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It was felt in September, 1990, that the seamless tube unit can be profitably and efficiently combined with the existing steel activity. Initially, the project cost was considered at Rs. 156 crores. The company being an existing listed company could raise equity at a premium while a new company was prohibited to do so as per the Controller of capital issues guidelines. Initially, therefore, it was advantageous to take up the project by the assessee-company itself.

20. Unfortunately, the project cost escalated substantially due to the devaluation of rupee and went upto Rs. 271 crores. At the same time, due to changes in Government policies and liberalisation, imports of seamless tubes were freely permitted and imports for the domestic suppliers went down due to the removal of benefits from deemed export status, etc. At the same time, steel making activity was also facing difficulties due to increase in cost of imported scrap and power and fuel cost. Moreover, entry was allowed for private sector companies in steel making directly from iron ore through blast furnace routes. It was, therefore, necessary for the company to go for steel making directly from iron ore through blast furnace route to survive competition in the steel business. At the same time, tube division was likely to incur substantial losses due to the factors mentioned above. The management felt that if the tube division was continued in the company, it could have wiped out the net worth of the assessee-company in 2-3 years time. It was, therefore, necessary to spin off the tube division into a separate company and restructure its debt and equity through the process of public issue through premium. By doing so, the interest cost could be brought down and viability of project could be improved. Simultaneously, the company decided to set up a unit for blast furnace at Hospet in Karnataka. The decision to spin off tube division was taken by the company to improve the viability of the project and also ensure survival of the company. It was also submitted that the spin off was undertaken after setting up of tube division and sales worth Rs. 28 crores were effected during the previous year 1994-95. He further submitted that the spin off of tube division was entirely due to strong business and commercial compulsions and was not even remotely connected to any taxation. In fact, purely from the tax point of view, it was advantageous for the company not to transfer the tube division as it could have availed of the benefits of substantial losses and depreciation. He further pointed out that as a matter of fact, on this issue, the case of the assessee is fully covered by the decision of the Pune Bench in the case of Bharat Forge Ltd. (supra) and in MA No. 8/PN/95, dt. 26th February, 1996.

57. The learned counsel further pointed out that the entire case of the Department has been built up around the amputation of the tube division from the assessee-company. He pointed out that in December, 1994, the assessee-company had to take the painful decision of spinning off tube division due to bona fide and commercial reasons. The business and economic environment went through a sea change between 1991 and 1994 due to liberalisation. Due to devaluation of the rupee, the tube project cost escalated substantially. Due to change in the Government policy in 1993-94, the deemed export status of supplies to petroleum sector was withdrawn, price preference given to domestic manufacturers was reduced substantially from optimum of 35 per cent to 10 per cent and on top of it terminal excise duty was levied. As a result, the contribution margin on tubes required in petroleum sector reduced substantially and products of the company became uncompetitive especially in comparison with imported tubes. Due to reduction in customs duty, imports became cheaper and hit the prices of indigenous production.

58. The cumulative effect of all these changes was that the tube project became unviable and was bound to make losses. The changed scenario not only affected the profitability of tube activity, but also affected the steel activity of the company. Steel activity was suffering due to heavy competition from cheaper imports on one hand and escalation in cost of imported scrap and power. At the relevant time, the assessee was also exploring proposals for the joint venture. The joint venture was possible only if tube division was separated into a separate company. Through the process of spin off to a separate company and public issue of shares by it, the debt portion of the project was reduced. Consequently, the interest cost could be brought down and thereby the losses could be reduced. It was under these compelling reasons that the company had to take the decision of spinning off of tube division.

108. As regards saving of capital gains tax on land transferred to KSTL, we find that the land in Baramati is located in a rural area and was a leasehold land. It also constituted only 1 per cent of the project cost. The unit was transferred as a going concern along with its problems and potential of making substantial losses, as it is evident from the results of the subsequent years. In the light of this, the transfer value was, in our view, fair and the transfer was for valid commercial considerations. No motive of tax saving, therefore, can be attributed to the assessee-company. As a matter of fact, if tax was the only consideration, the tube division would not have been transferred as it had incurred substantial losses and substantial depreciation was to be allowed, which could be set off against the income of the assessee-company. It would, therefore, have been beneficial to the assessee-company not to spin off the tube division. It was also clarified by the learned counsel that the share premium could not be and was actually not transferred to KSTL as allegedly by the learned senior Departmental Representative.