GHCL LIMITED,AHMEDABAD vs. THE DY.CIT., CIRCLE-4,, AHMEDABAD

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD “D” BENCH (Conducted Through Virtual Court) Before: Shri Rajpal Yadav, Vice President And Shri Amarjit Singh, Accountant Member

Sl. No. ITA No. Appellant Respondent A.Y. 1 976/Ahd/2014 Dy. CIT, Cir-4, GHCL Ltd.,Ahd 2009-10 Ahd 2 1042/Ahd/2014 GHCL Ltd., Dy. CIT, Cir-4, 2009-10 Ahd Ahd 3 302/Ahd/2015 DCIT, Cir- GHCL Ltd., 2010-11 2(1)(1), Ahd Ahd 4 82/Ahd/2015 GHCL Ltd., JCIT, Range-4, 2010-11 Ahd Ahd 5 2279/Ahd/2015 GHCL Ltd., DCIT, Cir- 2011-12 Ahd 2(1)(1), Ahd 6 2625/Ahd/2015 ACIT, Cir- GHCL Ltd., 2011-12 2(1)(1), Ahd Ahd 7 1120/Ahd/2017 ACIT, Cir- GHCL Ltd., 2012-13 2(1)(1), Ahd Ahd 8 C.O. 29/Ahd/2018 GHCL Ltd., ACIT, Cir- 2012-13 Ahd 2(1)(1), Ahd 9 1121/Ahd/2017 ACIT, Cir- GHCL Ltd., 2013-14 2(1)(1), Ahd Ahd 10 C.O. 30/Ahd/2018 GHCL Ltd., ACIT, Cir- 2013-14 Ahd 2(1)(1), Ahd 11 2124/Ahd/2017 ACIT, Cir- GHCL Ltd., 2014-15 2(1)(1), Ahd Ahd

PAN No: AAACG5609C

Revenue by: Shri Mohd. Usman, CIR-D.R. & Shri Rajdeep Singh, Sr. D.R. Assessee by: Shri S. N. Soparkar, Sr. A.R. & Shri Parin Shah, A.R.

Date of hearing : 22-01-2021 Date of pronouncement : 05-03-2021 आदेश/ORDER PER : AMARJIT SINGH, ACCOUNTANT MEMBER:-

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All these appeals filed by the Revenue and by the assessee on different assessment years are directed against the order of DRP and CIT(A), Ahmedabad. Since common issues and identical facts involved in these appeals, therefore, for the sake of convenience, these appeals are adjudicated by this common order as follows:-

Appeal filed by the assessee vide ITA No. 1042/Ahd/2014 A.Y. 2009-10

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S. Particular Amount (Rs.) No. 1 Upward adjustment 2,39,89,224/- 2 Disallowance u/s. 14A 3,48,322/- 3 Development of SBCLs Disallowance of Rs. 30.96 crores

The draft assessment order passed by the Assessing Officer was served on the assessee on 29th March, 2013. The assessee has filed objection before the Dispute Resolution Panel (DRP) u/s. 144C(2)(b) of the Income Tax Act, 1961 on 29th April, 2013. The Dispute Resolution Panel has issued direction u/s. 144C(5) r.w.s. 144C(8) on 27th December, 2013. The assessee has objected two comparables Cosmic Global Ltd. and Coral Hub Ltd. before the DRP on the ground that they follow different business model by outsourcing their function. The said companies outsource significant portion of the work to outside vendors. It was also submitted that the business model of the aforesaid companies were different from the assessee since these companies outsource significant portion of their work. After considering the assessee’s submission and the judicial decision, the DRP has directed TPO to exclude these two companies from the comparable sets. Excluding the aforesaid two comparables the DRP has not rejected the other comparable used by the TPO. Accordingly, after taking into consideration, the direction of the DRP, the Assessing Officer has restricted upward adjustment to the amount of Rs. 1,93,46,224/-. In the draft assessment order, the Assessing Officer has proposed the addition on account of disallowance as per the provisions of section 37(1) of the Act of devolvement of SBLC of Rs. 30.98 crores considering capital loss and not revenue loss in nature. The assessee has raised objection before the DRP

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against the proposed adjustment of Rs. 30.96 crores and the DRP has sustained the objections and deleted the entire the addition of Rs. 30,96,28,781/-.

Ground No. 1 (Erred in holding foreign exchange fluctuation gain should not form part of operating income for comparative analysis)

(i) Receipts/expenditure are booked at the time of transaction while conversion of payment/receipt on foreign exchange occurs on a later point of time resulting into foreign exchange gain/loss due to variation in the exchange rate from the date of transaction to that of conversion of foreign exchange. (ii) An exporter/importer entering into forward contract for sale/purchase of foreign exchange to hedge itself from the fluctuation in exchange rates. However, the TPO was of the view that risk management policy of each company was its internal matter and it had got nothing to do with transaction entered into by it with its associated enterprises. The margin of two companies entering into similar transaction may vary substantially depending upon the level of hedging of their foreign exchange transaction though at the time of entering into the transaction their estimated profit margin was same. The TPO stated that it would be unfair to compare their result i.e. profit margins at the end of the year for determination of the arms’ length price. The Dispute Resolution Panel has agreed with the TPO stating

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that foreign exchange gain or loss were part of treasury management on the part of the assessee and other extraneous factors and stated that it is difficult to ascertain the exact nature of such gains in the case of comparables.

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purpospe of comparables to determine the arms length price of the international transsctions. The DRP has agreed with the view of the TPO and stated that the gain or loss on account of foreign exchange fluctuation is not linked to the quality or quantity of the services rendered and further stated that it is difficult to ascertain exact nature of such gains in the case of comparables. In this regard, we have gone through the judicial pronouncement referred by the learned counsel. In the case of Techbooks International Pvt. Ltd. 150 ITD 162, the Co-ordinate Bench of the ITAT Delhi has held that the foreign exchange gain/loss is required to be considered as part of the operating revenue cost. The relevant part of the decision of the Co-ordinate Bench is reproduced as under:- “4.4 The first issue agitated before us is against treating the foreign exchange fluctuation as an item of non-operating nature which was excluded by the TPO for the purposes of computing the margin of the assessee as well as of the comparables. The ld. AR contended that the assessee earned foreign exchange gain amounting to Rs. 1,17,78,842/- which was declared as pan of the operating profit by reducing it from the operating expenses incurred by the assessee, but the TPO reduced such amount of foreign exchange fluctuation gain from the assessee's profit and also embarked upon the same exercise for excluding the effect of similar foreign exchange gain/loss from the financial result of the five compatibles cases finally chosen by him. It was urged that the forex gain loss is required to be considered as a part of the operating revenue/cost. 4.5 We observe that the assessee raised objection at Serial Xo. 11 before the DRP contending for the inclusion of foreign exchange gain/loss as part of the operating cost/revenue. The DRP vide page 9 of its order directed the TPO: 'to rectify the arithmetical errors in the computation of margins of the comparables in accordance with the provision of the Act*. There is no decision on the assessee's objection against not including foreign exchange gain/loss as the operating revenue/cost. On a specific query, it was pointed out by the Id. AR that the assessee's foreign exchange gain resulted from the international transactions in question which are of the revenue character. 4.6 We find merit in the contention raised on behalf of the assessee about inclusion of foreign exchange gain/loss in the operating revenue/costs of the assessee as well as that of the comparables. When we advert to the nature of such foreign exchange gain earned by the assessee, it comes out that the same is in relation to the revenue earned by the assessee from its A.Es in connection with the provision of IT Enabled data conversion services, which has been reported as international transaction to the tune of; Rs. 113.76 crores. When the foreign exchange gain directly emanates from the consideration received for rendering of services to its A.E, we fail to appreciate as to how such foreign exchange gain fluctuation can be considered as an item of non- operating revenue. What is true for foreign exchange gain from the transactions of the revenue nature being considered as part of operating revenue is equally true for the foreign exchange loss being considered as part of operating costs from the transactions of the revenue nature. 4.7 The Special Bench of the Tribunal in Assn. CIT v. Prakash L Shah 120081 115 1TD 167fBom1 (SB) has held that the gain due to fluctuation in the foreign exchange rate emanating from export is its integral part and cannot be differentiated from the export proceeds simply on the ground that

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the foreign currency rate has increased subsequent to sale but prior to realization. It went on to add that when goods are exported and the invoice is raised in the currency of the country from where the goods are sold and subsequently when the amount is realized in that foreign currency and then converted into Indian rupees, the entire amount is relatable to the exports made. In fact it is only the translation of invoice value from the foreign currency to the Indian rupees. It held that the exchange rate gain or loss cannot have a different character than the transaction to which it relates. The Bench further found fallacy in the submission made on behalf of the Revenue that the exchange rate difference should be detached from the exports and be considered, as an independent transaction. Eventually, the Special Bench held that such exchange rate gain arising from export cannot be viewed in a different shade. 4.8 In the context of transfer pricing, the Bangalore Bench of the Tribunal in SAP Lab.-; India (P.) Ltd v. Asset. C/7T20I I I 44 SOT 156/F20121 134 1TD 253/17 Laxmiinn.com 16 has held that foreign exchange fluctuation gain is part of operating profit of the company and should be included in the operating revenue. Similar view has been taken in Trilogy1 E Business Software India (P) Ltd. v. Dy. CIT 120111 47 SOT 45 (URO)/12 raxmann.com 464 (Bangalore). The Mumbai Bench of the Tribunal in S. Narendra v. Addtl, C/r[2013| 32 taxmann.com 196 has also laid down to this extent. In view of the foregoing discussion, we are of the considered opinion that the amount of foreign exchange gain/loss arising out of revenue transactions is required to be considered as an item of operating revenue/cost. 4.9 Since, the TPO has computed PLI of the assessee as well as comparables by ignoring the amount of forex gain/loss, we set aside the impugned order and remit the1 matter to the file of AO/TPO to recompute the assessee's margin as well as that of the comparables by considering foreign exchange gain/loss as an item of operating revenue/cost. We want to make it clear that our finding in this regard is restricted to considering forex gain/loss from the transactions of the revenue nature as part of operating revenue/cost. If the forex gain/loss is relatable to capital account, then that cannot be considered as part of operating revenue/cost. In the fresh exercise to be undertaken by the TPO/AO, it is directed to examine the nature of forex gain/loss in the light of our above observations not only in the case of the assessee but also the comparables for deciding as to whether such forex gain/loss should constitute part of operating-revenue/costs.”

With the assistance of ld. representatives, we have also perused the decision of Co-ordinate Bench of Ahmedabad in the case of Effective Tally Services Pvt. Ltd. (2018) 90 taxmann.com 390 ITAT Ahmedabad wherein it is held that the ld. CIT(A) has rightly treated the foreign exchange fluctuation gain/loss as a operating item not to be excluded for the purpose of computing arms length price. The relevant part of the decision of ITAT is reproduced as under: - “21. We further find that the appellant company has earned foreign exchange gain on revaluation of its outstanding revenue receivables which were not considered as part of operating profit by the TPO as well as CIT(A). We find that the foreign exchange gain earned by the appellant pertained towards revaluation of its debtors as on the balance sheet 'date which means that exchange fluctuation was towards revenue item. Further, Safe Harbour Rules are only applicable to those assessee who have opted for Safe Harbour Rules and the same is made effective from A.Y. 2013- 14 onwards

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It is clear from the findings of the authoriies below that in case of the asssesse, the amount of foreign exchange gain are arised out of the revenue transactions. We are of the considered view that when foreign exchange fluctuation income is an operating income then same has to be taken into consideration while determining ALP of international transactions entered into by assessee. After considering the decision of the Co-ordinate Benches as supra, we consider that the amount of foreign exchange gain/loss arising out of revenue transaction is required to be considered as an item operating revenue/cost, therefore, we restore this issue to the file of Assessing Officer/TPO to compute the assessee’s margin as well as comparables by

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considering foreign exchange gain/loss as an item of operating revenue/cost. Accordingly, this ground of appeal of the assessee is allowed for statistical purposes.

Ground No. 2 (erred in holding that adjustment with respect to capacity utilization should not be given to assessee company for comparative analysis)

Ground No. 3 (erred in additionally including Accentia Technologies Ltd. in the set of comparables although its functions are different from that of the assessee)

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During the course of appellate proceedings before us, the ld. counsel contended that the ld. DRP is unjustified in sustaining the view of the TPO and the relevant submission of the assessee has not been considered. The ld. counsel has placed reliance on the following judicial pronouncements:- (i)PTC Software (I) Pvt. Ltd. (2019) 101 taxman.com 117 (Bom) (ii)BNY Mellon International Operations India Pvt. Ltd. (2018) 93 taxmann.com 363 (ii) U.T. Starcom Inc. 89 taxman.com 90 (Del-Trib) On the other hand, the ld. Departmental Representative has placed reliance on the decision of DRP. Heard both the sides and perused the material on record. With the assistance of the ld. representatives, we have perused the judicial pronouncements referred by ld. counsel. In the case of PTC Software Industries Pvt. Ltd. supra, the Hon’ble High Court of Mumbai on similar nature of transaction as in the case of the assessee sustained the decision of ITAT in excluding M/s. Accentia Technology Ltd. from the list of comparables to determine the arms length price. The relevant part of the decision is reproduced as under:- “(i) The impugned order of the Tribunal has excluded M/s. Aecenlia Technologies Ltd., from the list of comparables to determine the ALP of the Respondent's transactions. (ii) The impugned order renders a finding of fact that the nature of activities carried out by M s. Aecenlia Technologies Lid., are different from that carried out by Respondent. M/s. Accentia Technologies Ltd developes its own software and rendered Medical transcription services while the Respondent is providing BPO Services. Besides, the impugned order of the Tribunal held that high profit margins of M/s. Aecenlia Technologies Ltd.. was attributable to amalgamation which took place in the previous years relevant to subject Assessment Year. Therefore, not comparable. (iii) In fact, this Court in Pi: CIT v. Apitira Technology (P.) Ltd. [2018] 92 taxmann.com 240 has upheld the view of the Tribunal in not accepting the Aecentia Technologies Ltd., as comparable, inter alia, on account of fact that extra ordinary event such as merger/ amalgamation would affect the profitability of M/s. Accentia Technologies Ltd.. Thus, making it incomparable. (iv) Further in that case, as in this case, the Tribunal has also recorded a finding of fact that the activities of M/s. Technologies Ltd., and the Respondent are different. Thus, not comparable. The above finding of Fact is not shown to be perverse.

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(v) In the above view, the question as proposed does not give rise to any substantial question of law. Thus, not entertained.” We have also gone through the decision of BNY Mellon International Operations India Pvt. Ltd. (2018) 93 taxman.com 363 wherein the Hon’ble Mumbai High Court has also considered the issue of exclusion of M/s. Accentia Technology Ltd. from the list of comparables. The Hon’ble High Court has sustained the view of ITAT in excluding M/s. Accentia Technology Ltd as comparable on the basis of different nature of functions performed by the entity. The relevant part of the decision is reproduced as under:- “(a) The impugned order of the Tribunal excluded Accentia Technologies Ltd. from the list of comparables by rendering a finding of the fact that the services rendered by Accentia Technologies Ltd. is different from that offered by the Respondent to its A.E, It found on facts that Accentia Technologies Ltd. was providing medical transaction, billing and coding services, application development and customization service in respect of which segmental data was also not available while the Respondent provides E-Learning service. Thus, the impugned order of the Tribunal found that M7s. Accentia Technologies Ltd. is not comparable with the Respondent- Assessee. Besides, impugned order also records a finding of fact that during the year the profitability of M/s. Accentia Technologies Ltd. had been impacted by merger/amalgmation and therefore, cannot be considered to be comparable. (b) The grievance of the Revenue before us is that the merger and/or amalgmation would have no impact on the profitability of M/s. Accentia Technologies Ltd. Therefore, it was urged to be an appropriate comparable as both are rendering ITES services. (c) We find that the impugned order of the Tribunal has after rendering a finding of fact that the activities of the tested party and comparable are functionally different, also records finding of fact that extraordinary events such as merger/amalgrnation would have an impact/effect on the profitability of M/s. Accentia Technologies Ltd. Therefore, on both the above grounds, it was held to be not a comparable to the transaction of the Respondent with its AE. (d) Infact on the issue of merger/amalgmation the Tribunal holds that it affected the profitability of M/s, Accentia Technologies Ltd. Reliance for the above was placed on the decisions of its co- ordinate benches in Hyderabad and Bangalore, i.e.. Capital 1Q Information Systems (India) (P.) Ltd. \. Dy. CIT [2D131J2.taxmami.cpm 2.1/57 SOT 14 (Hyd) and Symphony Marketing Solutions India (P.) Ltd. v. ITO [2013] 18 taxmann.com 55 (Bang). The Revenue has not attempted to show either before the Tribunal or even before us that the merger/amalgmation which took place in the previous year relevant to subject assessment year did not have an impact on the profitability of the Accentia Technologies Ltd. Merely because both the tested and the comparable provide ITES services they do not become comparable. This is so as the nature of services provided by use of In formation-Technology is different. In any event, no challenge has been made to the finding of the Tribunal that the activities carried out by Accentia Technologies Ltd. and the Respondent- Assessee are functionally different and, therefore, not comparable. (e) Therefore, the view taken by the Tribunal in excluding Accentia Technologies Ltd. is a possible view more particularly in the absence of the same being shown to be perverse. Thus, no interference is warranted.”

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We have gone through the decision of U.T. Star Com Inc. Industry 89 taxmann.com 90 Delhi ITAT wherein the Co-ordinate Bench of the ITAT has considered the issue on excluding M/s. Accentia Technology Ltd. in the list of comparables and held that there was functional dissimilarity in the M/s. Accentia Technology Ltd. as it was into health care receivable, management services. The relevant part of the decision of Co-ordinate Bench is reproduced as under:- “16. The taxpayer sought the exclusion of Accentia on the grounds inter alia that there was extra ordinary events which have impacted its PLI; that there is functional dissimilarity in the Accentia vis-a-vis the taxpayer as it is into health care receivables management services. However, Id, TPO/DRP brushed aside the objections raised by the taxpayer by observing that the acquisition by Accentia is situated in USA and has no bearing on its business in India and has also not impacted the revenue in the current financial year. 17. When we examine the annual report, available at pages 1 to 67 of the paper book, highlights of the achievement of the Accentia in the year 2008-09 are given as under:— • Opened a production centre in Kolkata; • Opened a production centre in Chandigarh; • Consolidated the operations of the existing three production units in Hyderabad, and added on more production centre in this city; • Consolidated the operations of GSR Physician's Billing Service, specialized in Billing and Collections, based in Florida, USA; • Consolidated the operations of GSR Systems, a software Company specializing in HRCM, based in Florida, USA; • Completed the acquisition of Oak Technologies Inc., USA and has rapidly increased its customer base from New Jersey and neighbouring areas. High growth potential since we are now offering medical coding and billing services as well; • Consolidated the operations of Dcnmed Inc., the acquired Medical Transcription Company based in Salem, Oregon, USA, serving the Portland area; • Streamlined the production operations at the new facility at the Technopark campus, Trivandrum, including the billing operations; • Started initial work for setting up of an IT Park at SEZ, Visakhapatnam, where the Company owns land. 18. Furthermore, at page 32 of the annual report, performance of Oak Technologies Inc. is highlighted as under:— "During the current year the Company completed the acquisition of 96% of M/s Oak Technologies Inc., a Healthcare Back Office Processing Company engaged in Medical billing, Coding and Transcription activities and having a global work force of over thousand employees in India, Philippines and USA. In the financial Year 2008. Oak Technologies inc. achieved a turnover of 10.3 Million USD, Oak Technologies is having its head quarters in New Jersey." “19. Comparability of the Accentia has been examined by the coordinate Bench of the Tribunal in case Exchanging Technology Services India (P.) Ltd. v, Dy. CIT [20J 5] 57Jaxmann.com_437_/DelhiJrib). copy available at pages 20 to 30 of the compendium of case laws, with Accentia which was also providing to its AE Information Technology Enabled Services and has directed to be Excluded from the final set of comparables by returning following findings :— "9.2. We have heard the rival submissions and perused the relevant material on record. We have also gone through the Annual report of this company for the year in question,

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which has been placed in the paper book. It can be noticed from page 31 of the Annual report that during the year under consideration this company completed the acquisition of 96% of M/s Oak Technologies Inc., a healthcare back-office processing company engaged in medical billing, coding and transcription activities and having substantial global work force. The Mumbai Bench of the Tribunal in Petro Araldite (P) Ltd. v. DCIT [2013] 154 TTJ(Mum) 176, has held that a company cannot be considered as comparable because of exceptional financial results due to mergers/demergers./ Similar view has been taken by the Delhi Bench of the Tribunal in several cases including Ciena India Pvt. Ltd. v. DCIT (ITA No.3324/Del/2013) vide its order dated 23.4.2015. in view of the fact that there was merger of some entity with Accentia Technologies Ltd., we hold that this company cannot be considered as comparable. Accordingly, the same is directed to be excluded from the final list of comparables." 20. Accentia has also been ordered to be excluded from the final set of comparables for benchmarking international transactions in the case of Ameriprise India (P.) Ltd. v. Dy. CIT [2016] 66 taxmarni.com 246 (Delhi-Tribl and the said order has already been upheld by the Hon'ble jurisdictional High Court in ITANo.461/2016 dated 19.10.2016 by making following observations :— "The assessee reported international transactions for the relevant year, with its A£. In its transfer pricing report, it include' certain details and data of certain comparables- The TPO and thereafter the DRP included certain other comparables; the assessee's grievance with respect to the inclusion of the three comparables was accepted in the appeal by the impugned order. The comparables so excluded were M/s Accentia Technologies, iGate Global Consultants Ltd and Infosys BPO, The exclusion was on the ground that in respect of each comparable, certain extraordinary events had occurred during the previous periods which distorted the profitability thereby increasing the margin." 21. Even functional business model of Accentia vis-a-vis the taxpayer is dissimilar as the Accentia is one of the very few companies that have expertise in all the areas of Transcription, Coding, Billing and Collections. It has over a decade of experience in this field and is the only company in this segment listed in the Bombay Stock Exchange. It has Offshore Development Centers (ODCs) ir different cities of the country and has over 3000 trained professionals working round the clock, all 365 days of the years. Furthermore Accenria is a giant company having 3000 trained professionals as against 12 employees working with the taxpayer. 22. So, in view of what has been discussed above, we hereby direct to exclude Accentia from the final set of comparable benchmarking the international transactions qua ITES.” In the light of the above facts and judicial findings, we consider that there is functional dissimilarity in the case of M/s. Accentia Technology Ltd. as compared to the function performed by the assessee company that has not been specifically considered by the TPO and DRP. It is categorically demonstrated from the facts and findings of various judicial decisions as supra that M/s. Accentia Technology Ltd. has expertise in all the areas of transcription, coding, billing and collections, therefore, we direct the Assessing Officer/TPO to exclude M/s. Accentia Technology Ltd. in the set of comparables for determining arms length price of international

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transactions in the case of the assessee. Therefore, this ground of appeal of the assessee is allowed. Ground No. 4 (Erred in additionally including Genesys International Corporation Ltd in set of comparabes although apart from investing heavily in research and development it’s function are very different from that of the assessee 8. In the ground no. 4, the assessee has opposed the including of Genesys International Corporation Ltd. in set of comparable on the reasoning that its functions were very different from that of the assessee. During the course of appellate proceedings before us, the ld. counsel has contended that the decision of TPO/DRP is not justified in including Genesys International Corporation Ltd. in set of comparables after placing reliance on the decision of Hon’ble High Court of Punjab and Haryana in the case of CIT, Faridabad vs. Mercer Consulting (India) (P) Ltd. 390 ITR 615. Heard both the sides and perused the material on record. With the assistance of ld. representatives, we have gone through the above referred decision in the case of Mercer Consulting (India) Ltd. wherein the Hon’ble High Court of Punjab & Haryana held in reference to Genesys Industrial Corporation Ltd. that it provides a full range of geospatial services to its clients. Geospatial services relate to the relative position of things on the earth’s surface. This includes 3D mapping, navigation, maps, image processing and cadastral mapping etc. The two services are entirely different therefore cannot be compared for the purpose of determing the ALP. In this regard, it is observed that neither the TPO nor the DRP has specially considered the relevancy of the Genesys International Corporation Ltd as comparable in the case of the assessee. Therefore, we restore this issue to the file of TPO/A.O. for deciding afresh for taking it as comparable

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after examination of functional differences as referred in the decision of the Hon’ble High Court in the Punjab as supra. Therefore, this ground of appeal of the assessee is allowed for statistical purposes.

Ground No. 5 (Erred in not including Allsec Technologies Ltd., CG-Vak Software and exports Ltd., informed Technologies India Ltd, Accel Frontline Ltd., CMC Ltd., Reliance Technoova Global Solutions, Ltd., Spano Ltd., Sparsh BPO Services Ltd and Triton Crop Ltd. in final set of comparables)

Ground No. 6 (Erred in making upward adjustment of Rs. 8,09,224/- in respect of interest on loan to Colwell and Saloman and not accepting the interest at 4% already charged by the assessee)

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any merit in this ground of appeal of the assessee, therefore, the same stands dismissed.

Ground No. 7 (Disallowance of Rs. 3,48,322/- u/s. 14A r.w.r. 8D) 11. During the course of assessment, the Assessing Officer has made disallowance of Rs. 3,48,322/- u/s. 14A of the Act on the ground that assessee has used interest bearing fund for earning exempt income. The DRP has dismissed this ground of appeal of the assessee stating that assessee has not brought any specific defect in formula adopted by the Assessing Officer.

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Ground No. 8 (Erred in concluding that if corporate guarantees/SBLCs given by appellant to its AEs are treated for revenue purpose, guarantee commission should be charged from A.E & ground no. 9 (Erred in concluding that if loans/guarantee given by appellant to its AEs are treated for revenue purpose, interest should be charged from A.Es)

Since ground no. 5 and 6 of the Revenue is rejected vide ITA No. 976/Ahd/2014, therefore, these grounds of appeal filed by the assessee has become infructuous. Accordingly, these grounds of appeal stand dismissed.

ITA No. 976/Ahd/2014 A.Y. 2009-10 filed by revenue Ground No. 1 (Erred in directing exclusion of two entities identifies as comparable by TPO Coral Hub Ltd. Comic Global Ltd.)

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significant portion of their work. The DRP has also considered the decision of Co-ordinate Bench of the ITAT in the case of the ACIT Mumbai Vs. Maersks Global Service Centre India Pvt. Ltd. ITA No. 2774/Mum/2011. In that ruling, the ITAT has held that since the particular company had significant portion of its work outsourced which was a different model from the assessee, its rejection from the comparable set was accordingly upheld by the ITAT. The DRP has also considered the other case laws in the case of Vishal Information Technology wherein these companies outsourced considerable portion of their business. On the other hand, assessee carried out entire operation by itself therefore held that these cases were rightly excluded. In the case of Zydus Atlanta Healthcare Pvt. Ltd. (2011) 44 SOT 132 the ITAT Bench held that the function of outsourcing/administering services were not comparable to the activity of tested parties which provided services to associated enterprise itself. In the light of the above facts and finding, the DRP has excluded the aforesaid two comparables out of the comparable set. It is evident from the analysis of the annual account as per page 5-6 of the DRP order that Coral Hub Ltd’s operating cost consists 90.57% as outsourcing charges and Cosmic Global Ltd’s operating cost comprises 57.31% as outstanding charges. After considering these facts it is clear that aforesaid two companies’ business model were quite different from the business model of the assessee. Because of significant dissimilarities it cannot be considered comparable services. Therefore, after considering the facts and judicial finding as reported in the decision of DRP, we do not find any merit in the appeal of revenue and the same stands dismissed.

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Ground nos. 2, 3, & 4 of the appeal of the revenue 15. These grounds of appeal of the revenue are directed against the order of ld. DRP stating that proper opportunities were not given to the TPO and Assessing Officer and also not properly examined the evidences filed by the assessee.

Ground No. 5 (Erred in rejecting application of tests made by TPO/AO for determining nature of transaction related to devolvement of SBLCs amounting to Rs. 30.96 crores) 17. The Assessing Officer has made disallowance of Rs. 30,96,28,781/- on claim of devolvement of guarantee against SBLCs provided by the assessee company to the IDBI Bank who in turn gave SBLCs to the Bank of India, Manchester and to seven vendors of Rosebys Operations Ltd., the subsidiary company of the assessee. On scrutiny, it was found that the assessee company having its subsidiary claimed Rosebys Operations Ltd. in U.K. and SBLCs devolved are in connection to this subsidiary only. During the course of assessment, the Assessing Officer issued show cause notice to

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the assessee as to why Rs. 30.96 crores expenses incurred towards SBLC devolvement should not be disallowed as per the provisions of the section 37 of the Income Tax Act, 1961 being SLBC are in the nature of capital contribution to the subsidiaries. In response, the assessee has furnished its reply discussed as under:- “5.2 In response to the show cause, the assessee furnished his reply in Annexure-3 of letter dtd.25.03.2013. For the sake of clarity, the relevant portion of the same is reproduced hereunder: 1.1 GHCL Ltd (GHCL) acquired Roseby Operations Ltd (Roseby) running a reputed chain in retail stores in UK in 2006 with a view to have a ready distribution channel for home textile products manufactured at its Vapi unit. Unfortunately, due to macro economic factors, recession set in Europe soon thereafter and Roseby faced significant difficulty in obtaining funds to run its operations. With a view to support the trading operations of Roseby and consequently to protect business of its own Vapi unti, GHCL issued Standby Letter of Credit (SBLCs) in favour of trade creditors of Roseby as a temporary measure to tide over financial difficulties. 1.2 Roseby was unable to honour its dues due to deteriorating financial conditions and GHCL Ltd (GHCL) incurred losses of Rs.30.96 Cr in F.Y, 2008-09 upon devolvement of such SBLCs. Rodsby went into liquidation in the same year ad GHCL has not recovered any money so far, GHCL has written off such losses in F.Y. 2008-09 in its boks. 2.1 By 2005, GHCL has successfully set up spinning units at Madurai and Tirupur with capacities of 85,000 spindles with plans for expansion to 1,40,000 spindles over next two years. 2.2 Prior to 2005, there were quota restriction in the export market for textiles which made it impossible for the Indian textile manufactures to penetrate the US and European markets. Post to 2005, the quota restrictions in US and Europe were removed pursuant to General Agreement on Trade and Tariffs (GATT) which provided low cost manufacturing countries like Indian and China huge potential to tap these markets. The textile outsourcing to low cost manufacturing countries was perceived as the second wave of outsourcing after information technology. 2.4 With a view to tap these export markets, GHCL set up a home textile products manufacturing plant at Vapi using the latest technology. GHCL's vision was to be a fully integrated player in the world with presence across mill-to-consumer operations. GHCL already had spinning units at Madurai/Tirupur. The Vapi unit is a fully integrated weaving and textile manufacturing unit for weaving of grey fabric and manufacture of final home textile consumer products like bed linen, curtains and made ups. The Vapi unit was conceived in 200S It was set up in March 2006at cost of Rs.230 Cr. The project report prepared for the purpose of availing long term finance from financial institutions projected a turnover of Rs.533 Cr. On full scale utilization from third year onwards (i.e. 2008 onwards). The Annual Report of GHCL for 2005 projected a turnover of US $ 100 Million for the Vapi unit. 2.5 The next step was the development of export markets for selling the textile products manufactured by Vapi unit. In line with its vision of having presence in the entire textile value chain from spinning to retail selling, GHCL was also interested having access to retail outlets in US and European markets. With this end in view, GHCL first made acquisition of Dan River in USA in January 2006 at a cost of US $ 17.50 M which specialized in sourcing home textile products for large retailers like Bed Bath & Beyond, Bloorningdale, JC Penny, Anna's linen and Wal-Mart. Dan River sourced the

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products for these retailers from India, Pakistan and China. If had an annual turnover of around US $ 250 M' [approx INR 1000 Cr.) . 2.6 The second acquisition that GHCL made was of Roseby Operations Ltd in UK in July 2006. Rosebys was UK's largest Home Textiles Retail chain company, if had a strong presence in bedding, curtains and kids garments with over 300 retail outlets across UK. It also had an annual turnover of close to US $ 250 M (approx INR 1000 Cr.) " 2.7 Since Dan River and Roseby offered significant synergies for the Vapi unit- GHCL also started evaluating efficient supply chain siructure between Vapi unit and Dan River/Roseby, The technical personnel of Dan River and Roseby visited the Vapi plant to ; appraise themselves of the production facilities available as also to discuss the US and European market trends, customer tastes and preferences with Vapi unit personnel. Since prior to acquisitions, Dan River and Roseby were independent entities having their own supply chain and souring structures which were in place for a long period of time, the process of integrating the Vapi unit was feasible in due course. Had things moved along as planned, Vapi Unit would have been fully utilized by Dan River and Roseby by sourcing some of their requirements [say, between 25% to 35%) from this unit. In fact, there is surplus land available at the Vapi Unit which could have been fruitfully utilized to expand the Vapi Unit by 100%. 2.8 Unfortunately soon after the acquisitions, recession set in US and Europe largely fuelled by the US sub-prime crises in 2008. The recession impacted the retail textile trade very badly. Both Dar River and Roseby faced double whammy of plummeting sales and shortage of liquidity to sustain the operations. The financial lenders withdrew the credit lines to reduce their exposure to the badly affected retail sector. This was also largely on account of their own inability to raise funds. 2.9 Particularly with reference to Roseby, the supplies of Roseby were getting protection for their dues in the from of insurance coverage from insurance companies. With the onset of recession and insurance companies themselves being under severe financial stress, they withdrew frorn the retail sector as a result of which suppliers became reluctant to supply goods to Roseby in absence of adequate protectin. 2.10 The regular banker of Roseby viz. Barclay Bank which was also facing financial crisis could not extend additional working capital to Roseby. On the contrary, it withdraw its own credit line to Roseby farcing it to approach another private financing company viz. Burdale Financial Ltd. Burdale initially extended a credit line of GBP 10 M covering both cash credit and Letter of credit facility. However, subsequently with a view to reducing its exposure to Reoseby, it reduced the actual drawing power to GBP 1.6 M. 2.11 BACKGROUND OF DEVELOPMENT OF SBCL ISSUED TO ROSEBY OPERATIONS LTD > Unfortunately, due to macro economic factors, recession set in Europe soon thereafter and Roseby faced significant difficulty in obtaining funds fo run its operations. > With a view to support the operations of Roseby and consequently to protect business of its own Vapi unit. GHCL

issued Standby Letter of Credit (SBLCs) in favour of trade creditors & Bank of India far providing working capital finance to Rosebys Operations as a temporary measure to tide over financial difficulties.

2.12 HOW SBCL LIMIT WAS CREATED > GHCL Home Textile division was enjoyed working capital facilities with various banks as per details mentioned below : Sl. No. BANKS RS. IN CRS

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1 SBT 40.00

2 Canara 35.00

3 BOI 35.00

4 SBH 30.00

5 IDBI 35.00

6 Total 175.00

2.13 FACTS The issue under consideration is in respect of SBLC issued on behalf of subsidiary Rs.30 cr. 1. GHCL Issued SBLC on behalf of its step down subsidiary Rosebys for an amount of 30 crs through 1DB1 bank, Ahmedabad. 2. SBCL issued in favour of Bank Of India Manchester branch for Rs. 16 crs and sundry vendors of Rosebys for Rs. 14 Crores. 3. The SBLC was issued for working capital requirement of Rosebys. 4. SBLC was issued due to financial crunch faced by Rosebys on account or recession in UK in 2008. 5. Bank Of India had sanction the lo an for working capital requirement of Rosebys which can be verified from Sanction letter. 6. Due to deteriorate financial condition Rosebys could not repay the loan of BOI and vendors and therefore SBLC devolved on GHCL. 7. As Rosebys could not pay, the SBLC devolved on GHCL, and it has to honour the SBCL for commercial reasons. 8. During the year under consideration Rosebys went into liquidation and chances for recovery of Rs. 30 Crores from Rosebys were quite remote. 9. Therefore GHCL had write off the said amount in books and claimed as business loss u/s 37(i).

2.14 JUSTIFICATION FOR ALLOWANCETHE WRITE OFF OF RS.30.96 CR. 1.IDBI issued SBLC from working capital CC limit of GHCL Ltd, which is purely sanctioned for GHCL's Subsidiary operational funding requirement purpose. 2. No bank can Issue Standby Letter of Credit/ Guarantee until business nexus between parent company and subsidiary is established. In view of severe financial difficulties faced by Roseby, GHCL had to step in1 to support the company during its most difficult time by providing Standby Letter of Credit (SBLC) facility by drawing upon its own available credit limit. The SBLCs were required to continue the supplies to Roseby by third party vendors. The Memorandum of Association of GHCL which contains the following clause under the Main objects of the company :- "To carry on whether in India or anywhere else in the world any business or branch of a business which the Company is authorized to carry on by means of or through the agency or any subsidiary company or companies and to enter into any arrangement with such, subsidiary company for sharing the profits and bearing the losses of an business or branch so carried on, or for financing any such subsidiary company or guaranteeing its liabilities or to make any other arrangement which may seem desirable with reference to any business or branch so carried on including power at any time and either temporarily or permanently to close any such branch or business.'

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By September 2008, 10 top retailers of UK were reported shut down or sold out. Even Roseby had to be referred to the Administrator as a sick company on 25 September 2008. As.a consequence of this, Vapi unit also ran into losses with huge unutilized capacity. Out of SBLCs issued to the tune of GBP 3.97M, SBLCs to the extent of GBP 3.94M devolved upon GHC1 on failure of Roseby to make payment to the suppliers. Being a contractual obligation, GHCL had to honour the SBLCs. The losses incurred by GHCL on this account are to the tune of Rs.30.96 Cr in F.Y. 2008-09. No further losses are expected to be incurred since there are no further outstanding SBLCs.” Roseby was placed under Administration in UK in September, 2008. Since the administration of Roseby was taken over by liquidator from that date, GHCL has no access to the funds or records of Roseby. Roseby's assets were much lesser than its liabilities at the time of being placed under Administration and GHCL saw no chances of recovery of any money. Hence the loss of Rs.30.96 Cr was also written off in the same year (i.e. F.Y. 2008-09).” The Assessing Officer has not accepted the submission of the assessee. The issue in appeal has been discussed by the Assessing Officer at page no. 44 to 117 of the assessment order. The main reason for disallowance of devolvement guarantee amount was that the advancement on loans were in the nature of capital contribution therefore expenditure incurred by way of devolvement of SBLC of Rs. 30.96 crores were considered as capital loss and not the revenue in nature. To support this conclusion, the Assessing Officer has referred 11 tests as reproduced in page no. 69 to 74 of the assessment order which is reproduced as under:- SN Tests Description 1 Names or labels given This factor is neutral as no loan has been granted by the to the instruments assessee directly. 2 Presence or There is no fixed maturity date by which the SBLC would not be absence of a fixed required by the associate enterprise and consequently the maturity date assessee could withdraw it. This means that the funding veers more towards equity.

3 Source of There is no indication of repayment for the funds repayments provided by the assessee to the associate enterprise. This clearly indicates that the funds have been provided at the disposal of "the business" of the associate enterprise and consequently the repayment would be | when the associate enterprise would be able repay, on the basis of its improved financial

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4 Right to enforce There is no indication of any enforcement of payments' payment by the assessee, Consequently the funding veers more towards equity.

5 Participation in The AE is already 100% subsidiary of the assessee. Therefore, this management as a factor is neutral. result of advances

6 Status of Since the fund have been granted to make the payment to the normal Advances in creditors of the business, it is clear that the status of funds provided by relation the assessee is subservient to the status of a creditor. Therefore, the regular nature of funding veers more towards equity corporate creditors.

7 Intent parties The absence of any repayment date by the associate enterprise to the of the parties assesse clearly indicate that the intent of the assessee was to provide funding to the associate enterprise, till its financial position is improved. Therefore, the intention also indicates that the nature of funding is more towards equity.

8 Ability of the corporation As already discussed in detail above, the associate enterprise was not to obtain credit from able to obtain loans without any support from the assessee. outside sources Consequently, the nature of funding by the assessee were more towards equity.

9 Use to advances were put The funds provided by the assessee were used by the associate enterprise for working capital purposes. On the basis of this test it could be argued that the nature is more towards loan, however coupled with the financial distress of the AE and other factors, this factor does not remain a decisive factor.

10 Failure of debtor to The associate enterprise was not able to make any repayment to the repay lenders, which was the reason for devolvement of SBLCs and subsequently the entity had been referred to the administrator, it is clear that no repayment of any kind has been made by the AE. Thus, this factor veer more towards equity.

11 Risk involved in making As already discussed above, advances the financial position of the associate enterprise was very risky when the funds were infused by the assessee. As a result the funds were placed at risk of the business and consequently on the business of this factor the nature of funding by the assessee were more towards equity.

After taking into consideration the above referred tests, the Assessing Officer stated that provisioning the guarantee by the assessee to fund the working capital was in the nature of equity contribution or quasi equity

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because the independent parties were not willing to provide financial support to the associated enterprises. The Assessing Officer has also placed reliance on the following judgments:- (a) VST industries Ltd. (41 SOT 415) Hyd.

(b) Abdullabhai Abduikada ( 41 ITR 545) SC

(c) Salem Mangesite (P) Ltd. (180 Taxman 545) Bom.

(d) D.C.M. Limited (123 TTJ 114) Del.

After referring the aforesaid decisions, the Assessing Officer was of the view that the nature of funding made by the assessee was more towards equity contribution, therefore, since the funding was capital in nature, no guarantee fees, interest was required to be charged. Taking into consideration the above facts and observations, the Assessing Officer has come to the conclusion that the loss incurred by way of guarantee on SBLC of Rs. 30.96 crores was capital loss and the disallowance was made as per the provision of section 37(1) of the Act.

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(1) Acquisition of Rosebys Operations Ltd. UK was not In isolation but was In the line of expansion after set-up of Vapi Home Textile Plant to expand (n overseas market, as the company is having its textile manufacturing units at Vapi and Madurai. • (ii) The Rosebys was having working capital finance from its regular banker Barclays Bank UK at the time of acquisition, which was later on shifted to Burdle Financial Ltd, who provided 10 Mn. GBP credit facility, but as; the same was very expensive, the assessee company's textile division approached IDBI Bank India, who parted its non-fund limit and gave SBUCs in favour of Bank of India, Manchester UK, who in turn provided working capital facility to Rosebys, UK amounting to 2 Mn. GE1P (Rs. 16.78 crore). (iii) IDBI bank also issued SBLCs in favour of 7 vendors of Rosebys of Rs. 14.18 crore, as part of working capital directly to vendors. (iv) The assessee company has given guarantee for SBLCs in June 2008 but never given any fund to the ROL Ltd. (a) Assessee company neither gave any advance to Rosebys UK nor given any capital contribution in 2008. BOI, Manchester Branch, UK and IDBI, India directly provided working capital facility / SBLCs to Rosebys, UK and Its suppliers based on business connection between ROL and GHCL. (b) Assessee company was only a guarantor for the aforesaid working capital / SBLCs and as no money was given by GHCL to Rosebys, therefore, when there are no funds given, how TPO / AO can characterize guarantee as equity / capital. (c) Assesses company acquired Rosebys, UK in July, 2006 and infused Equity contribution of 10 Mn GBP and hence, Rosebys, UK became 100% Subsidiary of GHCL Ltd. Therefore, there was no need of infusing any further equity, in 2008. (d) Capital contribution Is always given for some specific purpose like for acquisition and/or for purchase of capital assets; whereas working capital facility is for running day to day operations. (e) In case of capital contribution, there is no right of retrieval, whereas in case of guarantee, there Is a right of retrieval. GHCL filed Its claim before Liquidator for the devolvement of guarantee, which could not be sustained as there are insufficient assets In ROL, UK. (f) When financial experts / bankers like IDBI and BOI - UK have given 16 crore and Rs. 14 crore respectively as working capital directly to ROL - UK and its suppliers, how can TPO / AO characterize working capital facility granted by banks as equity contribution. (g) Further, at the time of providing working capital / SBLCs to ROL, UK, neither BOI nor IDB! advised GHCL to provide any capital contribution or "Reconstruct" the capital of ROL, UK.

(h) But for the global financial crises as well as huge unprecedented recession in UK resulting in administration of RDL, the aforesaid guarantees would not have devolved on GHCL. (i) The earlier facility of working capital was provided by Burdale Bank, UK to ROL for 10 Mn GBP. Whereas the new facility by BOI and IDBI was hardly for 2 Mn GBP each. Had GHCL given the guarantee for entire 10 Mn. GBP, the loss would have been much higher. (j) Working capital/SBUCs were given in the month of June-July, 2008 and the same were devolved on IDBI between October 2008 to January 2009, who charged such amount to .GHCL. (k) The assesses company has not written off Capital Contribution in ROL as business loss and also stated that they are not going to claim the same in future as business loss. The conclusion and the allegation of the Assessing Officer that funds were indirectly provided by the assessee company to the Rosebys Ltd and its Vendors In the capacity of shareholder and in the form of equity contribution or quasi equity contribution does

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not find support from the above mentioned facts which remained uncontroverted by the Assessing Officer in the assessment order or by the officer representing the case on behalf of the department during the course of hearing. Therefore, it is held that there was no capital contribution by the assessee company to the subsidiary company i.e. Rosebys Ltd. The losses were due to the devolvement of guarantee given against Issuance of SBLCs. (v) The 11 tests applied by the Assessing Officer for treating the devolvement of guarantee against issuance of SBLCs which were treated by the Assessing Officer as capital contribution or equity contribution also does not find any support from the facts given in the present case. The Id. Authorised Representative has filed uncontroverted rebuttal against each and every test applied by the Assessing Officer which is reproduced in the foregoing paragraphs on Page no. 17 and 18 of this order. The subsiffiary company Rosebys was acquired in 3uly 2OO6 f-om Uoyds TSB Capital Ltd, hence, the portion of capital contribution was already given, the nature of SBLCs are for working capital finance .by IDBI Bank. The Departmental Officer was again given opportunity to controvert the rebuttal by the Id. Authorised Representative, but he could not substantiate by providing any facts regarding any money contributed by the assesses company at the time of providing guarantee against SBLCs. In view of the above facts, it is clear that the assessee company has not made any contribution towards capital, but provided guarantee against SBLCs through the bank which provided working capital to the Rosebys Operations Ltd. Now, the only question remains to be decided whether the guarantee against SBLCs to subsidiary company provided was in the nature of commercial expediency or not. The Id. Authorised Representative was provided opportunity to explain the commercial expediency In providing guarantee against the SBLCs to the subsidiary company i.e. Rosebys Operations Ltd. The Id. Authorised Representative has argued in detail and also filed a written submission to prove that the guarantee provided to the subsidiary company ROL was on account of commercial expediency and on the ground that the assessee company had business interest in providing guarantee. The arguments submitted by the Id-Authorised Representative are reproduced as under: "(a) The acquisition of USA and UK Home Textile chain stores were in the line of expansion after set-up of Vapi Home Textile Plant, so chat from India products can be lined in USA and UK as the India become processing hub of home furnishing textile items, (b)The objective of the acquisition was to capture and expand Home Textile market in UK and also enter in European region. Had we not setup VAPI Home Textile Ptont, there was no need to acquire ROL in UK or Dan River in USA. (c) ROL, UK had 325 retail outlets and there was a long-term plan to aign txGiness of RDL with Vapi and make the same profitable by cheaper sourcing from India and Asia. (d) ROL, UK was not making profit at the time acquisition and our lone term plan was to make it profitable by restructuring Its product sourcing and aligning It with Vapi. This would normally take around 4-5 years for shifting major product sourcing from UK 1:0 India. (e) GHCL had started to develop the products in gradual manner for ROL, UK In 2007-08 and supplied the same and continued in 2008-09. The entire transition of replacing UK supply source with GHCL Vapi Unit were to take 5 years. (f) Had the operations continued, the plan was to achieve turnover around 75-80 Crores in 3-4 years. (g) Nobody anticipated the Global Financial Crises of 2008 wherein, a ISO year old Bank like Lehman Brothers collapsed overnight with over $ 650 Billion assets. (h) Had anybody anticipated this, banks like BOI - UK and IDBI, India would not have financed even a penny to Rosebys, therefore, TPO/AO were wrong in saying that there was no hope of recovery of this money financed by BOI - UK and IDBI, India. TPO/AO has no basis of questioning the prudence of the business IDBI/BOI. (I) GHCL took a right business decision In arranging working capital/SBLCs by BOI - UK and IDBI, India as the plan was to grow and expand textile business of GHCL through ROL, UK. j) Nobody including GHCL has anticipated global financial crises,

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(k) ROL, UK had varity of products categories and provided a complete basket of products In the Home Furnishing segment with following major product categories-Bed linen. Bedding, Bathroom, Curtains, Kitchen, Children, Home, Blinds, Nets, Volts, Tracks & Poles, Bed Linen accessories : (I) Whereas GHCL started supplies of Bed Linen, Curtains and . Bedding products, the other aforesaid suppliers were supplying other product categories for ROL, UK to have complete product ramie. (m) The sale of GHCL products was interdependent on sale of products by the aforesaid suppliers and vice-a'-versa Further, please note that, the product range of suppliers to whom IDBI Bank had issued SBLCs on the basis of business connection of GHCL with Rosebys is as under:- COMFY QUILTS LTD Quilts, Pillows, Mattress covers Bed linens DREAM 'N' DRAPES Curtains, Blinds and Cushions curtain rods GORDON JOHN TEXTILES, UK Curtains, Blinds Cushions, Linen sets IRWIN MUTCHELL, UK Roller Blind : Fabric, roman blinds and curtains RAPPORT HOME FURNISHING LTD, UK Soft furnishing like Duvet Cover SNUG COMPANY LIMITED Pillows and mattress protectors Duvets SPEEDY PRODUCTS LTD, UK Tracks and poles. (n) The aforesaid suppliers of Rosebys were getting protection for their dues in the form of credit insurance coverage from UK based insurance companies. However, with the onset of global recession in 2008 and insurance companies themselves being under severe financial stress, they withdrew the insurance cover from the retail sector in UK. Therefore, some of the suppliers requested for additional security to continue their credit supplies to ROL, UK. As the sales of GHCL's products were interdependent on sale of products supplied by these parties, and IDBI Bank, India rightly understanding the business connection between GHCL and ROL, UK, It directly provided SBLCs in favour of these 7 suppliers." 13. After considering the arguments and written submission of the ld. Authorised Representative and after going through the assessment order, it Is crystal clear that the subsidiary company Rosebys Operations Ltd was acquired by the assesses company to expand its textile business operations globally based on the study carried out by KSA Technopak, renowned global consultant, as the objective was to capture ready home-textile market in UK and European regions for Its manufacturing facility of Vapi Textile unit. The Rosebys Ltd, having 325 retail outlets In UK was dealing In variety of home furnishing products Including the products manufactured by Vapi unit of assessee company and therefore it was commercially expedient to provide guarantee against SBLCs issued by IDBI bank to BOI Manchester and directly to vendors of Rosebys for the working capital of Rosebys so that the business of Rose ays and consequently the business of assesses company can be further expanded. Therefore, it is held that the assessee company provided guarantee against SBLCs for its business purpose and same was commercially expedient. The guarantee provided by the assessee company is also authorised as per clause 57 of the Memorandum of Association and resolution passed by the assessee company. The devolvement, of guarantee was on account of unforeseen global financial crises trigged by the collapse of global bankers and retail businesses in the western world particularly in September 2008. Nobody including the assessee company and bankers could anticipate the global financial crises at the time of providing guarantee / SBLCs in the month of June 2008. Therefore, the loss suffered by the assessee company of Rs. 30,96, 28, 781/-, on account devolvement of guarantee / SBLCs is to be considered as revenue loss for the assessee company and is held as allowable u/s.

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37(1} of the IT Act, and it can in no way be considered as capital loss. This finding is also supported by the decisions in following cases: (a) CITvs. Amalaamated Ltd. (92 Taxmann 132) SC In this case, the Supreme Court was concerned with a case where 'the assessee's business Includes furnishing guarantee to debts' borrowed by subsidiary companies'. It was held that the guarantee devolvement liability which fell upon the assessee In respect of a newly acquired subsidiary was in the course of the taxpayer's business and hence was an allowable loss. The taxpayer in this case was engaged In formation, acquisition and management of subsidiaries which, in turn, were engaged In operating businesses like manufacturing, trading, financing, etc. (b) ACIT vs. W.S. Industries (40 DTK 1O6). Chennai Trib. The SC decision was applied by Chennai Tribunal in the case of ACIT vs. W. S. Industries (India) Ltd )(2010)[40 DTK (Chennai)(Trib) 106]. In this case, the subsidiary of the taxpayer was supplying materials which were important for the taxpayer's business. This was held to be an important circumstance supporting the action of the taxpayer i.e giving corporate guarantee as well as trade advance being incidental to the taxpayer's business. It was also noted that the giving of guarantee had due sanction of the MOA of the taxpayer which contained suitable enabling object. (C) CIT vs. Pure Beverages Ltd. (2O9 ITR 131). GUI. In this case, the taxpayer was a soft drink manufacturer who gave guarantees to the bank for loans advanced to retailers to enable them to purchase coolers to store soft drinks sold by the taxpayer. Prior to 1969, the taxpayer itself used to provide the coolers to the retailers. From 1969, the retailers were persuaded to purchase the coolers themselves. The cost of the cooler ranged between Rs 3000 to Rs 6000. Some of the retailers eventually defaulted in payment of the loans taken from the bank and as a result the taxpayer had to bear the loss arid make payment to the bank. The loss incurred was claimed by the assessee u/s 37 of the Act. The Tax Authority rejected the claim and held the loss to be capital in nature. The High Court (HC) held the loss could not be treated as capital in nature since there was no Intention of the taxpayer to acquire any asset of enduring nature. The amount expended was In the course of business, and hence was revenue in nature. Thus such expenditure would be allowable u/s 37(1) of the Act. (d) S.A. Builders vs. CIT 1288 ITR IV SC. In this regards, at the outset, it would be necessary to understand the meaning of the term 'commercial expediency'. In the context of allowability of an expenditure, the Supreme Court in the case of S. A. Builders Ltd. (288 ITR 1)(SC) has stated that the expression 'commercial expediency is an expression of wide import and Includes such expenditure as a prudent business man incurs for the purposes of the business. The expenditure may not be incurred under any legal obligation but yet is admissible as a business expenditure if it was incurred on the grounds of commercial expediency. e) CIT vs. Khambhata Family Trust 34 Taxman.com 36). GUJ. In this case Honouarble Highcourt held that that white examining a claim for deduction under section 37, what has to be seen is whether the expenditure had been incurred wholly and exclusively for the purpose of the assessee's business and whether it falls under any of the exceptions carved out under sub-section(2B) thereof, and nothing more. Once it is found that the expenditure had been iricurred by the assessee for publicity or advertisement, it Is not for the department to consider what commercial expediency justified such expenditure, it is, therefore, not permissible for the Assessing Officer to scrutinize the claim any further to examine as to whether in the process any third party has also benefited. The mere fact that on account of the expenditure incurred by the assessee wholly and exclusively for its own business, incidentally some third party is also benefited Is no ground to disallow any part of such expenditure. In the case at hand, the assessee procured usage rights for brand "Rasna" for a valuable consideration and Incurred advertisement expenses in respect of products manufactured by it under such brand name. No part of the said expenditure was expended for any purpose other than for the assessee's business; merely because by virtue of such advertisements the brand value of Rasna is enhanced and other manufacturers of the brand are also Indirectly benefited, it cannot be said that the expenditure Incurred by the assessee is not wholly and exclusively for its own

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business. It cannot be gainsaid that when any user of a brand name advertises Its product, as a necessary corollary the brand value is likely to increase, thereby benefiting the owner of such brand name. If the owner of the brand name has licensed such brand to other manufacturers, It is quite possible that such other manufacturers may also be benefited on account of such advertisements as the advertisements may enhance the value of the brand as a whole. In fact, such incidental benefits are bound to accrue to the owner of the brand as well as other users of the brand name when any of the users of such brand name advertises its products. However, merely because some other persons are incidentally .benefited from the advertisements issued by the assesses, the same would not change the character of the expenses from being wholly and exclusively for the purpose of its business. Therefore, it is not a relevant circumstance for the purpose of considering allow/ability of expenditure under section 37. The Tribunal was, therefore, wholly justified in confirming the order of the Commissioner (Appeals) allowing such expenditure under section 37- There being no legal infirmity in the impugned order, the same does not give rise to any question of law, much less, a substantial question of law so as to warrant interference. (f) J.R. Patel & Sons Ltd, vs. CIT (69 1TR 782) In this case Honouable High court held that the Tribunal erred In law In holding that an indirect benefit flowing to the managing agents could not Justify the employment of a person, who rendered services to the managed company, as being in the Interest of the business of the managing agency. As has. been observed in J.R. Patel and Sons CPO Ltd. v. CIT [1964] 51 ITP, 717, the correct approach should be whether the payment was made on grounds of commercial expediency for the ultimate benefit of the assessee-company, whether that benefit was to accrue immediately or to accrue after a lapse of time, directly or indirectly. Even if the benefit which flows to the assessee-company came to it indirectly, that payment could be considered on grounds of commercial expediency if it was for the ultimate benefit of the assessee-company. The fact that the services were not rendered by A' directly to the managing agency company made no difference to the ultimate conclusion to be reached in the case because the test to be applied was whether, as a result of the arrangement which came into force with effect from 1-4-1956, even an indirect benefit was derived or was expected to be derived by the assessee-company. Applying the principle approved of by the Supreme Court in Eastern Investments Ltd. v. CIT [1951] 20 ITR 1 CSC), it was clear that in the instant case, in the light of the additional materials which had been brought on the record of the case, the assessee-company did derive indirect benefit from the remuneration which it paid to its own managing director. Thus the services which A rendered to the managed company for the period commencing from 1-4-1956, were rendered by him to the managed company on behalf of the assessee-company, and as the managing director of the assessee-company, Applying the well-known decisions as regards the notions of commercial expediency and the principles to be applied as to when an amount paid can be said to be expended wholly and exclusively for the purpose of the business of the assessee-company, it could be concluded that in the instant case, the excess remuneration over the sum of Rs. 12,000 paid by the assessee- company to 'A' was wholly and exclusively expended by it for the purposes of its business and was, hence, a deductible allowance within the meaning of section 10(2)(xv) of the Act. CIT vs Williamson Magor & Co Ltd, ( 117 ITR 581), Cal. In this case, the taxpayer who was acting as managing agent and secretaries of other companies was appointed as a secretary of Tukvar & Co (TCO) Ltd till 1957. In 1955, TCO was in need of funds. The taxpayer provided guarantee to the bank due to which TCO was provided overdraft facilities by the bank. In 1957, TCO defaulted in repayment to the bank, which ultimately had to be settled by the taxpayer. Thus for the year under consideration le 1957, the assessee claimed a sum of Rs 1.68 lakhs as bad debts. The Tax Authority disallowed the claim on the basis that the taxpayer's liability to pay the bank did not arise in the course of business as the taxpayer was not under an obligation to arrange funds for TCO. Further it was also contended that the Impugned amount was also not allowable as bad debts since the business of the assessee was not that of money lending, and more so since such debt had never been taken into account for computing income of earlier years.

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The HC noted that furnishing of guarantee was Incidental to taxpayer's business and that the debt due from TCO In respect of amount devolved on the taxpayer had become bad in the year under consideration and that these factual findings had not been challenged by the Tax Authority. The HC, therefore, held that the findings of the Tribunal could not be interfered and the impugned loss was allowable. (h) Essen (P) Ltd VS. CIT (65 ITR 625). SC. In this case, the taxpayer was a private limited company which was a managing gent of several concerns and it also derived income from an insurance agency. The taxpayer was managing a company named Amer Hind Manufacturer (Amer) which was engaged in the manufacture of carbon paper, ink' and other allied products. Due to increase In need of funds for carrying on manufacturing operations, Amer entered into a managing agreement with the taxpayer, and under the said agreement, taxpayer advanced an amount of Rs 3.40 lakhs to Amer. Apart from lending money, taxpayer also guaranteed a sum of Rs 2 lakhs obtained by Amer from Indian Overseas Bank. Subsequently, Amer failed in its business and incurred heavy losses because of which it was unable to pay the bank as well as the taxpayer. As a result of the guarantee, taxpayer became liable to pay the bank outstanding dues of Amer. Thus total amount due to the taxpayer in respect of the guarantee as well as advances was Rs 4 lakhs which it claimed as a business deduction for AY 1956-57. The Tax Authority rejected the claim of the taxpayer and disallowed the loss on the ground that the management agreement did not mandatorily require the taxpayer to expend money by way of advances or give guarantees in favour of Amer. The Tribunal, by referring to the MOA of the taxpayer held that since the main objects of the taxpayer included lending of money as also providing guarantees, the advances made were only In pursuance of fulfilling Its stated objects. Hence, the expenditure incurred would be allowable as business expenditure for AY 1956-57. The HC reversed the decision of the Tribunal and held the loss to be capital loss on the grounds that the agency was obtained with a pre-condition of giving loans and making advances to Amer. On further appeal by the-taxpayer, the SC restored the decision of the Tribunal and held that HC had wrongly concluded the said loss to be capital in nature as also disagreed the facts which had been placed on record by the Tribunal. The guarantee and advances given to managed company were well within the objects of the taxpayer (as was evident from the MOA of the taxpayer), arising from the managing agency business. Hence such loss/expense incurred would be an admissible deduction for AY 1956-57. (i) CIT vs. Delhi Safe Deposit Co. Ltd f!33 ITR 7561. In this case the tax payer was a company which was a partner of a managing agency firm which in all consisted of three partners. The managing agency firm, in turn, was managing another public limited company (managed company). During the year, at the instance of one of its major share holding partner, a huge sum was expended by the managed company to a firm located in Calcutta. The sum of money advanced was ultimately dishonored by the Calcutta firm, resulting in a net loss of Rs 1.9O lakhs to the managed company. Out of the total loss, a sum of Rs 0.9 lakhs was agreed to be borne equally by the taxpayer and its partner. The share of the taxpayer of Rs 0.47 lakh was claimed as business expenditure, in the relevant year, u/s 37 of the Act. The Tax Authority disallowed the said expenditure and held that the taxpayer was not legally bound to make such payment on behalf of the firm. Further, it also held that the loss had been borne by the taxpayer for personal considerations and more so as the loss belonged to the firm, the partners were in no way connected to such loss. The taxpayer on the other hand contended that the settlement made was purely to protect its interest in the firm as well as to protect its business reputation which it had built over a period of years. Hence such expenditure ought to have been allowed as deduction on the basis of principles of commercial trading and commercial expediency. On appeal, the HC accepted the contentions of the taxpayer which was upheld by the SC. The SC held that taxpayer had rightly Incurred expenditure to protect its interest in the managing agency as well as to protecting Its name, which would have otherwise been tarnished had the expenditure not been

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incurred. Thus the expenditure which is incurred for the preservation of a profit earning apparatus is allowable as revenue expenditure. (j) CIT vs. Rao construction (P) Ltd. (33 taxman.com 613), Guj In this case, the assessee-company deposited equity shares and fixed deposits with the bank for obtaining bank guarantee for securing government tender. However, RBI ordered for the liquidation of said bank. Accordingly, assessee-company wrote off the balance of FD and equity shares and claimed the same as business • expenditure. The Assessee had availed such bank guarantee faculties as per the prescribed norms of the bank which required the purchase of the shares and margin money for using the bank guarantee also was required to be kept as a fixed deposit. This bank, when eventually was declared as sick bank, was unable to repay the deposits, the membership of the said bank also was cancelled and the steps were taken pursuant to the order of the Reserve Bank of India. Assessee-company, thereafter, had written off the balance. In such circumstances, both Commissioner (Appeals) as well as the Tribunal were . absolutely justified in applying the ratio laid down by the Apex Court in case of Ramchandar Shivnarayan v. CIT [1978] 111 tTR 263 as also in case of Indian Aluminium Co. Ltd. V. CIT tl992] 84 ITR 735 CSC) to hold that such expenditure were needed to be spent by the assessee for the purpose of carrying on its business and are incidental to the business, therefore, any loss shall have to be considered as the revenue cost and not the capital cost. In view of the above findings, the objections (1 & 12) raised by the assessing company against disallowance of Rs. 30,96,28,781/- are sustained and the addition made by the Assessing Officer is directed to be deleted.”

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Hon’ble Supreme Court in the case of S.A. Builders Ltd. 220 ITR 1 on the issue of commercial expediency. The ld. counsel has also referred page no. 15, 17 to 21 of the order of the DRP pertaining to the facts on the point that acquisition of USA and U.K. Home Textile chain stores (Rosebys Retail Chain) were in the line of expansion after set up of Vapi Home Textile Plant so that from India Products can be lined in USA and U.K. as the India become processing hub of home furnishing textile items. Ld. counsel has also referred page no. 532 to 1143 of the paper book pertaining to copies of various documents filed in support of the fact that expenditure claimed were incurred for the purpose of business. The ld. counsel has also referred page no. 25 to 35 of the DRP order wherein the DRP has elaborated the various facts of the commercial expediency between assessee company and its subsidiary/associated company Rosebys Operations Ltd. –U.K. and giving SBLC to subsidiary company was in the nature of business loss. The ld. counsel has also referred compilation of orders paper book no. IV. In this paper book, the ld. counsel has placed reliance on the judgment of Hon’ble Supreme Court in the case of CIT vs. Amalgamation Pvt. Ltd. 226 ITR 188, judgment of Hon’ble Supreme Court in the case Essen Pvt. Ltd. vs. CIT 65 ITR 625. The ld. counsel has also placed reliance on the decision of Co- ordinate Bench of the ITAT Chennai in the case of ACIT Chennai VS. W.S. Industries (I) Ltd. and decision of Hon’ble Gujarat High Court in the case of Pure Beverages Ltd. 209 ITR 131 and decision of Hon’ble Calcutta High Court in the case of CIT vs. Williamsons Magore Co. Ltd. 117 ITR 858, decision of Hon’ble Bombay High Court in the case of CIT Mumbai Vs. Mehta P. Ltd. 174 taxman 104. The ld. counsel further submitted that views taken by the DRP are correct and same may be confirmed. The ld.

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Departmental Representative has stated that no sufficient opportunities were provided by the DRP to the revenue before deciding the issue in appeal.

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which had also impacted the retail textile industry particularly in respect of Rosebys Operations Ltd.. The assessee company has acquired Rosebys Operations Ltd. running a retail chain in retail stores in U.K. in 2006 with a view to have ready distribution channel for home textile products manufactured at its Vapi unit. Due to recession in Europe and with a view to a support the trade operation of Rosebys Operations Ltd. and to protect business of its own Vapi unit, the assessee company has issued standing letter on credit in favour of the trade creditors of Roseby Operations Ltd. as a temporary measure to tide over financial difficulties. But Rosebys could not clear the dues of its creditors due to deteriorating financial conditions and GHCL has incurred losses of Rs. 30.96 crores in F.Y. 2008-09 upon devolvement of such SBLC, Rosebys went into liquidation in the same year and GHCL has not recovered any money therefore assessee company has written off such losses in F.Y. 2008-09 in its books. The losses incurred by the GHCL on this account was to the tune of Rs. 30.96 crores in F.Y. 2008- 09. The SBLC was issued for working capital requirement of Rosebys Operation Ltd. and financial crunch faced by Roseby Operation Ltd. on account of recession in U.K. In 2008 Bank of India sanctioned loan for giving capital requirement of Rosebys Operation Ltd.. Due to deteriorating financial conditions, Rosebys Operations Ltd. could not repay the loan to the Bank of India vendors therefore SBCL devolved on the assessee company. As Rosebys Operations Ltd. could not pay SBCL devolved on assessee company and during the year under consideration the Rosebys Operations Ltd. went into liquidation and chances of recovery of Rs. 30 crores from Rosebys Operations Ltd. were quite remote. Therefore, the assessee company had written off the amount in books and claimed as business losses

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u/s. 37(1) of the Act. We have also gone through the explanation furnished on devolvement of SBLCs and commercial expediency furnished by the assessee company before the DRP which is discussed as under:- ”Allowability of SBLCs (Stand by Letter of Credit) write off as business expenditure u/s 37 (1) of Income Tax Act, 1961. Sec. 37 grants deduction In respect of expenses incurred wholly and exclusively for business purpose. However the provision specifically excludes following- (a) Expenditure of the nature described in sec. 30 to 36. (b) Capital expenditure (c) Personal expenses. On Facts: 1. Formation of Subsidiary for the sole purpose of expansion of existing textile business of GHCL. 1.1 Background: GHCL Limited ("GHCL"), incorporated in 1983, Is a leading Chemical and Textile manufacturing company. GHCL established its Soda Ash Plant at Sutrapada, Gujarat in 1989 and over a decade, it became one of the leading Soda Ash manufacturers of the country and attained position of pre eminence in Soda Ash industry. In the year 2001, GHCL diversified into Textile business by acquiring and merging a sick spinning mill "Sree Meenakshi Mills" based in state of Tamil Nadu. GHCL turned around this unit by downsizing labour cost, upgrading technology and modernisation and made it profitable in a short span of time. The revenue and profit of the Textile business increased significantly over a period of time which is evident from the following financial performance for the period FY 2000-01 to FY 2004-05. Total revenue of Soda Ash and Textile segment of GHCL from FY'2000 -2001 to 2004- 2005 is as under: Rs. In crore Revenue FY 2000-01 FY 2001-02 FY 2002- FY 2003-04 FY 2004-05 03

Soda Ash 408 410 370 376 131 & Inorqanic

Textile 0 55 59 86 94

Others 3 3 6 8 8

Total 412 468 435 470 533

(The relevant extracts from Financial of GHCL for the above period are attached as Annexure- 1) ( Page no. 1 to 10 of paper book 3A) After turning around and stabilizing its Textile spinning business, GHCL decided to be a global player in Textile segment. For this purpose , GHCL in In 2004, engaged KSA Technopak, a leading Consulting firm in Textiles & Retail to advise the company to identify the area of expansion in Textiles. Based on their in-depth Market Study in both Home Textiles and Apparel, KSA advised GHCL to expand in "Home .Textiles" Segment and; a) Capture entire value chain from manufacturing to retailing.( Page No 6 of KSA Report attached as Annexure 2 and Annexure-3) b) Expand globally as major Markets exist in US (40%) & Europe (30%) Prior to 2005, there were quota restrictions in the export market for textiles which made it impossible for the Indian textile manufacturers to penetrate the US and European markets, Post

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2005, the quota restrictions in US and Europe were removed pursuant to General Agreement on Trade and Tariff^ (GATT) which provided low cost manufacturing countries like India and China huge potential to tap these markets. The textile outsourcing to low cost manufacturing countries was perceived as the second wave of outsourcing after information technology. (Page no 117 of KSA Report attached as Annexure-2) KSA advised that post lifting or quota, only those textile players would survive who have :- Presence across entire textile value chain Nearness to the customer Size; and Design and development capability > KSA Technopak, highlighted following factors in favour of i Home-Textiles Positive Turnover Vs Capital Investment ratio ( Annexure-3 KSA Report) Opportunities for Manifold growth Flexible Markets with possibilities of switching between Domestic and Overseas Markets depending on demand pattern. (Copy of KSA's Report is attached as Annexure-2 and Annexure-3, Page no. 11 to 171 of paper book 3A) Based on the advice of KSA, and to achieve its objective to become a major player in the Home Textiles segment, GHCL established a state i of art Home Textile plant comprising of weaving, processing and I made up facility at Vapi, Gujarat at a cost of 220 Crs. which was commissioned in March 2006. (Certified Copy of Board Resolution for setting up VAPI is attached as Annexure-4, I Page 172 to 173 of paper book 3A) The Vapi facility is a fully I integrated weaving and textile manufacturing unit for weaving of grey fabric, processing, dying and printing and manufacturing of final home textile consumer products like bed linen, curtains and made ups, comforter covers, cushions etc. 1.1 Acquisition of Rosebvs. UK -. Rationale & Need Further to expand its reach globally In home textiles market, and to penetrate the international markets, GHCL looked at various acquisition opportunities which had a strong relationship with big international retailers. With this view, GHCL decided to undertake certain overseas acquisitions both in US and UK. In order to capture European market, which was also ; considered to be growth driver and to connect with the ultimate customer, GHCL decided to acquire Rosebys Retail chain In July 2006 which had 325 Home-Textile retail outlets across UK. For this, the Board of GHCL deliberated and I approved acquisition of Rosebys on 18th June 2006. A certified copy of board resolution dated 18.06.2006 ( approving Rosebys acquisition is attached as Annexure- 5, page no. 174 to 175 of paper book 3A). GHCL engaged Grant Thomton, Delhi to carry out a detailed due diligence of ; Rosebys business post which it was acquired from Lloyds TSB I Development Capital Ltd . A copy of due diligence report of Rosebys is enclosed (Annexure -6, Page no. 176 to 302 of ; paper book 3A). 1.2 Brief about Rosebys. (Page no 9 & 11 of Due Diligence Report of Grant Thortan at Annexure 6 and giving history of Rosebys UK from Wikipedia attached as Annexure -7, page no. 303 to 304 of paper book 3A) > Headquartered in Manchester in UK, it was one of the largest home , furnishing Retailer with 325 stores across UK. > Total Area - 7,70,000 Square Feet as Retail space. Annual Turnover of the business was around GBP 105 million for year ended April 2006. > To match Different Social Patterns of the Customer, Stores were Located in both: a) High Streets b) Retail Parks > Sourced up to 78% of Its Retail Product requirements from UK & UK based Suppliers > 59% of the revenue was contributed from bedding / curtain products. a) Offer a choice of Good - Better - Best products,

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b) Kids bedding products were sold under brand names namely Disney Princess, Butterfly, England 2006, Garden Flowers, Photo Bunnies c) 310,000 Sq.ft. Of Highly automated Distribution and Warehousing facilities connected by Rail and conveniently located for Imports d) Additional 100,000 Sq.ft. in place for expansion and launch of ePorta! Sales 1.3 Benefits for acquisition of Rosebys - Synergy with VAPI Home Textile Acquisition of Rosebys made GHCL a fully integrated Home Textile player from Spinning to Retail and also provided an immediate access to UK Market especially market for high end products of VAPI. Apart from ready distribution channel, GHCL envisaged that the acquisition of Rosebys would provide the company with below opportunities: *• Stores expansion in UK. *• Entry in to Europe and Asian markets. * Introduction of new products from GHCL, *• Other Stiles channel (e.g. e-commerce) Additionally, GHCL also envisaged following cost reduction opportunities post acquisition of Rosebys through vertical integration: ** Using global sourcing model through GHCL > Put in place better enterprise systems, In the areas of merchandising, sourcing and inventory management • Improve operational processes to drive efficiencies, considering outsourcing opportunities. The acquisition was considerably large as compared to the expected output of Vapi unit. Therefore, there was fair chance of it being able to absorb a significant production of Vapi unit. Without this acquisition, GHCL would have had to incur huge cost and spend considerable time and effort In developing the distribution channel in UK for i1;s products of Vapi unit. As Rosebys offered significant synergies for the Vapi unit, GHCL started evaluating efficient supply chain structures between Vapi unit and Rosebys. For this purpose Rosebys team visited Vapi plant in 2007 to appraise themselves of the production facilities available and also to discuss the European market' trends, customer tastes and preferences with Vapi unit personnel. Since prior to acquisition, Rosebys was an independent entity having its own supply chain and sourcing structures which were in place for a long period of time, the process of integrating the Vapi unit was feasible in due course of time. Accordingly the supplies to Rosebys from VAPI division started in calendar year 2007. Post acquisition revenue of Soda Ash and Textile GHCL India Rs. in Crs. Revenue FY FY FY FY FY FY FY

2006- 2007- 2008- 2009- 2010- 2011- 2012-

07 08 09 10 11 12 13 (15

Month)

Soda 708 653 857 831 927 1,148 1216 Ash/lnoraani c

Home 363 417 383 383 571 749 909

Textiles

Total 1,071 1,O71 1240 1214 1498 1,897 2,125

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Had things moved along as planned, Vapi Unit would have been substantially utilized by Roseby by sourcing some of their requirements (say, between 25 % to 35 %) from this unit. 2. Post Acquisition Rosebys Business Operations , Banking facility and need for Issuance of SBLCs by IDBI Bank. 2.1 After acquisition, Rosebys UK initiated various steps to improve its operations which included:- a. Reduced UK Sourcing from 78% to 50% in 2007-08. b. Rationaling low margin stores c. Enhancing product portfolio with global products d. Direct Sourcing from GHCL India/Stragic Vendors Based on the above, Rosebys had stable business operations. The Barclays Bank, UK had provided normal working capital facility to Rosebys considering its stable business operations. (Enclosed as Annexure - 8, page no 305 to 317 of paper book 3A). A snap shot of Rosebys flnandals is as under- Amt. In ‘000 GBP) Particulars FY 2005-06 52 FY 2006-07 48 weeks FY 2007-08 48 weeks (as weeks (as on (as on 31.03.2007) on 01.03.2008) 29.04.2006)

Sales 143680 117784 103151

Operating Profit (8281) (4678) (3306)

2.2 The operations of Rosebys and its banking continued smoothly till the end of calendar year 2007. However, with the onset of global financial crisis which started at the end of calendar 2007, banks in both Europe and USA started facing huge financial stress. This resulted in Banks stopping both inter-bank lending and withdrawal of banking support to many business in UK, Europe and USA, 2.3 In such turbulent global financial scenario, the regular banker of Roseby viz. Barclays Bank which also faced financial stress ( An article is enclosed as Annexure-9, page no 318 to 319 of paper book 3A) could not continue its working capital facility to Rosebys and decided to withdraw the same sometime tn February/March 2008. This almost coincided with the first collapse of a Bank namely Northern Bank in UK on February 22, 2008 (Enclosed as Annexure - 10, page no 320 to 326 of paper book 3A) which implied that there was a huge stress on the banking industry in UK. 2.4 In this situation Rosebys approached another private bank Burdale Financial Ltd. Burdale initially extended a credit line of GBP 10 million covering both cash credit and Letter of credit facility. (Agreement Enclosed as Annexure - 11, page no 327 to 395 of paper book 3A). However, the cost of borrowing from Burdale was very high, Not only the rate was higher for fund based limit but also exorbitant charges were levied for non fund based limit and Incidental expenses which adversely impacted Rosebys margins especially at the time when the overall business scenario was tough. 2.5 At such time, Rosebys UK approached GHCL for funding from Indian banks. GHCL approached IDBI bank for providing working capital support to Rosebys. IDBI Bank after evaluating the textile business connection of GHCL with Rosebys, revised the terms of its working capital limit which it had provided to VAP1 unit of GHCL and carved out a limit of Rs. 35 crore to meet working capital requirement of Rosebys. (Copy of IDBI Sanction Letter dated June 11, 2008 is enclosed as Annexure - 12, page no 396 to 399 of paper book 3A IDDI bank issued Stand By Letter of Credit (SBLC) of Rs. 16.78 crore on July 3, 2008 in favour of Bank of India, Manchester Branch (Annexure - 13, page no 400 to 404 of paper book 3A), which In turn provided working capital limit to Rosebys. Thereafter Rosebys repaid Burdale banking facility

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and started availing working capital facility from Bank of India on counter guarantee by IDBI Bank. . In addition to this IDBI also Issued SBLC of Rs. Rs. 14.18 crore in June 2008 to 7 vendors of Rosebys in UK as per SBLCs (Enclosed as Annexure - 14, page no 405 to 452 of paper book 3A). Thus the total amount of SBLCs issued by IDBI was Rs, 30.96 crore. 2.6 What is SBLCs and to whom these have been Issued. Standby letter of credit (SBLC) is a non fund based limit issued by Bank to provide a Guarantee to third party that in case the payment is not made by the company/party on whose behalf it Is issued, the Issuing bank would make the payment. SBLC is in the nature of a working capital facility and no bank will grant a working capital facility other than for business purpose. As mentioned above, the facility was provided by IDBI Bank to Rosebys UK by carving out working capital limit of VAPI division of GHCL Further as stated above, IDBI had issued SBLC to Bank of India, which in turn provided working capital facility to Rosebys, UK and therefore it cannot be treated as a capital contribution. (Sanction Letter of Bank of India, Manchester is enclosed as Annexure - 15, page no 453 to 45 of paper book 3A) 2.7 Lehman Brothers Collapse and its impact on Global Economy -Also on Rosebys Business With the above financial support from IDBI, Rosebys was continuing its business operations. However, the sudden collapse of Lehman Brothers, a $ 650 billion Investment bank, proved to be major catastrophe for the entire global economy in September 2008. ( Copy of article on collapse of Lehman is attached as Annexure- 16, page no 455 to 456 of paper book 3A)Thls not only resulted in the crash of hundreds of banks in USA, UK and Europe, but also resulted in the closure of many businesses in western world, especially the retail outlets. The Impact was so severe that some of the large Retailers in UK closed within few weeks of collapse of Lehman Brothers such as Woolworth, Officers Club, MK One, MFI, Dolics, Whittard of Chelsea. An exhaustive list of the Retail Outlets and the banks which collapsed in the year 2008 during global financial crisis is enclosed Annexure - 17 (page no 457 to 459 of paper book 3A) and Annexure - 18 (page no 460 to 465 of paper - book 3A). More than 5 Lakh (Article enclosed as Annexure - 19, page no 466 to 471 of paper book 3A) people lost their jobs in UK precipitating a great global depression. • 2.8 Separate news articles of the following Retails Companies in UK on the bankruptcies and Its impact on the economy are enclosed as Annexure 2O A to 201 (page no 472 to 538 of paper book 3A). s. Name of Date of No. Jobs Lost Size (GBP Mn) Annexure no. the Retailer Closure of Stores

1 Wool worth 26.11.08 807 27000 296.90 20A

2 Officers 23.12.08 150 900 52.51 208 Club

3 MK One 21.11.08 125 800 - 20C

4 MFI 26.11.08 110 1200 74.20 20D

5 Sleep Dejjot 01.04.08 111 367 14.14 20H

6 Willis 25.08.08 4.81 20H Gambler

7 Dolcis 21.01.08 185 800 0.62 20G

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8 Viyella(225y 07.01.09 40 700 20H r old textile player)

9 Whittard 23.12.08 78 950 30.00 201 of Chelsea

2.9 The onslaught of the aforesaid global financial turmoil was so devilfsh that despite IDBI Bank's financial support, Rosebys UK could not sustain its operations and suffered a huge loss. As it could not raise any further resources due to ongoing financial turmoil in UK and global financial markets, Rosebys was left with no choice but to file for Bankruptcy at the end of September 2008. KPMG was appointed as administrator, a copy of KPMG Report attached herewith as Annexure 21 (page no 539 to 566 of paper book 3A) which reflects that no amount is recoverable from Rosebys on liquidation. A copy of Article dated 26tf1 September, 2008 is attached as Annexure - X2 (page no 567 to 568 of paper book 3A). 2.10 Due to the filling of Bankruptcy of Rosebys, it could not meet its financial obligations to its vendors and Bank of India, UK. The Vendors and Bank of India invoked their claims on IDBI Bank, India who In turn recovered the amount from GHCL as it had provided the working capital limlt/SBLCs to Rosebys UK by carving out working capital limit of VAPI division of GHCL. The intimation received from " IDBI debiting GHCL account Is enclosed as Annexure - 23 (page no S69 to 599 of paper boo^c 3A). GHCL could not recover any money from Rosebys as the same had been put under liquidation by KMPG in UK. 9. The assessee company further submitted rebuttal to the AO's observations on financial support to Rosebys and considering SBLCs as equity contribution or quasi equity and rebutted FAR test observations of the Assessing Officer, the relevant portion is reproduced as under: "Rebuttal tQ the AQ's Observations 1. The AO alleged that: the regular banker of the associated enterprises did not provide additional working capital and in this scenario the assessee provided the stand by letter of credits in favour of suppliers of the associated enterprises by drawing up its own credit limit with the IDBI (Pg. no. 55 of Assessment Order).' Reply: The allegation by AO based on conclusion, whereas, the financial supports to Rosebys were as under: (1) Regular banker of Roseby viz. Barclays Bank which also faced financial stress could not continue its working capital facility to Rosebys and decided to withdraw the same sometime in February/March 2008. This almost coincided with the first collapse of a Bank namely Northern Bank In UK on February 22, 2008, which implied that there was a huge stress on the banking industry in UK. (ii) In this situation Rosebys approached another private bank Burdale Financial Ltd, Burdale initially provided credit line of GBP 10 million covering both cash credit and Letter of credit facility vide Agreement dated 23-04-2008. (iii) However, the cost of borrowing from Burdale was very high, expensive, therefore, GHCL asked IDBI to evaluate textiles business of Rosebys and provide working capital. (iv) The IDBI looking to the business connections with GHCL Textile Division, financial of Rosebys parted non-fund base limit of GHCL Textile Division of Rs. 16.78 crore through issuance of Standby letter of credit (SBLC) to Rosebys through Bank of India, Manchester Branch UK, who provided working capital limit to Rosebys. (v) Similarly, In addition to this IDBI also issued SBLC of Rs. Rs. 14.16 crore in June 2008 to 7 vendors of Rosebys in UK as per SBLCs, which is also in the nature of working capital.

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(vi) Guarantee was given by IDBI only for 4 Mrt. GBP, whereas the UK Financier, Burdale provided facility for 10 Mn GBP, thus, the present facility was only 40% of earlier facility. (vii) SSLCs issued directly by IDBI, India to 7 Suppliers of ROLr UK, which is more transparent way to provide working capital deployment, therefore, IDBI Bank provided these SBLCs directly to the suppliers. Thus, the allegation of AO Is baseless that regular bankers or other financial institutions were not providing any finance to Rosebys. Rebuttal to foe AQ's 2. The AO alleged that: the issuance of SBLC is nothing but financial restructuring done by owner in the -capacity of shareholder and therefore support provided is in the nature of shareholding activity and hence, required to be considered as capital contribution (Pg, no. 56 of Assessment Order). Reply. The allegations by AO are arbitrary, without considering the facts, which are as under: (i) GHCL neither gave any advance to Rosebys UK nor given any capital contribution in 2008. 8OI, Manchester Branch, UK and IDBI, India directly provided working capital facility / SBLCs to Rosebys, UK and its suppliers 'based on business connection between ROL and GHCL. (ii) GHCL was only a guarantor for the aforesaid working capital / SBLCs and as no money was given by GHCL to Rosebys, therefore, when there are no funds given, how TPO / AO can characterize guarantee as equity / capital. (iii) GHCL acquired Rosebys, UK in July, 2006 and infused Equity contribution of 10 Mn GBP and hence, Rosebys, UK became 100% subsidiary of GHCL Ltd. Therefore, there was no need of infusing any further equity, in 2008. (iv) Capital contribution is always given for some specific purpose like for acquisition and/or for purchase of capital assets; whereas working capital facility is for running day to day operations. (v) In case of capital contribution, there is no right of retrieval, whereas in case of guarantee, there is a right of retrieval, GHCL filed its claim before Liquidator for the devolvement of guarantee, which could not be sustained as there are insufficient assets in ROL, UK. (vi) When financial experts / bankers like IDBI and BO! - UK have given 16 crore and Rs. 14 crore respectively as working capital directly to ROL - UK and its suppliers, how can TPO / AO characterize working capital facility granted by banks as equity contribution. (vii) Further, at the time of providing working capital / SBL.Cs to ROL, UK, neither BOI nor IDBI advised GHCL to provide any capital contribution or "Reconstruct" the capital of ROL, UK. (viii) But for the global financial crises as well as huge unprecedented recession in UK resulting in administration of ROL, the aforesaid guarantees would not have devolved on GHCL. : (ix) The earlier facility of working capital was provided by Burdale Bank, UK to ROL for 10 Mn GBP. Whereas the new facility by BOI and IDBI was hardly for 2 Mn GBP each. Had GHCL given the guarantee for entire 10 Mn. GBP, the loss would have been much higher, (x) Working capital/SBLCs were given in the month of June-July, 2008 and the same were devolved on IDBI between October 2008 to January 2009, who charged such amount to GHCL. (xi) We have not write-off of our Capital Contribution in ROL as business loss and we are not going to claim the same in future as business loss. Thus, the allegation of AO is baseless that the issuance of SBLC Is nothing but financial restructuring done by owner in the capacity of shareholder and therefore support provided Is in the nature of shareholding activity and hence, required to be considered as capital contribution is incorrect, as the GHCL has not given single rupee to Rosebys and the losses are due to guarantee for commercial expediency. The AO has analyzed transaction on the basis of FAR and replied various factors (Pg. no. 20 & 21 of TP Order), which are rebutted as under: Rebuttal S.N. Test AO's observations 1 Names or labels This factor is neutral No money given by given to the as no loan has been GHCL, either loan or instruments granted by the equity, the same is

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assessee directly accepted by AO also. 2 Presence or There is no fixed When no money was absence of a fixed maturity date by given, where is the maturity date which the SBLC question of any fixed would not be maturity. Working required by the capital directly associate enterprise provided by BOI / and consequently the IDBI to ROL, UK, assessee could only guarantee was withdraw it, This given by GHCL. means that the funding veers more towards equity

3 Source There is no As no money was of repayments indication of given by GHCL, no repayment for repayment required. the funds For guarantee provided by the invocation, by assessee to IDBI, claim was filed the associate by GHCL before enterprise. This Liquidator. clearly indicates that the funds have been provided at the disposal of "the business" of the associate enterprise and consequently the repayment would be | when the associate enterprise would be able repay, on the basis of its improved financial

4 Right to There Is no Right of enforce payments indication of any guarantee Invocation enforcement of filed with payment by Liquidator of ROL, the assessee. UK Consequently, the funding veers more towards equity.

5 Participation The AE is AO/TPO has in management as already 100% accepted our view a result of advances subsidiary of the point. assessee. Therefore, this factor is neutral.

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6 Status of the Since the fund No funds provided advances in have been granted by assessee. IDBI relation to to make the directly provided regular corporate payment to the SBLCs to creditors . normal creditors of suppliers of ROL, UK the business. It is as working capital. clear that the status of; funds provided by. the assessee is subservient to the status of a creditor. Therefore, the nature of funding veers more towards equity.

7 Intent of the parties The absence of There is no any repayment date repayment date as by the associate no money was enterprise to the advanced by assessee clearly GHCL to Rosebys, indicate that the only guarantee Was intent of the given to IDBI. assessee was to provide funding to the associate enterprise, till its financial position is improved. Therefore, the intention also indicates that the nature of funding is more towards equity.

8 Ability of As already discussed ROL obtained the corporation in detail above, the credit from Burdale to obtain credit associated Bank, UK which from outside enterprise was not was expensive sources able to obtain loans and therefore the without any same was replaced support from by SBLCs provided the assessee. by IDBI to BOI, Consequently, the Manchester and nature of funding by vendors of the assessee were Rosebys, for more towards equity. which guarantee was given by GHCL to IDBI.

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9 Use to The funds provided No advance was which advances by the assessee given by were put were used by GHCL, only ther associate guarantee was given enterprise for to IDBI, who Issued working capital SBLCs for the purposes. On the working capital. The basis of this test it sanction letters of could be argued BOI; and IDBI that the nature is mention that such more towards loan, SBLCs are for however coupled working capital. with the financial distress of the AE and other factors, this factor does not remain a decisive factor.

10 Failure of debtor to The associate ROL went repay enterprise was not into liquidation due to able to make any global financial repayment to the crises in 2008 which lenders, which was was beyond the reason for control of anybody. devolvement of SBLCs and subsequently the entity had been referred to the administrator, it is clear that no repayment of any kind has been made by the AE. Thus, this factor veer more towards equity,

11 Risk involved As already Both the in making advances discussed above, bankers provided V the financial working capital position of the support to Rosebys associate enterprise after analyzing the was very weak prospects of when the funds business of Rosebys, were infused by which include the assessee. As a assessing of credit result the funds were risk. placed at the risk of the business and consequently on the basis of this factor the nature of funding veer more

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towards equitv.

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We have gone through the judicial pronouncement in the case of S.A. Builders Ltd. vs. CIT 288 ITR 1 wherein the Hon’ble Supreme Court discussed the issue of commercial expediency at page 23, 25, 29, 31 and 32 of the order reproduced as under:- “23. Thus in Atherton v. British Insulated & Helsby Cables Ltd. [1925] 10 TC 155, it was held by the House of Lords that in order to a claim a deduction, it is enough to show that the money is expended, not of necessity and with a view to direct and immediate benefit, but voluntarily and on grounds of commercial expediency and in order to indirectly to facilitate the carrying on the business. The above test in Atherion'scase, (supra) has been approved by this Court in several decisions e.g. Eastem Investments Ltd. v. CTT v. Chandulal Keshavlal & Co- [1960] 38 ITR MR. etc. ' 25. The expression "commercial expediency" is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure, if it was incurred on grounds of commercial expediency. 29. It has been repeatedly held by this Court that the expression "for the purpose of business" is wider in scope than the expression for purpose of earning profits" vide CIT v. Malayalam

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Plantations Ltd. [1964]-53 ITR.140 , CIT v. Birla Cotton Spg. & Wvg. Mill Ltd. [1971] 82I ITR 166 etc. 31. It is true that the borrowed amount in question was not utilized by the assessee in its own business, but had been advanced as interest free loan to its sister concern. However, in our opinion, that fact is not really relevant. What is relevant is whether the assessee advanced such amount to its sister concern as a measure of commercial expediency . 32. Learned counsel for the revenue relied on a Bombay High Court in Phaltan Sugar Works Ltd. v. CWT [1994] 208 ITR 989 in which it was held that deduction under section 36(1)(iii) can only be allowed on the interest if the assessee borrows capital for its own business. Hence, it was held that interest on the borrowed amount could not be allowed if such amount had been advanced to a subsidiary company of the assessee. With respect, we are of the opinion that the view taken by the Bombay High Court was not correct. The correct view in our opinion was whether the amount advanced to the subsidiary or associated company or any other party was advanced as a measure of commercial expediency. We are of the opinion that the view taken by the Tribunal in Phaltan Sugar Works Ltd. 's case (supra) that the interest, was deductible as the amount was advanced to the subsidiary company as a measure of commercial expediency is the correct view, and the view taken by the Bombay High Court which set aside the aforesaid decision is not correct.”

The Hon’ble Supreme Court in the case of CIT vs. Amalgamation (P) Ltd. 226 ITR 188 held that assessee company had incurred losses in carrying on its business which included furnishing guarantee to debt borrowed by its subsidiary company. It was further held that loss could be allowed in year in which it came to be ascertained. We have also gone through the decision of Hon’ble Supreme Court in the case of Essen (P.) Ltd. vs. CIT 65 ITR 625 wherein it is held that the loan advanced by the assessee to the managed company and the payment made by it under the terms of guarantee given to the company were in the course of assessee’s business and the claim for allowance of the loss sustained by the assessee was therefore admissible u/s. 10(2)(xi) of the Act, 1922. The Co-ordinate Bench of ITAT, Chennai in the case of ACIT vs. W.S. Industries India Ltd. 128 ITD 98 has held that giving corporate guarantee was not only one of the objects of the assessee company but the same was given for its subsidiary company and it was in the interest of the assessee company and for commercially expedient decision. We have also perused the other judicial pronouncements referred by the ld. counsel.

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It is demonstrated from the various submission made before the authority below and during the course of appellate proceedings before us that assessee company had acquired its subsidiary company Rosebys Operations Ltd. to expand its textile business operations globally based on the study carried out by KSA Techno Pak, renowned global consultant. It is clear from the comprehensive written submission from the assessee and the detailed findings of the ld. DRP as elaborated supra in this order that assessee company had provided guarantee against SBLC issued by IDBI bank to BOI Manchester and directly to vendors of Roseby for the working capital of Rosebys as a temporary measure to tide over the financial difficulties and further expand the business of the assessee company and same was on account of commercial reasons due to occurrence of financial global crisis. Because of such unforeseen global financial crisis the Rosebys Operations Ltd went into liquidation consequently the assessee company has suffered loss to the amount of Rs. 30,96,28381/-. In the light of the aforesaid facts and circumstances and findings of judicial decision, we consider no infirmity in the order of the ld. DRP holding that loss suffered on account of devolvement of guarantee as revenue loss for the assessee company. Therefore, ground of appeal of the Revenue from 5 to 6 stands dismissed.

ITA No. 82/Ahd/2015 filed by assessee A.Y. 2010-11 Ground No. 1 (Erred in confirming upward adjustment of Rs. 2,89,670/- on account of Arm’s length interest rate on loan to AE Colwell & Salmon) 21. As the facts and issue involved in ground of appeal no. 6 vide ITA No. 1042/Ahd/2014 Assessment Year 2009-10 are similar as in ITA No. 82/Ahd/2015 Assessment Year 2010-11 therefore after

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applying the decision adjudicated vide ITA No. 1042/Ahd/2014 as supra in this order, this ground of appeal of the assessee stands dismissed. Ground No. 2 (Erred in confirming upward adjustment of Rs. 3,09,27,000/- in respect of IT enabled services rendered to AE in cryptic manner)

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employees. To arrive at the correct profitability, expenses on account of un- utilized capacity of Rs. 174.58 lacs was not considered. On the other hand, ld. Departmental Representative has supported the order of ld. CIT(A).

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submission made before the Assessing Officer during the course of assessment proceedings and enclosed annexure 3 on the issue of capacity utilization adjustment. In the annexure -3, the assessee has given the detailed information from page no. 186 to 200 in respect of capacity utilization in the case of the assessee compared to the other comparable. After perusal of the finding of TPO, A.O. and CIT(A), it is observed that the detailed information furnished by the assessee has not been considered while rejecting the claim of the assessee of under utilization of capacity. In the light of the aforesaid facts and circumstances, we restore this issue of upward adjustment to the file of the A.O. for deciding afresh after excluding the two comparables as mentioned above and considering the capacity utilization of the employees and the profit margin after verification and examination of the details furnished by the assessee. Accordingly, this ground of appeal of the assessee is partly allowed for statistical purposes.

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2009-10 on identical issue and facts, this ground of appeal of the assessee is allowed. We direct the A.O./TPO to exclude these two comparables for deleting arms length price for the reasons given while adjudicating ground no. 1 of Revenue vide ITA No. 976/Ahd/2014 for A.Y. 2009-10 as supra in this order. Accordingly, these grounds of appeal of the assessee are partly allowed.

Ground No. 7 & 8:- 26. The TPO has held that assessee has not furnished documentary evidences to justify if there was really under utilization of capacity of its expenses. The ld. CIT(A) has held that that the profit margin of the assessee segment in which it has made export sale was not known. However, it is noticed that the assessee company has provided specific details which is also produced at page no. 44 of the ld. CIT(A) order. The same part of the detail in the form of the chart is reproduced as under:- Particulars Year Ended March 31, 2010 Export Sales Domestic Unutilized Total Sales CSU Others Sales / Operating Income Exports Services 301.26 47.04 348.30 Domestic Services 13.13 13.13 Other Income 30.71 3071 TOTAL 301.26 47.04 13.13 30.71 392.14 Personnel Expenses 124.04 22.72 38.92 127.04 312.73 Commission on Exports

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Lead List Data 0.17 0.17 Loss on Disposal of (2.98) (2.98) Asset Exchange Rate 7.49 (0.23) (23.62) (16.36) Fluctuation Other Operating and 102.36 18.75 32.12 104.84 258.08 Administrative Expenses TOTAL COST 233.90 41.24 71.22 205.28 551.64 OPERATING PROFIT 67.36 5.80 (59.09) (174.58) (159.50) BEFORE INTEREST Operating Profit / Total 28.80 14.07 (81.87) Cost Total Billed Hours 55784 10218.50 17504.35 Revenue rate in USD 11.37 9.14 per Hour

After perusal of the material on record, it is observed that the TPO/CIT(A) has not specifically considered these details while adjudicating this issue, therefore, we consider it appropriate to restore this issue to the file of TPO/Assessing Officer for deciding afresh after examination of the relevant details and supporting material to be produced by the assessee. Therefore, this ground of appeal of the assessee is allowed for statistical purposes. Ground No. 9 (Erred in directing to disallow interest & administrative expenses u/s. 14A r.w.r. 8D(iii) of Rs. 3,74,410/- though appellant on earning exempt of Rs. 2,93,606/- suo-moto disallowed Rs. 1,00,000/-)

27 During the course of assessment, the Assessing Officer made disallowance of interest and administrative expenses u/s. 14A r.w.r. 8D(3) of the act of Rs. 3,74,410/- which was sustained by the ld. CIT(A). During the course of appellate proceedings before us, it is brought to our notice that

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total exempt income earned by the assessee during the year under consideration was only to the extent of Rs. 2,93,606/- as against disallowance of expenditure made to the extent to Rs. 3,74,410/-. After taking into consideration the finding of the various decisions of the Tribunal on this issue, we restrict the disallowance to the extent of exempt income of Rs. 2,93,606/-. Accordingly, this ground of appeal of the assessee is partly allowed.

ITA No. 302/Ahd/2015 filed by revenue A.Y. 2010-11

Ground No. 1 (Erred in deleting disallowance of Rs. 63,47,445/- u/s. 14A r.w.r. 8D) 28. During the course of assessment, the Assessing Officer has made disallowance of interest and administrative expenses u/s. 14A r.w.r. 8D(3) of the act of Rs. 63, 47,445/-. The ld. CIT(A) stated that the assessee has worked out the disallowance according to the investment on which exempt income was determined at Rs. 4,74,410/-. Accoringly, the A.O. was directed to modify the addition after verfiation of calcualation. During the course of appellate proceedings before us, it is brought to our notice that total exempt income earned by the assessee during the year under consideration was only to the extent of Rs. 2,93,606/- therefore after taking into consideration the finding of the various decisions of the Tribunal on this issue, we restrict the disallowance to the extent of exempt income of Rs. 2,93,606/- and the Assessing Officer is directed to allow the sett off of muo motto disallowance if any already made by the assessee after verification. Accordingly, this ground of appeal of the assessee is partly allowed.

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Ground No. 2 (Erred in deleting disallowance of Rs. 1,40,60,93,531/- u/s. 37(1))

ITA No. 2625/Ahd/2015 filed by revenue & ITA No. 2279/Ahd/2015 filed by assessee A.Y. 2011-12

Ground No. 1 of revenue (Disallowance u/s. 14 r.w.s 8D) & Ground No. 7 of assessee ( Erred in directing to disallow interest & administrative expenses u/s. 14A rwr 8D(iii) of Rs. 22,10,085/- through appellant earning exempt income of Rs. 3.5 lakhs, suo-moto disallowed Rs. 1,00,000/-)

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controvert these undisputed facts considering a number of judicial pronouncements of the Co-ordinate Benches on this issue, we restrict the disallowance u/s. 14A r.w.r. 8D to the extent of exempt income of Rs. 3.55 lacs. Since the assessee has suo moto made disallowance of Rs. 1 lacs, therefore, we direct the Assessing Officer to making further disallowance of Rs. 2.55 lacs in the case of the assessee. Therefore, this ground of the assessee is partly allowed and ground of the revenue is dismissed.

Ground No. 2 (Disallowance of Rs. 184,75,10,600/- u/s. 37(1)

Ground No. 3 (Disallowance of Rs. 3,79,13,654/- u/s. 40(a)(ia) of the Act 32. During the course of assessment, the Assessing Officer noticed that assessee has made payment of foreign commission to non-residents amounting to Rs. 39,51,1251/- but no tax was deducted. On query, the assessee explained that the overseasbroker/commission agents were providing export order by search/enquiring export/import from their countries. It was submitted that commission does not accrue or arise or deemed to accrue or arise in India to such non-resident commission agents as they had rendered services outside India and commission was also paid to

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them outside India. In the absence of any activity being carried out in India by a non-resident commission agent, the commission does not accrue or arise in India. Therefore, such payments are not taxable in India. Accordingly, such payments do not require any deduction on tax or tax withholding. The Assessing Officer has not accepted the explanation of the assessee stating that assessee has not provided the identity and the evidences of services rendered by the foreign commission agent for which commission was paid by the assessee. Consequently, the Assessing Officer has disallowed the commission expenses paid to non-residents amounting to Rs. 3,95,11,251/- and added to the total income of the assessee.

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connection in India and the services were rendered outside India. It is clear from the finding of ld. CIT(A) that the commission agsents have not carried aout any activity in India. Non-residents commission agents were not having any permanent establishment in India. Therefore, commission paid to non-resident agents was not liable to tax under the provision of the act. In view of the above facts and detailed finding of ld. CIT(A), we do not find any merit in the appeal of the revenue and the same is dismissed.

ITA No. 2279/Ahd/2015 filed by assessee A.Y. 2011-12

Ground Nos. 1 and 3 to 6 (Confirming upward adjustment of Rs. 1,44,50,000/- in respect of I.T. enabled Services rendered AE in Criptic manner)

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Ground No. 8 (Confirming disallowance of Rs. 15,97,957/- in respect of commission paid to non-residents on exports sales)

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there was no documentary evidence in support of this claim, therefore, deduction claimed by the assessee in respect of payment of Rs,. 14,36,111/- was held to be not allowable. Further, the ld. CIT(A) has held that in respect of realization of Rs. 1,61,485/- from Hareram Natbarlal was nothing but a provision made by the assessee on 28th Feb, 2011 and the entry has subsequently been reversed in the next financial year as the assessee has received the full payment. However, the ld. CIT(A) has held that during this period an amount of Rs. 1,61,485/- was not deductable. During the course of appellate proceedings before us, the ld. counsel has submitted an amount of Rs 1,61,485/- was offered in the next year which was already taxed in the next year therefore it is incorrect to tax the same amount during this year also. It was also submitted that it was the short realization of sale and not commission. Regarding other entry of Rs. 14,36,111/-, the ld. counsel has submitted that it was bad debt which should be allowed after necessary verification. On the other hand, the ld. Departmental Representative has submitted that the submission of the ld. counsel of these issues is required verification. In the light of the above facts and circumstances, we restore these two issues for verification to the Assessing Officer. In case the amount of Rs. 1,61,485/- is pertained to short realization of sale which has been offered for tax in the next year then the same is not to be added to the total income of the assessee during the year under consideration. The Assessing Officer has to verify and give the treatment to this amount as directed above. In respect of other disallowance of Rs. 14,36,111/- after considering the submission of the assessee, we restore this issue to the file of Assessing Officer for deciding afresh after verification of the claim of bad debt.

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Therefore, this ground of appeal of the assessee is allowed for statistical purposes. ITA No. 1120/Ahd/2017 filed by revenue & CO 29/Ahd/2018 filed by assessee A.Y. 2012-13

Ground No. 1(Disallowance u/s. 14A r.w.r. 8Dof Rs. 4,69,448/- as against 39,80,621/- made by the Assessing Officer) & ground no. 1 of cross objection

Ground No. 2 (Disallowance of foreign commission expenses amounting to Rs.5,51,33,615/-)

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account of commission payable to overseas agents was deemed to accrue or arise in India and was accordingly taxable under the provisions of section 5(2)(b) r.w.s. 9(1)(i) of the Act. The ld. CIT(A) deleted the addition. The part of the decision of ld. CIT(A) is discussed as under:- “4.3. I have carefully considered the facts of the case, assessment order and submission of the appellant. The AO has disallowed the commission paid to foreign agents amounting to Rs.5,51,33,615/- by holding lhaf the income arising on account of commission payable to overseas agents was deemed to accrue or arise in India and was accordingly taxable under the Provisions of section 5 [2)[bJ read with section 9 (l)(i) of Incom Tax Act. it has further been observed by the AO that the appellant company had failed to comply with the Provisions of section 195 (2). He has also held, without prejudice to the main findings that, the appellant had also failed to prove the commissions paid to the agents were genuine and justified. The AO observed that the appellant has not proved the identity and the evidences of services rendered by the foreign commission agents for which commission was paid by the appellant. No copy of agreement or documentary evidences in support of commission payment was given by the assesses which could justify the reasonableness of the commission payment to the non resident as well as genuineness of the expenses incurred for the purpose of business. The AO observed the fact that the agents have rendered services abroad in the form of soliciting the orders and the commission is to be remitted to them abroad is wholly irrelevant for the purpose of determining the question of accrual and arise of income, since the income from commission payment to non - resident have arose in India and is taxable under the Act, in view of the specific provisions of section 5(2)(b) r.w.s. 9(l)(i) of . T. Act, 1961, the provisions of section 195 would therefore be applicable. 4.4. The appellant on the other hand, in its detailed written submission, has claimed that the Provisions of Section 5 (2)(b) read wifh section 9 (])(i) of Income Tax Act were not applicable in its case. The income has been earned abroad and. is therefo-e, not taxable in India. It has also given detailed evidences to prove that the commission paid was genuine. The appellant claimed that there was no PE of the foreign agents / non -residents in India, therefore, nc TDS was required to be deducted from such payments. The appellant claimed that it was engaged in the business of manufacturing of Soda Ash and textile products and export thereof. The details of the commission payment to the agents on export are as under:-

Manufacturing items Export Sale Commission (Rs.)

Soda Ash 82,58,95,71 3/- 18,13,852/-

Home Textile Made-Ups / Bed Sheet 4,43,77,29,733/- 5,33,19,763/-

Total 5,26,36,25,446/- 5,51,33,615/-

4.5. It was claimed that the goods were exported thiough brokers who basically were from UAE, Bangladesh, UK and USA etc. It is further claimed these overseas brokers were providing export orders by searching 7 inquiring export - import from countries spread over world wide along with other services like negotiating he rates, freight, conditions for payments, opening LCs of importers in foreign countries and informing the appellant and taking care of the deliveries of goods to the importers and follow up for final payments. 4.6. He also provided the relevant details to the AO during assessment proceedings through its letter dated 0270272016 & 1570272016 like name and address of the broker, name and country of buyers, items exported, bill quantity, export value in US $ and realization in INR with brokerage in US $ and brokerage in INR. Along with the aforesaid details, the appellant also provided to the AO, the broker wise payment evidences along with bank payment details realizing the export

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proceeds, company payment advice, Form No.lSCA and 15CB, credit note of overseas brokers, invoice for export by company with commission amount and copies of commission agreements and export contract furnished as evidences for justification of commission to overseas brokers. Thus, it was submitted that the payment of commission to overseas brokers was part of export of products and an important mediatory channel to book the export orders as well as to take care of realization of export proceeds. Thus, the commission payment was genuine and paid through banking channels on export orders procured. The same were made for the purpose of business in prudent way to increase export and increase customer base in foreign countries. 4.7. With regard to the provisions of section 9(1 )(i), it was submitted that the overseas brokers were not doing any business in India. They were merely providing export orders to facilitate appellant. Further, the overseas brokers did not have any business connection in India. It was further claimed that there is no income deemed to accrue or arise in India in view of the explanations to the provisions of section 9(l)(i) of the I. T. Act as the overseas brokers had 'endered services outside India and the commission was also paid to 'hem outside India. Hence, there was no obligation to deduct the tax from such commission payments as per the provisions of section 195 of the I. T. Act. 4.8. Thus, it has been submitted that the identity and genuineness of the overseas commission agents is proved with the evidences as briefly noted above and submitted to the AO in the assessment proceedings. 4.9. Having considered the facts and submissions, the issues which are to be examined and decided are as under:- 1. Whether the commission paid to foreign agents is taxable in India by virtue of the provisions of section 5 (2)(b) read with section 9 (l)(i) of Income Tax Act. 2. Whether the provisions of section 195(2) were applicable on the appellant and he should have deducted tax and in case of no deduction he should have obtained a no deduction certificate from the AO. And 3. Whether the commission paid was genuine and the services have been rendered. 4.10. Regarding the first issue r is noted from the evidences given by the appellant as well as noted by the AO in his order that the services have been rendered by the foreign agents outside India. The sales were booked by them in their country or for the country for which they have been appointed as commission agents. None of the activities soliciting the clients and procuring the orders has taken place in India. The goods were being delivered by the appellant company in the other country. The activities of procuring the paynent on behalf of the appellant company were also done abroad. The AO was therefore, incorrect to hold that the source of income lies in India as the sales have been made from India. The provisions of Income Tax Acf clearly provide fhat the tax would be deducted on the income which is taxable in India. The activity of earning the income is not the sale but soliciting fhe sales by commission agents. Though this activity is linked to the sales of the company but it cannot be said that the income has been derived.from sales which has been made from India. The income has been derived from the activity of soliciting the sales on behalf of the appellant company. The agents have carried out all the activity on the foreign soil and none of their activity is in India therefore, it cannot be said thct the income has accrued or arisen in India and the source of income was in India. There is no fact brought out by the AO in the order as well as observed by me during the course of appellate proceedings to indicate that the services have been rendered in India. 4.11. The judgment of honourable Supreme Court in the case of CIT vs. Toshoku Limited [125 ITR 525 (SC)] is important on the issue, whereby it has been held that commission earned by the non- resident for acting as the selling agent for the Indian exporter, wherein such non-resident was rendering services from outside India does not accrue in India. In the present case before me also, the foreign selling commission agents are resident of foreign country, from where the procurement service had been provided for which the commission has been paid, and therefore, the issue is directly and squarely covered by the Apex Court decision. 4.12. Regarding the observation of the AO that the income is deemed to accrue or arise in India by applying the provisions of section 9 (l)(i), it is seen that there is no fact on record to indicate that any of the agents had any permanent establishment in India. All the agents had their offices

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on the foreign soil and nothing on record that they had PE in India. Further the assessing officer has also not pointed out any such fact in its order which indicate that there was any such office of the overseas agents in India which attract the deeming provisions. Further the observation that the source of income was in India is also not proper as it has clearly been discussed in the preceding paragraphs that none of the services have been rendered in India and source of income cannot be said to be in India as the source of income i; the services rendered and not the sales. There is no business connection in India from which the income has been earned, there is no property through or from which the income has been earned. Therefore, the provisions of section 9 (l)(i) also cannot be applied. 4.13. Reliance is placed on the'judgement of honourable Supreme Court in the case of GE India Technology Centre Private Limited 327 ITR 456 and the judgement of honourable ITAT Mumbai in the case of our Ardesi B Cursetjee & Sons Ltd. 115TTJ 916. 4.14. Therefore, in view of the preceding discussion the AO was not justified to hold that the commission payable to the overseas agents was deemed to accrue or arise in India and is taxable under the Act in view of the specific provisions of sections 5 (2J(b) read with section 9 (l)[i) of Income Tax Act. 4.15. The last issue which is to be adjudicated is that whether the commission payment was genuine and the services were rendered. The AO has briefly dealt with the issue in para - 5 of his order. It has placed on record several documents whicn indicale that the agents have rendered services prior to the actual sales as well as subsequently also. It is further observed that the payments hcve been made through banking channel and are duly documented. The appellant has made commission payment to agents during the year and it has provided copies of various evidences. The appellant has given satisfactory evidences in respect of all commission payments, and therefore, considering the overall facts and circumstances the payment made to the agents is taken as genuine. Accordingly, in rny considered opinion the appellant has given satisfactory evidences regarding the services rendered by the agents and the genuineness of payment of commission. 4.16. The AO has also placed reliance on the decision of Hon'ble Authority of Advance Rulings in the case of SKF Boilers and Driers (P.) Ltd. (2012) 18 Taxmann 325 and Rajiv Malhotra (2006) 284 ITR 564 (Delhi). The judgements are not applicable to the present facts as there are several other decisions of Hon'ble ITAT, Mumbai in the cose of ACIT [Internationa! Taxation) Vs. Star Cruise India Travel Services Pvt. Ltd. [14 ITR (T) 282 (Mum)], CLSA Limited Vs. ITO (International Taxation) [56 SOT 254], which hold that such kind of commission is not taxable in India and accordingly no liability to deduct tax was there. Further the decision of honourable Supreme Court of India in the case of Hon'ble Supreme Court in the case of CIT vs. Toshoku Limited 125 ITR 525, still prevails as on date and is the law of the land as regards applicability of TDS provisions to commission paid to overseas/non-resident agents by Indian Exporters. 4.17. Further, reliance is placed on the following decisions / judgments:- Recently the Hon'ble Madras High Court in the case of C1T, Chennai Vs. Farida Leather Company in Tax Appeal No. 484 ot 2015 dated 20/01/2QU has held that the commission payment by the assessee to non - resident agents for services rendered by them outside India in procuring export orders for assessee would not partake character of fees for technical services as expalind in context of section 9(1)(vii) and therefore, provisions of section 195 would not apply. ACIT Vs.Modern Insulators Ltd. [56 DTR 362 (Jaipur Trib.)] Ishikawajama - Harima Heavy Industries Ltd. Vs. Director of Income Tax [207 CTR 361] Dy. Commissioner of Income Tax Vs. Divi's Laboratories Ltd. [(201 1) 60 DTR (Hyd) (Trib) 210] ITO, International Taxation, Chennai Vs. Prasad Productoin Ltd. [(2010) 125 ITD 263 Chennai) (SB) ACIT, Circle - 16(3)(Hyderabad-Trib) vs. Priyadarshini Spinning Mills (P.) Ltd. (2012) ITA No. 1776 (2011) ACIT (International Taxation) vs. Star Cruise India Travel Services Pvt. Ltd. [14 ITR (T) 282 (Mum.)

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CLSA Limited vs. ITO (International Taxation) [56 SOT 254 (Mum.) ACIT Vs. Moderal Insulators Ltd. [56 DTR 362 (ITAT, Jaipur)] Ishikawajama - Harima Heavy Industries Ltd. Vs. Director of Income Tax [207 CTR 361] DCIT Vs. Eon Technology Pvt. Ltd. [46 SOT 323 (Delhi ITAT) Sukani Enterprises Vs. ACIT [ITA No. 1 330/Mum/201 1 ] (ITAT, Mumbai) ITO Vs. Pipavav Shipyard Limited [(2014) 42 Taxmann.com 159] ACIT 17(2), Mumbai Vs. Vilas N. Tamhankar (2015) [55 Taxmann.com 413] CIT V. Vinayak Exports 82 CCH 0032 (Guj) (2012) CIT Vs. Fluldtherm Technology (P.) Ltd. (2015) 57 taxmann.com 87 (Madras) CIT Vs. Orient Express (2015) 56 taxmann.com 331 Madras) Asst. CIT v. India Shoes Exports (P.) Ltd. (2015) 57 taxmann.com 303 (Chennai - Trib) Indo Industries Ltd. v. ITO (2015) 53 1axmann.com 458 Mumbai -Trib.) Khimji Visram & Sons v. Addl. CIT (2014) 52 taxmann.com 485 (ITAT, Mumbai) Commissioner of Income-tax, Chennai v. Faizan Shoes (P.) Ltd. [2014] 48 Taxman.com 48 (Mad.) Assistant Commissioner of Income-tax, Co. Circle - 1(3) v. Comex Exports (P) Ltd. [201 4] 45 taxmann.com 406 (Chennai -Trib.) Assistant Commissioner of Income-tax, Company Circle 1 1 1(2), Chennai v. T. Abdul Wahid Tanneries (P.) Ltd. 85 [2014] 47 taxmann.com 133 (Chennai Tri.) Ajit Impex vs. DC1T 46 taxmann.com 163 [2014] Pankaj A. Shah vs. ITO, Ward - 1, Baroda [47 taxmann.com 205(2014)1 Zanav Home Collection Vs. JCIT, Range - 10, Bangalore [2015] 55 Taxman.com 200 (Bangalore Trib.) ACIT Vs. Karishma Global Minerals Pvt.Ltd. [2015] 56 Taxman.com 265 (Panaji Trib.) ACIT Vs. Shiva Texyarn Ltd. [2015] 53 Taxman.com 495 (Chennai Trib.) ITO, Wd. 2(1), Ahmedabad Vs. Excel Chemicals (1) Ltd. in ITA No. 5/Ahd/16 for A. Y. 2012-13 dated 29/07/2016 4.18. In view of the preceding discussions and the submissions of the appelant, besides the judgments / decisions of various courts, it is clear that the appellant was not liable to deduct tax on the commission paid to foreign agents. On going through the material on record, there were the uncontroverted facts that the agents were non - residents and they were acting outside India and providing the services in lieu of commission from abroad only, the agents did not not have any permanent establishment for business connection or business place in India. Thus, in absence of any activity being caried out in India by a non - resident commission agent, the commission does not accrue or arise in India, and hence, not taxable in India. It is worth here to mention that on the similar facts, the CIT(A] - 2, Ahmedabad in appellant's own case for A. Y. 201 1-12 in Appeal No.CIT[A)-2/507/DClT, Cir. 2(1](1 J/2014-15 dated 11/06/2015 has deleted the disallowance of the commission payments to foreign agents. Even through oversight the short relation from export easterners amounting to Rs. 57,43,530/- has been debited under the head of foreign commission expenses in place of reducing such claims from the total export value. Thus, the claim of Rs.57,43,53C/- was not the foreign export commission payments on which no IDS was required to be made. In view of the above, the disallowance of Rs. 5,51 ,33,615/- under section 40(a)(ia) made by the AO is directed to be deleted.”

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As the facts and issue involved in ground of appeal no. 3 vide ITA No. 2625/Ahd/2015 Assessment Year 2011-12 are similar as in ITA No. 1120/Ahd/2015 Assessment Year 2012-13 therefore after applying the decision adjudicated vide ITA No. 2625/Ahd/2015 as supra in this order, this ground of appeal of the revenue stands dismissed.

Ground No. 3 (Erred in allowing long term capital loss as revenue loss claimed during the course of the appellate proceedings) 41. During the course of assessment, the Assessing Officer noticed that assessee has claimed long term capital loss on account of loss in shares of subsidiary companies of Rs. 1,57,97,38,428/-. In the assessment proceedings, the assessee company has revised its claim relating to investment in wholly owned subsidiary company Indian Britain BV of Rs. 99,89,96,245/- and requested that loss on account of capital may be granted as business loss. In this regard, a detailed submission on business strategy and commercial expediency was filed vide letter dated 15th Feb, 2016 before the Assessing Officer. In its submission, the assessee company has explained that the investment in the wholly owned subsidiary Indian Britain BV was for the purpose of business and loss on account of investment in shares was purely for the purpose of business and to achieve business objectives with commercial expediency and stated that loss arising from investment in shares was allowable as business loss. However, the Assessing Officer has not accepted the submission of the assessee stating that assessee company has not filed revised return for such claim as per

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provisions of section 139(5) of the Act. Since, there was no revised return filed the claim of assessee company for capital loss as business loss was not entertained by the Assessing Officer after placing reliance on the decision of Hon’ble Supreme Court in the case of Goetz (India) Ltd. vs. CIT 157 taxman 1 (SC) wherein it is held that there is no provision under the Income Tax Act to make the amendment in the return of income by merely on the basis of a letter at the assessment stage without revising the return. Therefore, the Assessing Officer has treated the investment as long term loss. Subsequently, the assessee has preferred appeal before the ld. CIT(A). The ld. CIT(A) has adjudicated the issue in favour of the assessee. The relevant part of the decision of CIT(A) is reproduced as under:- “Decision: 5.3. I hove carefully considered the facts of the case, assessment order and submission of the appellant. It is noticed that, the appellant company has invested in share capital of its subsidiary company namely; Indian Britain BV consisting 221586 share @ Euro 100 each in A Y 2006-07. During the year under consideration due to heavy losses, the capital reduction / redemption was carried out by the subsidiary i.e. IBBV. Accordingly, Indian Britain BV redeemed/reduced 185644 shares out of the issued share capital of 221586 shares. Due to capital reduction / redemption in Indian Britain BV, the appellant has incurred losses of Rs. 99.89 Cr. on investment in the equity shares of Indian Britain BV. On this capital reduction/redemption carried out by Indian Britain BV, the appellant had received 0.10 Euro per share from Indian Britain BV. Total amount received from Indian Britain BV was at 18564.40 Euro (185644 shares X 0.1) i.e. on conversion the amount received in INR was at Rs. 9,99,996/- 18564.40 @ 53.866338). Therefore, net loss incurred by the appellant on capital reduction of investment in Indian Britain BV was at Rs. 99,89,96,245/- (Rs. 99,99,96,245/- less Rs. 9,99,996/-) which is claimed as business loss. 5.4. It has been submitted by the appellant that the entire investment in wholly owned subsidiary - Indian Britain BV was made by the appellant for acquiring global units of soda ash manufacturing and textile business / chains as a measure of commercial expediency to further its business objectives and were primarily related to the business operations in India of the appellant i.e. for business purposes only. The appellant through this wholly owned subsidiary - Indian Britain BV formed further step-down subsidiaries in Netherlands and USA to expand its business of soda ash and home textile globally. Through such step-down subsidiaries, the appellant acquired SC Bega Upsom (renamed as GHCL Upsom Ltd) at Romania in soda ash manufacturing sec'or and similarly, the appellant acquired Rosebys UK Ltd in United Kingdom qnd Dan River Inc in USA to expand ils home textile business, as the company is having plants for textile manufacturing at Madurai and Vapi, Investment in subsidiaries, step-down subsidiaries and acquisition of retail chains was only to expand business globally. After such acquisitions, the sales and exports shoot up substantially and international brands started taking GHCL Textile products even after reduction in shares / liquidation of subsidiary - Indian Britain BV. Therefore, the losses due to reduction in share capital of Indian Britain BV, the wholly owned subsidiary company of Rs.

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99,89,96,245/- was business loss as the investment was made for the purpose of business and was commercially expedient. 5.5. In the assessment proceedings, the appellant through the letter dated 15/02/201 6 revised its claim of loss on investment in shares of wholly owned subsidiary company Indian Britain BV of Rs. 99,89,96,245/-, which was claimed in return of income filed as capital loss and requested that this loss may kindly be allowed as business loss. In this letter, appellant explained its business strategies and business expansions in global world for making investment in subsidiary company in Netherlands from commercial prospective. As no revised return was filed by the appellant, the claim of capital loss as business loss was not entertained by the AO relying on the decision of Apex Court in the case of Goetze (India) Ltd. vs. CIT Reported in 157 taxman 1 ;$C) and rejected request of the appellant to treat capital loss on shares / investments as business loss. For ready reference, the relevant portion of the AO's observation made in the assessment order is reproduced as under:- "6.3 I have gone through llie contention of the assessee company in llic matter of claim of loss in the investment as business loss, but do not agree as the assessee company has not filed revised return for such claim as per provisions of section 139(5) of the I.T. Act, 1961. As there is no revised return, the claim of assessee company for capital loss as business loss could not be entertained. The reliance is placed on the decision of Apex Court in the case of Goetz (India) Ltd. vs. CIT Reported in 157 taxman 1 (SC). In which it is held that there is no provision under llie Income tax Act lo make the amendment in the return of income by merely on the basis of a letter at the assessment stage without revising the return. The assessee company originally treated such loss as capital loss; therefore, the same is considered as capital loss for the purpose of assessment of the year under consideration. In view of the above, the request of assessee company is rejected and the loss on shares / investments is treated as long term capital loss." 5.6. As discussed above, the AO did not accept the contention of the appellant for the reason that the appellant company has not filed the revised return of income for such claim as per the provisions of section 139(5) of the I. T. Act and therefore, such loss could not be entertained by following the judgment of Hon'ble Court in the case of Goetze India Ltd. and thereafter, the same was not considered as business loss while completing the assessment. The AO did not made any observaiions on merits with regard to disallowability of such loss as business loss in the assessment order. 5.7. During the course of appellate proceedings, through the aforesaid ground, the appellant has objected the action of the AO staling that the loss claimed on account of investment in shares of the wholly owned subsidiary company was a business loss and the same could have been allowed although the revised return of income u/s. 139(5) of the I. T. Act has not been filed but the claim was made through the letter in the assessment proceedings before the AO. 5.8. Having considered the facts and submissions and also various judgments of Hon'ble Courts, whereby it has been held that even where the facts are necessary to examine such a claim were not placed in the original return of income or through the revised return of income but by way of written submissions in the assessment proceedings before the A.O., there would be no impediment in the CIT(A) entertaining such a claim. On the contrary, the case of the appellant was on a better footing for the reason that all the facts were on record before the A.O. In this regard, the binding decisions / judgments and the Circular of the CBDT are relevant to be considered in such issues. Some of them are briefly noted as under. 5.9. In the circular of CBDT Circular No. 1 4 (XL-35) dated 11 April 1955, it has been observed that the AO being the taxing authority ought to have exercised his powers, in doing so he must act in a fair manner and his judgments may not be in a partition manner. Being a quasi judicial authority, the AO is bound to determine the correct tax payable by the assessee. In arriving at such correct tax, the AO is bound to allow the deductions and exemptions available to the assessee in accordance with law. The CBDT in its circula- (supra) has clearly made out that the department is not supposed to take advantage of any mistake committed by the assessee or of ignorance of the assessee regarding provision of law and that the department is duty bound to even assist the assessee so as to make him aware of the provisions which may be beneficial to him.

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In view of the aforesaid circular, the A.O. ought to have taken the considered view on the issue before him when the judgment of jurisdictional High Court and other courts have been brought to his notice by the appellant in the assessment proceedings. 5.10. The Hon'ble Gujarai High Court in the case of S.R. Koshti Vs. CIT 1276 ITR 165] relying upon various judgements have held that if an assessee under a mistake, misconception or on not being properly instructed is over assessed, the authorities under the Act, are required to assist him and ensured that only legitimate taxes due are collected. Further the Hon'ble Gujarat High Court in the case of CIT Vs. Mitesh Impex Tax Appeal Nos. 2560 to 2563, 2567 to 2570 and 2602 & 2607 of 2009 - April 2, 2014 have allowed the grant of claim of deduction u/s.80IB or 80HHC to the appellant although such claims were made first time before the CIT(A) by the appellant, which was not claimed before the A.O. The Hon'ble Bombay High Court in the case of CIT Vs. Pruthvi Brokers and Share Holders [2012] 23 Taxmann.com 23, has held that an assessee is entitled to raise before appellate authorities additional grounds in terms of additional claims not made in returns filed by it. The Hon'ble ITAT Kolkata in the case of Kanoi Industries Pvt. Ltd. Vs. DCIT [100 ITD 462 (KOL)] has held that the purpose of assessment proceedings is to assess the tax liability/ income of the assessee correctly in accordance with law and if the assessee is entitled to certain relief/deduction or benefits the assessee should not be derived or deprived of it even if the claim periaining to the same is made for the first time before the Tribunal during pendency of appeal before it. In the case of Thomas Kurian Vs. ACIT [106 ITD 158 (Coch.)], the Hon'ble ITAT Cochin bench hcve granted the deduction u/s.80HHC for the first Time before the first appellate authority claimed which the appellant has omitted to make in its return of income. Even the Hon'ble ITAT, Delhi in the case of Xerox India Ltd., New Delhi Vs. assessee in 1TA No. 1590/DEL/2010], has observed thai an officer must not take the advantage of the ignorance of the assessee. The Hon'ble Gujarat High Court in the case of CIT Vs. Milton Laminates Ltd. (2013) 37 Taxmann.com 249 have held that while giving effect to order of CIT(A) A.O con compute income lower than that returned. The Hon'ble Delhi High Court in the case of CIT Vs. Jai Parabolic Springs Limited (2008) 306 ITR 42 has also held that the decision of Honourable Court in the case of Goetze India Ltd. was limited to the power of the AO not to entertain claim for deduction, otherwise then by revised return and did not impinge on the power of the Tribunal. The Honourable Supreme Court in the cose of National Thermal Power Company Ltd. Vs. CIT (1999) 229 ITR 383 has observed that it was open to the assessee to raise 'he points of law even before the appellate tribunal. 5.11. Similarly, the Honourable Ahmedabad Tribunal in the case of DCIT Vs. Zydus Wellness Limited (2016) 76 taxmann.com 328 rws held as under:- "36. Further wo also observe that the main reason for denial of deduction by Id. Assessing Officer was that assessee has not filed revised return of income to make rightful claim. Ld. AR took us through the judgment of Hon'ble Bomoay High Court in fhe case of Pruthvi Brokers and Shareholders (supra) wherein it has been categorically held that Assessing Officer is bound to entenain righlful claim of deduction made otherwise than by filing revised return. We find it pertinent to observe the ralio of the judgmenl of Hon'ble Bombay High Court in Ihe case of Pruthvi Brokers and Shareholders (supra)...., 37. Respectfully following the judgment of Hon'ble Apex Court in the case of Smifs Securities Ltd. (supra), and the judgment of Hon'ble Bombay High Court in the case of Pruthvi Brokers and Shareholders (supra) we are of the view that Id. CIT(A) has rightly allowed the justifiable 8, correct claim of depreciation on 'goodwill1 made by the assessee through revised computation of income without filing revised return of income during the course of assessment proceedings. Therefore, no interference is called for in the order of Id. CIT(A) on this issue. This ground of Revenue is dismissed."

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Thus, following the judicial pronouncements, the A.O. ought to have computed the income consiaering the claim made through letter even though no revised return of income was filed by the appellant. 5.12. Similar views have also been taken'by the Hon'ble ITAT Indore in the cose of Smt. Subhadra Devi Gupta Vs. ACWT whereby it has been held that in view of the various decisions and circulars of Board it can safely be said that the department is not permitted to ignore the due claim of the assessee and further is not expected to take advantage of the ignorance of the assessee and if any benefit is available to the assessee in accordance to the law that is expected to be extended to the assessee by the A.O. 5.13. Considering the aforesad judgements and circular, as per the legal position, the CIT(A) and ITAT have power to allow deduction of expenditure / claim to appellant which it was otherwise entitled even though such claim was not rrade through revised return of income. Even, the appellant, if entitled to a particular claim which it remained to be claimed in the return of income may claim during the appellate proceedings. Thus the decision in the case of Goetze Indi Ltd. does not restrict the appellant to make such claim in the appellate proceedings. The A.O. ought to have dealt the issue under consideration on merits which he wrongly chosen not to do so, more so when the appellant has given the written submissions, explaining the reasons and citing the judgements for acceptance of its claim. Thus, the A.O.'s action for non consideration of the claim in the assessment proceedings on merits is found not correct in view of the judicial propositions of the Hon'ble Courts and circular cited above. Therefore, the issue under consideration on merits is decided as under. 5.14. The brief background of the business of the appellant company is as under- 1. GHCL Limited ("GHCL") was in incorporated in 1983 and started its Soda Ash Manufacturing in Gujarat in 1988. 2. Became one of the largest Soda Ash Producers of the Country and attained position of Pre- eminence in Soda Ash Industry by year 2000. 3. Entered in Textile Business in 2001 by acquiring and merging a sick spinning mill "Sree Meenakshi Mills" based at Madurai in the Stale of Tamil Nadu. GHCL turned around this unit by downsizing labour cost, upgrading technology and modernization and made it profitable in a short span of time. 4. Total revenue of Soda Ash and Textile segment of GHCL in FY'2003-04 and FY'2004-05 as under; Rs. In crore

Revenue F.Y. 2003-04 FY 2004-05

Soda Ash & Inorganic 376 431

Textile 86 94

Others 8 8

Total 470 533

I.T.A Nos. 976/Ahd/2014 & 10 others Page No 73 Dy. CIT vs. GHCL Ltd. & 10 others

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Ash manufacturing in Romania and competitive advantage in East European region. The acquisition had several commercial advantages for GHCL India some of which were as follows: i. With global footprint, GHCL could offer fixed rate contracts to its global customers like P&G, Saint Gobain, Unilever, etc who required soda ash for detergents and glass and provide them supply in any part of the world. ii. Further, it also gave GHCL India the opportunity to study the operational processes for manufacture and waste disposal used at GHCL Upsom and implement the same in its own plant. iii. GHCL India could also import soda ash from GHCL Upsom to cater to the local growing demand. In fact, in F.Y. 2006-07, GHCL India imported soda ash worth Rs. 9.09 Cr and sodium bicarb of Rs,0.65 Cr from GHCL Upsom c) GHCL Upsom was located about 400 KM from Capital City of Bucharest with a capacity of 2.25 Lac Per Annum d) The plant was spread over 80 hectares with a market shore of 25% of Domestic Market, e) The acquisition was completed after Financial, Legal and Environment due diligence conducted by Ernst & Young, Musat & Asociafii, Pricewater House Coopers respectively. 3. Home-Textiles Business Expansion: Vapi Project and Acquisition in USA and UK. a) After lurning around and stabilizing Texiile Spinning business in 2004, GHCL engaged KSA Technopak, a renowned consultant, who advised GHCL to expand its textile business by entering in Home Textile Segment both in India and Overseas. b) Objective of Textile expansion was to be present in the entire textile value chain right from "Spinning to Retail", which included spinning, weaving, processing, Institutional Sales (B2B) and Retail Chain. c) To fulfil the objective, at first stage, GHCL set-up a state of art Home Textile plant comprising of weaving, processing and mode up- facility at Vapi, Gujarat al a cost of Rs.220 Crores which was commissioned in March 2006. d) Subsequently GHCL carried out acquisitions of Home Textile business in USA and Retail Chain in UK which were in the line of expansion after setting-up ot Vapi Home Tex.tile Plant, so that from India products can be lined in USA and UK as the India become processing nub of home furnishing textile items. e) In Home Textile Segment, USA is the largest market with almost 40% market share with next being Europe with almost 30% market share. f) The objective of the acquisition was to capture and expand Home Textile market in USA, UK and European Region. g) Had we not setup VAPI Home Textile Plant, there was no need to acquire Dan River Inc in USA and Rosebys Operations Limited (ROL] in UK. h) PAN_River Inc (DR) USA Acquisition • Dan River was third largest US Home Textile Manufacturer with over 125 years design and development experience. • Was headquartered in Danville, Virgino. Strong B2B relationship 100 Retailers like Wall-Mart, K-Mart, Bed Bath and Beyond and J C Penny etc, Revenue - US$250 Million Financial and Legal Due Diligence done by E&Y and Stockle Greene LLP • Acquisition completed in Jan'2006 Strong Product alignment with GHCL's Home Textile Vapi Division Post acquisition, GHCL Vapi unit India made sales of around Rs.33 Crore and Rs.78 Crore to Dan River in FY'2006-07 and FY'2007-08. i) Rosebys Operations Limited. UK_(RQ_L) Acquisition ROL was one of the largest Home Textile Retailers in UK with 325 Retail outlets. • Headquartered in Manchester's UK Revenue - US$250 Million • Retail space around 7,70,000 sq.ft.

I.T.A Nos. 976/Ahd/2014 & 10 others Page No 75 Dy. CIT vs. GHCL Ltd. & 10 others

• ROL also had a highly automated distribution and warehousing f acility well connected by Rail and convenient located for Imports. • The business was acquired from Lloyds TSB Development Capital Limited wherein the transaction was run over a period of two men Ins during which Grant Thornton, Delhi and Beachcroft LLP, UK were engaged to cairyout financial and legal due diligences respectively and Beachcroft and Adelshaw Goddard were the Attorneys to conclude the transactions far both the parties. Acquisition was completed in July'2006. The acquisition was done with a well crofted strategy as the product profile of Rosebys could be synergized with Vapi Plant as about 59% of the revenue was contributed from bedding / curtain products which were largely sourced from UK and UK based suppliers till then. At the time accuisition, DAN River Inc., USA and Rosebys Operations Limited (ROL), UK were not making profits and our long term plan wa; to make them profitable by restructuring their product souring and aligning it with Vapi. The acquisitions were conducting under "Long Term Business . Growth Strategy" and it is well proven that it normally takes around 3- 4 years to stabilize and turnaround businesses. The experience frcm the aforesaid acquisitions proved extremely helpful for Indian Textile business which is evident from the fact that the Revenue of the textile segment increased from mere Rs.90Crs. in 2003-04 to Rs.900 Crores in 2012-13: Post acquisition revenue of Soda Ash and Textile GHCL India Rs. In Crs. FY "TV FY FY FY FY FY Reven 2006- 2007- 2008- 2009- 2010- 2011- 2012- ue

07 08 09 10 11 12 13

Soda 708 653 857 831 927 1,148 1216 Ash / Inorg anic

Home

Textil 363 417 383 383 571 749 909 es

Total 1,071 1,071 1240 1214 1498 1,897 2,125

I.T.A Nos. 976/Ahd/2014 & 10 others Page No 76 Dy. CIT vs. GHCL Ltd. & 10 others

liabilities, and thus the acquisitions were made as per the objects of the appellant company. For ready reference the objects of the appellant company are noted as under:- "32. To acquire anci undertake the whole of any part of the business property and liabilities of any person or company carrying on or proposing to carry 01 any business which the company is authorize fo carry on or possessed of property suitable for the purpose of this company, or which can be carried on in conjunction therewith or which is capable of being so conducted as to directly or indirectly benefit the company." 33. To underwrite, acquire, take up and hold shares, stocks, debentures, debenture stocks, bonds, obligations and securities issued or guaranteed by any company constituted or carrying on business in India or any foreign country in connection with the business which the company is authorize to carry on and to subscribe for the same, either conditionally or otherwise, and to guarantee the subscription thereof and to exercise and enforce all rights and powers conferred by or incidental to the ownership thereof, 34. To establish or promote 01 concur in establishing or promoting any company or companies in India or anywhere else in I he world for the purpose of acquiring all or any of the properties rights and liabilities of the company or for any other purpose which may seen directly or indirectly ca culated to benefit the company and to place or guarantee the placing of, underwrite, subscribe for 01 otherwise, acquire all or any part of the shares, debentures or other securities of any such other company. 57, To carry on whether in India or else in the world any business or branch of the business which the company is authorized to carry on by means, of or through the agency or any subsidiary company or companies and to enter into any agreement with such subsidiary company for sharing the profits and bearing the losses of any business or branch so carried on, or for financing any such subsidiary company or guarantying its liabilities or to make any other arrangement which may seen desirable with reference to any business or branch so carried on including powei al any time and either temporarily or permanently to close any such brarch or business. [Adopted under Main objects of the company vide Resolution No. 6 passed at the 11th Annual General Meeting of the company held on 27-09-1994J. 57. The appellant submitted that the initiation of process for acquiring chain of business / plant in foreign countries through subsidiaries, step-down subsidiaries started from September 2005, the appellant identified soda-ash plants in Romania for acquisition and home textile business in USA for such acquisition the appellant issued 1% convertible bonds (FCCB) of USD 78.20 Mn in September 2005, which were listed in Singapore out of such funds USD 26 Mn were invested in shares of 100% subsidiary company Indian Britain BV for acquisitions related to Soda ash and textile businesses in Romania, USA and UK and USD 54.20 Mn were invested as loan for acquisitions. Such funds were infused in Indian Britain BV (WOS), which were further infused in step-down subsidiaries of IBBV for acquiring soda ash business and home textile business. Summary of investment is as under: GHCL LIMITED

Year Source USD ~ Application [_usp____

Own 80,224,832 Investment In Indian Britain BV 26,024,832 Funds (FCCB)

2006-07 Loan given to Indian Britain BV 54,200,000

TOTAL 80224,832 TOTAL 80,224,832

INDIAN BRITAIN BV, NETHERLANDS - SUBSIDIARY

I.T.A Nos. 976/Ahd/2014 & 10 others Page No 77 Dy. CIT vs. GHCL Ltd. & 10 others

Year Source LUSD_____ Application USD

2006-07 Capital 26,024,832^ Investment in Indian England 9,803 from GHCL NV

Loan from 54,200,000 Loan given to Indian England 30,012,900 GHCL NV

Investment in Indian Wales NV 76,789

Loan given to Indian Wales NV 5,200,000

Investment in GHCL INC. 5,000

Loan given to GHCL INC. 42,222,065

Used for Assets/Expenses 2,698,275

TOTAL 80,224, 832 TOTAL 80,224,832

INDIAN IGLAND NV - STEP-DOWN SUBSIDIARY SC GHCL Upsom Romania - Soda Ash Et\ Manufacturing Plants) (To^acquii Year

Source USD Application USD

2006-07 Capital from 9,803 Investment in SC GHCL Upsom 23,355,972 Indian Britain BV SA

Loan from 30,012,900 Loan given to GHCL Upsom SA 1 ,200,000 Indian Britain BV

Used for Assets/Expenses 5,466,731

TOTAL 30,022,703 TOTAL 30,022,703

GHCL . USA - STEP-DOWN SUBSIDIARY e DAN River Inc. USA - Textile Unit) INC (To acquit Year

Source USD Application USD

2006-07 Capital from 5,000 Investment in Dan River inc. 18,380,759 Indian Britain BV

Loan from 42,222,065 Loan to Dan river inc. 18,700,236 Indian Britain BV

I.T.A Nos. 976/Ahd/2014 & 10 others Page No 78 Dy. CIT vs. GHCL Ltd. & 10 others

Used for 5,146,070 Investment/Assets/Expenses

TOTAL 42,227,065 TOTAL 42,227,065 j

INDIAN WALES NV - STEP-DOWN SUBSIDIARY (To acquire Rosebys Ltd, UK - Textile Chain)

Year Source USD Application USD

2006-07 Capital from 76,789 Investment in Rosebys 20,808,439 Indian Britain BV

Loan from 5,200,000 Loan to Rosebys 25,162,553 Indian Britain BV

Loan from Exim 39,600,000 Used for Assets/Expenses 97,149 Bank

Interest and 1,191,352 Other Income

TOTAL 46,068,141 TOTAL 46,068,141

5.18. The appellant also relied upon the resolutions related to acquisition and investments in Soda-ash olant SG Bega Upsom SA in Romania, Textile business of Dan River Inc USA and Home textile chain of Rosebys UK through subsidiary Indian Britain BV and step-down subsidiaries of IBBV. The brief of the above strategical acquisitions as submitted by the appellant is noted as under:- a] In board meeting on 01-09-2005, the investment up lo USD 100 Mn for acquisition of soda ash plants at Romania was approved. The proposal involves acquiring two units having current production of 4,30 lakh tones in Romania - the vintage of 1 plant being 1953 and the other 1962. The board was informed that crilical raw materials like salt / limestone / anthracite are available in plenty from nearby supply sources and one unit has captive steam / power generated by gas and other unit buys steam / power from local utility company and both plants have approximately 1000 employees each with cordial labour relationship. The board was further informed that in order to turnout of both the plants following steps are required to bo taken: > Modernization /revamping of plant thereby reduction of cost of production. > Scope of change of market mix to increase sale of ED by load rather than export by sea route to increase realization, > Long term tie up with external parties for supply of raw materials. y Reduction of labour / overhead cost. The board was informed that estimated cost of acquisition of both !he plants i.e. majority stake in both the plants, cost of debt to be taken over and indicated investments [over 2 years] would not exceed to USD lOOMn, b) In board meeting on 01-09-2005, the investment up to USD 60 Mn for strategic acquisition in Home textile business in USA was approved. The proposal involves strategic acquisition business in USA in the line with the overall marketing strategy for the home textile products at Vapi. The board was informed that the target entity is one of the third largest bedding product manufacturer in USA. The home fashion revenue of the target entity is exceeding USD 300 Mn annually with the advantage of huge market presence and distribution networ< with 4 warehousing facility in different locations in USA. The entry has large customers base including most renowned retailers,

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specialty stores, discount stores and catalogue stores like Wal-Mart, K-Mart, JC Penny, Bed, Balh and Beyond and Linen and Things. The board was informed that the target entity is now transitioning its home fashions from existing domestic manufacturing base in USA to an outsourced mode and possibilities of outsourcing mere thon 80% products. The board was informed that the proposed strategic acquisition would bring following benefit to the company: > Ready market of over USD 300 Mn, propelling company to be one of the major international home textile players. > Immediate access to major retailers and specialty stores, absolute synergy with Vapi Manufacturing Facility, which can immediately cater to available market. > Strong and diversified portfolio of licensed brands of title entity to provide study revenue and profitability. > Large production facility of target entity can be relocated to India at a much cheaper cost. > Production facility in India with reduced overhands and reduced cost of production to increase margins and consequently profitability. The board was further informed that the negotiation for purchase of majority stake approximately 60% against indicative equity value of USD 60 Mn is in progress. In board meeting on 15-10-2005, the board was informed about the status of acquisition of soda ash plant in Romania and home textile business in USA was informed to the board. d) In board meeting on 19-11-2005, acquisition of business in Romania and USA and investment in wholly owned subsidiary in Netherland approved. > Acquisition of Bega Upsom SA in Romania with investment of US $62 Mn approved. The acquisition of shares of Bega Upsom SA will be through the wholly owned subsidiary (WOS)/Step- down Subsidiary, Registered in Netherlands. > Acquisition of Dan River Inc USA with investment of US $42 Mn approved. The acquis'tion of shares will be through the wholly owned subsidiary (WOS)/Step-down Subsidiary, Registered in Netherlands. > In this board meeting, consent accorded to make investment in wholly owned subsidiary i.e Valdralona Investments BV [name may be changed to Indian Brhain BV) registered in Netherland, not exceeding to USD 42 Mn out of tne proceeds of the foreign currency convertible bonds [FCCBs) currenty lying with Deutsche Bank Singapore. e) In board meeting on 19-01-2006, the board was informed that; > Acquisition of SG Bega Upsorn SA in Romania was completed through CEPOM [i.e. Indian England NV), a step-down subsidiary of Indian Britain BV. > Acquisition of Dan River Inc USA was completed through GHCL Inc, USA. f) In board meeting on 21-04-2006, the board was informed that the company has invested USD 80.50 Mn [proceeds of FCCBs) in its Indian Britain BV (i/VOS). These funds are invested as equity of USD 26 Mn and debt of USD 54.20 Mn. Acquisition of SC Bega Upsom SA, Romania through Indian England NV was completed. Similarly, acquisition of Dan River Inc, USA has been completed through GHCL Inc. g) In board meeting on 18-06-2006, the board was informed lhat GHCL forayed in home textile segment by setting up production facilities at Vapi to manufacture bed sheets and curtains. The board was further informed that by acquiring US based Dan River Inc, GHCL entered in the distribution segment with USD 250 Mn top line. The next step in the value chain of manufacturing to customer is the retail. The company is in discussion with the shareholder of the retail chain namely Rosebys. The brief profile of Rosebys are given below: > Headquartered in Manchester, UK. >• One of the largest retail home textiles chain. > 325 Stores fora total footage of 770,000 square feet (190 in high street and 130 retail parks). > Generally mid market value oriented. > 2200 employees (including part time), Two retail divisions - Basic Household Textiles and Fabric Warehouse. > To acquire only Basic Household Textiles division. Annual Turnover of about 105 million pounds for FY ending April 2006,

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> Competitors - Marks & Spencer, Next, IKEA, Debenhams, etc. This acquisition can bring following on table for GHCL: > Fully integrated player from spinning to retail. > Immediate access to UK market. > Market for high value items of Vapi. > Increased sourcing from ndia, Pakistan and China - to improve margins. > Outsourcing of back office to India - cost reduction. The investment up to UK £ 21 Mn for acquisition of Home textile chain Rosebys UK was approved. h) In board meeting on 17-07-2006, the board was informed that acquisition of Rosebys UK will be made through Indian Wales NV, a wholly owned suosidiary of Indian Britain BV, which is a wholly owned subsidiary of GHCL Ltd. The board was further informed that the investment of UK £ 27 Mn (USD 50 Mn) will be financed parfiy from debt and balance from FCCB. i) In board meeting on 30-10-2006, the board was informed about acquisition of Rosebys UK. j) In board meeting on 29-01-2007, the board was informed about acquisition of Best Manufacturing Group LLC. 5.19. The appellant also submitted the details of import and exports with the acquired undertakings and copies of abstracts of Form no. 3CEB [TP Reports). Such details of import and exports are as under: Name Product details Amount (Rs) Amount (Rs) Amount (Rs) of acquired company

Yr 2006-07 Yr 2007-08, Yr 2008-09

Dan Textile Export 343791548 782710393 0 River Inc, USA

Dan Trading Exports (bed 91579264 0 0 River Inc, sheets) USA

SC Import of Soca Ash 90971227 0 0 GHCL Upsom SA

SC Import of Sodium 6544852 0 0 GHCL Bicarbonate Upsom SA Rosebys Textile Exports 0 46769133 35443627 Operations Ltd

5.20. The appellant further submitted that there was recession in Europe and USA, due to continued financial difficulties coupled with recessionary and other adverse factors, all the three subsidiaries / acquisitions were incurring huge losses and become sick units. As there was no hope of recovery of financial p_ositions, therefore the appellant decided to re-organise its business / foreign acquisition or to close down. The appellant furnished reasons for closure as under SC GHCL Upsom SA, Romania GHCL Ltd acquired Bega Upsom Ltd [renamed as GHCL Upsom Ltd] in Romania with a view to penetrate East European region in Soda Ash market. Unfortunately, due to macro economic factors, recession set in Europe soon thereafter and all the three companies faced significant difficulty in obtaining funds to run their operations.

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Soon after the acquisitions, several adverse factors combined together on account of which GHCL Upsom could not survive the economic and financial crises. They werejpriefly; as follows : Cost of production turned to be higher than the sale realizations leading to persistent cash losses. The production had to be curtailed to 50% of installed capacity, The price of gas supplied by M/s. Romgaz, Romanian gas supplier, went up significantly as compared to international gas prices (almost three times of international price] making it unviable for GHCL Upsom to continue production. M/s. Romgaz also stopped gas supplies because of which plant had to be shut down. Further, "he plant also suffered damage due to being idle in extreme cold in winter, Lenders and trade creditors of GHCL Upsom put pressure for Recovery of their dues. Recession set in Europe and US leading to all round fall in demand and prices of soda ash. GHCL also had to extend support to get the damaged plant repaired to a level essential to start functioning. GHCL also sought assistance from Romanian government to sustain the operations of GHCL Upsom. However, things did not improve and the production was stopped, employees had to be retrenched and presently GHCL Upsom is in the_process of being wound up. Since GHCL Upsom was perceived as horizontal expansion of GHCL to cater to East European and other markets and it also offered several synergetic advantages, if became necessary for GHCL to extend working capital support to enable GHCL Upsom to tide over its crisis. Failure of GHCL Upsom would have meant not only loss of opportunity to diversify into East European market but also loss of ability to leverage upon the synergelic advantages. Dan River, inc, USA & Rosebys Operations, UK GHCL Ltd acquired Dan River Inc [Dan River] in USA and Rosebys Operations Ltd [Rosebys) in UK to have a ready distribution channel for home textile products manufactured at its Vapi unit. Unfortunately, due to macro economic factors, recession set in Europe soon thereafter and all the three companies faced significant difficulty in obtaining funds to run their operations. However, due to deepening of the financial crisis in Europe and US in 2008 and 2009, these companies were unable to recover and went into winding up. Unfortunately soon after the acquisitions, recession set in US and Europe largely fuelled by the US sub- prime crises in 2008. The recession impacted the retail textile trade very badly. Both Dan River and Rosebys faced double whammy of plummeting sales Cost of production turned to be higher than the sale realizations leading to persistent cash losses. The production had to be curtailed to 50% of installed capo city The price of gas supplied by M/s. Romgaz, Romanian gas supplier, went up significantly as compared to international gas prices (almost three times of international price) making it unviable for GHCL Upsom to continue production. M/s. Romgaz also stopped gas supplies because of which plant had to be shut down. Further, -he plant also suffered damage due to being idle in extreme cold in winter Lenders and trade creditors of GHCL Upsom put pressure for recovery of their dues. Recession set in Europe and US leading to all round fall in demand and prices of soda ash. GHCL also had to extend support to get the damaged plant repaired to a level essential to start functioning. GHCL also sought assistance frcm Romanian government to sustain the operations of_GHCL Upsom. However, things did not improve and the production was stopped, employees had to be retrenched and presently GHCL Upsom is in the process of being wound u| Since GHCL Upsom was perceived as horizontal expansion of GHCL to cater to East European and other markets and it also offered several synergetic advantages, it became necessary for GHCL to extend working capital support to enable GHCL Upsom to tide over its crisis. Failure of GHCL Upsom would have meant not only loss of opportunity to diversify into East European market but also loss of ability to leverage upon the synergelic advantages. Dan River, inc. USA^& Rosebys Operations, UK GHCL Ltd acquired Dan River Inc [Dan River) in USA and Rosebys Operations Ltd (Rosebys) in UK to have a ready distribution channel for home tex'ile products manufactured at its Vapi unit. Unfortunately, due to macro economic factors, recession set in Europe soon thereafter and all the three companies faced significant difficulty in obtaining funds to run their operations. However, due to deepening of the financial crisis in Europe and US in 2008 and 2009, these companies were unable to recover and went into winding up Unfortunately soon after the acquisitions, recession set in US and Europe largely fuelled by the US sub- prime crises in 2008. The recession impacted the retail textile trade very badly. Both Dan and Rgsebys facedjdouble whgmmy of plummeting sales and shortage if liquidity jg sustain the operations. The financial lenders withdrew the credit lines to reduce their exposure to the badly affected retail sector. This was also largely on account of their own inability to raise funds. Particularly with reference to Rosebys, the suppliers of Rosebys were getting protection for their dues in the form of insurance coverage from insurance companies. With the onset of recession and insurance companies

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themselves being under severe financial stress, they withdrew from the retail sector as a result of which suppliers became reluctant to supply goods to Rosebys in absence of adequate protection. Due to sudden collapse of Lehman Brothers, a $650 billion investment bank in September 2008. This not only resulted in the crash of hundreds of banks in USA, UK and Europe, but also resulted in the closure of many businesses in Western World, specially the retail outlets such as Woolworth, Officers Club, MK1, MFI, Dolcis, Whittard of Chelsea. Due to the global financial crisis, more than 5 lakh peoplejost their jobs. The regular banker of Rosebys viz. Barclay Bank which was also facing financial crisis could not extend additional working capital to Rosebys. During the crucial period when Dan River and Rosebys were facing severe financial difficulties, the restructuring and integration plans of GHCL were required to be put on hold and the immediate focus was to keep Dan River and Rosebys afloat. GHCL's interest in supporting Dan River and Rosebys were manifold. Firstly, both these companies were perceived as major customers for Vapi unit; secondly, the acquisition of Dan River and Rosebys was with a view to fulfill the vision of GHCL to be a globally integrated textile company; thirdly, it was necessary for GHCL as a parent company to protect its cost and support its subsidiary since failure of the subsidiary would impact GHCL's own credibility and business reputation. 5.21. The appellant submitted that looking to the huge losses of subsidiary company i.e. Indian Britain BV passed resolution to reduce its share capital Of Euro 18,564,400 [185,644 shares) to 18,545,835.60 (185,644 shares) out of 221,586 shares so that such amount can be set-off against the accumulated deficit / losses of the company IBBV and in result Euro 18,564.40 were repaid to the shareholder i.e. appellant company which was at Rs. 9,99,996/- on 26.09.2011. This resulted in the losses amounting to Rs. 99,89,96,245/-, due to reduction in value ot shares of IBBV. 5.22. The appellant further submitted that due to above acquisitions, there was increase in export of home textile made-ups from GHCL Vapi Unit to USA and UK, as these customers were having business relations with Dan River Inc, USA and Rosebys Operations Ltd, UK. The turnover increased from Rs, 80.11 crore [F. Y. 2008-09) to Rs. 452 crore (F. Y. 2012-13). Apart from the above, the appellant exported its products to various other countries due to brand name of Dan River, USA and Rosebys Operations, UK, which gives enduring benefits io the company GHCL Ltd at large and the same will further gave benefits to the company in the coming years. The summary of exports to UK and USA in year 2008-09, 2009-10, 2010-11, 2011-12 and 2012-13 as submitted are as under: DETAILS OF EXPORT SALES TO UK AND USA

SN Cuslomer name Country FY 2008-09 FY 2009- 10 FY 201 0-11 FY 2011-12 FY 201 2- 13

1 Edinburgh UK 4,039,622 - - - - Woollen Mills Lid

2 Home Base Lid UK - - - 55,388,535 61.328,992 Avebury

3 Home Relail UK - - - 56,505,359 70,573,052 Group

4 House of Fraser UK 25,112,469 66,449,555 127,370,228 73,867,269 47,661,636 (Stores) _Ud ___________ .

5 Rosebys UK ' 35,443,627 - - - - Operations Ltd

6 American Down USA 9,477,860 1 ,021 ,539 10,677,994 - - Inc

7 Anna's Linens USA 11,851,837 - - - -

8 AQ Textiles LLC USA - - - 76,013,355 39,534,624

9 Babies R US USA____, - - - - 5,494,484

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10 Beco Induslries USA - - - 7,438,008 - Limited 11 Big Lols Stores USA - _ - 49,135,879 21,439.916 Inc, 12 Bristol Associates USA 5,409,909 - - - - Lid 13 Chimes Inc. USA - - - 5.581.661 -

14 Colton Sheet ^JSA - - - 169,337,58 1.438,204,714 LLC 5

15 Croscill Inc. USA - - 15,904,313 54,627,215 20,199,727

16 Domestications USA 10,665,489 - - - -

~^~\ E& E Co. Ltd iJJSA___ - - - 17,012,570 17,262,164

18 Elite Home [USA - 7,409,099 3,030,124 89,456,945 85,055,223 Products Inc

~\9 Fox rich HJSA 27,038,273 _8790,535l 3,360,804 - - ' textiles. Inc,

20 G S Nizarni USA 5,021,145 - - - -

21 Grace Home USA 55,455,359 237,472,868 313,493,315 15,412.107 - Fashions LLC

22 Heritage Linen USA r^7704T3T3 20.183,157 78,513,581 - - Crait ~~ Inc.

23 Hudson Bay USA - - 13,669,944 Company

24 Integrated USA - - - 518,336,957 115,209,6 Textile Group 61

25 1 &S USA 21.460,788 3,335,01 1 - - - Houseware Corpn

26 Kmart USA 65,419,051 246,406,998 183,528,675 228,436,814 198,709,2 Corporation 84

27 Li & Funq USA - - - 58,827,302 - India Pvt Ltd.

28 LNf USA 410,916,729 - - - - Merchandising

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Co, L1.C

29 Macy's Inc. USA - - 239,513,487 742.410,831 816,003,0 75

30 Madison USA 16,435,816 - - - - industries Inc

31 Millwork Pie USA - - - 102,140,447 - Ltd

32 Nantucket USA - - - 3,325,754 - Distributing

33 Niki USA - - - 55,629,096 465,2 1 2 international inc.

34 Pine Cone Hill USA 99,877 - - - -

35 Plane! home USA 6,976,340 - - - - interl LLC.

36 Revman USA - 44,319,038 139,745,869 328,735,608 402,988,4 International, 71 Inc.

37 Robert Alien & USA - 10,501,068 - - - Assoctes Inc

38 Rockford USA - - • - 1,400,617 - Internl Pvt Ltd

39 Royale Linens, USA 10,504,348 - - - - Inc

40 Sam Salem & USA - 2,118,851 - - - Son

41 Scent-Sation, USA 17,673,036 2,224,905 - - - Inc.

42 Sears Holding USA - - 22,462,833 71.858,874 45,569.93 Corporation 9

43 Sleep 8, Beyond USA 221,544 - - - -

44 Snowhite textile USA 4,212,467 - - - - inc.

45 Springs global USA - 98,189,037 385,755,653 1,118.974,935 1,134,131, us inc.. 321

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46 Startex USA - 4,322,718 - - - industries, inc.

47 Thread Trading USA - - - 8,684,039 - Ma k wo no

48 U.S.Polo Assn. USA - - 54,502,548 - -

49 Wal-mart USA - - 119,207.106 1,635,438 - stores inc.

50 westport linens USA - 2.267,510 - - - inc.

51 williams- USA - - - - 502.841 sonoma, inc.

52 Zetex USA - 5,561,179 - - international ltd.

TOT L 801,139,799 760,573,067 ~ 3,923,843,142 4.520,334, A 1,697,066,529 338

5.23. The facts and explanation submitted by the appellant are briefly noted as under, which amoly establishes that the investment in the subsidiary company was made on account of business development out of commercial expediency and thus on reduction of capital of the said subsidiary company the loss incurred in the value of shares were in the nature of business losses. (1) The appellant company GHCL is manufacturing soda ash from 1988, whereas, entered in textile business in 2001 by merging 6 Spinning Mills "Sree Minaxi Mills" at Madurai. After turning around and stabilizing its Textiles Spinning Business, GHCL deckled to expand both lines of Businesses i.e. Soda Ash and Textiles in 2004. (ii) To enter in Global Market, GHCL identified two Soda Asli Plants in Romania and acquired one of them namely llega Upsoni (subsequently renamed GHCL Upsom Limited) in December 2005. (iii) In the Textile segment, GHCL decided to be a Global Player and engaged KSA Technopak a renowned consultant, who advised GHCL io expand its Textile Business by entering in Home Textile Segment both in India and Overseas especially USA and European Market. (iv) GHCL set up home textile made-ups plant comprising of weaving, processing and made- up facility at Vapi in March 2006. This unit manufacture products like bed linen, curtains and made ups, comforter covers, cushions, etc. (v) For expansion in overseas market, GHCL. Ltd incorporated 100% subsidiary namely Indian Britain BV. Netherlands (ML). (vi) GHCL through this wholly owned subsidiary - Indian Britain BV formed further step-down subsidiaries in Netherlands and USA to expand its business of soda ash and home textile globally. Through such step-down subsidiaries, the appellant acquired SC Bega Upsom {renamed as GMCL Upsom Ltd) at Romania in soda ash manufacturing sector in December 2005. (vii) Similarly, GHCL acquired Kosebys UK Ltd in United Kingdom and Dan River Inc and Best Textile International in USA during the period January 2006 to March 2007. The acquisitions of Home Textile Business in USA and Retail Chain in UK were in the line of expansion after setting-up of Vapi Home Textile Plant, so that from India products can be lined up in USA and UK as the India became processing hubof home furnishing textile Hems,

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Due to entering in Glcbal market through these acquisitions, the revenue of the textile segment increased from mere Rs. 90 crore in 2003-04 to (is. 900 crore in 2012-13 and the revenue of the soda ash segment increased from mere Rs. 376 crore in 2003-04 to Rs. 1200 crore in 2012-13. Through such acquisitions GHCL succeeded in establishing long term relationship with such eminent customer based like Wall-Marl, K-Marl, JC Penny, Macy's etc. which shall prove beneficial for Indian Textile operations for years to come. (x) The investment in subsidiary company, step-down subsidiaries and acquisition of retail chain was only to expand business globally; therefore, the investment in shares of Indian Brila-.n BV was made by the Appellant to expand its business and to achieve business objectives as a measure of commercial expediency and such investment is related to the business operalions of the appellant company GHCL. 5.24. Considering the above facts and submissions in brief, it is noticed that the entire investment in 100% subsidiary company Indian Britain BV was made by appellant for acquiring soda-ash manufacturing plants in Romania and textile business / chains in USA and UK to expand its business and acquisitions were related to the appellant's business operations in India. The appellant through 100% subsidiary company Indian Britain BV formed further step-down subsidiaries in Netherlands and USA, through such step-down subsidiaries, the appellant acquired soda-ash manufacturing plants SC Bega Upsom (renamed as GHCL Upsom Ltd] at Romania and similarly the appellant acquired Dan River Inc in USA and Rosebys UK Ltd in United Kingdom to expand its home textile business, as the company is having textile manufacturing plants at Madurai and Vapi. The appellant's objective of investment in subsidiary, step-down subsidiaries and acquisitions of retail chains was to expand its business globally and to bring its products in international market, even after closure of such acquisitions, the sales and exports shoot up substantially and international brands started taking appellant's textile products. At no point of time, the investment in subsidiary company was made with a intention to realize any enhancement in value thereof over a period of time or to earn dividend income. The investment was made by the appellant from commercial prospective in the course of business on the grounds of commercial expediency, therefore, the losses on reduction in value of shares of investment in subsidiary company is allowable as business loss in the hands of the appellant. In other words, the losses from investment in subsidiary company of Rs. 99,89,96,245/- is held to be business loss as the investment was made for the purpose of business as the same was commercially expedient to do so. 5.25. This view has been taken respectfully following the judgments / decisions of Hon'ble Courts and Tribunals. Some of such judgments are briefly noted as under: CIT v. Colqgtg Pgirnoljye jndjqn limited 5485/Mum/2009) "4............ Learned CIT(A] upheld the grievance of the assessee and deleted the impugned disallowance by observing as follows: "I have considered the arguments and submissions of the appellant as also that stated by the Assessing Officer, I find that the Camelot was a 100% subsidiary cf the appellant and the appellant had deep business interest in Camelot. The main reason for setting up Camelot was to manufacture toothbrushes exclusively for the appellant. The appellant was relying upon Camelot for manufacturing of toothbrushes to be traded by the appellant. The entire investment in Camelot was made by the appellant only as a measure of commercial expediency to further its business objectives and were primarily related to the business operations of the appellant. At no point of time, the investments in Camelot was made or held with an intention to realize any enhancement in value thereof over a period of time or to earn dividend income. Rather the investments were made only to separately house an integral part of the business activity of the appellant, which essentially operated as a single unified business. Thus, relying on the principles laid down by Hon'ble Supreme Court in the case of Patnaik & Co Ltd (supra) and SA Builders vs. CIT (supra), since the investment in Camelot was made by the appellant from a commercial perspective only in the course of business. Keeping in view the commercial expediency of the transaction, I hold that the loss of Rs 5.50 crores , incurred upon sale of shares in Camelot, should be allowed as a

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business loss in the hands of the appellant, and the action of the Assessing Officer denying the deduction as business loss stands reversed," 7. We find that Camelot was set up to manufacture toothbrushes exclusively for the assessee company and that it had no other customer that the assessee. It was said to have been set up as a small scale industrial undertaking with a view to certain preferential treatment in the excise laws, but whatever it manufactured was bought by the assessee company alone. Camelot did incur the losses but the assessee company extended financial help to Camelot from time to time. This financial help was clearly in assessee's own business interests because, if the assessee company was not to do so, Camelot could not have continued to exist, and all these losses incurred by Camelot were essentially relatable to doing business with assessee alone, i.e. Camelot's only customer. The loans and advances so given by the assessee were therefore wholly incidental to its business and could not be treated in isolation of its legitimate business interests. When the grant of loan itself is justified on the ground of commercial expediency, it is only corollary thereto that even write off of such a loan is incidental to business. It is, therefore, not really correct to say that write off of the loans granted by the assessee to Camelot would have been an inadmissible business ceduction and the entire transaction was devised to avoid legitimate tax liability. We see substance in the plea of the company that anyone buying a company would like to buy o company with minimum liabilities, it was considered appropriate to first pay off the dues by the company, even by raising the funds through fresh issue, and then sell the company. This explanation is in consonance with the ground business realities and we find no infirmity in the same. The advances given by the assessee were finally converted into equity, as the assessee company subscribed to the Camelot shares to enable Camelot to pay off its dues to the assessee company. On these facts, in our humble understanding, the assessee had invested in the Camelot, and extended financial help to Camelot, purely for commercial expediency. The head under which investments in subsidiaries is shown is governed by the disclosure requirements under Schedule VI to the Companies Act, and, therefore, the fact that an asset is shown as 'investment1 per se does not, and cannot, negate the fact that the such investments are made on the grounds of commercial expediency. Similarly, the head under which dividend income is assessed to tax does not also affect determination of question whether the shares ere purchased on account of commercial expediency or not. It is only elementary that dividend income, whether the shares are held as investments or as any other asset, is always taxable under the head 'income from other sources'. Therefore, nothing really turns on Assessing Officer's emphasis on the fact that the Camelo* shares were shown as investments in the balance sheet and that dividend income from these shares is taxable as income from other sources. We have also noted that as long as shares are acquired on the grounds of business expediency, any loss on sale thereof is also required to be treated as an admissible business deduction. Hon'ble Supreme Court's judgment in the case of Patnaik & Co (supra) deals with a situation in which the assessee had subscribed to certain Government security but incurred a loss on sale of that security. The stand of the assessee was that the assessee had made the said investment with a view to promote its business interests and as subscription to the Government Loan was conducive to its business, the loss arose in the course of the business, and that, therefore, the assessee was entitled to a deduction of the loss claimed by it. A coordinate bench of this Tribunal upheld the claim made by the assessee. The Tribunal found that having regard to the sequence of events and the close proximity of the investment with the receipt of the Government orders, the conclusion was inescapable that the investment was made in order to further the sales of the assessee and boost its business. In the circumstances, the Tribunal held that the investment was made by way of commercial expediency for the purpose of carrying on the assessee's business and that, therefore, the loss suffered by the assessee on the sale of the investment must be regarded as a revenue loss. Upholding the stand of the Tribunal, Hon'ble Supreme Court held that the Tribunal was right in its view. It is thus clear that as long as investment is justified on the grounds of commercial expediency, the loss on sale of such investment is to be considered a business loss. The nature of business expediency could vary from case to case but what is important is that there must be an underlying motive to serve business interests of the assessee in making such investment. Let us now turn to the facts of the case before us. The compan/ in which shares are subscribed is engaged only in the business of manufacturing

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the toothbrushes for the assessee company. Any investment in such a company is justified for pure commercial considerations, and, therefore, loss on sale of such shares is admissible as business losses. In the case of DCIT Vs Gujarat Small Industries Corporation [84 TTJ 22), a coordinate bench of this Tribunal was dealing with a situation in which " from the facts on record, it is obvious thct the Girnar Scooter Ltd. was floated for the same purpose as a subsidiary and later on sold off when the loss started mounting" and on these facts the coordinate bench held that loss on sale of shares in subsidiary was business loss in nature. We are in considered agreement with the line of reasoning thus adopted by the coordinate bench. In view of these discussions, as also bearing in mind entirety of the case, we uphold the stand of the CIT(A) and decline to interfere in the matter." (ii) The above decision cr ITAT Mumbai is also confirmed by Hon'ble Bombay High Court in favour of assessee in the aforesaid case CIT vs. Colgate Palmolive (India) Ltd, (2015) 370 1TR 0728, where the Hon'ble Court held that loss on sale ot shares of subsidiary was business loss in nature. The revenue filed the appeal raising the question to be decided by the Honourable Court as under:- "5.1) Whether on the facts and circumstances of the case and in law, the ITAT is justified in holding that the loss incurred on the sale of shares of Camelot a wholly owned subsidiary was a business loss when the investment made in the latter was not a business asset, but investment for obtaining an enduring benefit." The Honourable Court has decided the above question as under:- "6. The facts necessary for that question are that the Assessee is engaged in the business of manufacturing and trading of oral care products. In the course of the assessment proceedings, the Assessing Officer noted that the Assessee claimed deduction on account of loss on sale of shares held in Camelot Investment Pvt. Ltd. (Camelot, in shorti amounting to Rs.5,50,00,000. The Assessee had made investment in 100% owned subsidiary Camelot as claimed for purely business reasons. The stand of the Assessee that the investment was made because and for the purposes of business, the loss on sale of such investment is required to be treated as business loss. The Assessee placed reliance, inter alia, on a judgment of the Hon'ble Supreme Court in the case of Patnaik. &. Co. Ltd. Vs. C1T, 161 ITR 365 and of this Court in the case of CIT vs. Investa Industrial Corporation Ltd., 119 ITR 360, The alternate argument and which was canvassed without prejudice need not detain us. 7. The Commissioner and the Tribunal concurrently found that the Camelot was fu.ly owned subsidiary of the Assessee and engaged in the manufacturing of tooth brushes exclusively for the sole client namely the Assessee. Shares purchased of Carnelot were also sold by the Assessee to one Ramesh Sukharam Vaidya for consideration of Rs.45,00,000/-. The Assessing Officer held that the sum of Rs.5,50,00.000/- which was invested by the Assessee in the equity of Camelot on 1 7 March 2003 and which have been used to repay the loan to the Assessee company, amounting to Rs.5.5 crores, before 1 March 2003 would demonstrate that the purpose of investment was to give a Long Term Enduring Benefit to the Assessee. Merely because it was made in the normal course of business, it cannot be termed as anything but long term investment. This conclusion of the Assessing Officer was challenged in the Appeal before the Frst Appellate Authority and the Commissioner concluded that the main reason for setting up Camelot was to manufacture tooth brushes exclusively for the Assessee. Since the Assessee was relying on Camelot for manufacturing of tooth brushes to be traded by the Assessee, the investment is nothing but a measure of commercial expediency to further business objectives and primarily related tc the business operations of the Assessee. At no point of time the investment in Camelot was made with an intention to realize any enhancement value thereof or to earn dividend income. The nvestment was made to separately house the integral part of the business activity. In such circumstances, the Commissioner relied upon the above judgments and allowed the Appeal. He concluded that the loss of Rs.5.50 crores is a business loss in the hands of the Assessee. He set aside the order of the Assessing Officer.

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"Business loss—Lass on sale of securities—Loss suffered by the assessee financial corporation on sale of securities acquired from surplus funds—Assessee corporation had the statutory function of advancing loans fo industrial concerns—Governing consideration for selling the securities was the' necessity to find money for disbursing the sanctioned amount' of loans—Sale was closely linked with the business of assessee—Loss suffered on account of such a sale of securities was a trading loss Held: The governing consideration for selling the securities was the necessity to find money for disbursing the sanctioned amount of loans to the extent of Rs. 38 lakhs. Thus there was a pressing demand for sale of securities and if, in doing so, such securities were going down in value, then it cannot be predicted that the dominant intention stood transformed from that of advancing loans to one of saving the loss on securities or for earning more interest. As this money had to be advanced within a year, there is nothing wrong if it was contemplated that if not disbursed the money would be deposited in short term deposits with banks. It was also expected that new loans were tc be floated in which Rs. 10 lakhs might be invested, but this agair is nothing but a proposal for utilisation of money if it ever were to remain unutilised after disbursement of the sanctioned loans. In dealing with the instant case one could not legitimately ignore the statutory functions that the corporation had to discharge, which was, of helping industrial concerns, and in doing so it had to have due regard to the interest of the industry, commerce and the general public. It had not been provided that the avowed object of the corporation was money- making as such, though in trying to advance loans to the industries, it would certainly earn interest. Functions envisaged under the State Financial Corporation Act, were nothing but those of a Welfare Stafe and, therefore, the corporation could not put off the question of disbursing loans by waiting for the investment in securities to mature. In the above context the sale of securities were only closely linked up with the business of the corporation, so that, loss suffered on account of such a sale of securities was a trading loss.—Sardar Indro Singh & Sons Ltd. vs. CIT (1953) 24 1TR 415 (SC) : TC12R.837 and Punjab Co-operative Bank Ltd. vs. CIT (1940] 8 ITR 635 (PC) ; TC12R.1135 applied. Conclusion: Sale of securities effected by a State Financial Corporation only to find necessary funds for meeting certain pressing commitments being closely linked up with business of the corporation, the loss suffered on such sale of securities was only a trading loss." vi. The Hon'ble Karnataka High Court in the case of CIT Vs, Malabar Industrial Company Limited in 320 ITR 486 has held that holding of shares by the assessee in pursuance of the object of fhe company should be treated as holding of shares for the purpose of business and accordingly any loss on sale of such shares should be treated as business loss and not loss under the head capital gain and capital loss. vii. Hon'ble ITAT Chennai Bench in the case of Indian Commerce and Industries Company Pvt. Ltd. Vs. CIT (1995) 213 ITR 533. viii. Commissioner of Income-tax.v.Gillanders Arbuthnot 8, Co. Ltd. [1982) 9Taxman76 (Cal.) Section 28, read with section 36(2), of the Income-tax Acf, 1961 — Business loss—Besides being engaged in various other business activities, assessee-company also financed or advanced loans to its subsidiary companies—Assessee purchased shares of one of its subsidiary companies whose financial position was not sound and/advanced unsecured loans to it - Said subsidiary company subsequently went into liquidation and certain amount remained due on it—Assessee wrote off said amount as bad debt after liquidator informed it that there was no chance of recovery and claimed deduction under section 36(2)—Both ITO and A AC disallowed claim—Tribunal, however, allowed impugned amount as a trading loss—Whether tribunal justified—Held, on facts, yes

ix. Commissioner of Income-tax v. Dhandayuthapani Foundry (P.) Ltd. [19801 4 Taxman 116 (Mad.) Section 28 of the income-tax act, 1961—Business loss/deduction—At instance of sales tax authorities, assesses purchased certain government securities and sold them immediately entailing

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certain loss—Whether tribunal right in holding that impugned loss was incidental to business and allowable as revenue loss—Held, yes x. Commissioner of Income-tax-8, Mumbai v. Chemosyn Ltd. [2015] 64taxmann.com 219 (Bombay High Court) II - Section 37(1) of the Income-tax Act, 1961 - Business expenditure -Allowability of (Purchase of shares) - Assessment year 2007-08 - As a consequence of differences between brothers who together owned assessee cornpcny, assessee was directed by CLB to buy 34 per cent of shareholding of one of warring group and cancel same - Assessee claimed before Assessing Officer that said amount being difference between consideration paid and face value of shares acquired for cancellation, was revenue expenditure - However, Assessing Officer did not accept same and held expenditure to be of capital nature - Whether amounts which were paid by assessee was an expenditure incurred only to enable smooth running of business and, therefore, was a deductible expenditure - Held, yes [Para 11] [In favour of assessee] The ratio of the judgment is applicable to the facts of the appellant. xi. Commissioner of Income-tax v. Abhinandan Investment Ltd. [2015] 55 taxmann.com 362 (Delhi High Court) Section 28(i) of the Income-tax Act, 1961 - Business loss/deductions -Allowable as (Right issue) - Assessee was a promoter and shareholder of J1SCO, which declared a right issue of secured redeemable non-convertible debentures (NOD) of Rs. 500 each - As per terms of said issue, every shareholder had to pay a sum of Rs. III per debenture on making application and balance of Rs. 389 per NCD was payable on allotment - Before right issue, JISCO made certain arrangements with UTI, according to which allottees of NCDs could surrender all NCDs to UTI after application was made and UTI agreed to pay balance allotment money (Rs. 389 per NCD) to JISCO and secure NCD registered in its name - Assessee. a shareholder and promoter of JISCO, opted for arrangement entered into between JISCO and UTI and, therefore, when UTI paid balance allotment money (Rs. 389 per NCD) on behalf of assessee, allotment was made in its favour - Assessee claimed that amount of application money forgone was to be allowed as business loss -Assessing Officer rejected assessee's claim - Tribunal, however, allowed said claim - Whether since assessee subscribed to right issue of NCDs as a matter of commercial expediency in its capacity of promoter as otherwise JISCO might have to repay money to depositors on account cf failure of right issue, loss in question was rightly allowed as business loss - Held, yes [Para 23] [In favour of assessee] The ratio of the judgment is applicable to the facts of the appellant. xii. Commissioner of Income-tax v. H. P, Mineral and Industrial Development Corporation Ltd [2008] 305 ITR 111 (Himachal Pradesh High Court) "Whether on the facts end in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in deleting the addition of Rs. 96,38,630 made on account of bad debts written off by the assessee acceding to the plea of the assessee that the claim must be allowed" ? 2. The assessee held shares in its subsidiary companies. It was dealing in the shares and all the authorities below have held that in the previous assessment years the assessee was showing profits from the sale of shares and paying tax on the said profit. Thereafter, the subsidiary company, i.e., Himachal Worsted Private Ltd., was wound up in the year 1985. The assessee is a Government owned company and the subsidiary company was also a government owned company. The subsidiary company was wound up under the orders of the State Governmem since it has incurred heavy debts and had accumulated losses of more than Rs. 3 crores. The winding up petition was allowed by a company judge of this court on May 19, 1993. The assessee decided to write off the value of the shares held by it in the subsidiary company which was wound up. The Commissioner of Income-tax held that it was not feasible to revive the subsidiary company and the assessee had no other option but to write off the amount invested in the shares of the company. In fact a decision to waive off the interest recoverable from the subsidiary company had already been taken on July 27, 1981. The Tribunal treated the shades of the assessee Corporation as stock-in-trade and held that since the subsidiary company has gone into liquidation there was no question of selling off the shares.

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company amounting to Rs. 99,89,96,245/- was not claimed as deduction from profit and gain from business and provision. However, in the assessment proceedings, the assessee company has claimed the aforesaid losses as business loss stating that investment in the subsidiary was made for the purpose of business of the assessee company for setting up of supply chain system and manufacturing units in global market i.e. overseas countries. The assessee has submitted such investment was made for business reasons for expansion of the assessee company in global market. The assessee company was incorporated in 1983 and started its soda ash manufacturing in Gujarat in 1988. It entered in textile business in 2001. The entire investment in wholly owned subsidiary Indian Britain B.V. was made by the assessee company acquiring global units of soda ash manufacturing and textile business- chain as a measure of commercial expediency to further its business objective. In the line of expansion in overseas market, the assessee company has looked for various acquisitions of home textile business in U.S and retail chain in U.K. In the line of expansion after setting up of Vapi home textile plant show that from India product can be in U.S. and U.K. as such India became processing hub of home furnishing textile items. We have adjudicated the issue determining the nature of transaction relating to business loss of acquiring of Rosebys Retail chain in the appeal of the revenue vide ITA No. 976/Ahd/2014 for assessment year 2009-10 wherein business loss allowed by the ld. DRP in favour of the assessee was sustained on the ground that assessee company had acquired its subsidiary company Rosebys Operation Ltd. to expand its textile business operation globally based on the study carried out by KSA Tech Pak, renowned global consultant as stated supra in this order. Without

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reiterating the facts as elaborately discussed in the order of ld. CIT(A) and while adjudicating similar ground of appeal of the revenue vide ITA No. 976/Ahd/2014, it is undisputed fact that assessee has acquired S.C. Bega UPSAM (renamed as GHCL UPSAM Ltd.) at Romania in soda ash manufacturing centre and similarly the assessee acquired Rosebys U.K. Ltd. in U.K. and Ban River Inc in U.S. to expand its home textile business as the company was having plants for textile manufacturing at Madurai and Vapi. The purpose of investment in the subsidiaries was to expand its business globally. After such acquisition, the sales and export shoot up substantially and international concerns started taking assessee company product even after reduction in shares, liquidation of subsidiary –Indian Britain B.V. The assessee has explained its business expansion by making investment in subsidiary company in Netherland from commercial prospect. The Assessing Officer has rejected the claim of the assessee on the ground that assessee has not filed revised return after referring the decision of Hon’ble Supreme Court in the case of Goetz (India) Ltd. vs. CIT 157 taxman 1 (SC). The Assessing Officer has stated that since assessee has not filed the revised return of income therefore such loss could not be entertained by following the aforesaid judicial pronouncement. The Assessing Officer has not made any observation on the merit of allowability of such business loss in the assessment order. Before the ld. CIT(A), the assessee has made detailed submission as elaborated in the finding of the ld. CIT(A) cited above in this order demonstrating that loss claimed on account of investment in share of wholly owned subsidiary company was a business loss and further stated that ld. CIT(A) has power to allow deduction on such claim which was not made through revised return of income. It was further submitted that

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decision in the case of Goetz India Ltd supra does not restrict the assessee to make such claim at the appellate proceedings. As elaborated in the finding of ld. CIT(A), the assessee has given the detailed submission pointing out that there was recession in Europe and USA due to continued financial difficulty and other adverse factor, its subsidiaries has incurred huge losses and become sick units. The ld. CIT(A) has also produced the submission of the assessee company in his finding pertaining to financial crisis of different subsidiaries. The ld. CIT(A) has also discussed the submission of the assessee company stating that huge loss of subsidiary companies i.e. Indian Britain BV passed resolution to reduce its share capital of Euro 18564400 (185644 shares) to 18545835.60 (185644 Shares) out of 221586 shares so that such amount can be set off against the accumulated deposit. This has resulted in loss amounting to Rs. 99,89,96,245/- due to reduction in value of share of its subsidiary company. Without reiterating the fact it is demonstrated from the finding of the ld. CIT(A) as supra in this order that assessee company has made investment in the subsidiary company on account of business development out of commercial expediency and thus on reduction of capital of the said subsidiary company, the loss incurred in the value of shars were in the nature of business losses. In the light of the facts and finding reported in the decision of ld. CIT(A) as elaborated in this order, we do not find any infirmity in the decision of the ld. CIT(A) in allowing the losses on reduction in value of share on investment in subsidiary company as business losses in the hand of the assessee company. Therefore, this ground of the appeal of the revenue is dismissed.

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Ground No. 2of CO (confirming upward adjustment of Rs. 23,81,063/- in respect of interest on loan given to subsidiary)

ITA No. 1121/Ahd/2017 filed by revenue & Cross Objection No. 30/Ahd/2018 filed by assessee A.Y. 2013-14

Ground No. 1( Disallowance u/s. 14A r.w.r. 8D of Rs. 2,38,632/- as against Rs. 38,73,085/-) & ground no. 1 of cross objection

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Ground No. 2 (Deleting disallowance of Foreign Commission Expenses of Rs. 5,19,15,123/-)

Ground No. 3 (Allowing long term capital loss as revenue loss)

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ITA No. 2124/Ahd/2017 filed by revenue A.Y. 2014-15

Ground No. 1 (Disallowance u/s. 14A r.w.r. 8D)

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Ground No. 2 (Deleting disallowance of foreign commission expenses amounting to Rs. 1,93,51,867/-) 50. As the facts and issue involved in ground of appeal no. 3 vide ITA No. 2625/Ahd/2015 Assessment Year 2014-15 are similar as in ITA No. 2124/Ahd/2017 Assessment Year 2014-15 therefore after applying the decision adjudicated vide ITA No. 2625/Ahd/2015 as supra in this order, this ground of appeal of the revenue stands dismissed.

Ground No. 3 to 3.3 (allowing claim of loss on invocation of guarantee of subsidiary company of Rs. 241,62,54,490/-)

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on behalf of its subsidiary company Indian Wales, N.V. Netherland amounting to Rs. 2,41,62,54,990/- and claimed loss as business loss. In its submission, the assessee has furnished detailed submission of commercial strategy, commercial expediency that the corporate guarantee was for the purpose of global business. The assessee has explained that invocation of corporate guarantee was purely for the purpose of business to achieve business objective with commercial expediency and stated that losses arising from invocation on corporate guarantee was allowable as business loss. The Assessing Officer rejected the claim of the assessee stating that assessee has not filed revised return for such claim as per provision of section 139(5) of the Act after referring decision of Hon’ble Supreme Court in the case of Goetz (India) Ltd. vs. CIT 157 taxman 1 (SC). The ld. CIT(A) has allowed the claim of assessee and treated the transaction as revenue in nature. The relevant part of the decision of ld. CIT(A) is reproduced as under:- Decision: 4.3. I have carefully considered the facts of the case, assessment order and submission of the appellant. The AO has observed that appellant had claimed losses on account of invocation of corporate guarantee given to Exim Bank on behalf of its subsidiary company namely; Indian Wales, NV, Netherlands amounting to Rs. 241,62,54,990/- and had written off the same in the books of accounts as losses incidental to the business under section 37 of the Act. The transactions were treated as revenue in nature. After considering the explanation given by the appellant it has been held by the AO that sines the claim has been made not through revised return of income as per the provisions of section 139(5) of the . T. Act, and hence there is no revised return of income, therefore, the business loss could not be entertained. The AO also observed that there is no provision to claim made merely on the basis of a letter at the assessment stage without revising the return of income. Thus, the AO disallowed the business loss claimed by the appellant for invoking the corporate guarantee at the assessment stage in view of the decision of Apex Court in the case of Goetze (India) Ltd. vs. CIT Reported in 157 taxman 1 (SC) and rejected request of the appellant to grant as business loss. 4.4. As discussed above, the AO did not accept the contention of the appellant for the reason that the appellant company has not filed the revised return of income for such claim as per the provisions of section 139(5) of the . T. Act and therefore, such loss could not be entertained by following the judgment of Hon'ble Court in the case of Goetze India Ltd. and thereafter, the same was not considered as business loss while completing the assessment. The AO did not made any observations on merits with regard to disallowability of such loss as business loss in the assessment order.

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4.5. During the course of appellate proceedings, through the aforesaid ground, the appellant has objected the action of the AO stating that the loss claimed on account of invocation of corporate guarantee was a business loss and the same could have been allowed although the revised return of income u/s, 139(5) of the 1. T. Act has not been filed but the claim was made through the letter filed with the AO on 26/12/2016 in the assessment proceedings before the AO. For ready reference, the contents of the aforesaid letter is reproduced as under: "Kindly refer to ongoing assessment proceeding in our case for AY 20H-I5. In this regards the assessee request for the allowability of claim of Rs. 24162.55 lakhs in respect of invocation of corporate guarantee by EXIM Bank given on behalf of subsidiary company i.e. Indian Wales NV, Netherlands. In this connection, we have to submit as under: Revocation of corporate guarantee of Exim Bank of Rs. 24162.55 lakh: 1. The payment on revocation of corporate guarantee of Exim Bank of Rs. 24162.55 lakh was not claimed as business loss from profit &. gains of business & profession. Assessee has left out claiming such loss. 2. Now in assessment proceedings, the assessee company claim that the losses arising on payment of devolvement of corporate guarantee of Exim Bank for subsidiary Indian Wales NV, Netherlands of Rs. 241,62,54,9907- is deductible as business loss, as the corporate guarantee was given by GHCL for issuance of NCDs of $40 Mn by Exim Bank to Indian Wales NV. 3. Utilization of funds from Exim Bank USD 40 Mn: The Exim Bank has given funds to Indian Wales NV through NCDs of $40 Mn (Rs. 173.96 crore) on corporate guarantee of GHCL, parent company. Such loan (funds through NCDs) were taken by subsidiary for the purpose of business of GHCL Ltd. more precisely for setting up of supply chain system in global market i.e. overseas countries. From such funds, the subsidiary Indian Wales NV formed step-down subsidiary GHCL Rosebys Ltd in UK to acquire Rosebys Operations Ltd, a chain of Home Textile products. A fund flow statement of Indian Wales NV and GHCL Rosebys Ltd furnished Annexure - 1. 4. The assessee M/s. GHCL like to state that the said loss on invocation of corporate guarantee by Exim Bank may be treated as business loss u/s 28 / 37(1) of the Income Tax Act, 1961 as the funds of NCDs were utilized in the subsidiary company as strategic investment for expansion of business of GHCL in global market. "Claim of Rs. 24162.55 lakh paid to Fxim Bank against invocation of corporate guarantee for issuance of NCDs of S40 Mn to Indian Wales NV, Netherlands: In the matter of claim of write off of losses of Rs. 24162.55 lakh on account of invocation of corporate guarantee given to Exim Bank (USD 40 Mn) in favor of Indian Wales NV, we submit as under for your kind perusal: "A- Brief facts ofGHCL's Business Background: 1. GHCL Limited ("GHCL") was in incorporated in 1983 and started ils Soda Ash Manufacturing in Gujarat in 1988. 2. Became one of the largest Soda Ash Producers of the Country and attained position of Pre- eminence in Soda Ash Industry by year 2000. 3. Entered in Textile Business in 2001 by acquiring and merging a sick spinning mill "Sree Meenakshi Mills" based at Madurai in the State of'Tamil Nadu. GHCL turned around this unit by downsizing labour cost, upgrading technology and modernization and made it profitable in a short span of time. 4. Total revenue of Soda Ash and Textile segment of GHCL in FY'2003-04 and FY'2004-05 as under: Rs. In crore

Revenue FV 2003-04 FY 2004-05

Soda Ash & 376 431 Inorganic

Textile 86 94

I.T.A Nos. 976/Ahd/2014 & 10 others Page No 102 Dy. CIT vs. GHCL Ltd. & 10 others

Others 8 8

Total 470 533

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i) After turning around and stabilizing Textile Spinning business in 2004, GHCL engaged KSA Tcchnopak, a renowned consultant, who advised GHCL to expand its textile business by entering in Home Textile Segment both in India and Overseas.GHCL Limited j) Objective of Textile expansion was to be present in the entire textile value chain right from "Spinning to Retail", which included spinning, weaving, processing, Institutional Sales (B2B) and Retail Chain. k) To fulfil the objective, at first stage, GHCL set-up a state of art Home Textile plant comprising of weaving, processing and made up- facility at Vapi, Gujarat at a cost of Rs.220 Crores which was commissioned in March 2006. I) Subsequently GHCL carried out acquisitions of Home Textile business in USA and Retail Chain in UK which were in the line of expansion after setting-up of Vapi Home Textile Plant, so that from India products can be lined in USA and UK as the India become processing hub of home furnishing textile items. m) In Home Textile Segment, USA is the largest market with almost 40% market share with next being Europe with almost 30% market share. n) The objective of the acquisition was to capture and expand Home Textile market in USA, UK and European Region. o) Had we not setup VAPI Home Textile Plant, there was no need to acquire Dan River Inc in USA and Rosebys Operations Limited (ROL) in UK. p) Rosebys Operations Limited, UK (ROL) Acquisition • ROL was one of the largest Home Textile Retailers in UK with 325 Retail outlets. • Headquartered in Manchester's UK Revenue-US$250 Million Retail space around 7,70,000 sq.ft. • ROL also had a highly automated distribution and warehousing facility well connected by Rail and convenient located for Imports. « The business was acquired from Lloyds TSB Development Capital Limited wherein the transaction was run over a period of two months during which Grant Thornton, Delhi and Beachcroft LLP, UK were engaged to canyoul financial and legal due diligences respectively and Beachcroft and Adelshaw Goddard were the Attorneys to conclude the transactions for both the parties. • Acquisition was completed in July'2006. • The acquisition was done with a well crafted strategy as the product profile of Rosebys could be synergized with Vapi Plant as about 59% of the revenue was contributed from bedding / curtain products which were largely sourccd from UK and UK based suppliers till then. 3. At the time acquisition, DAN River Inc., USA and Rosebys Operations Limited (ROL), UK were not making profits and our long term plan was to make them profitable by restructuring their product souring and aligning it with Vapi. 4. The acquisitions were conducting under "Long Term Business Growth Strategy" and it is well proven that it normally takes around 3- 4 years to stabilize and turnaround businesses. 5. The experience from the aforesaid acquisitions proved extremely helpful for Indian Textile business which Is evident from the fact that the Revenue of the textile segment increased from mere Rs.90 Crs. in 2003-04 to Rs.900 Crores in 2012-13: Post acquisition revenue of Soda Ash and Textile GHCL India Rs. In Crs. Revenue FY FV FY 2008- FY 2009- FV FY FY 2012-13 2006- 2007- 09 10 201 2011-12 07 08 0-11

Soda Ash 708 653 857 831 927 1,148 1216 / Inorganic

Home 363 417 383 383 571 749 909 Textiles

Toial 1071 1071 1240 1214 149 1,897 2,125

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"In this case, the taxpayer who was acting as managing agent and secretaries of other companies was appointed as a secretary of Tukvar & Co (TCO) Ltd till 1957. In 1955, TCO was in need of funds. The taxpayer provided guarantee to the bank due to which TCO was provided overdraft facilities by the bank. In 1957, TCO defaulted in repayment to the bank, which ultimately had to be settled by the taxpayer. Thus for the year under consideration ie 1957, the assessee claimed a sum of Rs 1.68 lakhs as bad debts. The Tax Authority disallowed the claim on the basis that the taxpayer's liability to pay the bank did not arise in the course of business as the taxpayer was not under an obligation to arrange funds for TCO. Further it was also contended that the impugned amount was also not allowable as bad debts since the business of the assessee was not that of money lending, and more so since such debt had never been taken into account for computing income of earlier years. The HC noted that furnishing of guarantee was incidental to taxpayer's business and that the debt due from TCO in respect of amount devolved on the taxpayer had become bad in the year under consideration and that these factual findings had not been challenged by the Tax Authority. The HC, therefore, held that the findings of the Tribunal could not be interfered and the impugned loss was allowable." (d) Essen (P) Ltd vs. CIT (1967) 65 ITR 625 (SO. "In this case, the taxpayer was a private limited company which was a managing gent of several concerns and it also derived income from an insurance agency. The taxpayer was managing a company named Amer Hind Manufacturers (Amer) which was engaged in the manufacture of carbon paper, ink and other allied products. Due to increase in need of funds for carrying on manufacturing operations, Amer entered into a managing agreement with the taxpayer, and under the said agreement, taxpayer advanced an amount of Rs 3.40 lakhs to Amer. Apart from lending money, taxpayer also guaranteed a sum of Rs 2 lakhs obtained by Amer from Indian Overseas Bank. Subsequently, Amer failed in its business and incurred heavy losses because of which it was unable to pay the bank as well as the taxpayer. As a result of the guarantee, taxpayer became liable to pay the bank outstanding dues of Amer. Thus total amount due to the taxpayer in respect of the guarantee as well as advances was Rs 4 lakhs which it claimed as a business deduction for AY 1956-57. The Tax Authority rejected the claim of the taxpayer and disallowed the loss on the ground that the management agreement did not mandatorily require the taxpayer to expend money by way of advances or give guarantees in favour of Amer. The Tribunal, by referring to the MOA of the taxpayer held that since the main objects of the taxpayer included lending of money as also providing guarantees, the advances made were only in pursuance of fulfilling its stated objects. Hence, the expenditure incurred would be allowable as business expenditure for AY 1956-57. The HC reversed the decision of the Tribunal and held the loss to be capital loss on the grounds that the agency was obtained with a precondition of giving loans and making advances to Amer. On further appeal by the taxpayer, the SC restored the decision of the Tribunal and held that HC had wrongly concluded the said loss to be capital in nature as also disregarded the facts which had been placed on record by the Tribunal. The guarantee and advances given to managed company were well within the objects of the taxpayer (as was evident from the MOA of the taxpayer), arising from the managing agency business. Hence such loss/expense incurred would be an admissible deduction for AY 1956-57." (e) ACIT vs. W.S. Industries (2010) 40 DTR 106 (Chennni Trio). "The SC decision was applied by Chennai Tribunal in the case of ACIT vs. W. S. Industries (India) Ltd )(2010)[40 DTR (Chennai)(Trib) 106]. In this case, the subsidiary of the taxpayer was supplying materials which were important for the taxpayer's business. This was held to be an important circumstance supporting the action of the taxpayer i.e giving corporate guarantee as well as trade advance being incidental to the taxpayer's business. It was also noted that the giving of guarantee had due sanction of the MOA of the taxpayer which contained suitable enabling object." CIT vs. Rao Construction (P) Ltd. (2013) 33 Taxman.com 613 (Guj)

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"In this case, the assessee-company deposited, equity shares and fixed deposits with the bank for obtaining bank guarantee for securing government tender. However, RB1 ordered for the liquidation of said bank. Accordingly, assessee-company wrote off the balance of FD and equity shares and claimed the same as business expenditure. The Assesses had availed such bank guarantee facilities as per the prescribed norms of the bank which required the purchase of the shares and margin money for using the bank guarantee also was required to be kept as a fixed deposit. This bank, when eventually was declared as sick bank, was unable to repay the deposits, the membership of the said bank also was cancelled and the steps were taken pursuant to the order of the Reserve Bank of India, Assessee-company, thereafter, had written off the balance. In such circumstances, both Commissioner (Appeals) as well as the Tribunal were absolutely justified in applying the ratio laid down by the Apex Court in case of Ramchandar Shivnarayan v, C1T [1978] 1 1 1 ITR 263 as also in case of Indian Aluminium Co. Ltd. v. C1T [1992] 84 ITR 735 (SO) to hold that such expenditure were needed to be spent by the assessee for the purpose of carrying on its business and are incidental to the business, therefore, any loss shall have to be considered as the revenue cost and not the capital cost." (g) CIT vs Spencers Co. Ltd. (No. 1 )(2014) 47 Taxman.com 55 "Assessee offered guarantee to 'S' bank on behalf of its subsidiary company - Subsequently, on invocation of guarantee clause, assessee made payment to bank and wrote tiff said amount in its books of account believing that nothing could be recovered from subsidiary company -Assessee's claim for deduction of said amount as bad debts was rejected by revenue authorities - Tribunal, however, allowed assessee's claim -Whether since amount in question was paid for business expediency of wholly owned subsidiary company, it was to be regarded as directly relatable to business of assessee and, thus, eligible for deduction as business expenditure - Held, yes." In view of the above facts, submissions, explanations and case laws, the assessee company GHCL submits that guarantee was given to Kxim Bank for subsidiary Indian Wales NV, Netherlands for working capital requirement of its step-down subsidiary GHCL Rosebys Ltd. The GHCL Rosebys Ltd, is SVP to acquire Rosebys Operations Ltd, UK, a home textile chain stores, such step-down subsidiary was in the business of Home- Textile. The company GHCL manufactures home textile consumer products at 'us Vapi (Gujarat) Unit and as the company wants to develop business globally, the subsidiaries were incorporate / acquired with an object to capture ready market. As the step-down subsidiary Rosebys Operations Ltd, UK was requiring working capital facility, therefore, Exini Bank issued NCDs for which the company, GHCL Ltd given corporate guarantee. Thus, the loan given in form of NCDs by Exim Bank lo subsidiary was for the purpose of business and as per commercial expediency of the company GHCL Ltd. There is direct proximity and relationship of assessee's business to the subsidiaries business. The payment on invocation of corporate guarantee is on account of global financial crisis, due to which the business of step- down subsidiary Roscbys Operations Ltd, UK suffered huge losses and finally went into liquidation. Thus, the loss on invocation of corporate guarantee suffered by company GHCL is for the purpose of business / incidental to its business, due to commercial expediency. Such loss is in the nature of revenue loss, the same is allowable u/s. 28(i) / 37(1) of the IT Act. It is therefore prayed that loss on account payment to Exim Bank for invocation of corporate guarantee for Subsidiaries of Rs. 241,62,54,990/- may kindly be allowed as revenue loss." 4.6. Having considered the facts and submissions and also various judgments of Hon'ble Courts, whereby it has been held that even where the facts are necessary to examine such a claim were not placed in the original return of income or through the revised return of income but by way of written submission through the letter in the assessment proceedings before the A.O., there would be no impediment in the CIT(A) entertaining such a claim. On the contrary, the cose of the appellant was on a better tooting for the reason that all the facts with regard to justification of the claim made through the written submission were on record before the A.O. and the same have not been rebutted by the AO. In this regard, the binding decisions / judgments and the Circular of the CBDT are relevant to be considered in such issues whereby such claims have to be admitted in the appellate proceedings. Some of them are briefly noted as under.

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4.6.1. In the circular of CBDT Circular No. 14 (XL-35) dated 11 April 1955, it has been observed that the AO being the taxing authority ought to have exercised his powers, in doing so he must act in a fair manner and his judgments may not be in a partition manner. Being a quasi judicial authority, the AO is bound to determine the correct tax payable by the assessee. In arriving at such correct tax, the AO is bound to allow the deductions and exemptions available to the assessee in accordance with law. The CBDT in its circular (supra) has clearly made out that the department is not supposed to take advantage of any mistake committed by the assessee or of ignorance of the assessee regarding provision of law and that the department is duty bound to even assist the assessee so as to make him aware of the provisions which may be beneficial to him. In view of the aforesaid circular, the A.O. ought to have taken the considered view on the issue before him when the judgment of jurisdictional High Court and other courts have been brought to his notice by the appellant in the assessment proceedings. 4.6.2. The Hon'ble Gujarat High Court in the case of S.R. Koshii Vs. CIT [276 ITR 165] relying upon various judgements have held that if an assessee under a mistake, misconception or on not being properly instructed is over assessed, the authorities under the Act, are required to assist him and ensured that only legitimate taxes due are collected. 4.6.3. Further the Hon'ble Gujarat High Court in the case of CIT Vs. Mitesh Impex Tax Appeal Nos. 2560 to 2563, 2567 to 2570 and 2602 & 2607 of 2009 - April 2, 2014 have allowed the grant of claim of deduction u/s.80IB or 80HHC to the appellant although such claims were made first time before the CIT(A) by the appellant, which was not claimed before the A.O. 4.6.4. The Hon'ble Bombay High Court in the case of CIT Vs. Pruthvi Brokers and Share Holders [2012] 23 Taxmann.com 23, has held that an ossessee is entitled to raise before appellate authorities additional grounds in terms of additional claims not made in returns filed by it. 4.6.5. The Hon'ble ITAT Kolkata in the case of Kanoi Industries Pvt. Ltd. Vs. DCIT [100 ITD 462 (KOL)] has held that the purpose of assessment proceedings is to assess the tax liability/ income of the assessee correctly in accordance with law and if the assessee is entitled to certain relief/deduction or benefits the assessee should not be derived or deprived of it even if fhe claim pertaining to the same is made for the first time before the Tribunal during pendency of appea before it. 4.6.6. In the case of Thomas Kurian Vs. ACIT [106 1TD 158 (Coch.)], the Hon'ble ITAT Cochin bench have granted the deduction u/s.80HHC for the first time before the first appellate authority claimed which the appellant has omitted to make in its return of income. 4.6.7. Even the Hon'ble ITAT, Delhi in the case of Xerox India Ltd., New Delhi Vs. assessee in ITA No. 1590/DEL/2010], has observed that an officer must not take the advantage of the ignorance of the assessee. 4.6.8. The Hon'ble Gujarai High Court in the case of CIT Vs. Milton Laminaies Ltd. (2013) 37 Taxmann.com 249 have held that while giving effect to order of CIT(A) A.O can compute income lower than that returned. 4.6.9. The Hon'ble Delhi High Court in the case of CIT Vs. Jai Parabolic Springs Limited (2008) 306 ITR 42 has also held that the decision of Honourable Court in the case of Goetze India Ltd. was limited to the power of the AO not to entertain claim for deduction, otherwise then by revised return and did not impinge on the power of the Tribunal. 4.6.10. The Honourable Supreme Court in the case of National Thermai Power Company Ltd. Vs. CIT (1999) 229 ITR 383 has observed that it was open to the assessee to raise the points of law even before the appellate tribunal. 4.6.11. Similarly, the Honourable Ahmedabad Tribunal in the case of DCIT Vs. Zydus Wellness Limited (2016) 76 taxmann.com 328 has held as under:- "36. Further we also observe that the main reason for denial of deduction by Id. Assessing Officer was thai ossessee has not filed revised return of income to make rightful claim. Ld. AR took us through the judgment of Hon'ble Bombay High Court in the case of Pruthvi Brokers and Shareholders (supra) wherein it has been categorically held that Assessing Officer is bound to entertain rightful claim of deduction made otherwise than by filing revised return. We

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find it pertinent to observe the ratio of the judgment of Hon'ble Bombay High Court in the case of Pruthvi Brokers and Shareholders (supra)........... 37. Respectfully following the judgment of Hon'ble Apex Court in fhe case of Smifs Securities Ltd. (supra), and the judgment of Hon'ble Bombay High Court in the case of Pruthvi Brokers and Shareholders (supra) we are of the view that Id. CIT(A) has rightly allowed the justifiable & correct claim of depreciation on 'goodwill' made by the assessee through revised computation of income without filing revised return of income during the course of assessment proceedings. Therefore, no interference is called for in the order of Id. CIT(A) on this issue. This ground of Revenue is dismissed." Thus, following the judicial pronouncements, the A.O. ought to have computed the income examining the claim made through letter even though no revised return of income was filed by the appellant. 4.6.12. Similar views have also been taken by the Hon'ble ITAT Indore in the case of Smt. Subhadra Devi Gupta Vs. ACWT whereby II has been held that in view of the various decisions and circulars of Board it can safely be said that the department is not permitted to ignore the due claim of the assessee and further is not expected to take advantage of the ignorance of the assessee and if any benefit is available to the assessee in accordance to the law that is expected to be extended to the assessee by the A.O. 4.7. It has been claimed that in the preceding years, the claims have been made by fhe appellant in fhe return of income itself. But in the year under consideration, due to oversight this claim remained to be made in the return of income and therefore, the same was claimed through the written submission in the assessment proceedings before the AO. Thus, the nature of claim was not new but had been made in the preceding years and fhe same has been allowed in fhe appellate proceedings. Thus by making the claim in the assessment proceedings through written submission was on account ot uniformity in the approach of claim and the same shows the bonafide intention of the appellant. 4.8. Thus, considering the aforesaid judgements and circular, as per the legal position, the CIT(A) and ITAT have power to allow deduction of expenditure / claim to appellant which it was otherwise entitled even though such claim was not made through revised return of income'. Even, the appellant, if entitled to a particular claim which remained to be claimed in the return of income may claim during the appellate proceedings. Thus the decision in the case of Goetze Indi Ltd- does not restrict the appellant to make such claim in the appellate proceedings. The A.O. ought to have dealt the issue under consideration on merits which he wrongly chosen not to do so, more so when the appellant has given the written submissions, explaining the reasons and citing the judgements for acceptance of its ciairn. Thus, the A.O.'s action for non consideration of the claim in the assessment proceedings on merits is found not correct in view of the judicial propositions of the Hon'ble Courts and circular cited above. Therefore, the issue under consideration on merits is decided as under. Firstly the background of the appellant company with regard to its investments in the form of subsidiary companies abroad made for the purpose of business and commercial expediency is briefly discussed as under. 4.9. If has been submitted by the appellant that the entire investment in wholly owned subsidiary - Indian Britain BV was made by the appellant for acquiring global units of soda ash manufacturing and textile business / chains as a measure of commercial expediency to further its business objectives and were primarily related to the business operations in India of the appellant i.e. for business purposes only. The appellant through this wholly owned subsidiary - Indian Britain BV formed further step-down subsidiaries in Netherlands and USA to expand its business of soda ash and home textile globally. Through such step-down subsidiaries, the appellant acquired SC Bega Upsom (renamed as GHCL Upsom Ltd) at Romania in soda ash manufacturing sector and similarly, the appellant acquired Rosebys UK Ltd in United Kingdom and Dan River Inc in USA to expand its home textile business, as the company is having plants for textile manufacturing at Madurai and Vapi. Investment in subsidiaries, step-down subsidiaries and acquisition of retail chains was only to expand business globally. After such acquisitions, the sales and exports shoot up substantially and international brands started taking GHCL Textile products even after reduction in shares / liquidation of subsidiary - Indian Britain BV.

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4.10. The brief background of the business of the appellant company is as under:- 1. GHCL Limited ("GHCL") was in incorporated in 1983 and started its Soda Ash Manufacturing in Gujarat in 1988. 2. Became one of the largest Soda Ash Producers of the Country and attained position of Pre-eminence in Sodo Ash Industry by year 2000. 3. Entered in Textile Business in 2001 by acquiring and merging a sick spinning mill "Sree Meenakshi Mills" based at Modurai in the State of Tamil Nadu. GHCL turned around this unit by downsizing labour cost, upgrading technology and modernization and made it profitable in a short span of time. 4. Total revenue of Sodo Ash and Textile segment of GHCL in FY'2003-04 and FY'2004-05 as under: Rs. In crore

Revenue FY 2003-04 FY 2004-05

Soda Ash & Inorganic 376 431

Textile 86 94

Others 8 8

Total 470 533

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a. GHCL acquired Dan River Inc, USA in Jan'2006 - Dan River was Third Largest US Home-Textile Manufacturer with over 125 years of B2B relationship with around 100 Retailers including big names like Wall-Mart, K-Mart, J C Penny, Target etc. b. In UK, GHCL acquired Rosebys Reiqj] Chgin in July 2006 from Lloyds TSB Development Capital Limited, which was having 325 Home-Textile retail outlets across UK. c. In March'2007, GHCL acquired Best Textile International, USA who was a premier supplier of re-usable textiles and garments to Institutional laundry industry (hospitals and hotel), with the key product category of Table Linen, Chef's Apparel, Aprons. Thus, the acquisitions of Home Textile Business in_USA_a_nd fjetajj Chainjn JJK were in the line of expansion after setting-up oLVaBJ Home Textile Plant, so that from India products con be lined in USA and UK as the India became processing hub of home furnishing textile items. ACQUISITION STRUCTURE - The above acquisitions were held in a well structured and identifiable group of companies as per RBI norms. These were held by'INDIAN BRITAIN B.V, NETHERLANDS(NL), a 100% subsidiary of GHCL Limited , as under:

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxx 4.11. It has been noticed that the aforesaid acquisitions in Romania, USA and UK were to expand the existing business of the appellant company of Soda Ash and Home Textile Business to become the global player. So it was utmost required to make the investment in subsidiary company because of the requirement of business expansion and due to commercial expediency and the same is briefly discussed as under:- 1. The aforesaid acquisitions in Romania, USA and UK were to expand GHCL's existing Soda Ash and Home-Textile business so that GHCL can become Global Player. 2. Soda Ash: SC Bega Upsom Romania [GHCL Upsom Limited) Acquisition and Developments. a) In Soda Ash, GHCL had a leading presence in India in 2005 with a capacity of around 6 Lac Ton per annum. With to view to have Global footprint and penetrate East European markets like Romania, Hungary, Croatia, Moldova, Yugoslavia, Slovakia and Czech Republic, it acquired SC Bega Upsom (renamed as GHCL Upsom Limited) through Indian Britain. b) It also entered into agreement to acquire majority interest in only other Soda Ash manufacturing Company in Romania- The intent was to have a monopolistic advantage of Soda Ash manufacturing in Romania and competitive advantage in East European region. The acquisition had several commercial advantages for GHCL India some of which were as follows: i. With global footprint, GHCL could offer fixed rate contracts to its global customers like P&G, Saint Gobain, Unilever, etc who required soda ash for detergents and glass and provide them supply in any part of the world. ii. Further, it also gave GHCL India the opportunity to study the operational processes for manufacture and waste disposal used at GHCL Upsom and implement the same in its own plant. iii. GHCL India could also import soda ash from GHCL Upsom to cater to the local growing demand. In fact, in F.Y. 2006-07, GHCL India imported soda ash worth Rs. 9.09 Cr and sodium bicarb of Rs.0.65 Cr from GHCL Upsom c) GHCL Upsom was located about 400 KM from Capital City of Bucharest with a capacity of 2.25 Lac Per Annum d) The plant was spread over 80 hectares with a market share of 25% of Domestic Market. e) The acquisition was completed after Financial, Legal and Environment due diligence conducted by Ernst & Young, Musat & Asociatii, Pricewater House Coopers respectively. 3. Home-Textiles Business Expansion: Vapi Project and Acquisition in USA and UK. a] After turning around and stabilizing Textile Spinning business in 2004, GHCL engaged KSA Technopak, a renowned consultant, who advised GHCL to expand its textile business by entering in Home Textile Segment both in India and Overseas.

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b) Objective of Textile expansion was to be present in the entire textile value chain right from "Spinning to Retail", which included spinning, weaving, processing, Institutional Sales (B2B) and Retail Chain. c) To fulfil the objective, at first stage, GHCL set-up a state of art Home Textile plant comprising of weaving, processing and made up- facility at Vapi, Gujarat at a cost of Rs.220 Crores which was commissioned in March 2006. d) Subsequently GHCL carried out acquisitions of Home Textile business in USA and Retail Chain in UK which were in the line of expansion after setting-up of Vapi Home Textile Plant, so that from India products can be lined in USA and UK as the India become processing hub of home furnishing textile items. e) In Home Textile Segment, USA is the largest market with almost 40% market share with next being Europe with almost 30% market share. f) The objective of the acquisition was to capture and expand Home Textile market in USA, UK and European Region. g) Had we not setup VAPI Home Textile Plant, there was no need to acquire Dan River Inc in USA and Rosebys Operations Limited (ROL) in UK. h) DAN River Inc (DR) USA Acquisition Dan River was third largest US Home Textile Manufacturer with over 125 years design and development experience. Wos headquartered in Danville, Virgina. Strong B2B relationship 100 Retailers like Wall-Mart. K-Mart, Bed Bath and Beyond and J C Penny etc. Revenue - US$250 Million • Financial and Legal Due Diligence done by E&Y and Stockle Greene LLP • Acquisition completed in Jan'2006 Strong Product alignment with GHCL's Home Textile Vapi Division Post acquisition, GHCL Vapi unit India made sales of around Rs.33 Crore and Rs.78 Crore to Dan River in FY'2006-07 and FY'2007-08. i Rgsebys Operations LimitedJJK (ROL) Acquisition • ROL was one of the largest Home Textile Retailers in UK with 325 Retail outlets. • Headquartered in Manchester's UK Revenue - US$250 Million Retail space around 7,70,000 sq.ft. • ROL also had a highly automated distribution and warehousing facility well connected by Rail and convenient located for Imports. • The business was acquired from Lloyds TSB Development Capital Limited wherein the transaction was run over a period of two months during which Grant Thornton, Delhi and Beachcroft LLP, UK were engaged to carryout financial and legal due diligences respectively and Beachcroft and Adelshaw Goddard were the Attorneys la conclude the transactions for both the parties. • Acquisition was completed in July'2006. • The acquisition was done with a well crafted strategy as the product profile of Rosebys could be synergized with Vapi Plant as about 59% of the revenue was contributed from bedding / curtain products which were largely sourced from UK and UK based suppliers till then. At the time acquisition, DAN River Inc., USA and Rosebys Operations Limited (ROL),-UK were not making profits and our long term plan was to make them profitable by restructuring their product souring and aligning it with Vapi. The acquisitions were conducting under "Long Term Business Growth Strategy" and it is well proven that it normally takes around 3- 4 years to stabilize and turnaround businesses. The experience from the aforesaid acquisitions proved extremely helpful for Indian Textile business which is evident from the fact that the Revenue of the textile segment increased from mere Rs.90 Crs. in 2003-04 to Rs.900 Crores in 2012-13: Post acquisition revenue of Soda Ash and Textile GHCL India Rs. In Crs. Revenue FY FY FY FY FY FY FY 200i-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13

I.T.A Nos. 976/Ahd/2014 & 10 others Page No 112 Dy. CIT vs. GHCL Ltd. & 10 others

Soda Ash / 708 653 857 831 927 1,148 1216 Inorganic

Home Textiles 363 417 383 383 571 749 909

Total 1,071 1,071 1240 1214 1498 1,897 2125

Additionally, GHCL succeeded in establishing long term relationship with such eminent customer based like Wall-Mart, K-Mart, JC Penny, Macy's etc. which shall prove beneficial for Indian Textile operations for years to come. In view of the above, it is beyond doubt established that the investment in Indian Britain BV [wholly owned subsidiary) is for business reasons only and therefore, the loss on such investment/shores should be allowed as business loss. 4.12. The appellant during the course of appellate proceedings has explained the acquisitions by subsidiary / step down subsidiary companies for which the invocation of corporate guarantee to Exirn Bank has taken place. For the sake of ready reference, the same is reproduced as under:- (i) Acuisiton Structure - The above acquisitions were held in a well structured and identifiable group of companies as per RBI norms. These were held by Indian Britain BV, Netherlands (ML), a 100% subsidiary of GHCL Limited, as under: xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Acquisition__of _Rgsgbys - The subsidiary Indian Britain BV acquired Rosebys through Indian Wales INV, through following resolutions: a) Inboard meeting on 18-06-2006, the board was informed that GHCL forayed in home textile segment by setting up production facilities at Vapi to manufacture bed sheets and curtains with an investment of Rs. 2.2 Billion. The plant was commissioned in the month of March 2006. The board was further informed that by acquiring US based Dan River Inc. GHCL entered in the distribution segment with USD 250 Mn top line. Dan River is the third largest supplier in the bedding product...... The next step in the value chain of manufacturing to customer is the retail. The company is in discussion with the shareholders of the retail chain namely Rosebys. The brief profile of Rosebys are given below: Headquartered in Manchester, UK.. > One of the largest retail home textiles chain. > 325 Stores for a total footage of 770,000 square feet ( 1 90 in high street and 1 30 retail parks). > Generally mid market value oriented. > 2200 employees (including part time). > Two retail divisions - Basic Household Textiles and Fabric Warehouse. > To acquire only Basic Household Textiles division.

> Annual Turnover of about 105 million pounds for FY ending April 2006. > Competitors - Marks & Spencer, Next, !KEA, Debenhams, etc. This acquisition can bring following on table for GHCL: > Fully integrated player from spinning to retail. > Immediate access to UK market. > Market for high value items of Vapi. > Increased sourcing from India, Pakistan and China - to improve margins. > Outsourcing of back office to India - cost reduction. Price of the acquisition is £ 21 million to be paid at the time of completion for 100% equity. The pricing stated above is based upon the asset details as given in the draft MOU for the period ended April 2006 and any negative valuation impact on the same would entitle GHCL to make adjustment in the said pricing.

I.T.A Nos. 976/Ahd/2014 & 10 others Page No 113 Dy. CIT vs. GHCL Ltd. & 10 others

The working capital of Rosebys is likely to increase by £ 3.2 million by July 31, 2006. GHCL would compensate Rosebys on this increase in working capital at actual figure to be determined at the time of the acquisition. Due diligence (financial, legal) to start immediately. Deal to be closed by July 31,2006. Thus, the investment up to UK £ 21 Mn for acquisition of Home textile chain Rosebys UK was approved (Pg. no. 39 to 40). b) In board meeting on 17-07-2006, the board was informed that acquisition of Rosebys UK will be made through Indian Wales NV, a wholly owned subsidiary of Indian Britain BV, which is a wholly owned subsidiary of GHCL Ltd. The board was further informed that the investment of UK £ 27 Mn (USD 50 Mn apprx) will be financed partly from debt of $ 37 Mn and balance from FCCB proceeds available at Netherlands for investment. The Board deliberated the proposal for acquisition of ROSEBYS businesses for £ 27 million and authorized Mr. P Sampath and/ or Mr. R S Jalan Managing Directors to negotiate the terms and conditions, finalise transaction structure, sign and execute necessary agreements and disclosure. Guarantee for RosebyS Acquisition: The Board was informed that in line with the approval of the Board of Directors in their meeting held on June 18, 2006 for making investment directly / indirectly of approximately £ 27 million plus expenses, if any and subject to due diligence and necessary approvals. The Board was further informed that the acquisition to be done through Indian Wales NV in Netherlands and Company has finalized the financing of US Dollar 37 million with Export Import Bank of India in the Netherlands entity. The borrowing is at an Interest cost of 6M LIBOR + 3.50% with an upfront fees of 1%. The security for the same is the corporate guarantee of GHCL and pledge of 51% equity of Rosebys. The arrangement with the Exim Bank is 80% funding of acquisition cost which translated to USD 40 million. Hence, discussion with Exim Bank for enhancing this financing to USD 40 million is in progress and if approved, the total borrowing may reach to USD 40 million and the Banking & Operations Committee of the Company will be authorized to take all necessary actions. After deliberation, Board passed following resolutions: "RESOLVED that subject to provisions of Section 372A and other applicable provisions, if any of the Companies Act, 1956 the Company do take on record and approve the sanction letter no. CBGJV-429:77 dated July 10, 2006 issued by Export Import of India ("Exim Bank") to the company's step down wholly owned subsidiary Indian Wales NV {previous name Melidor NV), Amsterdam, Netherlands, setting out the terms and conditions subject to which Exim Bank has agreed to extend term loan facility of US $ 37.00 million to Indian Wales NV by way of subscription to non convertible debentures (NCD) towards part financing inter alia acquisition of Rosebys Ltd. UK, in respect of which the Company is required, as per the said sanction terms, to provide guarantee for the repayment of the above NCD issued by Indian Wales NV" (Pg. no. 41 to 42). c) In board meeting on 30-10-2006, the board was informed about acquisition of Rosebys UK. Acquisition of Roscbys and its funding: The Board was informed that in line with the Board approval in its meeting held on July 17, 2006, GHCL through its step down wholly owned subsidiary GHCL Rosebys Limited registered in UK acquired Rosebys Operations Limited, Rosebys Holding Limited and Rosebys (2004) (called "Rosebys"'] on July 28, 2006. The Board noted mat Mr. Sanjay Dalmia, Mr. Anurag Daimia, Mr, P Sampath, Mr. R S Jalan, Mr. Sanjay Purohit, Ms Sue Tenant as CEO and Mr. Mark Dyson as CFO were appointed an the Board of the Company. The Board was also informed that Indian Wales NV a step down subsidiary of GHCL, which is the holding Company of GHCL Rosebys Limited has funded the cost of acquisition of USD 50 million of which USD 37 million has been borrowed from Exim Bank (against corporate guarantee of GHCL Limited and pledge of shares of Rosebys to the extent of 51% as approved by the Board in the meeting held on July 17, 2006). In order to maintain an 80:20 ratio of debt to own contribution of funding any acquisition. Indian Wales NV had further approached Exirn Bank to lend USD 3 million on the same security and the sanction for the same has been received and the documentation is in progress. Further, the Board took note that working capital limits have been arranged for Rosebys Operations Limited through an Overdraft facility for £ 3,000.000 and ancillary facility for £ 500;000 with Barclays

I.T.A Nos. 976/Ahd/2014 & 10 others Page No 114 Dy. CIT vs. GHCL Ltd. & 10 others

Bank Pl.C and its associates against the security of Debenture on the bank's standard form and a letter of comfort from GHCL Limited.

EXIM Bank Funding The Board noted that Exim Bank had agreed to provide USD 30 million 10 Indian England NV which will be used for the purpose of acquisition of soda ash business in Romania as Informed and approved in the Board Meetings dated January 19, 2006 and April 21, 2006. However, the total funding has been realigned as Follows, in view of the increase in funding for Rosebys acquisition. The Board further noted the summary of funding arrangement with Exim Bank as follows: Original New Nature of

Indian England NV 14 13 Debt/ Corporate Guarantee For GHCL Upsom SA Debt/Corporate Guarantee

30 77

Indian Wales NV 37 40 Pledge on 51% of Rosebys, For Rosebys shares and Corporate guarantee

Total 67 67

The Board authorised the Banking & Operation Committee of Directors to take all necessary actions in this behalf (Pg. no. 43). 4. The Exim bank has given $ 37 Mn through Debenture Subscription Agreement dated 19-07-2006 (Pg. no. 44 to 65) and S 3 Mn through Debenture Subscription Agreement dated 17-11-2006 (Pg. no. 66 to 86), such debentures were allotted for seven years, as per agreement, re-purchased at means the date of expiry of a period of seven (7) years from the date of first subscription on which the outstanding debenture shall fall due for repurchase by Indian Wales (Pg. No. 47/B & 71) respectively. 6. Your goodself further discussed about usage of $ 40 Mn funds received from Exim Bank by Indian Wales NV, subsidiary company and further step-down subsidiaries in home textile chain Rosebys UK. As explained above, $ 40 Mn and FCCB funds from Indian Britain BV of USD 5.20 Mn were infused in home textile chain Rosebys UK. Trie position of application of funds as per balance sheet of Indian Wales NV as on 31-03-2007 is as under (Pg. no. 87 to 100): INDIAN WALES NV - STEP-DOWN SUBSIDIARY (To acquire Rosebys Ltd, UK - Textile Chain)

Source USD INR Application USD INR (Mn) (Cr) (Mn) (Cr)

Capital from Indian Britain 0.080 0.36 Investment in Rosebys 20.808 89.61 BV

Loan from Indian Britain BV 5.200 22.61 Loan to Rosebys 25.163 109.43

Loan from Exim Bank 40.000 173.96 Loan to others 2.896 12.60

Liabilities 3.992 17.36 Cash at Bank 0.020 0.09

Misc Expenses 0.362 1.57

Exchange Loss 0 0.89 (conversion)

I.T.A Nos. 976/Ahd/2014 & 10 others Page No 115 Dy. CIT vs. GHCL Ltd. & 10 others

P&L A/c 0.023 0.10

Total 49.272 214.29 Total 49.272 2 1 4.29

I.T.A Nos. 976/Ahd/2014 & 10 others Page No 116 Dy. CIT vs. GHCL Ltd. & 10 others

Yi- 2006-07 Vr 3007-08 Vr 2008-09

Dan Riverine, USA Textile Export 343791548 782710393 0

Dan River Inc. USA Trading Exports (bed 91579264 0 0 sheets)

SC GHCL Upsom SA Import of Soda Ash 90971227 0 0

SC GHCL Upsom SA Import ol 6544852 1) 0 Sodium Bicarbonate

Rosebys Operations Textile Exports 0 46769133 35443627 Ltd

It is further submitted that due to above acquisitions, there was increase in export of home textile made-ups from GHCL Vapi Unit to ready customers for its products and direct access to consumers in UK and USA, as these customers were having business relations with Dan River Inc, USA and Rosebys Operations Ltd, UK. The summary of exports to UK and USA in year 2008-09, 2009-10, 2010-11.2011-12 and 2012-13 are as under: DETAILS OF EXPORT SALES TO UK AND USA

SN Customer name County FY 2008-09 iFYJW200 FY 2010-11 FV 2011-12 FY 2012-13

1 Edinburgh Woollen Mills UK 4,039,822 . . _ Ltd

2 Home Base Ltd Avehury UK - - - 55,388,535 61,328,992

3 Home Retail Group UK - - - 56,505,359 70,573,052

4 House of Fraser (Stores) UK 25,112,469 66,449,555 127.370,228 73,867,269 47,661,636 Ltd

5 Rosebys Operations Ltd UK 35,443,627 - - - -

6 American Dawn Inc USA 9,477,860 1,021,539 10,677,994 - -

7 Anna's Linens USA 11,851,837 - - - -

8 AQ Textiles LLC USA - - - 76,013,355 39,534,644

9 Babies R US USA - - - - 5494,484

10 Bee a Industries Limited USA - - - 7,438,008 -

11 Big Lots Stores Inc, USA - - - 49,135,879 21,439,916

I.T.A Nos. 976/Ahd/2014 & 10 others Page No 117 Dy. CIT vs. GHCL Ltd. & 10 others

12 Bristol Associates Ltd USA 5,409,909 - - - -

13 Chimes Inc. USA - - - 5,581,661 -

14 Cotton Sheet LLC USA - - - 169,337,585 1,438,204,714

15 Croscill Inc. USA - - 1 5,904,3 1 3 54,627,215 20,199,727

16 Domestications USA | __ - - - - 10,665,489

17 E & L Co. Ltd USA - - - 17,012,570 17,262,164

18 Elite Home Products Inc USA - 7,409,099 3,030,124 89,456,945 85,055,223

19 Fox rich textiles. Inc. USA 27,038,273 8,790,535 3,360,804 - -

20 G S Nizami USA 5,021,145 - - - -

21 Grace Home Fashions USA 55,455,359 237,472,868 313,493,315 15,412.107 . LLC

22 Heritage Linen Craft Inc. USA 57,704,313 20,183,157 78,513,581 _ _

23 Hudson Bay Company USA - - - 13,669,944 -

24 Integrated Textile Group USA 518,336,957 1 15,209,661

25 J & S Houseware Corpn USA 21,460,788 3,335,011

26 Kmart Corporation USA 65,419,051 246,406,998 183,528,675 228,436,814 198,709,284

27 Li & Fung India Pvt Ltd. USA 58,827,302

28 LNT Merchandising Co, USA 410,916,729 . . LLC

29 Macy's Inc, USA . - 239,513,487 742,410,831 816,003,075

30 Madison Industries Inc USA 16,435,816 - - - -

31 Millwork Pte Ltd USA - - - 102,140,447 -

32 Nantucket Distributing USA - - - 3,325,75V -

33 Niki international inc. USA - - - 55,629,096 1——— J65,2_L2_

34 Pine Cone Hill USA 99,877 - - - -

I.T.A Nos. 976/Ahd/2014 & 10 others Page No 118 Dy. CIT vs. GHCL Ltd. & 10 others

35 Planet home interl LLC. USA 6,976,040 .

36 Revman International, USA 44,319;038 139,745,869 328,735,608 402,988,471 Inc.

37 Robert Alien & Assoctes USA 10,501,068 . Inc

38 Rockford Internl Pvt Ltd USA 1 .400.6 1 7

39 Royale Linens, Inc USA 10,504,348 - - -

40 Sam Salem & Son USA - 2,118,851 - - -

41 Scent-Sation, Inc. USA 17,673,036 2,224,905 - - -

42 Sears Holding USA 22,462,833 71,858,874 45,569,939 Corporation

43 Sleep & Beyond USA 221,544 - - - -

44 Snowhite textile inc. USA 4,212,467 - - - -

45 Springs global us inc., USA - 98,189,037 385,755,653 1,118,974,935 1,134,131,321

46 Startex industries, inc. USA - 4,322,718 - - -

47 Thread Trading USA 8,684,039 Makwana

48 U.S. Polo Assn. USA - - 54,502,548 - -

49 Wal-mart stores inc. USA - iTvorTfbT 1,635,438 -

50 Westport linens inc. USA ________ r 2,267,510 - - -

51 William s-sono ma, inc. USA - - - - Z^ZH^84T]

52 Zetex international ltd. USA - 5,561,179 - - -

TOTAL 801,139,799 760,573,067 1,697,066,529 3,923,843,142 4,520,334,338

Thus, due to above acquisitions in foreign, the export from GHCL Vapi Unit was increased from Rs. 80.11 crore to Rs. 452 crore. Apart from the above, the export to various other countries also increased due to ready customer chain of Dan River and Rosebys Operations, which gives enduring benefits to the company GHCL at large and the same will further give benefits to the company in the years to come. 9. After 7 years, the subsidiary Indian Wales NV due to huge losses amounting to Rs. 333.04 crore (Pg. no. 103) from business of step-down subsidiary Rosebys Operations Ltd, the company Indian Wales MV was not able to pay the borrowings and liabilities. The position of funds as per balance sheet of Indian Wales NV as on 31-03-2013 and 31-03-2014 furnished (Pg. no. 101 to 109). Therefore, as per debenture subscription agreement, NCD's funds were recovered by Exim Bank from guarantor GHCL Ltd, the holding company. Correspondence and payments in this regard are as under:

I.T.A Nos. 976/Ahd/2014 & 10 others Page No 119 Dy. CIT vs. GHCL Ltd. & 10 others

(i) NCD of $ 37 mn - The Exim Bank demanded for payment of USD 37 inn along with interest of $ 148,870 up to 24-07-2013 vide letter dated 16-07-2013 (Pg.no. 110 to 111). The Exim Bank mentioned as under: "Sub: - Subscription to NCDs of USD 40 Mn issued by Indian Wales - JVJ/. Indian Wales)", Amsterdam- the Netherlands - Demand for payment of USD 3 7mn value July 24, 2013 Please refer to the Debenture Subscription Agreement dated July 19, 2006, and Supplemental Debenture Subscription Agreement dated November 17, 2006, [collectively referred to hereinafter as Debenture Subscription Agreement] in respect of the subject facility, executed by Indian Wales as the issuer, GHCL Limited (GHCL) as the Guarantor, and Exim Bank as the Subscriber. 2. Exim Bank, vide its letter no. CBG: JV~429/436:46 dated April 29, 2013, raised a demand on Indian Wales for repayment of the first tranche of principal of USD 37 mn, along with interest accrued thereon, value July 24, 2013, in terms of the said Debenture Subscription Agreement. In this connection, we have received a communication from the Issuer, Indian Wales, dated July 10, 2013. wherein they have expressed their inability to make payment to Exim Bank as there is no cash flow in Indian Wales on account oj ili, step-down subsidiary, namely "Rosebys Ltd.", being under Administration in UK since September 2008. 3. Under the said Debenture Subscription Agreement, GHCL has unconditionally and irrevocably guaranteed the payment under NCDs subscribed to by Exim Bank on behalf of Indian Wales, in the event of default by Indian Wales. We, therefore: hereby raise a demand on you for payment of USD 3 7 mn, along with interest of USD 148,370n accrued upto July 24, 2013, within 30 days from the date of this letter alongwith further interest thereon as per terms oftha said Debenture Subscription Agreement-, 4. The aforesaid aggregate amount of USD 37,148,870 may be made to our nostro account as under: CITI Bank, New York SWIFT: CITIUS33 Account No.36046887. 5. Please acknowledge receipt." (ii) The company GHCL vide letter dated 17-07-2013 (Pg. no. 112) requested for payment within 30 days from the date of demand notice and also requested for payment in Indian currency and not in US dollar as both are Indian entities. The company GHCL also requested for date of conversion, rate of conversion, exact liability in Indian Rupee and interest rate to be applied from 24-07-2013 10 till date of payment. The Exim Bank vide letter dated 02-08-2013 (Pg. no. 113) stated that "2. The Rate of Interest applicable an the crystallized Rupee Loan (Equv. USD 37 mn, plus accrued interest) far Rs. 2,21,27,05,639/- would be 12.00% p.a. from July 24, 2013 lill date of payment. Exim Bank reserves the right to increase the interest rate, if crystallized INR amount along with applicable interest is not paid by August 15, 2013." The company GHCL made payment of NCD $ 37 mn along with interesi lill valued at 24-07-2013 and interest, from 24-07-2013 to 12-08-2013 to Exim Bank in Indian Rupees vide letter dated 13-08-2013 (Pg. no. 114). where in forwarding following payment details were given to Exim Bank: "Sub: - Pgyment of USD 37 mn along with interest of USD 148870.00 Value date July_2_&_20l3 This has reference to payment of USD 37 Mn on behalf of Indian Wales alongwith interest of S 148870.00 accrued upto 24.07.2013 aggregating USD 37,148,870.00 The total liability in foreign currency i.e. USD 37,148,870.00 has been into rupees and the amount comes. to Rs, 221,27,05,639,00 which has been remitted to Exim Bank, Ahmedabad-in following trenches: Sr. No. Amount In Rupees Date of Payment

1 50,00,00,000 06.08.1013

2 50,00,00.000 07.08.2013

j 511,00,00.000 08.08.2013

1 71,27.05,639 13.08.2111

Total 221,27,05,639

I.T.A Nos. 976/Ahd/2014 & 10 others Page No 120 Dy. CIT vs. GHCL Ltd. & 10 others

In addition, interest amount of Rs 1,15,90,393.00 from 24.7.2013 to till 12.08.2013 has also been paid by us on 13.08.2013. With the above, she total liabilities of USD 37 million stands Nil / repaid Therefore, we hereby request you to provide us the following' 1. No Due Certificate 2. Cancellation of NCD 3. Handover the original title deeds of Yarn Division, Madurai." After receiving above payments, the Exim Bank issued letter for repayment of first trench for USD 37 mn along with interest (Pg. No. 115). Where the Exim Bank stated that: "Sub: Subscription of NCDs of USD 40Mn issued by Indian Wales N.V. Indian Wales)” Please refer to the debenture subscription agreement dated July 19, 2006 and supplemental debenture subscription agreement dated November 17. 2006. collectively referred to hereinafter as Debenture Subscription Agreement] in respect of the subject facility, executed by Indian Wales as the issuer, GHCL Ltd (GHCL) as the guarantor and Exim Bank as the subscriber. 2. First Tranche of USD 37mn, along with accrued interest was due jor payment on July 24, 2013. 3. We hereby confirmed the receipt of USD 37mn along with inlen'.-i! towards payment of first tranche of NCD on August 13, 2013. " (vi) NCD of $ 3 mn - The Exim Bank demanded for payment of USD 3 mn along with interest of $ 54,008.82 up to 26-11-2013 vide letter dated 06-12-2013 (Pg. no. 116). The Exim Bank mentioned as under: "Sub: - Subscription to NCDs of USD 40 Mn issued by Indian Wales - /V. V. Indian Wales)", Amsterdam- the Netherlands - Demand for payment of USD, 3mn Please refer to your Letter no. GHCL/Dec2013/25/2013-14 dated November 22. 2013 on the captioned subject. 2. Total dues of USD 3054008.82 (Principal of USD 3 mn and Interest of USD 54008.82 upto 26.11.2013), has been crystallized into INR 19,03,32.010 on 27.11.2013, at a conversion rate of 1 USD = Rs. 62.32. 3. The Rate of Interest applicable on the crystallized amount of Rs. 19,03,32,010 (Inclusive Service tax of Rs. 6I80J would be Exim Baiik'x ITMLR +200 bps. i.e. at 12.00% p.a. (Exim Bank's LTMLR a! present is 10%) from November 27, 2013 till date of payment. Exim Bank reserves the right to increase the interest rate, if crystallized INR amount along with applicable interest is not paid by December 21, 2013. 4. Please acknowledge receipt and arrange to make paymen! by December 21,2013." (vii) The company GHCL made payment of NCD $ 3 mn along with interest till valued at 26-11-2013 and interest from 26-11-2013 to 23-12-2013 to Exim Bank in Indian Rupees vide letter dated 24-12-2013 (Pg. no. 117), where in forwarding following payment details were given to Exim Bank: "Sub: - Payment of USD 37 mn along with interest of USD 54008.82 - Value date 26.11.2013 This has reference to payment of USD 3 Mn on behalf uf Indian Wales ulongwiih interest of $ 54008.82 accrued upto 26.11.2013 aggregating USD 3,054,008.82 The total liability in foreign currency i.e. USD 3,054,008.82 has been converted into rupees and the amount comes to Rs, 19,03,32,010.00 (including service tax of Rs. 6180.00) which has been remitted to Exim Bank, Ahmedabad on23.12.2013 In addition, interest amount ofRs 16,26,948.00 from 26.11.2013 to 23.12.20J3 has also been paid by us on 23.12.2013 With ihe above, the total liabilities of USD 3 million stands Nit / repaid. Therefore, we hereby request yon to provide us the following: 1. No Due Certificate 2. Cancellation of NCD 3. Handover the original title deeds of Yarn Division, Madurai." (viii) After receiving above payments, the Exim Bank issued no due certificate for repayment of USD 40 mn along with interest vide letter dated 28-03-2014 (Pg. No. 118). The same is reproduced hereunder: "Re: Foreign Currency Term Loans aggregating USD 40_mn under Overseas Investment Finance Programme (OIF) to Indian Wales N. V. (Indian Wales)L Amsterdam, The Netherlands by way of subscription to NCDs issued by Indian Wales

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Please refer to the requesi letter of GHCL limited (GflCLj (Corporal*.' Guarantor) dated December 24, 2013 for issuance of No Dues Certificate in respect of the captioned Loans. With reference to ihe Debenture Subscription Agreement dated July 19, 2006, and Supplemental Debenture Subscription Agreement dated November 17, 2006, (collectively referred to hereunder us Debenture Subscription Agreement) in respect of the subject facility, executed by Indian Wales as the issuer, GHCL Limited (GHCL) as the Guarantor, and Exim Bank as the Subscriber. 2. First Tranche of USD 37 mn along with accrued interest wax due for payment on July 24, 2013. Second Tranche of USD 3 mn along with accrued interest was due for payment on November 24, 2013. 3. We hereby confirm the receipt of USD 37 mn along with interest towards payment of first tranche of NCD on August 13. 2013 and USD 3 mn along with interest towards payment of second tranche of NCD on December 23, 2013 aggregating USD 40 mn along with interest thereon. 4. Accordingly, we hereby confirm that the Corporate Guarantee issued by GHCL for USD 37 mn and USD 3 mn to secure the aggregate NCDs of USD 40 mn shall be null and void." 10. As explained and evident in Para no. 9 above, the appellant company has paid Rs, 222,42,96,032/- (Rs. 221,27,05,639/- + Rs. 115,90,393/-) against corporate guarantee of $ 37 Mn and paid Rs. 19,19,58,958/- (Rs. 19,03,32,010/- + Rs. 16.26.948/-) against corporate guarantee of S 3 Mn. The payments made by GHCL for corporate guarantee of $ 40 mn are as under: Date Amount (Rs) Amount Particulars (inS)

06-08-13 221,27,05,639 37,148,870 $ 37 Mn Principal amount of NCD and $ to 13-08- 148,870 interest on NCD 13

13-08-13 115,90,393 interest @ 12% on outstanding amount of Rs. 22U7.05.639/- from 24-07-13 to 12-08-13

Total 222,42,96,032 Payment for $ 37 Mn - Corporate Guarantee

23-12-13 19,03,32,010 3,054,008,82 $ 3 Mn Principal amount of NCD and $ 54,008.82 interest on NCD

13-08-13 16,26,948 Interest @ 12% on outstanding amount of Rs. 9,03,32,010/- from 26-1 1-13 to 23-12-13

Total 19,19,58,958 Payment for $ 3 Mn - Corporate Guarantee

Grand 241,62,54,990 Payment by GHCL to Exim Bank for Total corporate guarantee for subsidiary - Indian Wales NV

Thus, the appellant company GHCL paid Rs. 241,62,54,990/- during financial year 2013-2014 (AY 2014- 2015} to Exim Bank due to invocation of corporate guarantee given for subsidiary company, Indian Wales NV." 4.13. The appellant has further submitted that the investment in 100% subsidiary company Indian Britain BV was for the purpose of expansion of its existing business of soda-ash and textile in the global world. The

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object authorizes company to carry business in the global world through any subsidiary company or companies and to financing such subsidiary company or guarantying its liabilities, and thus the acquisitions were made as per the objects of the appellant company. For ready reference the objects of the appellant company are noted as under- "32. To acquire and undertake the whole of any part of the business property and liabilities of any person or company carrying on or proposing to carry on any business which the company is authorize to carry on or possessed of property suitable for the purpose of this company, or which can be carried on in conjunction therewith or which is capable of being so conducted as to directly or indireclly benefit the company." 33. To underwrite, acquire, take up and hold shares, stocks, debentures, debenture stocks, bonds, obligations and securities issued or guaranteed by any company constituted or carrying on business in India or any foreign country in connection with the business which the company is authorize to carry on and to subscribe for the same, either conditionally or otherwise, and to guarantee the subscription thereof and to exercise and enforce all rights and powers conferred by or incidental to the ownership thereof. 34. To establish or promote or concur In establishing or promoting any company or companies in India or anywhere else in the world for the purpose of acquiring all or any of the properties rights and liabilities of the company or for any other purpose which may seen directly or indirectly calculated to benefit the company and to place or guarantee the placing of, underwrite, subscribe for or otherwise, acquire all or any part of the shares, debentures or other securities of any such other company. 57. To carry on whether in India or else in the world any business or branch of the business which the company is authorized to carry on by means, of or through the agency or any subsidiary company or companies and to enter into any agreement with such subsidiary company for sharing the profits and bearing the losses of any business or branch so carried on, or for financing any such subsidiary company or guarantying its liabilities or to make any other arrangement which may seen desirable with reference to any business or branch so carried on including power at any time and either temporarily or permanently to close any such branch or business. (Adopted under Mam objects of the company vide Resolution No. 6 passed at the 11 th Annual General Meeting of the company held on 27-09-1994).

4.14. The appellant submitted that the initiation of process for acquiring ,, ill chain of business / plant in foreign countries through subsidiaries, step- down subsidiaries started from September 2005, the appellant identified soda-ash plants in Romania for acquisition and home textile business in USA for such acquisition the appellant issued 1% convertible bonds (FCCBj of USD 78,20 Mn in September 2005, which were listed in Singapore out of such funds USD 26 Mn were invested in shares of 100% subsidiary company Indian Britain BV for acquisitions related to Soda ash and textile businesses in Romania, USA and UK and USD 54.20 Mn were invested as loan for acquisitions. Such funds were infused in Indian Britain BV (WOSj, which were further infused in step-down subsidiaries of 1BBV for acquiring soda ash business and home textile business. Summary of investment is as under;

GHCL LIMITED

Year Source USD Application USD

2006-07 Own Funds 80,224,832 Investment In Indian Britain BV 26,024,832 (FCCB)

Loan given to Indian Britain BV 54,200,000

TOTAL 80,224,832 TOTAL 80,224,832

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INDIAN BRITAIN BV, NETHERLANDS - SUBSIDIARY

Year Source USD Application USD

2006-07 Capital from 26,024,832 Investment in Indian England 9,803 GHCL NV

Loan from GHCL 54,200,000 Loan given to Indian England 30,012,900 NV

Investment in Indian Wales NV 76,789

Loan given to Indian Wales NV 5,200,000

Investment in GHCL INC. 5,000

Loan given to GHCL INC. 42,222,065

Used for Assets/Expenses 2,698,275

TOTAL 80,224,832 TOTAL 80,224,832

INDIAN ENGLAND NV - STEP-DOWN SUBSIDIARY (To acquire SC GHCL Upsom Romania - Soda Ash Manufacturing Plants)

Year Source USD Application USD

2006-07 Capital from Indian 9,803 Investment in SC GHCL Upsorn 23,355,972 Britain BV SA

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Loan from 30,012,900 Loan given to GHCL Upsom SA 1,200,000 Indian Britain BV

Used for Assets/Expenses 5,466,731

TOTAL 30,022,703 TOTAL 30,022,703

GHCL INC. USA- STEP-DOWN SUBSIDIARY (To acquire DAN River Inc, USA - Textile Unit)

Year 1 Source USD Application USD

2006-07 Capital from Indian 5,000 Investment in Dan Riverine. 18,380,759 Britain BV

Loan from 42,222,065 Loan to Dan river inc. 18,700,236 Indian Britain BV

Used for 5,146,070 Investment/Assets/Expenses

TOTAL 42,227,065 TOTAL 42,227,065

INDIAN WALES NV - STEP-DOWN SUBSIDIARY (To acquire Rosebys Ltd, UK - Textile Chain)

Year Source USD Application USD

2006-07 Capital from Indian 766789 Investment in Rosebys 20,808,439 Britain BV

Loan from Indian ^200,000, Loan to Rosebys 25,162,553 Britain BV

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Loan from Exim Bank 39,600,000 Used for Assets/Expenses ,97,149

Interest and Other 1,191,352 Income

TOTAL 46,068,141 TOTAL 46,068,141

4.15. The appellant also relied upon the resolutions related to acquisition and investments in Soda-ash plant SG Bega Upsom SA in Romania, Textile business of Dan River Inc USA and Home textile chain of Rosebys UK through subsidiary Indian Britain BV and step-down subsidiaries of IBBV. The brief of the above strategical acquisitions as submitted by the appellant is noted as under:- a) In board meeting on 01-09-2005, the investment up to USD 100 Mn for acquisition of soda ash plants at Romania was approved. The proposal involves acquiring two units having current production of 4.30 lakh tones in Romania - the vintage of 1 plant being 1953 and the other 1962. The board was informed that critical raw materials like salt / limestone / anthracite are available in plenty from nearby supply sources and one unit has captive steam / power generated by gas dnd other unit buys steam / power from local utility company and both plants have approximately 1000 employees each with cordial labour relationship. The board wds further informed that in order to turnout of both the plants following steps are required to be taken: > Modernization /revamping of plant thereby reduction of cost of production. > Scope of change of market mix to increase sole of EU by road rather than export by sea route to increase realization. > Long term tie up with external parties for supply of raw materials. > Reduction of labour / overhead cost. The board was informed that estimated cost of acquisition of both the plants i.e. majority stdke in both the plants, cost of debt to be taken over and indicated investments (over 2 years| would not exceed to USD lOOMn. b] In board meeting on 01-09-2005, the investment up to USD 60 Mn tor strategic acquisition in Home textile business in USA was approved.

The proposal involves strategic acquisition business in USA in the line with the overall marketing strategy for the home textile products at Vapi. The board was informed that the target entity is one of the third largest bedding product manufacturer in USA. The home fashion revenue of the target entity is exceeding USD 300 Mn annually with the advantage of huge market presence and distribution network with 4 warehousing facility in different locations in USA. The entity has large customers base including most renowned retailers, specially stores, discount stores and catalogue stores like Wal-Mart, K-Mart, JC Penny, Bed, Bath and Beyond and Linen and Things. The board was informed that the target entity is now transitioning its home fashions from existing domestic manufacturing base in USA to an outsourced mode and possibilities of outsourcing more than 80% products. The board was informed that the proposed strategic acquisition would bring following benefit to the company: Ready market of over USD 300 Mn, propelling company to be one of the major international home textile players. Immediate access to major retailers and specialty stores, absolute synergy with Vapi Manufacturing' Facility, which can immediately cater to available market. Strong and diversified portfolio of licensed brands of title entity to provide study revenue and profitability-Large production facility of target entity can be relocated to India at o much cheaper cost. Production facility in India with reduced overhands and reduced cost of production to increase margins and consequently profitability.

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The board was further informed that the negotiation for purchase of majority stake approximately 60% against indicative equity value of USD 60 Mn is in progress. c) In board meeting on 15-10-2005, the board was informed about the status of acquisition of soda ash plant in Romania and home textile business in USA was informed to the board. d) In board meeting on 19-11-2005, acquisition of business in Romania and USA and investment in wholly owned subsidiary in Netherlanci approved. Acquisition of Bega Upsom SA in Romania with investmenf of US $62 Mn approved. The acquisition of shares of Bega Upsom SA will be through the wholly owned subsidiary [WOS)/Step-down Subsidiary, Registered in Netherlands. Acquisition of Dan River Inc USA with investment of US $42 Mn approved. The acquisition of shares will be through the wholly owned subsidiary (WOS)/Step-down Subsidiary, Registered in Netherlands. In this board meeting, consent accorded to make investment in wholly owned subsidiary i.e. Valdralona Investments BV (name may be changed to Indian Britain BV) registered in Netherland, not exceeding to USD 42 Mn out of the proceeds of the foreign currency convertible bonds [FCCBs) currently lying with Deutsche Bank Singapore. e) In board meeting on 19-01-2006, the board was informed that: > Acquisition of SG Bega Upsom SA in Romania was completed through CEPOM (i.e. Indian England NV), a step-down subsidiary of Indian Britain BV. > Acquisition of Dan River Inc USA was completed through GHCL Inc. USA. f) In board meeting on 21-04-2006, the board was informed thai the company has invested USD 80.50 Mn (proceeds of FCCBs) in its Indian Britain BV (WOS). These funds are invested as equity of USD 26 Mn and debt of USD 54.20 Mn. Acquisition of SC Bega Upsom SA, Romania through Indian England NV was completed. Similarly, acquisition of Dan River Inc, USA has been completed through GHCL Inc. g) In board meeting on 18-06-2006, the board was informed that GHCL forayed in home textile segment by setting up production facilities at Vapi to manufacture bed sheets and curtains. The board was further informed that by acquiring US based Don River Inc, GHCL entered in the distribution segment with USD 250 Mn top line. The next step in the value chain of manufacturing to customer is the retail. The company is in discussion with Ihe shareholders of the retail chain namely Rosebys. The brief profile of Rosebys are given below: > Headquartered in Manchester, UK. > One of the largest retail home textiles chain. > 325 Stores for a total footage of 770,000 square feet [190 in high street and 130 retail parks}. Generally mid market value oriented. > 2200 employees [including part time). > Two retail divisions - Basic Household Textiles and Fabric Warehouse. > To acquire only Basic Household Textiles division. > Annual Turnover of about 105 million pounds for FY ending April 2006. > Competitors - Marks &, Spencer, Next, IKEA, Debenhams, elc. This acquisition can bring following on table for GHCL: > Fully integrated player from spinning to retail. > Immediate access to UK market. > Market for high value items of Vapi. > Increased sourcing from India, Pakistan and China - to improve margins, > Outsourcing of back office to India - cost reduction. The investment up to UK £ 21 Mn for acquisition of Home textile chain Rosebys UK was approved. h] In board meeting on 17-07-2006, the board was informed that acquisition of Rosebys UK will be made through Indian Wales NV, a wholly owned subsidiary of Indian Britain BV, which is a wholly owned subsidiary of GHCL Ltd. The board was further informed that the investment of UK £ 27 Mn [USD 50 Mn) will be financed partly from debt and balance from FCCB. i) In board meeting on 30-10-2006, the board was informed about acquisition of Rosebys UK.

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j} In board meeting on 29-05-2007, the board was informed about acquisition of Best Manufacturing Group LLC. 4.16. Considering the above facts and submissions in brief, it is noticed that the entire investment in 100% subsidiary company Indian Britain BV was made by appellant for acquiring soda-ash manufacturing plants in Romania and textile business / chains in USA and UK to expand its business and acquisitions were related to the appellant's business operations in India. The appellant through 100% subsidiary company Indian Britain BV formed further step-down subsidiaries in Netherlands and USA, through such step-down subsidiaries, the appellant acquired soda-ash manufacturing plants SC Bega Upsom (renamed as GHCL Upsom Ltd) at Romania and similarly the appellant acquired Dan River Inc in USA and Rosebys UK Ltd in United Kingdom to expand its home textile business, as the company is having textile manufacturing plants at Madurai and Vapi. The appellant's objective of investment in subsidiary, step-down subsidiaries and acquisitions of retail chains was to expand its business globally and to bring its products in international market, even after closure of such acquisitions, the sales and exports shoot up substantially and international brands started taking appellant's textile products. At no point of time, the investment in subsidiary company was made with a intention to realize any enhancement in value thereof over a period of time or to earn dividend income. The investment was made by the appellant from commercial prospective in the course of business on the grounds of commercial expediency. 4.17. The investment in subsidiary company, step-down subsidiaries and acquisition of retail chain was only to expand business globally; therefore. the acquisition of Rosebys Operations in UK was to expand its business and to achieve business objectives as a measure of commercial expediency and such investment is related to the business operations of the appellant company GHCL. 4.18. For acquisition of Rosebys through step down subsidiary Indian Wales, NV, the appellant company has given funds to Indian Wales NV from own funds and funds from Exim Bank through NCDs of $40 Mn (Rs. 173.96 crore) on corporate guarantee of GHCL, parent company. Such loan (funds through NCDs) were taken by subsidiary for the purpose of textile business of GHCL Ltd. more precisely for setting up of supply chain system in global market i.e. overseas countries. From such funds, the subsidiary Indian Wales NV formed step-down subsidiary GHCL Rosebys Ltd in UK to acquire Rosebys Operations Ltd, a chain of Home Textile products. 4.19. The loan given in form of NCDs by Exim Bank to subsidiary Indian Wales NV was for the purpose of business ana as per commercial expediency of the company GHCL Ltd. There is direct proximity and relationship of assessee's business to the subsidiaries business. The payment on invocation of corporate guarantee is on account of global financial crisis, due to which the business of step-down subsidiary Rosebys Operations Ltd. UK suffered huge losses and finallywent into liquidation. The facts are as under:-

"9. After 7 years, the subsidiary Indian Wales NV due to huge losses amounting to Rs. 333.04 crore (Pg. no. 103) from business of step-down subsidiary Rosebys Operations Ltd, the company Indian Wales NV was not able to pay the borrowings and liabilities. The position of funds as per balance sheet of Indian Wales NV as on 31-03-2013 and 31-03-2014 furnished (Pg. no. 101 to 109). Therefore, as per debenture subscription agreement, NCD's funds were recovered by Exim Bank from guarantor GHCL Ltd, the holding company." Thus, the loss on invocation of corporate guarantee suffered by company GHCL is for the purpose of business / incidental to its business, due to commercial expediency. 4.20. In view of the above facts, the payment on invocation of corporate guarantee was given by the appellant company to Exim Bank for subsidiary company namely; Indian Wales, NV, Netherlands. Exim Bank was issued NCDs of $ 40 million for acquiring home textile produces, retail chain in the name of Rosebys Operations Ltd., UK. Since the appellant company was manufacturing home textile consumer products at Vapi Unit and it had the intention to develop business globally, AEs / subsidiaries / step down subsidiaries were incorporated or acquired with an object to capture ready market. The subsidiary namely; Indian Wales, NV issued debentures to Exim Bank for which the appellant company had given corporate guarantee. Thus, the loan given by Exim Bank to subsidiary was for the purpose of business and as per commercial expediency of the appellant company. There is direct proximity and relationship of appellant's business to the subsidiary / step down subsidiary business. The payment on invocation of corporate guarantee was on account of global financial crisis due to which the business of step down subsidiary namely; Rosebys Operations Limited suffered huge losses and finally went into liquidation. Thus, the loss

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on invocation of corporate guarantee suffered by the appellant company was for the purpose of business / incidental to the business due to commercial expediency and such business loss is allowable u/s. 37(1) of the I. T. Act, 1961. 4.21. Further, on going through the facts of the case, it is noticed that identical issue on similar facts has been decided by this office in A. Y. 2011-12 vide appellate order No. CIT[AJ-2/507/DCIT, Cir. 2(1](1)/2014-15 dated 11/06/2015, whereby issue has been decided in favour of the appellant. The relevant findings given therein are reproduced hereunder:- "5.3. Decision: have carefully considered the facts of the case, the assessment order and the written submission of the appellant. The AO has observed from the report given by the TPO that appellant had claimed losses on account of invocation of corporate guarantee given on behalf of its subsidiary company GHCL International Inc amounting to Rs. 184.75 crores and had written off the same in the books of accounts as expenses incidental to the business under section 37 of the Act. The transactions were treated as revenue in nature. The AO has relied on the report given by the TPO and asked the appellant to furnish explanation on the same. After considering the explanation given by the appellant it has been held by the AO that the loans were in the nature of shareholder activity and thus were capital in nature. He agreed with the finding given by the TPO and held the right of invocation of corporate guarantee of Rs. 184.75 crores as capital expenditure, and disallowed the claim under section 37. The appellant on the other hand has submitted that the company manufactures home textile consumer products at Vapi unit and the appellant company wanted to develop business globally. For this purpose A.E's/subsidiaries were incorporated and acquired with an object to capture ready market. Dan River USA, which was the step down subsidiary of the appellant was having working capital facility with heavy interest of 20% annum. To reduce the interest burden, AE GHCL International Inc issued securities/debentures to Deutsche Bank for which the appellant company, GHCL Ltd. gave a corporate guarantee. The loans given by Deutsche Bank to AE in USA was for the purpose of business and as per the commercial expediency of the appellant company. There is direct proximity and relationship of the appellant's business to the AE's/subsidiaries business. The payment on invocation of corporate guarantee was on account of global financial crisis, due to which the business of the step down subsidiary, Dan River Inc suffered huge losses and finally went into liquidation. It has therefore, been submitted by the appellant that the loss on invocation of corporate guarantee suffered by the appellant company was for the purpose of business and incidental to its business, due to commercial expediency. Regarding, the observation of the AO that the transaction was capital in nature, it has been submitted by the appellant that capital contribution is always given for some specific purpose like for acquisition or purchase of capital asset, whereas working capital facility is for running day-to-day operations. The corporate guarantee was given by the appellant company for replacing high interest working capital facility of its step down subsidiary Dan River Inc, USA. The AE and step down subsidiary utilised the funds from Deutsche bank in repayment of higher interest funds. In TP proceedings and the assessment proceedings, the complete details of the usage of funds received on guarantee by AE were explained and necessary evidences were filed. It has been submitted by the appellant that none of the funds were used for acquisition of any capital asset. The funds have not been used for the purpose of equity contribution for acquisition of the AE/subsidiary or for acquisition of capital asset. The appellant has also given a tabular rebuttal of the AO's observation which are reproduced here for the sake of convenience and clarity: - AO's observations Rebuttal by Appellant Company Para No. 6.3 This issue had been examined at The ld. TPO in Para no. C.4.1, length by the TPO, Ahmedabad as produced above: as evident from the findings given In Para no. 6 staled that "Since in Para No. C.4.1 of the TPO the fund have been granted to order dated 21/11/2014 and retire the high interesl bearing since, the TPO had concluded funds, it is clear that the status ol that these loans are in nature of funds provided by the assessee is shareholder activity and thus ate subservienl to the stalus ol such capital in nature, the undersigned creditors, which were to be has full concurrence with the repaid and even subservient to

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finding and observation of the the working capital requirements TPO on this issue and o! the AE [Dan River]." accordingly, the write off of In Para no. 9 stated thai "The invocalion of corporate funds provided by the assessee guarantee of Rs. 18475106007- is were used by the associate held as expenditure of capital enterprise for retiring high nature and is disallowed u/s. interest bearing loans, for making 37(1) of the Income tax Act, 1961. interest payments on the debentures issued and for working capital purposes. Since the primary aim was to retire high interest bearing funds, the use of Ihe funds is for working capital purposes." Thus, the Deutsche Bank given loan to GHCL International Inc. USA for ils AE Dan River Inc USA on the guarantee of GHCL Ltd India for the purpose of working capital and as it was in the nature of commercial expediency and having direct proximity with the business of the appellant company. Ihe guarantee given is in the course of business and not in the nature ot capital contribution.

6.4 It is relevant to mention that The Id. AO has considered the similar issue arose in the AY submission ol Ihe assesses 2009-10 and AY 2010-11. In the company, but as against the AY 2009-10, the AO in draft DRP's order in AY 2009-10 and assessment order treated CIT(A)'s Order in AY 2010-11, advancement of SBLCs/loan in the Department has preferred the nature of capital contribution further Appeals before Hon'ble and disallowed the expenditure ITAT, which are yet to be incurred by way of devolvement adjudicated. Therefore, to of SBLCs of Rs. 30.96 crore maintain consistency, treating the same as capital loss. disallowance is made. It was submitted by the assessee that such proposed disallowance in draft assessment order of A.Y. 2009-10 was not accepted.by the Hon'ble DRP as the Hon'ble DRP considered such amount of devolvement of SBLCs given to subsidiary company in the nature of revenue loss and held the same as allowable u/s. 37(1) of the IT Act. The assessee further submitted that the identical issue arose in AY 2010-11 also, wherein the CIT(A| has allowed the assessee's claim of write off of

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loan given to ils subsidiary company i.e. Indian Britain 8V of Rs. 1406093531/-u/s 37(1) vide its order dated 10/11/2014 wherein the CIT{A) held that such amount given to subsidiary company is in the nature of revenue and held the same as allowable u/s. 37(1) of the IT Act. Though, the disallowances made on similar issue in AY 2009-10 (rejected by Hon'ble DRP considering such loss as revenue in nature) and similarly in AY 2010-11 (wherein, the C1T(A) held such loss as revenue in nature) were decided in favour of the assessee, the Department has preferred appeals against such orders giving relief to the assessee for both AY 2009-10 and 2010-11 before Ihe Hon'ble ITAT, which are yet to be adjudicated. Therefore, to maintain the consistency, disallowance of Rs.1847510600/- is made in this year also and the same is added back to the totgjincome of tjig assessee company.___

The appellant has also pointed out that for A Y 2009 - 10, the disallowance of claim of devolvement of SBLC of Rs. 30.96 crores was made by TPO, holding the same as capital loss and not in the nature of revenue. The issue has been decided by honourable DRP in its order dated 27/12/2013 u/s.!44C(5) and the proposal of the TPO has been rejected and it has been held that the guarantee was for the business purpose. The claim under section 37 has, therefore, been held to be allowable. The appellant has also submitted that during A.Y. 2010-11 the write off ot loan/advances to subsidiary company has also been held as allowable under section 37(1) by CIT(A}-V1I1, Ahmedabad vide order dated 10/11/2014. On a careful consideration of entire facts of the case, it is noted that the transaction of giving the guarantee to its step down subsidiary for converting the high interest-bearing loan to a low interest-bearing loan by Deutsche Bank is a genuine transaction and there are no facts on record to indicate that the facts pointed out by the appellant are not correct. It is further noted that the loan was required for working capital purposes of the AE of the appellant. The AE was one of the parties who were selling the products manufactured by the Vapi unit of the appellant company. The guarantee was given for the purpose of business and the appellant felt that it was commercially expedient to do so. The same was not in the nature of capita! contribution. It is further noted that the AO has also referred to the orders of honourable DRP and the CIT(A) for A.Ys. 2009-10 and 2010-11, and it has been mentioned by him that to maintain consistency, the disallowance is made. The honourable DRP while deciding the issue for A.Y.2009-10 has discussed the issue in detail. It has also discussed various judicial pronouncements which have been relied by the appellant in support of its claim. For the sake of convenience and clarity the findings given by DRP are reproduced here under: -"13. After considering fhe arguments and written submission of fhe Id. Authorised Representative and offer going through fhe assessment order, it is crystal clear that the subsidiary company Rosebys Operations Lfd was acquired by fhe assessee

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company fo expand its textile business operations globally based on the study carried out by KSA Technopak, renowned global consultant, as the objective was fo capture ready home-fexfi/e market in UK and European regions for its manufacturing facility of Vapi Textile unit. The Rosebys Ltd, having 325 retail outlets in UK was deaiing in variety of home furnishing products including the products manufactured by Vapi unit of ossessee company and therefore it was commercially expedient fo provide guarantee against SBLCs issued by IDS/ bank fo SOI Manchester and directly to vendors of Rosebys for fhe working capifai of Rosebys so that fhe business of Rosebys and consequently fhe business of assessee company can be further expanded. Therefore, it is held that the assessee company provided guarantee against SBLCs for its business purpose and same was commerciaily expedient. The guarantee provided by the assessee company is also authorised as per clause 57 of fhe Memorandum of Association and resolution passed by the assesses company. The devo/vemenf of guarantee was on account of unforeseen global financial crises trigged by the collapse of global bankers and retail businesses in the western world particularly in September 2008. Nobody including the assessee company and bankers could anticipate the global financial crises at the time of providing guarantee / SBLCs in the month of June 2008. Therefore, the loss suffered by the assessee company of Rs. 30,96,28,781/-, on account devofvement of guarantee 7 SBLCs is to be considered as revenue loss for the assessee company and is held as allowable u/s. 37(1) of the IT Act, and it can in no way be considered as capital loss. This finding is also supported by the decisions in following cases: (a) CITvs. Amalgamated Ltd (92 Toxmann 132). SC In this case, the Supreme Court was concerned with a case where 'the assessee's business includes furnishing guarantee fo debts borrowed by subsidiary companies'. It was held that fhe guarantee devolvemenf liability which fell upon fhe assessee in respect of a newly acquired subsidiary was in fhe course of the taxpayer's business and hence was an allowable toss. The taxpayer in this case was engaged in formation, acquisition and management of subsidiaries which, in turn, were engaged in operating businesses like manufacturing, trading, financing, etc. (b) ACITvs. W.S. Industries (40 DTR 106], ChennaiTrib. The SC decision was applied by Chennai Tribune/ in fhe case of ACIT vs. W. S. Industries {India} Ltd H2010)i40 DTR (Chennai)(Trib) 106], In this case, fhe subsidiary of the taxpayer was supplying materials which were important for fhe taxpayer's business. This was held to be an important circumstance supporting the acfion of the taxpayer i.e giving corporate guarantee as well as trade advance being incidental fo the taxpayer's business. If was also noted that fhe giving of guarantee had due sanction of fhe MOA of the taxpayer which contained suifable enabling object. (c) CITvs. Pure Beverages Ltd. (209 ITR 131). Gui. In this case, the taxpayer was a soft drink manufacturer who gave guarantees fo fhe bank for loans advanced fo retailers to enable them fo purchase coolers fo store soft drinks sold by fhe taxpayer. Prior to 1969, fhe taxpayer itself used fo provide fhe coolers fo the retailers. From 1969, fhe retailers were persuaded to purchase fhe coolers themselves. The cost of the cooler ranged between Rs 3000 to Rs 6000. Some of fhe retailers eventually defaulted in payment of the loans taken from fhe bank and as o result fhe faxpayer had to bear fhe toss and make payment to the bonk. The loss incurred was claimed by the assessee u/s 37 of the Act. The Tax Authority rejected the claim and held the loss to be capital in nature. The High Court (HC) held the loss could not be treated as capital in nature since there was no intention of the taxpayer to acquire any asset of enduring nature. The amount expended was in the course of business, and hence was revenue in nature. Thus such expenditure would be allowable u/s 37(1) of the Act. (d) S.A. Builders vs. C1T (288 ITR 1). SC. In this regards, at the outset, it would be necessary to understand the meaning of the term 'commercial expediency'. In the context of allowability of an expenditure, the Supreme Court in the case of S. A. Builders Ltd. {288 ITR 1)(SC) has stated that the expression 'commercial expediency is an expression of wide import and includes such expenditure as a prudent business man incurs for the purposes of the business. The expenditure may not be incurred under any legal obligation but yet is admissible as a business expenditure if it was incurred on the grounds of commercial expediency. (e) CITvs. Khambhata Family Trust (34 TQxman.com 36), Guj. In this case Honouarbte Highcourt held that that while examining a claim for deduction under section 37, what has to be seen is whether the expenditure had been incurred wholly and exclusively for the purpose of the assessee's business and whether it falls under any of the exceptions carved out under sub-section 12B}

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thereof, and nothing more. Once it is found that the expenditure had been incurred by the assessee for publicity or advertisement, it is not for the department to consider what commercial expediency justified such expenditure. It is, therefore, not permissible for the Assessing Officer to scrutinize the claim any further to examine as to whether in the process any third party has also benefited. The mere fact that on account of the expenditure incurred by the assessee wholly and exclusively for its own business, incidentally some third party is also benefited is no ground to disallow any part of such expenditure. In the case at hand, the assessee procured usage rights for brand "Rasna" for a valuable consideration and incurred advertisement expenses in respect of products manufactured by it under such brand name. No part of the said expenditure was expended for any purpose other than for the assessee's business; merely because by virtue of such advertisements the brand value of Rasna is enhanced and other manufacturers of the brand are also indirectly benefited, it cannot be said that the expenditure incurred by the assessee is not wholly and exclusively for its own business. It cannot be gainsaid that when any user of a brand name advertises its product, as a necessary corollary the brand value is likely to increase, thereby benefiting the owner of such brand name. If the owner of the brand name has licensed such brand to other manufacturers, it is quite possible that such other manufacturers may also pe benefited on account of such advertisements as the advertisements may enhance fhe value of the Prand as a whole- (n fact, such incidental benefits are bound to accrue to the owner of the brand as well as other users of the brand name when any of fhe users of such brand name advertises its products. However, merely because some other persons are incidentally benefited from fhe advertisements issued by the assessee, the same would not change fhe character of fhe expenses from being wholly and exclusively for fhe purpose of its business. Therefore, if is not a relevant circumstance for fhe purpose of considering allowabilify of expenditure under section 37. The Tribunal was, therefore, wholly justified in confirming the order of fhe Commissioner (Appeals] allowing such expenditure under section 37. There being no legal infirmity in fhe impugned order, the same does not give rise to any question of law, much less, a substantial question of law so as to warrant interference. (f) J.K. Patef & Sons fP) Ltd, vs. Cir (69 ITR 782), GUJ In this case Honouable High court held that fhe Tribunal erred in law in holding that an indirect benefit flowing fo the managing agents could not justify fhe employment of a person, who rendered services to the managed company, as being in fhe interest of fhe business of fhe managing agency. As has been observed in J.R. Pafel and Sons (P.; Ltd. v, CIT [I964J 51 ITR 717, the correct approach should be whether fhe payment was made on grounds of commercial expediency for fhe ultimate benefit of fhe assessee-company, whether that benefit was to accrue immediately or fo accrue after a lapse of time, directly or indirectly. Even if fhe benefit which flows fo fhe assessee-company came fo if indirectly, that payment could be considered on grounds of commercial expediency if if was for fhe ultimate benefit of fhe assessee-company. The fact that fhe services were not rendered by A' directly fo fhe managing agency company made no difference fo fhe ultimate conclusion to be reached in fhe case because the test to be applied was whether, as a result of fhe arrangement which came info force with effect from 1-4-1956, even an indirect benefit was derived or was expected fo be derived by fhe assessee-company. Applying the principle approved of by fhe Supreme Courf in Eastern Investments Ltd. v. CIT [1951] 20 ITR 1 (SQ, it was clear that in the insfanf case, in fhe light of the additional materials which had been brought on fhe record of fhe case, the assessee-company did derive indirect benefit from the remuneration which it paid fo its own managing director. Thus fhe services which A rendered to fhe managed company for fhe period commencing from M-1956, were rendered by him fo fhe managed company on behalf of fhe assessee-company, and as fhe managing director of fhe assessee- company. Applying the well-known decisions as regards the notions of commercial expediency and the principles to be applied as to when an amount paid can be said to be expended wholly and exclusively for the purpose of the business of the assesses-company, it could be concluded that in the instant case, the excess remuneration over the sum of Rs. 12,000 paid by the assessee-company to 'A' was wholly and exclusively expended by if for the purposes of its business and was, hence, a deductible allowance within the meaning of section 10(2) (xv) of the Act. (g) CIV vs. WBIlamson Mayor & Co Ltd. (117ITR 858), Cal. In this case, the taxpayer who was acting as managing agent and secretaries of other companies was appointed as a secretary of Tukvar & Co (TCOj Ltd till 1957. In 1955. TCO was in need of funds. The taxpayer provided guarantee to the bank due to which TCO was provided overdraft facilities by the bank.

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In 1957, TCO defaulted in repayment to the bank, which ultimately had to be settled by the taxpayer. Thus for the year under consideration ie 1957, the assessee claimed a sum of Rs 1.68 lakhs as bad debts. The Tax Authority disallowed the claim on the basis that the taxpayer's liability to pay the bank did not arise in the course of business as the taxpayer was not under an obligation to arrange funds for TCO. Further it was also contended that the impugned amount was also not allowable as bad debts since the business of the assesses was not that of money lending, and more so since such debt had never been taken into account for computing income of earlier years. The HC noted that furnishing of guarantee was incidental to taxpayer's business and that the debt due from TCO in respect of amount devolved on the taxpayer had become bad in the year under consideration and that these factual, findings had not been challenged by the Tax Authority. The HC. therefore, held that the findings of the Tribunal could not be interfered and the impugned loss was allowable. (h) Essen (P) Ltd vs. CIT (65 ITR 625). SC. In this case, the taxpayer was a private limited company which was a managing gent of several concerns and it also derived income from an insurance agency. The taxpayer was managing a company named Amer Hind Manufacturers (Amen1 which was engaged in the manufacture of carbon paper, ink and other allied products. Due to increase in need of funds for carrying on manufacturing operations, Amer entered into a managing agreement with the taxpayer, and under the said agreement, taxpayer advanced an amount of Rs 3.40 lakhs to Amer. Apart from lending money, taxpayer also guaranteed a sum of Rs 2 lakhs obtained by Amer from Indian Overseas Bank. Subsequently, Amer failed in its business and incurred heavy losses because of which if was unable to pay the bank as well as the taxpayer. As a result of the guarantee, taxpayer became liable to pay the bank outstanding dues of Amer. Thus total amount due to the taxpayer in respect of the guarantee as well as advances was Rs 4 lakhs which if claimed as a business deduction for AV 1956-57. The Tax Authority rejected the claim of the taxpayer and disallowed the loss on fhe ground that the management agreement did not mandatory require fhe taxpayer to expend money by way of advances or give guarantees in favour of Amer. The Tribunal, by referring to fhe MOA of fhe taxpayer held that since fhe main objects of fhe taxpayer included lending of money as also providing guarantees, the advances made were only in pursuance of fulfilling its stated objects. Hence, fhe expenditure incurred would be allowable as business expenditure for AY 1956-57. The HC reversed fhe decision of fhe Tribunal and held fhe loss to be capital loss on fhe grounds that fhe agency was obtained with a pre-condition of giving loans and making advances to Amer. On further appeal by the taxpayer, fhe SC restored fhe decision of the Tribunal and held that HC had wrongly concluded fhe said loss fa be capital in nature as also disregarded fhe facts which had been placed on record by the Tribunal. The guarantee and advances given to managed company were well within fhe objects of fhe taxpayer (as was evident from fhe MOA of fhe taxpayer), arising from fhe managing agency business. Hence such loss/expense incurred would be an admissible deduction for AV 1956-57. (i/1 CIT vs. Delhi Safe Deposit Co. Ltd f 133 ITR 756), SC In this case fhe taxpayer was a company which was a partner of a managing agency firm which in all consisted of three partners. The managing agency firm, in turn, was managing another public limited company (managed companyj. During fhe year, at fhe instance of one of its major share holding partner, a huge sum was expended by fhe managea company to a firm locafea in Calcutta. The sum of money advanced was ultimate!/ dishonored by fhe Calcutta firm, resulting in a net loss of Rs 1.90 lakhs to fhe managed company. Out of the total loss, a sum of Rs 0.9 lakhs was agreed to be borne equally by fhe taxpayer and its partner. The share of the taxpayer of Rs 0.47 lakh was claimed as business expenditure, in fhe relevant year, u/s 37 of fhe Act. The Tax Authority disallowed fhe said expenditure and held that fhe taxpayer was not legally bound to make such payment on behalf of the firm. Further, if also held that the loss had been borne by fhe taxpayer for personal considerations and more so as the loss belonged to fhe firm, fhe partners were in no way connected to such loss. The taxpayer on fhe other hand contended that fhe settlement made was purely to protect its interest in fhe firm as well as to protect its business reputation which if had built over a period of years. Hence such expenditure ought to have been allowed as deduction on the basis of principles of commercial trading and commercial expediency.

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On appeal, the HC accepted the contentions of the taxpayer which was upheld by the SC. fhe SC held that taxpayer had rightly incurred expenditure to protect its interest in the managing agency as well as to protecting its name, which would have otherwise been tarnished had the expenditure not been incurred. Thus the expenditure which is incurred for the preservation of a profit earning apparatus is allowable as revenue expenditure. (j) CIT vs. __RQo__Construction_ (P) Ltd. (33 Taxman.com 613 Guj in this case, the assessee-company deposited equity shares and fixed deposits with the bank for obtaining bank guarantee for securing government tender. However, RB! ordered for the liquidation of said bank. Accordingly, assessee-company wrote off the balance of FD and equity shares and claimed the.same as business expenditure. The Assessee had availed such bank guarantee facilities as per fhe prescribed norms of the bank which required the purchase of the shares and margin money for using the bank guarantee also was required to be kept as a fixed deposit. This bank, when eventually was declared as sick bank, was unable to repay the deposits, the membership of fhe said bank also was cancelled and the steps were taken pursuant to the order of the Reserve Bank of India. Assessee-company, thereafter, had written off fhe balance. In such circumstances, both Commissioner fAppeal as we" os fhe Tribunal were absolutely justified in applying the ratio laid down by the Apex Court in case of Ramchandar Shivnarayan v. CIT [ / 978] 11! ITR 263 as also in case of Indian Aluminium Co. Ltd. v. CIT [1992] 84 ITR 735 (SCI to hold that such expenditure were needed to be spent by the assessee for the purpose of carrying on its business and are incidental to the business, therefore, any loss shall have to be considered as the revenue cost and not the capital cost. In view of the above findings, cars are the objections (1 & 12) raised by the assessing company against disallowance of Rs. 30,96,28,781/-are sustained and the addition made by the Assessing Officer is directed to be deleted." I am in complete agreement with the findings given by the honourable DRP for A Y 2009 - 10. If the guarantee is given for the purpose of business and is not related to any capital asset, any expenditure incurred on invocation of guarantee has to be treated as revenue expenditure- The facts are very clear in the present year. The appellant had given this guarantee for the working capital loan of its stepdown subsidiary. The subsidiary reduced its working capital facility which was at 20% interest to a lower interest rate loan and the restrictions on the earlier working capital loan were also done away with an order to facilitate the business in an easier manner. The appellant was doing business and exporting goods manufactured at its Vapi plant through that company in USA. It did good business in the initial few years but however due to some external factors beyond the control of the appellant, the company had to be closed and the bank invoked the guarantee given by the appellant company. In view of the above discussion, I am ot the considered opinion that claim ot the appellant of Rs.184.75 crores is allowable under section 37(1) of the Act as it is revenue expenditure. The ground of appeal is accordingly allowed. 4.22. Further, on the identical issue in appellant's own case, the Dispute Resolution Panel vide its order u/s. 144C(5) of the . T. Act, 1961 dated 27/12/2013 rejected the proposition of the AO and held the guarantee against SBLCs was for its business purpose and was commercially expedient. Therefore, the loss suffered by the appellant on account of devolvement of guarantee / SBLC is to be considered as revenue loss as allowable u/s. 37(1) of the . T. Act, 1961. The same cannot be considered as capital loss. 4.23. Since the guarantee has been given for the purpose of business and is not related to any capital asset, thus payment on invocation of guarantee has to be treated as revenue expenditure. The appellant had given this guarantee for its step down subsidiary for acquiring textile chain 'Rosebys'- The appellant was doing business and exporting goods manufactured at its Vapi plant through that company outside India. It did good business in the initial few years but however due to some external factors beyond the control of the appellant, the step down subsidiary company had to close down its business and the bank invoked the corporate guarantee, which is paid by the appellant company. In view of the above discussion, the claim of the appellant of Rs. 4.41.62 crores is allowable under section 37(1) of the Act as it is revenue expenditure.”

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Heard both the sides and perused the material on record. The assessee has claimed losses on account of invocation of corporate guarantee given to Exim Bank on behalf of its subsidiary namely Indian Wales, Netherland amounting to Rs. 2,41,62,54,990/- and had written off the same in the books of account as losses incidental to the business u/s. 37 of the Act. The Assessing Officer has rejected the claim on the ground that assessee has not made this claim through revised return of income as per the provision of section 139(5) of the Act after referring the decision of Hon’ble Supreme Court in the case of Goetz India Pvt. Ltd. vs. CIT 157 taxman 01 (SC). The ld. CIT(A) has allowed the claim of assessee as revenue expenditure u/s. 37(1) of the act holding that guarantee has been given for the purpose of business and is not related to any asset thus payment on revocation of guarantee has to be treated as revenue expenditure. The ld. CIT(A) has discussed the detailed facts in his order as discussed above that the assessee company claimed losses on payment of devolvement of corporate guarantee of Exim Bank for subsidiary Indian Wales N.V. Netherland of Rs. 2,41,62,54,990/- . The Exim Bank has given funds to Indian Wales N.V. through NCDs of $ 40 Mn (Rs. 173.96 crore) on corporate guarantee of GHCL parent company. Such loans were taken by the subsidiary for the purpose of business of assessee company precisely for setting up of supply chain system in global market i.e. overseas countries. The ld. CIT(A) has also stated in his order that in the preceding years, the claims have been made by the assessee in the return of income itself but in the year under consideration due to over sight this claim remained to be made in the return of income and therefore the same was claimed through the written submission in the assessment proceedings before the Assessing Officer. The

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ld. CIT(A) has also stated that nature of claim was not new but had been made in the preceding years and same has been allowed in the appellate proceedings. The ld. CIT(A) has also elaborated the brief background of the business of the assessee company in his order and the nature of investment and the nature of guarantee extended by the assessee company. The loan given by Exim Bank to subsidiary Wales N.V. was for the purpose of business and as per commercial expediency of the assessee company. The ld. CIT(A) has also stated that there was direct proximity and relationship of assessee’s business to the subsidiaries’ business. The ld. CIT(A) has also stated that on identical issue in assessee’s own case the dispute resolution panel vide its order u/s. 144C(5) of the I.T. Act, 1961 dated 27th December, 2013 held that the guarantee against SBLC was for its business purpose and was commercially expedient. In this regard, we observed that similar issue on same facts is adjudicated in the case of the assessee itself in the ground of appeal No. 5 and 6 of the revenue vide ITA No. 976/Ahd/2014 Assessment Year 2009-10 supra in this order, therefore, after applying the decision adjudicated vide ITA No. 976/Ahd/2014 and after considering the detailed facts and finding elaborated in the order of the ld. CIT(A) as cited in this order, we do not find any merit in this ground of appeal of the revenue, therefore, the same stands dismissed.

Ground No. 4 (Restrict adjustment in book profit u/s. 115JB by disallowance u/s. 14A r.w.r. 8D of Rs. 5,20,878/- as against Rs. 41,73,538/- made by the Assessing Officer)

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has partly sustained confirmed the addition after referring the decision of his predecessor for the present assessment year 2013-14.

Sd/- Sd/- (RAJPAL YADAV) (AMARJIT SINGH) VICE PRESIDENT ACCOUNTANT MEMBER Ahmedabad : Dated 05/03/2021 आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file.

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By order/आदेश से,

उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, अहमदाबाद