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Income Tax Appellate Tribunal, “H” BENCH, MUMBAI
Before: SHRI AMIT SHUKLA, JM &
Appellant/Assessee by : Ms. Vasanti Patel a/w Deepa Sheth, Mr. Bhavin Shah Revenue/Respondent by : Shri K.C Selvamani, CIT-DR : 18.10.2023 Date of Hearing : 06.11.2023 Date of Pronouncement O R D E R Per Padmavathy S:
The appeal of the assessee and the cross objections of the revenue for assessment year (AY) 2002-03 are against the order of the Commissioner Income Tax (Appeals) – X, Mumbai (the Ld. CIT(A)) dated 06.02.2006. The appeal for A.Y. 2012-13 is against the final order of assessment passed by the Assistant Commissioner of Income-tax-15(2)(1), Mumbai passed under section 143(3) read with section 144C(13) of the Income-tax (the Act) dated
3 C.O. No. 02/Mum/2012 & 1851/Mum/2017 Indian Oil Adani Ventures Ltd. 20/01/2017. Since there are common issues contended, these appeals were heard together and disposed off through this common order.
I.T.A. No. 2402/Mum/2006
The assessee through various grounds is contending the following issues- (i) Provision for performance warranty – Ground No.1 to 3 & 14 (ii) Disallowance under section 14A – Ground No.4 and 5 (iii) Expenditure on Development and other charges on lease hold land – Ground No.6,7 and 14 (iv) Expenditure on right of way – Ground No.8 and 9 (v) Unabsorbed depreciation and capital loss – Ground No.10 & 11 (v) MAT credit – Ground No.12 (vi) Interest under section 234D – Ground No.13 and 14 (vii) Short credit of TDS – Ground No.15 (viii) General – Ground No.15 and 16
For AY 2002-03, the assessee filed the return of income on 30.10.2005 declaring a loss of Rs. 7,51,04,542/- but paid tax on MAT of Rs. 93,89,051/- under section 115JB of the Act. The case was selected for scrutiny and statutory notices were duly served on the assessee. The Assessing Officer (AO) completed the assessment by making disallowance towards provision made for performance warranty and disallowance under section 14A towards interest expenses. The AO did not allow the claim of the assessee during assessment proceeding that the expenditure incurred on development of lease hold land and for right of way should be allowed as a deduction.
4. Aggrieved, the assessee filed further appeal before the Ld. CIT(A). The Ld. CIT(A) upheld the disallowances made by the AO with regard to performance warranty and disallowance under section 14A. Regarding the 4 C.O. No. 02/Mum/2012 & 1851/Mum/2017 Indian Oil Adani Ventures Ltd. assessee's claim with regard to expenditure incurred on development of lease hold land and for right of way the CIT(A) held that the expenditure is bringin benefit of enduring nature to the assessee and therefore the same needs to be capitalized and directed the AO to allow depreciation on the same.
5. Aggrieved, the assesee is in appeal before the Tribunal. The revenue has raised cross objections with regard to the depreciation allowed by the CIT(A) on the expenditure incurred on development of lease hold land and for right of way.
Provisions for Performance Warranty – Ground No. 1 to 3
6. During the course of assessment, the AO noticed that the assessee has made a provision of Rs. 1,80,71,019/- as provisions for performance warranties and other contractual liabilities and has debited the P&L A/c with the said amount. The AO further noticed that the assessee-company has made the provision @ 5% of the contract value in progress. The AO held that the provision for performance warranty is in the nature of provision for bad and doubtful debts and therefore cannot be claimed as a deduction until the debt has become bad and irrecoverable. Accordingly, the AO disallowed the claim and added the amount back to the total income of the assessee. The AO also made the similar addition to the book profits computed under section 115JB of the Act. The Ld. CIT(A) relied on the decision in assessee’s own case for AY 2001-02 and upheld the disallowance stating that the deduction claimed is contingent in nature.
The Ld. AR in this regard submitted that the issue is covered by the decision of the Co-ordinate Bench in assessee’s own case for AY 2004-05 to 2008-09 ([2013] 39 taxmann.com 195 (Mumbai - Trib.)) wherein the provision
5 C.O. No. 02/Mum/2012 & 1851/Mum/2017 Indian Oil Adani Ventures Ltd. for warranty made at 0.2% of the value of work completed was allowed as deduction. The Ld. AR further submitted that the above decision of the Tribunal has upheld the decision of the CIT(A) to make adjustment of the amount disallowed to book profit under section 115JB of the Act. The Ld. AR prayed for a similar direction for the year under consideration.
The Ld. Departmental Representative (DR) on the other hand relied on the order of the lower authorities.
We have heard the parties and perused the material available on record. We noticed that the Co-ordinate Bench in assessee’s own case for AY 2004-05 to AY 2008-09 (supra) had considered the issue of Provision towards Performance Warrantee and held that:
“9. We have considered the rival submissions and also perused the relevant material available on record. It is observed that although the provision made by the assessee for warranty @ 5% was allowed by the Tribunal for A.Y. 2001- 02 which was the first year of the assessee’s operation, it was observed by the Tribunal in its order for 2001-02 that such provision should be made on the basis of relevant past data. In A.Y. 2001-02, being the first year of assessee’s operation, past data was not available but the year under consideration is the 4th year of the operation of the assessee and the past data now being available at least for the first three years, we agree with the contention of the ld. D.R. that such past data should be taken into consideration to decide this issue. As per our direction, the assessee has furnished the relevant data in this regard for the past three years as well as for the subsequent eight years giving details of provision made for warranty in each year, warranty expenses actually incurred in each year and the reversal of warranty provision made in each year. The said details are as under: Sr Assessmen No. Revenue %of Gross Reversal Warranty . t Year of recognized warran Warranty of expense N Co via-a-vis t provision warranty (Rs.) (Refer o. ntr warrant provisi (Rs. provision Note act provision on on below) s (Rs.) revenu e recogni
6 C.O. No. 02/Mum/2012 & 1851/Mum/2017 Indian Oil Adani Ventures Ltd. zed (1 (2) (3) (4) (5) (6) (7) (8) ) 1. 2001-02 2 942,847,371 5.00% 48,372,135 - - 2. 2002-03 3 386,015,719 18,071,019 - - 3. 2003-04 3 158,913,730 5.00% 5,305,629 (64,039,720) - 4. 2004-05 8 1,437,365,613 1.00% 27,745,184 - 2.00% 5. 2005-06 11 2,179,705,801 1.00% 30,991,242 (10,638,202) 1,941,887 2.00% 6. 2006-07 9 1,110,780,148 0.10% 7,417,675 (30,208,158) 1,573,334 1.00% 7. 2007-08 31 3,611,692,269 0.20% 12,027,421 (27,421) - 0.50% 8. 2008-09 22 7,538,139,584 0.25% 28,296,542 - - 1.00% 9. 2009-10 21 8,805,276,517 0.25% 29,588,295 (31,979,280) 869,495 0.50% 1 2010-11 22 8,739,027,394 0.25% 23,332,258 (13,189,500) - 0. 0.50% 1 2011-12 20 10,654,822,678 0.25% 32,784,082 (4,917,051) - 1. 0.50% 1 2012-13 19 14,404,696,612 0.25% 48,416,926 (1,107,721) - 2. 0.50% A perusal of the above details shows that no expenditure was incurred by the assessee on warranty in the first three years i.e. 2001-02, 2002-03 & 2003-04 as well as in the year under consideration i.e. A.Y. 2004-05. In the absence of any expenditure incurred on warranty in assessment years 2001-02, 2002-03 & 2003-04, the provision made @ 5% for warranty in assessment years 2001- 02 & 2002-03 was substantially reversed by the assessee in A.Y. 2003-04. It is thus clear that when the provision for warranty was made by the assessee for A.Y. 2004-05, it was aware that no expenditure on warranty was actually required to be incurred in the earlier years i.e. assessment years 2001-02, 2002-03 & 2003-04 as well as in the year under consideration i.e. 2004-05. It was also aware that the provision made for 2001-02 & 2002-03 @ 5% was required to be substantially reversed in A.Y. 2003-04 and no warranty expenditure was incurred even in the year under consideration i.e. 2004-05. Still a provision of Rs. 2.77 crores was made by the assessee being 1-2% of the value of work completed which, in our opinion, cannot be justified on the basis of the past data and the ld. counsel for the assessee has not been able to controvert this position when it was confronted to him.
10. It is, no doubt, true that warranty expenditure of Rs. 19.41 lacs and Rs. 15.73 lacs was incurred by the assessee in A.Y. 2005-06 and 2006-07. However, the said expenditure actually incurred by the assessee in the 7 C.O. No. 02/Mum/2012 & 1851/Mum/2017 Indian Oil Adani Ventures Ltd. subsequent year, in our opinion, can only justify and support the view taken by the ld. CIT(A) that provision to the extent of 0.2% of the value of work completed is fair and reasonable in the facts of the case. As regards the contention raised on behalf of the assessee that the provision made for warranty in A.Y. 2004-05 to the extent found to be excess has been reversed and offered to tax in the subsequent years, we are of the view that such reversal of provision in the subsequent year cannot justify the provision maid in the year under consideration, the correctness of which is to be decided mainly on the basis of past data relating to expenditure actually incurred on warranty. In our opinion, once the deduction on account of provision is not allowed to the extent it is found to be excess, the reversal of provision in the subsequent year to that extent cannot give rise to any income and if the assessee has offered such income in the subsequent years, it can seek appropriate relief from the A.O. who shall allow the same in accordance with law. As such, considering all the facts of the case, we are of the view that the provision made by the assessee for warranty was rightly allowed by the ld. CIT(A) only to the extent of 0.2% of the value completed in the year under consideration being fair and reasonable and upholding his impugned order on this issue, we dismiss ground No. 1 of assessee’s appeal as well as Revenue’s appeal.
In the above decision, the coordinate bench has analyzed the provision for performance warranty vis a vis the actual expenditure from AY 2001-02 onwards to come to the conclusion that 0.2% of value of work completed during the year is reasonable. Further we notice that the Tribunal in the above decision has also observed that the excess provision made in earlier years including the year under consideration was reversed by the assessee. Therefore respectfully following the above decision we direct the AO to allow the claim to the extent of 0.2% of the of the contract value completed.
With regard to adjustment to the provision for performance warranty disallowed to book profit under section 115JB of the Act we notice that the coordinate bench in assessee's own case for AY 2004-05 to 2008-09 has held that –
8 C.O. No. 02/Mum/2012 & 1851/Mum/2017 Indian Oil Adani Ventures Ltd. “14. After considering the rival submissions and perusing the material available on record, we find merit in the contention of the ld. D.R. Having held that the provision made for warranty by the assessee is fair and reasonable only to the extent of 0.2% of the value of work completed during the year under consideration on the basis of past data, we are of the view that the said provision to that extent alone can be said to be the ascertained liability of the assessee and the balance provision, which is found to be excessive on the basis of past data clearly represents unascertained liability which is liable to be added back while computing the book profit of the assessee u/s 115JB of the Act. We therefore find no infirmity in the order of the ld. CIT(A) allowing the provision for warranty only to the extent of 0.2% of the value of work completed while computing the income of the assessee u/s 115JB of the Act and dismiss ground No. 2 of assessee’s appeal as well as that of Revenue’s appeal.
Respectfully following the above order of the Tribunal, we direct the AO to add only the amount of provision in excess of 0.2% of the value work completed during the year under consideration. In other words the AO is directed to allow the provision for warranty only to the extent of 0.2% of the value of work completed while computing the income of the assessee u/s 115JB of the Act. It is ordered accordingly.
Disallowance of interest under section 14A – Ground No.4 & 5
The Ld. AR submitted that for the year under consideration also the assessee’s own funds are much more than the tax free investments and that during the year under consideration, the assessee did not earn any dividend income. The ld AR submitted that therefore no disallowance under section 14A of the Act is warranted. The Ld. AR in this regard relied on the decision of the Hon’ble Supreme Court in the case of State Bank of Patiala (2018) 99 taxmann.com 286 (SC) and the decision of the jurisdictional High Court in the case of Reliance Utilities and Power Ltd (2009) 313 ITR 340 (Bom)
We noticed that the AO has arrived at the disallowance under section 14A at 5% of the total investments made by the assessee at Rs. 7,50,000/-. i.e. 5% X Rs.1,50,00,000/-. The Ld. CIT(A) upheld the disallowance made in the absence of any clear bifurcation given by the assessee with regard to whether the investments were made out of borrowed funds or out of own funds. It is a settled position that when own funds are available which is more than the investments made in the exempt income earning investments, no disallowance under section 14A is warranted. Further we notice that the Hon'ble Delhi High Court in the case of PCIT v. Era Infrastructure India Ltd. [2022] 141 taxmann.com 289 has held that the amendment to section 14A to the effect that even if there is no exempt income disallowance u/s.14A can be made, is prospective and is applicable only from 01.04.2022. Therefore we see merit in the contention of ld AR that no disallowance is warranted when the assessee has not earned any exempt income during the year under consideration. Accordingly we delete the disallowance made u/s.14A of the Act.
Expenditure on Development and other charges on leasehold land and Expenditure of Right of Way – Ground No.6 to 9 & 14
The assessee company has entered an agreement with City & Industrial Development Corporation of Mumbai Limited (CIDCO) towards leasing of land for 60 year period. By virtue of the agreement the assessee got the license for development of pipelines and CIDCO had also granted the assessee a Right of Way over the land for the purpose of laying of pipelines. The assessee during the year under consideration has incurred expenditure towards
10 C.O. No. 02/Mum/2012 & 1851/Mum/2017 Indian Oil Adani Ventures Ltd. development of the land and other charges to the tune of Rs.1,02,14,775 and had incurred Rs.2,14,86,121 towards Right of Way. The assessee had not written off the said amount in the P&L account but claimed the same as revenue expenditure by way of a note to the Statement of Total Income. The AO did not allow the claim of the assessee. Aggrieved the assessee raised the issue before the ld CIT(A). The assessee submitted that the expenditure is incurred to facilitate the assessee's operations and had enabled the assessee to manage the business more efficiently and profitably accordingly should be allowed as revenue expenditure. The assessee made a without prejudice plea that the amounts incurred should be allowed as a deduction over the lease period or if the amounts incurred are treated capital expenditure, the assessee be should allowed depreciation on the same. The assessee also submitted that the amount paid for use of land on which pipelines are laid have direct nexus to the construction of the pipelines and therefore should be capitalized as part of the actual cost of asset and depreciation be allowed. The ld CIT(A) did not agree to the contention that the expenditure incurred is revenue in nature for the reason that the assessee is deriving benefit of enduring nature from the expenditure incurred. However the ld CIT(A) allowed the claim of the assessee that the depreciation on the said amounts be allowed if it is to be treated as a capital expenditure and accordingly directed the AO.
With regard to expenditure incurred towards development and other charges, the ld AR submitted that the coordinate bench in assessee's own case for AY 2004-05 to 2008-09 (supra) has considered the issue had restored the issue to the AO to decide based on the decision of the Hon’ble Gujarat High Court in the case of Sun Pharmaceuticals Ind. Ltd. reported in (2010) 329 ITR 479 and in the order giving effect the AO vide order dated 25.07.2016 for AY
11 C.O. No. 02/Mum/2012 & 1851/Mum/2017 Indian Oil Adani Ventures Ltd. 2004-05 had allowed proportionate expenditure spread over the period of lease. The ld AR further submitted that the revenue has not filed any further appeal in the matter and therefore the decision to allow proportionate expenditure over the lease period has reached finality. Accordingly the ld AR submitted that for the year under consideration also the proportionate expenditure should be allowed to be claimed.
18. The ld DR relied on the order of the lower authorities.
We heard the parties and perused the material on record. We notice that the coordinate bench in assessee’s own case for AY 2004-05 to AY 2008-09 (supra) has considered the issue of expenditure incurred on development and other charges on the land leased from CIDCO, and has held that –
19. As regards the premium and other charges paid in respect of leasehold land, the ld. Counsel for the assessee has submitted that although a similar issue has been decided by the Tribunal against the assessee in A.Y. 1999- 2000, the decision of Hon’ble Gujarat High Court in the case of Sun Pharmaceuticals Ind. Ltd. reported in (2010) 329 ITR 479 rendered subsequently on a similar issue is in favour of the assessee. A perusal of the judgment passed by the Hon’ble Gujarat High Court in the said case shows that the Tribunal in that case had found on analysis of the relevant lease agreement that the land in question was not acquired by the assessee. The lease Deed was registered because as per the Registration Act it was compulsory to do so. There was no change in the ownership of the land and the lease rent payable was very nominal. Keeping in view all these facts, it was held by the Tribunal that the benefit accrued to the assessee was only in the nature of an advantage for carrying on the business by paying nominal rent of the land and by obtaining the land on lease, the capital structure of the assessee did not undergo any change. Keeping in view all these findings of fact recorded by the Tribunal, which were not specifically disputed by the Revenue, the Hon’ble Gujarat High Court did not find any infirmity in the order of the Tribunal deleting the disallowance made on account of lease rent paid by the assessee to GIC treating the same as Revenue expenditure. In our opinion, before the ratio of the decision of Hon’ble Gujarat High Court in the case of Sun Pharmaceuticals Ind. Ltd. (supra) is applied in the present case, the relevant facts are required to be 12 C.O. No. 02/Mum/2012 & 1851/Mum/2017 Indian Oil Adani Ventures Ltd. verified, we therefore restore this issue to the file of the A.O. for deciding the same afresh in the light of the decision of Hon’ble Gujarat High Court in the case of Sun Pharmaceuticals Ind. Ltd. (supra) after verifying the relevant facts. Ground No. 4 & 5 of the assessee’s appeal are accordingly treated as allowed for statistical purpose.
We in this regard further notice that the DRP for AY 2012-13, while considering the same issue has issued direction to the AO to allow the proportionate expenditure towards development and other charges and that the AO while passing the final assessment order has allowed the proportionate expenditure. Therefore respectfully following the above decision of the Tribunal, we direct the AO to allow proportionate expenditure incurred towards development and other charges for the year under consideration.
With regard to claim of right of way as revenue expenditure, the ld AR submitted that without the license to Right of Way, the assessee could not carry on the business efficiently since otherwise the assessee had to explore other ways to transport the fuel. The ld AR drew our attention to various clauses in the Agreement entered into with CIDCO to submit that the assessee is granted only the license to enter the land for the purpose of laying down the pipelines and therefore the amount paid is in the nature of license fee which is to be allowed as a revenue expenditure. The ld AR further drew our attention to clause 34 of the agreement as per which the assessee is required to remove the material things i.e. pipelines laid from the land after the completion of 60 year period which goes to prove that the assessee has not derived any other benefit from the right of way agreement. The ld AR also submitted that the license to Right of Way is an easement right obtained by the assessee through the agreement and as per the definition of the term "License" under section 52 of the Indian Easement Act 1882, the license does not result in easement or 13 C.O. No. 02/Mum/2012 & 1851/Mum/2017 Indian Oil Adani Ventures Ltd. interest in the property. Accordingly the ld AR submitted what the assessee has obtained is only a license to right of way which is to be used for a period of 60 years and the land need to returned in the same condition as it was at the time of grant of such license. The ld AR made a without prejudice submission that the expenditure on right of way should otherwise be allowed to be claimed on proportionate basis over the lease period of 60 years.
22. We heard the parties and perused the material on record. The assessee vide agreement dated 31st May 2002, has obtained the Right of Way from CIDCO. The assessee has paid a fee of Rs.2,05,74,000/- as premium for obtaining the Right of Way for a period of 60 years. The contention of the revenue is that since the amount paid is bringing enduring benefit to the assessee it is capital in nature and since it is towards the Right of Way of Land no depreciation is to be allowed. The argument of the assessee is that what the assessee has obtained is only a license to Right of Way which right helps in the business operations of the assessee and therefore the same needs to be allowed as a revenue expenditure. The alternate claim of the assessee is to allow proportionate deduction over the lease term. In this regard we will look at certain clauses in the agreement in order to understand the nature of the transaction – “1. During the period of Sixty years from the date hereof, OTL shall have licence and authority only to enter upon the said land for the purpose of laying of pipeline and for no other purpose and IOTL shall be deemed to be a mere Licensee of the Corporation for the said land for a consideration of Rs. 2,05,74,000/-(Rupees Two Crores Five Lakhs Seventy Four Thousand only) and subject to the terms and conditions agreed upon between the parties hereto.
IOTL shall obtain necessary permission/s and licences from all the appropriate authorities and will be required to take the permission before 14 C.O. No. 02/Mum/2012 & 1851/Mum/2017 Indian Oil Adani Ventures Ltd. commencement of the work and submit the copies of same to the Corporation.
The detailed plans of all crossings shall be submitted by the IOTI, for approval of the Corporation before executing the work.
The pipeline shall be laid as per the approved alignment plan and in case any deviations are required due to site constraints. IOTL have to take the prior approval in writing from the Corporation.
IOTL shall obtain prior approval from the Corporation for undertaking repairs and maintenance of pipeline in future.
No work shall be commenced or carried on, which infringes the Corporation's General Development Control Regulations for New Bombay 1975 or any other law for the time being in force as regards laying of pipeline on the said land and until the said plans, elevations, sections, specifications and details have been so approved as aforesaid and thereafter IOTL shall not make any alterations or additions thereto unless such alterations and additions have been in like manner approved previously.
IOTL shall not affix or display or permit to be affixed or displayed on the said land any sign boards, sky-signs, neon sign or advertisements painted or illuminated or otherwise, unless the consent in writing of the Managing Director shall have previously been obtained thereto.
The Managing Director and/or Officer/s and/or servants of the Corporation acting under the directions of Corporation at all reasonable times shall have right to enter upon the said land to view the state and progress of the work and for all other reasonable purpose.
33. In the event IOTL shall not proceed with the works with due diligence or shall fail to observe any of the stipulations on its part herein contained, the Corporation shall have the powers and liberty to revoke the licence hereby granted to IOTL on serving upon IOTL a notice in writing and after giving an opportunity to IOTL to remedy the damage done or correct its failure within a period of three months. On failure by IOTL to remedy the breach or damage within a period of three months the licence hereby granted shall come to an end and IOTL, its agents, servants shall be restrained from entering upon the said land.
15 C.O. No. 02/Mum/2012 & 1851/Mum/2017 Indian Oil Adani Ventures Ltd.
Upon expiry of the period of 60 years or earlier determination thereof or if land is required by the corporation earlier IOTL shall remove all materials and things from the said land and in the event of failure to do so and not withstanding any enactment for the time being in force to the contrary, such materials and things shall belong to the Corporation without any compensation or payment to IOTL for refund or repayment of any premium paid by it without prejudice to all other legal rights and remedies available to the Corporation against IOTL.”
From the combined reading of the above clauses of the agreement, it is clear that the assessee is only a licensee to whom CIDCO has granted the license and authority to enter the land for the limited purpose of laying pipeline and that the assessee does not have any other right over the land nor the right to use the land for any other purpose. Under the terms of the agreement, the assessee has very restrictive rights to use the property and that the license can be invoked by CIDCO under certain circumstances as per clause 33 as mentioned above. The assessee by making the payment towards to Right of Way, has obtained the license enter and use the land for laying pipelines and this right is for a period of 60 years. Therefore it is reasonable to conclude that the amount paid is for use of the land for a specific purpose of laying pipeline for a specific period time after which the right to use is revoked. Now coming to the issue of whether the fees paid is revenue or capital in nature. In our considered view the test of whether a particular payment is capital or revenue has to be decided based on the facts and circumstances peculiar to that case. In assessee's case it cannot be denied that the assessee has derived benefit of enduring nature extending for 60 years during which period the assessee is given a right of way in order to lay pipelines for the purpose of carrying on its business. Therefore we are unable to agree with the claim of the assessee that the amount paid towards Right of Way should be allowed as a revenue expenditure. At the same time it is pertinent note that the said enduring benefit
16 C.O. No. 02/Mum/2012 & 1851/Mum/2017 Indian Oil Adani Ventures Ltd. in assessee's case is in the form of advantage consists of facilitating business operations and enabling the management to conduct the business more effectively or profitably i.e. the assessee by obtaining the Right of Way is able to lay pipelines to carry on its business operations more efficiently. Therefore there is merit in the alternate claim of the assessee that the impugned payment bears an element of business expenditure and should be allowed to be amortized. In view of the above discussion and considering the unique facts of the present case, we are of the view that it would be just and proper to allow the expenditure to be amortized and claimed over the period of the agreement i.e. 60 years. It is also relevant to note here that the revenue has not disputed the claim of development and other charges incurred by the assessee on the said land over the lease period and therefore allowing the amount paid towards Right of Way to be claimed in the similar way would be consistent with the same. The grounds raised by the assessee in this regard are partly allowed.
Ground No.10 to 13 are not pressed by the Ld. AR during the course of hearing. Accordingly they are dismissed as not pressed. Ground No.14 is consequential not warranting separate adjudication.
Through cross objections (C.O. No. 02/Mum/2012) the revenue is contending that decision of the CIT(A) in directing the AO to allow depreciation on the expenditure incurred towards development and other charges and Right way which is treated as capital. In view of our decision on the said issues which is elaborated in the above paragraphs of this order, the cross objections raised have become academic and dismissed accordingly.
The assessee raised grounds pertaining to the following issues – (1) Disallowance under section 14A (Ground Nos. 1 to 6) (2) Expenditure on right of way (Ground No.7) (3) Interest under section 234C (Ground No.8) (4) Transfer Pricing - General (Ground No.9) (5) Transfer Pricing adjustment toward interest on advance to Associated Enterprise – (Ground Nos.10 & 11) (6) Transfer Pricing adjustment towards Corporate Guarantee fees – (Ground Nos 12 & 13)
The assessee is an Indian Company engaged in providing channeling services, operation and maintenance services, engineering, procurement and construction services in the petroleum sector. The assessee filed its return of income for A.Y. 2012-13 on 30/11/2012 declaring total income of Rs.194,01,39,110/- under the normal provisions of the Act and a book profit under section 115JB of the Act at Rs.15,62,81,882/-. The case was selected for scrutiny and the statutory notices were duly served on the assessee. A reference was made to the Transfer Pricing Officer (TPO) for the purpose of determining the arm’s length price of the international transaction entered into by the assessee company with its Associated Enterprise (AE). The TPO proposed a transfer pricing adjustment of Rs.1,64,69,926/- towards charging of interest on loan to AE and charging of corporate guarantee fee. The Assessing Officer passed a draft assessment order incorporating the above transfer pricing adjustment. Besides the TP adjustment the Assessing Officer also made disallowance of Rs.3,48,00,744/- as disallowance under section 14A read with rule 8D and also a disallowance towards provision for warranty of Rs.4,75,92,601/-. During the course of assessment proceedings, the assessee claimed proportionate deduction towards expenditure incurred
18 C.O. No. 02/Mum/2012 & 1851/Mum/2017 Indian Oil Adani Ventures Ltd. towards right of way and the Assessing Officer did not allow the claim stating that the same is capital in nature. Aggrieved by the draft order, the assessee filed its objections before the DRP. The DRP confirmed the transfer pricing adjustment and the disallowance under section 14A. With regard to the disallowance towards provision of warranty, the DRP gave partial relief to the assessee whereby the disallowance was reduced to Rs.2,84,61,029/-. On the claim of proportionate expenditure towards Right of way claimed by the assessee during assessment proceedings, the DRP upheld the decision of the Assessing Officer to te extent that it is capital in nature, but directed the Assessing Officer to allow depreciation on the same. The Assessing Officer passed the final assessment order in accordance with the directions of the DRP whereby the disallowance under section 14A was recomputed at Rs.4,07,32,520 besides the other additions / disallowances. The assessee is in appeal before us against the final order of assessment passed by the Assessing Officer pursuant to the directions of the DRP.
DISALLOWANCE OF INTEREST UNDER SECTION 14A – Ground No.1 to 6
28. During the year under consideration, the assessee has shown a dividend income of Rs.75,15,000/- from the shares held in Indian Subsidiary company, i.e. Zuari Indian Oil Tanking Ltd and claimed the same as exempt under section 10(34) of the Act. The assessee had also shown a dividend income of Rs.2,59,77,921/- earned from mutual funds which is claimed as exempt under section 10(35) of the Act. The assessee has made a suo motu disallowance of Rs.5 lakhs towards earning the exempt income. The Assessing Officer, during the course of assessment proceedings called on the 19 C.O. No. 02/Mum/2012 & 1851/Mum/2017 Indian Oil Adani Ventures Ltd. assessee to furnish the details pertaining to the exempt income earned and also to show cause why provisions of section 14A read with rule 8D should not be invoked. The assessee made a submission providing the details as called for. The Assessing Officer, however, recorded that he has not satisfied with the correctness of the claim of the assessee in respect of expenses disallowed suo motu by the assessee and, therefore, proceeded to work out the disallowance of Rs.2,54,89,145/- under rule 8D(2)(ii) and Rs.98,11,599/- under rule 8D(2)(iii). The Assessing Officer in the draft assessment order allowed the adjustment of suo motu disallowance of Rs.5 lakhs to arrive at the final disallowance of Rs.3,48,00,744/-. The DRP upheld the disallowance made by the Assessing Officer. The Assessing Officer, in the final assessment order, had re-worked out the disallowance wherein the disallowance under rule 8D(2(ii) was revised to Rs.2,97,72,225/- and disallowance under rule 8D(2)(iii) was revised to Rs.1,14,60,295/-. The Assessing Officer, after adjusting the suo motu disallowance, arrived at the final disallowance at Rs.4,07,32,520/-.
The Ld.AR before us submitted that the assessee is having sufficient own funds which is evidenced from the financial statements for the year ended 31st March, 2012. Accordingly, the Ld.AR submitted that there should not be any disallowance under section 14A read with rule 8D(2)(ii). The Ld.AR submitted that the co-ordinate bench in assessee’s own case for A.Ys 2004-05 to 2008-09 (ITA Nos. 1901, 2585, 3477, 3241/Mum/2009, 2208 & 7035/Mum/2010 and 7430/Mum/2011 dated 17/05/2013) had considered the similar issue wherein it is held that since the investments in shares and mutual funds were made out of its own funds and there being no utilization of borrowed funds, disallowance under section 14A read with 20 C.O. No. 02/Mum/2012 & 1851/Mum/2017 Indian Oil Adani Ventures Ltd. section 8D(2)(ii) is not called for. With regard to the disallowance under rule 8D(2)(iii), the Ld.AR submitted that the investments that are considered for the disallowance should be restricted to only those investments which are yielding exempt income. The Ld.AR in this regard relied on the decision of the co-ordinate bench in assessee’s own case for AYs 2010-11 & 2011-12 (ITA No. 3687/Mum/2016 & 972/Mum/2017 dated 22/08/2023).
The Ld. DR relied on the order of the lower authorities.
We heard the parties and perused the material on record. We notice that the own funds of the assessee as at 31st March 2012 is Rs.242.36 crores whereas the investment in shares and mutual funds as at the said date is Rs.330.12 crores. Therefore, we see merit in the submission that the investments in assessee’s case are made out of own funds and not out of borrowed funds. In this regard, we further notice that the co-ordinate bench in assessee’s own case for the A.Ys. 2004-05 to 2008-09 has considered similar issue where it is held that – “67. We have considered the rival submissions and also perused the relevant material available on record. A perusal of the balance sheet of the assessee for the year under consideration shows that own funds of Rs. 379 crores were available with the assessee which were sufficient to cover the investment of Rs. 50.88 crores made in shares and mutual funds. Even the current years profit after tax was Rs. 34.28 crores and if the depreciation claimed by the assessee at Rs. 18.07 crores is added back, the internal accrual of funds for the year under consideration itself was to the tune of Rs. 52.35 crores which is more than the investment of Rs. 50.88 crores made by the assessee in shares and mutual funds as on 31-3-2008. It is observed that a detail working was filed by the assessee before the A.O. as well as before the ld. CIT(A) showing the availability of own funds for making investment in shares and mutual funds but still disallowance u/s 14A of the Act was made out of interest on the ground that in the absence of separate books of account maintained by the assessee for 21 C.O. No. 02/Mum/2012 & 1851/Mum/2017 Indian Oil Adani Ventures Ltd. its investment activity, it was a case of common funds warranting disallowance u/s 14A of the Act. In the case of CIT vs. Reliance Utilities and Power Ltd. (2009) 313 ITR 340 (Bom.), the Hon’ble Bombay High Court has held that when there is a common pool of funds, presumption would arise that investment yielding tax free returns is made by the assessee out of its own funds. Keeping in view this decision of Hon’ble jurisdictional High Court, we hold that the investment in shares and mutual funds was made by the assessee out of its own funds and there being no utilization of borrowed funds to make the said investment, the disallowance u/s 14A of the Act out of interest is not called for.”
32. Respectfully following the above decision, we hold that no disallowance under rule 8D(2)(iii) is warranted for the year under consideration also for the reasons that own funds are more than the investments made which are earning exempt income.
33. With regard to the claim of the assessee that for the purpose of disallowance under rule 8D(2)(iii), only those investments which are earning exempt income only should be considered, we notice that the co-ordinat4e bench in assessee’s own case for A.Y. 2010011 & 2011-12 has held that – “7.1 We have heard the parties on this issue and perused the record. We noticed that the Assessing Officer himself has discussed in paragraph 5.7 of the assessment order relating to AY 2010-11 that the own funds available with the assessee is sufficient to cover the value of investment. Accordingly the Assessing Officer has observed that no disallowance under section 14A is called for out of interest expenditure. However, after having observed so, the Assessing Officer has again computed the disallowance out of interest expenditure to the tune of Rs. 4.79 crores. The above said computation made by the Assessing Officer is contrary to the observations made by him in paragraph 5.7 above. If the own funds available with the assessee is more than the investment, no disallowance out of interest expenditure is called for as held by Hon'ble Bombay High Court in the case of HDFC Bank Ltd. Vs. DCIT (366 ITR 505). Accordingly we direct the Assessing Officer to delete the disallowance made out of interest expenditure.
22 C.O. No. 02/Mum/2012 & 1851/Mum/2017 Indian Oil Adani Ventures Ltd. 7.2 with regard to the disallowance out of administrative expenses made under rule 8D(2)(iii) of the I.T. Rules, it is the submission of learned AR that the Assessing Officer has considered the value of foreign investments and also investments which did not yield dividend income for the purpose of computing average value of investment. The Learned AR submitted that, as per the decision rendered by Delhi (Special Bench) of the Tribunal in the case of Veerit Investments Pvt. Ltd., investments which did not yield dividend income should not be considered for computing average value of investments. Accordingly, the learned AR prayed that the Assessing Officer may be directed to exclude the foreign investments as well as investment which did not yield dividend income for computing average value of investments. We agree with the above said submission made by learned AR. Accordingly we direct the Assessing Officer to compute average value of investment by excluding value of foreign investment of the value of investment which did not yield dividend income. Thereafter the disallowance to be made under rule 8D(2)(iii) may be computed.”
34. Respectfully following the above decision of the co-ordinate bench, we direct the Assessing Officer to re-compute the disallowance under section 8D(2)(iii) by taking into consideration only those investments, which are earning exempt income. It is ordered accordingly.
EXPENDITURE ON RIGHT OF WAY – Ground No.7
The assessee company has entered an agreement with City & Industrial Development Corporation of Mumbai Limited (CIDCO) on 60 years’ licence on the land for laying of pipelines whereby CIDCO had agreed to grant the assessee a right of way over the land for the purpose of laying of pipelines for a consideration of Rs.2,66,53,121/-. The assessee has (1/60th claimed a proportionate deduction of Rs.4,44,219/- of Rs.2,66,53,121/-). During the course of assessment proceedings, the assessee claimed the proportionate deduction towards the right of way over the land
23 C.O. No. 02/Mum/2012 & 1851/Mum/2017 Indian Oil Adani Ventures Ltd. which is not allowed by the Assessing Officer. The assessee contended the issue before the DRP. The DRP had relied on the order of the CIT(A) in assessee’s own case or A.Y. 2002-03 whereby the CIT(A) had directed the Assessing Officer to allow depreciation on the proportionate expenditure claimed by the assessee which is treated as capital in nature. Accordingly, the Assessing Officer, in the final assessment order had allowed depreciation @25% amounting to TRs.1,11,055/-.
Before us, the Ld.AR submitted that the amount paid by the assessee to CIDCO is towards the right to use the land for a specific period of time and, therefore, the assessee has rightly claimed the proportionate deduction and the lump sum paid towards the right of way. The Ld.AR further submitted that the right to use the land cannot be treated as capital in nature since the assessee has no ownership rights over the land and has merely acquired the usage rights. The ld AR further submitted that the decision in assessee's own case for AY 2002-03 being the year in which such claim was first made would be applicable for the year under consideration also..
The Ld. DR, on the other hand, argued that the right to use the land is capital in nature and, therefore, no proportionate expenditure could be allowed.
We heard the parties and perused the material on record. We have while adjudicating the issue of allowability of payment made towards Right of Way by holding that the same shall be allowed over the period of lease. During the year under consideration, we notice that the assessee has claimed the proportionate expenditure which has been disallowed and only depreciation at 25% has been allowed on the proportionate claim. Since the claim made during the year under consideration is a continuation of what is claimed for the first
24 C.O. No. 02/Mum/2012 & 1851/Mum/2017 Indian Oil Adani Ventures Ltd. time in AY 2002-03, our decision in AY 2002-03 is mutatis mutandis applicable for year under consideration also. Accordingly we delete the disallowance made by the AO in this regard.
NOTIONAL INTEREST ON ADVANCED TO AES – Ground No.10 & 11.
The assessee has advanced an amount of Rs. 40,35,02,000/- on 22.09.2021 to AE, IOT Canada Ltd. and the said loan was repaid by IOT Canada on 19.12.2011. The assessee submitted before the TPO that IOT Canada wholly owned subsidiary of the assessee and that the said advance was given out of commercial expediency to enable the AE to further explore the business opportunity. The assessee further submitted that since the business opportunity could not materialize the advance was returned by the AE in December 2011. The assessee also submitted that no income has accrued to the assessee on the said advance, since it was given not with an intention to earn interest but a mere business advance given out of commercial expediency. The assessee also made a without prejudice submission that the interest rate if should be applied need to be at LIBOR rate linked to USD. The TPO applied an interest rate at 4.24% based on LIBOR rate available on Blumberg Portal.
Aggrieved, the assessee raised the objections before the DRP who upheld the decision of the TPO to charge interest at 4.24%. The Ld. AR before us submitted that the LIBOR rate prevailing during the year under consideration was less than 1% which could be adopted for the purpose of computing interest. The Ld. AR in this regard relied on the decision of the Co- ordinate Bench in assessee’s own case for AY 2010-11 and 2011-12 (supra).
We have heard the parties and perused the material on record. It is a settled position that in the case of loans advanced in foreign currency, the applicable LIBOR rate of the currency should be used for the purpose of arriving at interest. We notice that in assessee’s own case for AY 2010-11 & 2011-12, the Co-ordinate Bench while considering the issue interest on share application money re-characterized as loan has upheld the direction given by the CIT(A) to apply SIBOR/LIBOR rate on the impugned transaction. Applying the same ratio for the issue under consideration here we hold that LIBOR rate prevailing at that for the country in which the loan was given should be considered. The ld. AR during the course of hearing made written submissions along with documents evidencing that the 6 months USD LIBOR for FY 2011-12 was at 0.58%. Considering the facts of the present case and the evidences submitted, we hold that 0.58% could be considered as appropriate rate for ALP purposes. We accordingly direct the AO to recompute the TP adjustment considering the rate of 0.58% towards interest on loans advanced to IOT Canada.
CORPORATE GUARANTEE – Ground No.12 & 13
IOT Engineering and Construction Services LLC, Oman (IOT Oman) is a joint venture in Oman of the assessee under local Oman Company. During the year under consideration, the assessee had extended Corporate Guarantee on behalf of the IOT, Oman to State Bank of Oman of INR 58,07,43,520/- the guarantee was provided so as to enable IOT, Oman to secure certain credit facilities from State Bank of Oman and utilized the same towards projects
26 C.O. No. 02/Mum/2012 & 1851/Mum/2017 Indian Oil Adani Ventures Ltd. undertaken by IOT, Oman. The assessee did not charge any guarantee commission. However, the TPO made an advance of Rs. 1,16,14,870/- by applying 2% as Corporate Guarantee Fee.
Aggrieved, the assessee raised objections before the DRP. The DRP held that Corporate Guarantee is an international transaction and therefore should be bench marked and that the TPO has rightly proceeded to bench mark the transaction. Accordingly, the DRP upheld the TP adjustment towards guarantee fee computed by the TPO.
The Ld. AR submitted that the TPO has adopted the rate of 2% based on the SBI bank guarantee rate without any bench marking. The ld. AR further submitted that 2% cannot be applied as the ALP rate for Corporate Guarantee since the guarantee is given to assessee’s own subsidiary. The Ld. AR further relied on various judicial precedence of the coordinate bench and jurisdictional High Court to submit that the Guarantee Fee charged can be in the range of 0.5% to 1% and the same would be appropriate rate towards corporate guarantee fees.
We have heard the parties and perused the material on record. We notice that the coordinate bench in the case of Hindalco Industries Ltd. (2015) 62 taxmann.com 181has considered a similar issue and held that –
We have heard rival contentions and perused the record. We notice that the assessee has also referred to the decision dated 25.3.2015 rendered by the co- ordinate bench in the case of Manugraph India Ltd [IT Appeal No. 4761/Mum/2013], wherein the co-ordinate bench has determined a rate of 0.50% for guarantee given. We further notice that the rate of 0.50% is consistently followed in many of the cases by the Tribunal. In fact, in the case of Everest Kanto Cylinder Ltd (supra) which was considered by the Hon'ble Bombay High Court, the Tribunal has determined the rate at 0.50% and the same has not been disturbed by the Hon'ble Bombay High Court. Accordingly,
27 C.O. No. 02/Mum/2012 & 1851/Mum/2017 Indian Oil Adani Ventures Ltd. we modify the order of Ld CIT(A) on this issue and direct the AO to compute the addition by adopting the rate of 0.50%. 47. Respectfully following the consistent view taken by the coordinate bench regarding the guarantee fee rate, we direct the AO to recomputed the ALP by applying the rate of 0.5% towards guarantee fee. It is ordered accordingly
In the result, the appeals of the assessee in for AY 2002-03 and in I.T.A. No.1851/Mum/2017 for AY 2012 are partly allowed. The cross objections of the revenue in C.O. No. 02/Mum/2012 for AY 2002-03 is dismissed.
Order pronounced in the open court on 06-11-2023.