,32,233/- as against appellant's claim of Rs.29,43,27,07,267/- and thus granting relief of Rs.3,05,04,74,034/-
I.T.A. No.4475/Mum/2007 80 and 7 other appeals 66.1 At the time of hearing, ld. Representatives of the parties submitted that this ground is similar to Ground No.2 of the appeal taken by department for assessment year 2003-04 and the decision taken therein will ipso facto apply to this ground of appeal.
66.2 We have considered the above submissions of ld. Representatives of the parties and the orders of authorities below. We observe that this issue has been considered in paras 19 to 19.2 hereinabove and the Tribunal has upheld the order of ld. CIT(A) by following its earlier order for Assessment year 2002-03 that claim of depreciation prior to insertion of Explanation 5 to section 32 (1) of the Act inserted w.e.f.1.4.2002 was optional. Therefore, for the reasons mentioned in para 19.2 hereinabove, we uphold the order of ld. CIT(A) and reject Ground No.2 of the appeal taken by department.
67. In Ground No.3, the department has disputed the order of ld. CIT(A) in deleting the adjustment of Rs.1,76,36,077/- made by AO u/s 92C on account of international taxation entered by assessee company for consultancy charges with its associated enterprises.
67.1 At the time of hearing, ld. Representatives of the parties submitted that this ground is similar to Ground No.11 of the appeal taken by department for assessment year 2003-04 and whatever decision is taken therein will ipso facto apply to this ground of appeal.
67.2 We have considered the above submissions of ld. Representatives of the parties and the orders of authorities below. We agree with the ld. Representatives of the parties that the facts are identical to assessment year 2003-04 in respect of above ground taken by department. The Tribunal has considered this issue in paras 23.1 to 23.3 and vide para 23.4 by following the reasonings for AY 2002-03, has confirmed the order of First Appellate Authority by rejecting the Ground of appeal taken by department. In view thereof, we uphold the order of ld. CIT(A) and reject Ground No.3 of the appeal taken by department.
68. Ground No.4 of the appeal taken by department is as under :
"On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in allowing an amount of Rs.1,60,58,003/- u/s 40A(ia) of the Act by holding that no tax was deducted at source u/s 194C of the Act."
I.T.A. No.4475/Mum/2007 81 and 7 other appeals 68.1 At the time of hearing, ld. Representatives of both the parties submitted that this ground is similar to Ground No.5 of the appeal taken by department for the assessment year 2005-06 and whatever decision is taken therein will ipso facto apply to this assessment year as well.
68.2 We have considered the submissions of the ld. Representatives of the parties and the orders of authorities below. We agree with the ld. Representatives of the parties that similar issue has been considered by the Tribunal in the preceding assessment year 2005-06 in paras 57.1 to 57.9 hereinabove. Since the facts and the issue in this year are identical, we for the reasons mentioned in paras 57.5 to 57.8 hereinabove, uphold the order of ld. CIT(A) and reject Ground No.4 of the appeal taken by department.
69. In the result, all the appeals of assessee for assessment years 2003-04 to 2006- 07 are allowed in part. However, the appeals of department for assessment years 2003- 04 to 2005-06 are allowed in part as indicated above and whereas appeal for assessment year 2006-07 is rejected.
Order pronounced in the open court on 13th Sept, 2013
आदे श क घोषणा खुले यायालय म दनांकः 13th Sept, 2013 को क गई ।
Sd sd
(राजे संह/RAJENDRA SINGH) (बी.आर. म तल/B.R.MITTAL)
लेखा सद य / ACCOUNTANT MEMBER या यक सद य / JUDICIAL MEMBER
मब
ुं ई Mumbai; दनांक Dated 13 / 09/2013
व. न.स./ SRL , Sr. PS
आदे श क त ल प अ े षत/Copy of the Order forwarded to :
1. अपीलाथ / The Appellant
2. यथ / The Respondent.
3. आयकर आयु त(अपील) / The CIT(A)-
4. आयकर आयु त / CIT
5. वभागीय त न ध, आयकर अपील य अ धकरण, मब
ंु ई /
DR, ITAT, Mumbai
6. गाड फाईल / Guard file.
I.T.A. No.4475/Mum/2007
82 and 7 other appeals
आदे शानस
ु ार/ BY ORDER,
True copy
सहायक पंजीकार (Asstt. Registrar)
आयकर अपील य अ धकरण, मुंबई /ITAT, Mumbai