TATA CHEMICALS LTD,MUMBAI vs. ACIT 2(3), MUMBAI

आदेश / O R D E R PER M. BALAGANESH (A.M):

2. The ground No.1 raised by the assessee is with regard to the transfer pricing adjustment on account of low rate of interest charged on advance to M/s. Home Field International P. Ltd (Associated Enterprises- AE).

2.1.We have heard rival submissions and perused the materials available on record. Home Field International Pvt. Ltd. (HIPL) in Mauritius is a 100% subsidiary of the assessee formed with a view to make investments globally. The assessee was bidding for acquisition of Egyptian Fertiliser Company through HIPL With a view to fulfil the pre-bid condition of 'Proof of funds letter' from an international banker, the assessee had lent USD 110 million to HIPL to show availability of funds with them. The lending of funds was from 16.05.2005 to 26.06.2005 i.e. for a period of 41 days. Since, the bid was unsuccessful the funds were returned back. The said funds were placed by HIPL as short term fixed deposits with Barclays Bank. Interest earned by it on such deposits of USD 3,76,247 has been paid as interest to the assessee after reducing bank charges of USD 105. Accordingly, the assessee company earned interest income of USD 376247 from its AE on this special purpose lending to its AE. Apart from this, the assessee had also advanced regular loans to its AE which were benchmarked by the assessee by applying LIBOR + 200 basis points as the ALP rate. This was accepted by the ld. TPO to be at arm’s length. The mistake which the assessee committed was including this special purpose loan given to AE during the year in the sum of USD 110 million also in the list of total loans given to the AE and had erroneously stated in form 3CEB that all the loans to AE have been benchmarked by applying interest rate of LIBOR + 200 basis points. Though this is a disclosure error in Form No.3CEB, the fact on record clearly proves that assessee has not received interest @LIBOR + 200 basis points on the special purpose lending of USD 110 million from its AE. The fact is assessee has actually received interest at an average interest rate of 3% from its AE. We also find from page 193 of the paper book that assessee had maintained an account with State Bank of India in Bahamas where it had held foreign currency to the tune of USD 110127098.13. These funds were raised by the assessee through issue of Foreign Currency Convertible Bonds (FCCB). In other words, the monies raised by the assessee through issue of FCCB were lying in the bank account of State Bank of India in the name of the assessee at Bahamas. This FCCB funds lying in State Bank of India was fetching interest to the assessee @3% per annum. Those funds were lent to its AE as a special purpose loan to the tune of USD 110 million during the year on 16/05/2005. As stated supra, since the bid participation was unsuccessful, the funds were returned back by AE to the assessee on 26/06/2005 and the monies received in USD were again credited in the same bank account maintained by the assessee with State Bank of India Bahamas on 28/06/2005 in the sum of USD 110376142.02. The evidence in this regard is enclosed in pages 193-196 of the paper book. Out of the total sum credited in the bank account maintained with State Bank of India in the sum of USD 110376142.02, a sum of USD 110 million represent receipt of principal portion of the loan and interest of USD 3,76,247 after reducing bank charges of USD 105.

2.2. The monies received from the assessee by the AE was parked by the AE with Barclays bank in the form of short term deposits at Mauritius. The monies were lying with bank account at Mauritius in the name of AE for a period of 41 days and it had fetched interest of USD 376247.02. Since the bid was unsuccessful on 28/06/2005, the AE withdrew the amount in the sum of 110376247.02 on 28/06/2005 and returned the money to the assessee on the very same day. This goes to prove that the AE had actually received interest @3% on the funds parked by it with Barclays bank. The very same interest amount of USD 376247.02 had been returned to the assessee company by the AE without retaining any margin thereon. This peculiar fact itself goes to prove that the fund that was given to AE was not at the disposal of the AE to be utilised for any other purpose, rather it was used for special purpose funding to participate in the bid, for which purpose the funds were placed in the form of short term deposits with Barclays bank. Hence, this peculiar fact distinguishes this special purpose loan transaction given to AE in the sum of USD 110 million with regular loans given by the assessee to its AE. Accordingly, the assessee had bifurcated this special purpose loan which had fetched interest @3% with the regular loan transactions which had fetched interest @LIBOR +200 basis points.

2.3. The ld. TPO observed that since the assessee had included this USD 110 million in Form 3CEB along with all other loans by stating that it had benchmarked at LIBOR + 200 basis points, the ld. TPO concluded that the interest rate at LIBOR + 200 basis points becomes a CUP available with the assessee and accordingly determined the ALP of the international transaction of lending of USD 110 million also by applying LIBOR + 200 basis points and made the transfer pricing adjustment.

2.4. As stated earlier, the lending of USD 110 million is to be considered separate and distinct from the regular loan given to the AE. In our considered opinion, considering the purpose for which this USD 110 million was given to its AE by the assessee and also considering the fact that the AE could not utilise the monies received from the assessee for any other purpose other than for the purpose of participation in the bid, we have no hesitation to hold that this lending of USD 110 million should be construed as a special purpose lending and accordingly to be treated as separate and distinct from loan simplicitor. We find that similar issue had come up for adjudication of this Tribunal in the case of Bennett Coleman And Co. Ltd vs. DCIT reported in 129 taxmann.com 398 (Mumbai Trib). The issue in dispute and the facts in the aforesaid case are as under:-

3. To adjudicate on this issue, a few material facts, as discernible from material on record, need to be stated. The assessee before us is a company now merged in Bennett Coleman & Co. Ltd., the flagship company of a well-known Indian media group- commonly known as 'Times Group'. At the relevant point of time, the assessee company, then known as Times Infotainment Media Ltd (TIML-India, in short), was a fully owned subsidiary of Bennett Coleman & Co Ltd and was engaged, inter alia, in the radio broadcasting business. When the Times Group decided to expand its wings in the radio broadcasting business and acquire overseas companies engaged in this line of business, as is stated, it was considered commercially expedient to make these investments through the assessee company. A public listed company in the United Kingdom, by the name of Scottish Media Group plc (SMG-UK, in short), wanted to disinvest in its radio broadcasting business, and that is the reason it put to auction its entire shareholding in Virgin Radio Holdings Limited, UK, (Virgin Radio, in short) which was held through SMG's wholly-owned subsidiary Ginger Media Group Ltd, UK. (Ginger-UK, in short). TIML-India was one of the successful bidders in this auction. The assessee was then invited to participate in the 'final proposal' phase of this disinvestment deal. A final proposal dated 19th March 2008 was submitted by the TIML-India. This offer, at point no. 5, specifically stated, under title 'Identity of the shareholders (with immediate and ultimate ownership)' that the purchasing company will be "an SPV formed specifically for the purpose of acquiring Virgin Radio", which is "100% owned by TIML" and that "the immediate and ultimate shareholder of TIML is Bennett Coleman & Co Ltd". In point no. 6, it was further stated that "the transaction will be 100% equity- financed from internal resources of TIML/BCCL" and that "no further financing is required given the size of this transaction relative to the TIML/BCCL group". What followed is an exclusivity agreement dated 3rd April 2008 with respect to possible sale by Ginger Media Group Ltd, one of SMG plc's wholly-owned subsidiaries to TIML-India "the entire share capital of Virgin Radio Holdings Ltd", which ultimately culminated in, on 30th May 2008, a sale agreement was entered into between Ginger UK, SMG-UK, TIML-India and a company by the name of TML Golden Square Ltd, UK (TIML Golden, in short). The TIML Golden was thus evidently the SPV (special purpose vehicle company) for the purpose of acquiring Virgin Radio. TIML was initially incorporated by a third party, Huntsmoor Nominees Limited, with a paid-up capital of £ 1, on 22nd May 2008, and it was subsequently acquired by TIML, on 30th May 2008, by purchasing the £ 1 share. Subsequently, one more UK based SPV came into the picture as the assessee acquired another TIML Global Limited (TIML Global, in short), a company incorporated with a £ 1 paid-up capital by Huntsmoor Nominees Limited, on 13th June 2008. This company was acquired by TIML-India, by purchased the £ 1 share on 16th June 2008. On acquisition of TIML Global, and with a view to make TIML Golden a step down subsidiary, the only £ 1 share of TIML Golden, which was held by TIML-India, was transferred to TIML Global. TIML Golden and TIML Global, at this point of time, were typical £ 1 companies without substance- which were to be used special purpose vehicles for the acquisition of Virgin Radios. This transaction also took place on 16th June 2008 itself. As a result of these transactions, TIML Golden became a wholly-owned subsidiary of TIML Global, TIML Global became a wholly-owned subsidiary of TIML, and, TIML anyway was already a wholly-owned subsidiary of BCCL. With this structure in place and the deal having been finalized, the flow of funds started to complete the transaction. TIML received Rs. 388.85 crores as interest-free deposits from its holding company, i.e. BCCL, and Rs. 100 crores as a subscription for 1% non-cumulative preference shares. TIML-India then remitted UK £ 56,824,316 (UK £ 1.2 million for equity, and balance UK £ 55.824 million as an interest-free loan to TIML-Global on 27th June 2008. Once this amount of UK £ 56.82 million was received by TIML-Global, it paid UK £ 53.51 million, on that day itself, on behalf of TIML-Golden, for the acquisition of Virgin Radio shares, and the balance amount of TIML-Golden for other acquisition-related costs. The acquisition of shares in Virgin Radios by TIML-Golden was completed on 30th June 2008. A further payment of UK £ 3,75,000, as an interest-free loan, was made by TIML India to TIML Global for the working capital costs. It was in this backdrop that form 3CEB filed by the assessee company disclosed the following transaction with its AE: "Amount remitted Rs. 477,10,41,750".

2.4.1. The findings of the Tribunal are as under:-

14. It is also an admitted position that TIML-Global is a special purpose vehicle. A special purpose vehicle, or SPV as it is commonly called, is an entity that is set up for a special purpose or a special project. SPVs are often used by the promoters of a project or business to isolate the financial or legal risk associated with the project or activity for which the SPV was set up or because sometimes the activity or project in question requires an entity registered in a specific jurisdiction or specific jurisdictions. The business structuring through SPVs, particularly SPVs structured abroad, could be warranted on account of a variety of commercial and legal considerations, ranging from the comfort level of the outside parties dealing with entities incorporated in certain jurisdictions to the legal framework within which such entities operate, as also to cushion owners of these structures from financial, commercial or legal risk exposures emanating from the transactions that are undertaken through these SPVs. These SPVs are typical, to use transfer pricing terminology, "capital-rich low function entity".

22. To sum up, there cannot be a transaction, between the independent enterprises, of interest-free debt funding of an overseas SPV by its sponsorer; if such a transaction between independent enterprises is at all hypothetically possible, the arm's length interest on such funding will be 'nil'; and, if there has to be an arm's length consideration under the CUP method, other than interest, for such funding, it has to be net effective gains- direct and indirect, attributable to the risks assumed by the sponsorer of the SPV, to the SPV in question.

2.5. The only distinguishing feature of the assessee’s case with that of the facts prevailing in Bennett Coleman And Co. Ltd supra is that, in that case, special purpose lending was given for the purpose of participation in the bid and the bid was successful, whereas in the instant case, the bid was not successful. Barring this, all the facts are identical. Hence, ratio laid down by the Co-ordinate Bench of this Tribunal supra would be squarely applicable to the facts of the instant case before us.

2.6. In view of the aforesaid observations and respectfully following the judicial precedent relied upon hereinabove, we have no hesitation in directing the ld. TPO / AO to delete the transfer pricing adjustment made in respect of special purpose loan of USD 110 million. Accordingly, the ground No.1 raised by the assessee is allowed.

3. At this juncture, it would be relevant to address the additional ground raised by the assessee on 16/05/2011 which is as under:-

2. The appellant craves the leave to add, amend, alter and or delete any of the above grounds of appeal at or before the time of hearing of the appeal.

3.1. We find that this additional ground raised by the assessee goes to the root of the matter and does not require verification of fresh facts. Hence, they are admitted and taken up for adjudication. We find that the interest income received by the assessee from Home Field International Ltd. (AE) was duly offered to tax by the assessee company in Mauritius. The assessee paid the due taxes thereon at Mauritius. The assessee is only seeking foreign tax credit for the taxes already paid at Mauritius since the very same interest income received from AE is also subjected to tax in India in the hands of the assessee. We find that this is a legitimate claim of the assessee and hence, we direct the ld. AO to grant foreign tax credit tax while determining the tax liability on the assessee pursuant to this Tribunal order. Accordingly, the additional ground raised by the assessee is allowed.

4. The Ground No. 2 raised by the assessee was stated to be not pressed by the ld. AR due to smallness of the amount. We accordingly dismiss the said ground as not pressed with an observation that the same shall not be construed as a precedence for other years.

5. The Ground No. 3 raised by the assessee is challenging the disallowance of payments made to various instituitions by invoking the provisions of section 40A(9) of the Act.

5.1. We have heard the rival submissions and perused the materials available on record. We find that the assessee had made payment of Rs 81,26,900/- to as entrance fee subscription and contribution towards service and facility use to the following persons:- Corporate Office Tata Sports Club - Rs 3,30,000 Mithapur Mithapur Nutan Balshikshan Sangh - Rs 19,00,000 Kindergarten Primary School - Rs 10,75,000 Flag Day Celebration - Rs 2,150 Babrala Tatachem D A V Public School - Rs 44,44,813 Tatachem Sports and Cultural Club - Rs 3,71,337 Total Rs 81,26,900 5.2. The said payments were sought to be disallowed by the ld. AO by applying the provisions of section 40A(9) of the Act pursuant to the directions of the ld. DRP. Both the parties mutually agreed that this issue has already been settled in favour of the assessee by the co- ordinate bench decisions of this tribunal in assessee’s own case as under:- Contribution to Tata Sports Club Covered in dated 26.07.2006 in A.Y. 1995-96 Covered in ITA No. 6496/Mum/2004 dated 17.08.2007 in A.Y. 1996-97 Covered in ITA No. 3383/Mum/2015 dated 22.04.2019 in A.Y. 2002-03 Mithapur Nutan Balshikshan Sangh Covered in ITA No. 4442/Mum/1996 dated 04.02.2000 in A.Y. 1992-93 Covered in ITA No. 3383/Mum/2015 dated 22.04.2019 in A.Y. 2002-03 Kindergarten Primary School Covered in ITA No. 4442/Mum/1996 dated 04.02.2000 in A.Y. 1992-93 Covered in ITA No. 3383/Mum/2015 dated 22.04.2019 in A.Y. 2002-03 Flag Day Celebration Covered in ITA No. 3383/Mum/2015 dated 22.04.2019 in A.Y. 2002-03 Tatachem D A V Public School Covered in ITA No. 7035/Mum/2004 in A.Y. 1997-98 Covered in ITA No. 3383/Mum/2015 dated 22.04.2019 in A.Y. 2002-03 Tatachem Sports and Cultural Club Covered in ITA No. 3383/Mum/2015 dated 22.04.2019 in A.Y. 2002-03 5.3. Respectfully following the aforesaid decisions, we direct the ld. AO to delete the disallowance made in this regard. Accordingly, the Ground No. 3 raised by the assessee is allowed.

6. The Ground No. 4 raised by the assessee is with regard to the treatment of subscription paid to Tata Sons Ltd under the Brand Equity and Business Promotion Agreement.

6.1. We have heard the rival submissions and perused the materials available on record. We find that the assessee had entered into Brand Equity and Business Promotion (BEBP) Agreement dated 18.12.1998 with Tata Sons Ltd for use of Tata Logo by the assessee, pursuant to which payment has been made by the assessee. This payment was sought to be disallowed by the ld. AO on the ground that the assessee was a Tata Group Company since 1939 and has its own reputation and logo. Hence there is no need to use separate Tata Logo. Accordingly, the ld. AO disallowed the said payment as not meant for business purposes of the assessee.

6.2. We find that this issue is no longer res integra in view of the decisions of this tribunal in assessee’s own case in the following cases :- dated 15.09.2017 for A.Y. 2001-02 ITA No. 3383/Mum/2015 dated 22.04.2019 for A.Y. 2002-03 ITA No. 2439/Mum/2011 dated 19.02.2021 for A.Y. 2003-04 ITA No. 2440/Mum/2011 dated 06.07.2022 for A.Y. 2004-05 6.3. The ld. AR also stated that the similar issue has been decided by this tribunal in the case of assessee’s own subsidiary Rallis India Ltd case in ITA No. 5701/Mum/2008 for A.Y. 2004-05 ; in the case of BPL Refrigeration Ltd vs ACIT reported in 91 ITD 203 and in the case of Tata Autocomp Ltd in IT(TP)A No. 7596/Mum/2012 dated 12.06.2013.

6.4. Respectfully following the aforesaid judicial precedents, the Ground No. 4 raised by the assessee is allowed.

7. The Ground No. 5 raised by the assessee is with regard to disallowance of computer upgradation expenses, which was stated to be not pressed by the ld. AR as depreciation has been granted to the assessee in the later years. Hence Ground No. 5 raised by the assessee is dismissed as not pressed.

8. The Ground No. 6 raised by the assessee is challenging the denial of deduction u/s 80IA of the Act in respect of profits derived by the Mithapur Power Plant.

8.1. We have heard the rival submissions and perused the materials available on record. The assessee has claimed deduction u/s 80IA of the Act in respect of its Power Plant comprising of High-Pressure Boiler (HPB3) and Turbine (TT9) set, located at Mithapur Plant, Mithapur, Plha Mandal, Gujarat-361315. It is not in dispute that the power generated by this Power Plant is captively consumed by the other units of the assessee company. It is not in dispute that the said power plant was set up on 11.05.1995 and the initial year of claim of deduction u/s 80IA of the Act was A.Y. 2001-02. It is not in dispute that separate books of accounts are maintained at Mithapur Plant for determining the profits derived from Mithapur Power Plant. The status of allowability of the said claim of deduction for various years commencing from A.Y. 2001-02 onwards are as under:- a) For A.Y. 2001-02, the assessee’s claim of deduction was allowed by the ld. AO in the assessment framed u/s 143(3) of the Act. This assessment was not subjected to reopening u/s 147 of the Act or revision u/s 263 of the Act. b) For A.Ys. 2002-03 to 2004-05, the assessee’s claim was initially allowed u/s 143(3) of the Act, but later withdrawn in the re-assessment proceedings. On further appeal, the reopening was held to be invalid by this tribunal. No decision was rendered by this tribunal on merits. The appeal preferred by the revenue against this tribunal order is pending before the Hon’ble High Court. c) For A.Y. 2005-06, the assessee’s claim was initially allowed u/s 143(3) of the Act. This assessment was sought to be revised u/s 263 of the Act by the ld. CIT. On further appeal against the section 263 order to this tribunal, this tribunal had held the revision order passed u/s 263 of the Act by the ld. CIT to be invalid. The appeal preferred by the revenue against this tribunal order is pending before the Hon’ble High Court.

8.1.1. Hence as on date, the deduction u/s 80IA of the Act in respect of Mithapur Power Plant was allowed in A.Y. 2001-02 on merits , being the first year. For A.Ys. 2002-03 to 2005-06, it has been allowed by the ld. AO u/s 143(3) of the Act, which had become final as subsequent reopening and revision proceedings, as the case may be, were quashed by this tribunal. Effectively, the claim of deduction is allowed to the assessee upto A.Y. 2005-06. Accordingly, the ld. AR argued that there is no reason for the ld. AO to take a divergent stand during the year under consideration to deny the claim of deduction u/s 80IA of the Act, when the facts are identical and there is absolutely no subsequent adverse developments on facts. The method of working of the profit of the eligible undertaking adopted for the year is the same as it was for A.Y. 2001-02. This method has been consistently followed by the assessee in all the subsequent years also.

8.2. The audit report in Form 10CCB for the year under consideration is enclosed in page 125 of the paper book. The profit and loss account of the eligible power unit is enclosed in page 133 of the paper book. The workings for deduction u/s. 80IA of the Act are enclosed in page 131 of the paper book.

8.3. For the year under consideration, the sales figure for electricity is derived by multiplying units of electricity produced by the power plant with the fair market transfer price of Rs.4.74 per unit. The rate of Rs.4.74 per unit is derived as a equivalent cost of power per unit if the power would have been purchased from local state electricity board- i.e. Gujarat State Electricity Board. This is done as per the provisions of section 80(IA)(8) of the Act which provides for adoption of Fair Market Value (FMV) for goods transferred to another business of the assessee.

8.3.1. The sale of steam generated by the power project has been recorded at cost of producing the same. The sale of steam could not be recorded at fair market value as there is no ready market for steam i.e. steam is not a Marketable product.

8.3.2. As far as electricity is concerned, the cost of production of power is arrived at scientifically as per the cost records and the same has been matched against the figure of Sales which is the amount which would be required to be expended if the electricity had to be purchased from Gujarat Electricity Board, as per the provisions of Section 80(IA)(8) of the Act. The saving of cost has been determined as the profit from the industrial unit by the company.

8.3.3. The assessee further drew the attention of the ld. AO to the letter of the CBDT addressed to the IMC dt. 3.10.2001 (submitted vide letter dated 26-10-2010) wherein the issue of allowance of deduction u/s 80(IA) of the Act with respect to captive consumption of power units has been discussed at length.

8.3.4. The cost of the steam generated by the power project is the actual cost of production as per Cost Accounts. The sale of steam generated by the power project has been recorded at cost of producing the same. The sale of steam could not be recorded at fair market value as there is no ready market for steam i.e. steam is not a Marketable product. Hence, there is no profit no loss on steam. In support of the claim, the working sheet of rate of power of Gujarat State Electricity Board was also enclosed.

8.4. We find that the case of the ld. AO is that-- (i) since the said power plant is a captive power plant, deduction u/s.80IA of the Act is not eligible to the assessee; (ii) the assessee had adopted the rate of Rs.4.74 per unit to book income from sale of power. This is nothing but the rate charged by the Gujarat Electricity Board had it supplied power to the assessee. Hence, the assessee has inflated the profit on sale of power by showing the cost of production at a rate much lower than the one as per the tariff of Gujarat Electricity Board; and (iii) the assessee has claimed deduction u/s.80IA of the Act on the sale of steam also. This is merely a notional book entry passed by the assessee and accordingly, not eligible for deduction u/s.80IA of the Act.

8.5. We would like to adjudicate each of the aforesaid propositions separately. First, whether deduction u/s. 80IA of the Act would be eligible in respect of captive power plant i.e. power generated in the power plant when captively conceived by other non- eligible units, deduction u/s.80IA of the Act would be eligible for the said power plant. This issue is no longer res integra in view of the decision of the Hon’ble Madras High Court in the case of Tamilnadu Petro Products Ltd. vs. ACIT reported in (2011) 51 DTR (Mad) 67. Similarly, the Hon’ble Delhi High Court in the case of CIT vs. Orient Abrassive Ltd in 1078/2010, 1077/2010, 1079/2010 and 535/2011 dated 31/07/2014 had also held that assessee would be eligible for deduction u/s.80IA of the Act in respect of captive consumption of power generated from the eligible unit. Respectfully following the aforesaid decisions, we hold that assessee was duly justified in claiming deduction u/s.80IA of the Act for captive consumption of power. In any case, the very same deduction was granted under the same facts and circumstances by the ld. AO himself in A.Y.2001-02. Once, the deduction u/s.80IA of the Act has been granted in the first year of its claim, then in subsequent year, the same cannot be withdrawn unless there are adverse factual developments. In the instant case, there is absolutely no adverse factual development that had been placed on record by the Revenue to justify its withdrawal of deduction u/s.80IA of the Act in the 6th year of its claim of the assessee. Reliance in this regard has been rightly placed by the assessee on the decision of the Hon’ble Jurisdictional High Court in the case of CIT vs. Paul Brothers reported in 216 ITR 548 (Bom).

8.6. It is a fact that the steam generated from the power plant is transferred for usage in manufacturing soda ash and salt. For this transfer of usage of steam from power plant to the chemical plant, the assessee had reflected sale of steam in the profit and loss account of power plant and claimed deduction u/s.80IA of the Act. The steam generated effectively is a by-product of the power plant. Even though this income is booked by the assessee by way of book entry i.e. by booking income in the eligible unit and claiming expenditure in the non-eligible unit, in our considered opinion, the said profit represents profit derived from the power plant which is an eligible undertaking. We find that the assessee for the purpose of determining the value of steam transferred to the non- eligible unit, had adopted the cost of production of steam as the sale price. The cost of production of steam has been considered by the assessee by using the cost accounting records which is prescribed and which is as per the mandate of cost accounting rules which has been consistently followed by the assessee. In this regard, the eligibility of an assessee to claim deduction u/s.80IA of the Act for the sale of steam from power unit to non-eligible unit has been subject matter of consideration by the Co-ordinate Bench decision of this Tribunal in the case of DCW Ltd vs. The Additional Commissioner of Income Tax reported in 37 SOT 322(Mum). The relevant observation of this Tribunal on the impugned aspect of the issue is reproduced hereunder:-

“18.8 The next item of miscellaneous income is the income from sale of steam produced by the assessee. Briefly the facts and nature of steam are that the captive power undertaking also has waste heat recovery boiler, which is part of the power undertaking. The power generated by the running of diesel generating set is used in the manufacture of caustic soda. Running of Diesel Generating Sets produce heat, which is recovered from the waste heat recover boiler in the form of steam. During the year ended March, 2003, the total quantity of steam generated is 1,02,295 MT. The said steam is used as power for the manufacture of PVC and Ilmenite and 6,240 MT was used towards internal consumption. During the year 66,990 MT of steam was consumed in the manufacture of PVC and 29,065 MT was consumed in the manufacture of Ilmenite. 18.9 The submission of the learned AR of the assessee is that since power in the form of steam was generated by the captive power plant and consumed in the manufacture of PVC and Ilmenite, therefore, the assessee is entitled for deduction under section 80-IA. Further, the learned AR submitted that on identical set of facts, the department filed Special Leave Petition before Hon’ble Supreme Court against the judgment of Hon’ble Madras High Court in T.C. No. 1773 of 2008 and vide judgment dated 6th November, 2008, the Apex Court dismissed the department’s appeal. In the said judgment Madras High Court dismissed the Department’s appeal against the decision of Tribunal holding that the assessee was entitled to claim deduction under section 80-IA of the Act on the value of steam used for captive consumption by the assessee. CIT v. Tanfac Industries Ltd. [S.L.P.(C) No. 18537 of 2009] (319 ITR 8 & 9). In the light of above discussion, we find that the steam produced by the assessee is eligible unit is a bye-product and income from sale of steam is the income derived from industrial undertaking, therefore, deduction under section 80-IA is allow-able. We, accordingly, set aside the order of CIT(A) on this issue and the claim, of the assessee is allowed.”

8.7. In view of the above, we hold that assessee is entitled for deduction u/s.80IA of the Act in respect of sale of steam from its power plant to non-eligible units.

8.8. Now coming to the rate per unit of power adopted by the assessee for recognizing income on account of sale of power, we find that assessee had adopted the rate of Rs.4.74 per unit which is the same rate charged by Gujarat Electricity Board on the assessee had the power been drawn by the assessee from the Gujarat Electricity Board Grid. We find that the main grievance of the Revenue is that the cost of production of power for the assessee is less than Rs.4.74 per unit and hence, the assessee is not eligible to claim deduction u/s.80IA of the Act by considering the sale price of Rs.4.74 per unit which is nothing but the price charged on the power supply by Gujarat Electricity Board on the assessee. We find that this issue is no longer res integra by the decision of the Hon’ble Jurisdictional High Court in the case of CIT vs. Reliance Industries Ltd reported in 421 ITR 686 (Bom). The relevant question raised before the Hon’ble Jurisdictional High Court is reproduced as under:-

(c) Whether, on the facts and in the circumstances of the case and in law, the ld. Tribunal was right in upholding the decision of the ld.CIT(A) who had deleted the addition made by the then AO by restricting the deduction u/s. 80IA at Rs. 48,76,82,681/-as against Rs. 131,43,30,575/- claimed by the assessee?"

8.8.1. The Hon’ble Jurisdictional High Court disposed of the above question by observing as under:-

8.9. In view of the above, we hold that assessee was justified in recognizing the sale income of power at the rate of 4.74 power unit.

8.10. In view of the independent observations, we find that basis on which the deduction u/s.80IA of the Act has been denied by the ld. AO for the year under consideration has no legs to stand in the eyes of law. Hence, we direct the ld. AO to grant deduction u/s.80IA of the Act in respect of its captive power plant, in accordance with law. Accordingly, the ground No.6 raised by the assessee is allowed.

9.1. We have heard rival submissions and perused the materials available on record. We find that assessee had received a price concession from the Government which has been coined as fertilizer subsidy. The assessee submitted that the maximum retail price for sale of fertilizers to farmers had been fixed at a concessional rate by the Government, i.e. in other words, the assessee is mandated to sell the fertilizers to the farmer only at the maximum retail price fixed by the Government which is below the actual market price. The difference between actual market price and MRP is being paid by the Government to the assessee in the form of fertilizer subsidy. This is done in order to protect the farmers and it is more of welfare measures adopted by the Government in consonance with the Government Policies. It is only subsidy to the farmers and not to the assessee. Hence, as far as the assessee is concerned, it is effectively the receipt of sale price. It is not in dispute that assessee’s Haldia unit in West Bengal is eligible for claiming deduction u/s.80IB of the Act. The only dispute in the instant ground is whether the fertilizer subsidy received by the assessee as stated supra from the Government would be eligible for deduction u/s.80IB of the Act or not. As stated earlier, what assessee has recovered is only part of sale price in the form of subsidy. Hence, in our considered opinion, the same would be eligible for deduction u/s.80IB of the Act. In fact, in A.Y.2003- 04 this Tribunal in assessee’s own case vide its order dated 16/06/2022 had accepted the stand of the assessee and held that fertilizer subsidy represent part of the consideration received for sale of fertilizers and hence, the same would be eligible for deduction u/s.80IB of the Act. This order was subsequently followed by this Tribunal in assessee’s own case for A.Y.2004-05 and 2005-06 also. Respectfully following the same, we direct the ld. AO to grant deduction u/s.80IA of the Act in respect of fertilizer subsidy received by the assessee. Accordingly, the ground No.7a raised by the assessee is allowed.

11.1. We have heard rival submissions and perused the materials available on record. We find that assessee was directed to produce the details of the commission paid to the Directors and employees by the ld. AO during the course of assessment proceedings. The assessee filed the details vide letter dated 22/12/2009. The assessee stated that commission has been paid to the Managing Director and Executive Director as per the provisions of Companies Act 1956. It was specifically clarified that no commission was paid to any employee. The assessee stated that it had paid commission to Shri P R Menon, Managing Director in the sum of Rs.80 lakhs and Shri Homi R Khushrokhan, Executive Director in the sum of Rs.50 lakhs. Both these Directors i.e MD & ED were drawing salary from the assessee company. The assessee pleaded that the said payments were made to these two Directors as permitted in the provisions of the Companies Act 1956. The assessee also submitted that the said commission has been taken into account as part or remuneration paid to the said Directors and due deduction of tax at source were complied with. The ld. AO however, did not heed to the contentions of the assessee and invoked the provisions of Section 36(1)(ii) of the Act and disallowed the same on the ground that the said commission has been paid to the shareholders by way of distribution of profits as dividend. In other words, the case of the Revenue is that in lieu of the dividend, this commission has been paid by the assessee to the Directors. The ld. AR before us vehemently argued that both the Managing Director and Executive Director are not even shareholders of the assessee company. Hence, the provisions of Section 36(1)(ii) of the Act per se cannot be applied in the instant case. The ld. AR also submitted that the reliance placed by the ld. AO on the decision of the Hon’ble Bombay High Court in the case of Loyal Motor Services Co. Ltd. vs. CIT reported in 14 ITR 647 would indeed support the case of the assessee. In the said case, it has been categorically stated that the provisions of section 36(1)(ii) of the Act has been inserted in the statute to prevent the escapement from taxation by describing the payment as bonus, when in fact ordinarily, it should have reached the shareholder as profit or dividend. For the sake of convenience, we deem it fit to reproduce the provisions of Section 36(1)(ii) of the Act hereunder:-

Other deductions. 36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28— (ii) any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission; 11.2. From the bare reading of the aforesaid provision, it is very clear that in order to apply this provision in the first instance, the Managing Director and Executive Director should be shareholders and they should have been paid commission in lieu of distribution of profit or as dividend. Since the ld. AR placed on record the list of shareholders for the first time before us to drive home the point that both the MD and ED were not shareholders of the assessee company at the relevant point in time, we deem it fit and appropriate to restore this issue to the file of the ld. AO for the limited purpose of verification of facts as to whether Mr. P R Menon and Shri Homi R Khushrokhan were shareholders of the assessee company at the relevant point in time. If they are not found to be shareholders, then the disallowance made u/s.36(1)(ii) of the Act should be deleted. We make it clear that we are not even contemplating here that if the payment is made to shareholders in the form of Commission or Bonus, the provisions of section 36(1)(ii) of the Act would become applicable automatically. With these directions, the ground No. 8 raised by the assessee is allowed for statistical purposes.

13. The ground No.10 raised by the assessee with regard to disallowance of machinery hire charges was decided against the assessee by this Tribunal in A.Y.2002-03 and hence, the ld. AR did not press this ground. Accordingly, the ground No.10 is dismissed as not pressed.

15. The ground No.12 raised by the assessee is challenging the disallowance of deduction for early settlement scheme / voluntary retirement scheme expenses. The same was stated to be not pressed by the ld. AR as proportionate deduction was allowed to the assessee over a period of 5 years. Hence, the ground No.12 is hereby dismissed as not pressed.

(A.Y.2017-18) (Assessee Appeal)

19.2. We find that the issue as to whether LIBOR interest rate should be adopted in respect of loans given in foreign currency in which the said loan is to be recovered was subject matter of consideration by the Hon’ble Delhi High Court in the case of CIT vs. Cotton Naturals (I)(P) Ltd. reported in 276 CTR 445 (Del). The relevant operative portion in this regard is reproduced hereunder:-

“39. The question whether the interest rate prevailing in India should be applied, for the lender was an Indian company/assessee, or the lending rate prevalent in the United States should be applied, for the borrower was a resident and an assessee of the said country, in our considered opinion, must be answered by adopting and applying a commonsensical and pragmatic reasoning. We have no hesitation in holding that the interest rate should be the market determined interest rate applicable to the currency concerned in which the loan has to be repaid. Interest rates should not be computed on the basis of interest payable on the currency or legal tender of the place or the country of residence of either party. Interest rates applicable to loans and deposits in the national currency of the borrower or the lender would vary and are dependent upon the fiscal policy of the Central bank, mandate of the Government and several other parameters. Interest rates payable on currency specific loans/ deposits are significantly universal and globally applicable. The currency in which the loan is to be re-paid normally determines the rate of return on the money lent, i.e. the rate of interest. Klaus Vogel on Double Taxation Conventions (Third Edition) under Article 11 in paragraph 115 states as under:— "The existing differences in the levels of interest rates do not depend on any place but rather on the currency concerned. The rate of interest on a US $ loan is the same in New York as in Frankfurt-at least within the framework of free capital markets (subject to the arbitrage). In regard to the question as to whether the level of interest rates in the lender's State or that in the borrower's is decisive, therefore, primarily depends on the currency agreed upon (BFH BSt.B1. II 725 (1994), re. 1 § AStG). A differentiation between debt-claims or debts in national currency and those in foreign currency is normally no use, because, for instance, a US $ loan advanced by a US lender is to him a debt-claim in national currency whereas to a German borrower it is a foreign currency debt (the situation being different, however, when an agreement in a third currency is involved). Moreover, a difference in interest levels frequently reflects no more than different expectations in regard to rates of exchange, rates of inflation and other aspects. Hence, the choice of one particular currency can be just as reasonable as that of another, despite different levels of interest rates. An economic criterion for one party may be that it wants, if possible, to avoid exchange risks (for example, by matching the currency of the loan with that of the funds anticipated to be available for debt service), such as taking out a US $ loan if the proceeds in US $ are expected to become available (say from exports). If an exchange risk were to prove incapable of being avoided (say, by forward rate fixing), the appropriate course would be to attribute it to the economically more powerful party. But, exactly where there is no 'special relationship', this will frequently not be possible in dealings with such party. Consequently, it will normally not be possible to review and adjust the interest rate to the extent that such rate depends on the currency involved. Moreover, it is questionable whether such an adjustment could be based on Art. 11 (6). For Art. 11(6), at least its wording, allows the authorities to 'eliminate hypothetically' the special relationships only in regard to the level of interest rates and not in regard to other circumstances, such as the choice of currency. If such other circumstances were to be included in the review, there would be doubts as to where the line should be drawn, i.e., whether an examination should be allowed of the question of whether in the absence of a special relationship (i.e., financial power, strong position in the market, etc., of the foreign corporate group member) the borrowing company might not have completely refrained from making investment for which it borrowed the money."

considered some of the most complex transfer pricing issues in India. The Indian transfer pricing administration has followed a quite sophisticated methodology for pricing inter-company loans which revolves around: ♦ Examination of the loan agreement; ♦ A comparison of terms and conditions of loan agreements; ♦ The determination of credit ratings of lender and borrower; ♦ The identification of comparable third party loan agreements: and ♦ Suitable adjustments to enhance comparability. 10.4.10.2. The Indian transfer pricing administration has come across cases of outbound loan transactions where the Indian parent has advanced to its associated entities (AE) in a foreign jurisdiction either interest free loans or loans at LIBOR (London Interbank Offered Rate) or EURIBOR (Euro Interbank Offered Rate). The main issue before the transfer pricing administration is benchmarking of these loan transactions to arrive at the ALP of the rates of interest applicable on these loans. The Indian transfer pricing administration has determined that since the loans are advanced from India and Indian currency has been subsequently converted into the currency of the geographic location of the AE, the Prime Lending Rate (PLR) of the Indian banks should be applied as the external CUP and not the LIBOR or EURIBOR rate. 10.4.10.3. A further issue in financial transactions is credit guarantee fees. With the increase in outbound investments, the Indian transfer pricing administration has come across cases of corporate guarantees extended by Indian parents to its associated entities abroad, where the Indian parent as guarantor agrees to pay the entire amount due on a loan instrument on default by the borrower. The guarantee helps an associated entity of the Indian parent to secure a loan from the bank. The Indian transfer pricing administration generally determines the ALP of such guarantee under the Comparable Uncontrolled Price Method. In most cases, interest rates quotes and guarantee rate quotes available from banking companies are taken as the benchmark rate to arrive at the ALP. The Indian tax administration also uses the interest rate prevalent in the rupee bond markets in India for bonds of different credit ratings. The difference in the credit ratings between the parent in India and the foreign subsidiary is taken into account and the rate of interest specific to a credit rating of Indian bonds is also considered for determination of the arm's length price of such guarantees. 10.4.10.4. However, the Indian transfer pricing administration is facing a challenge due to non-availability of specialized databases and of comparable transfer prices for cases of complex inter-company loans as well as mergers and acquisitions that involve complex inter-company loan instruments as well as an implicit element of guarantee from the parent company in securing debt."

19.3. Further, we find that the Hon’ble Jurisdictional High Court in the case of PCIT vs. Manugraph India Pvt. Ltd in Income Tax Appeal No.758 of 2017 dated 09/09/2019 also had an occasion to consider the same issue. The relevant question raised before the Hon’ble Jurisdictional High Court was as under:-

"(a). Whether on the facts and in the circumstances of the case and in law, in terms of provision of Section 92C of the Income Tax Act read with Rule 10B of the Income Tax Rules, the Hon'ble Tribunal was right in restricting the rate of interest on loans given to Associated Enterprises @ LIBOR + 2% instead of 17.22% proposed by the Transfer Pricing Officer?

19.3.1. This question was disposed of by the Hon’ble Jurisdictional High Court by observing as under:-

19.4. Similar views were expressed by the Hon’ble Jurisdictional High Court in the case of CIT vs. Everest Kanto Cylinder Ltd in Income Tax Appeal No.435 of 2015 dated 18/07/2017; Income Tax Appeal No.294 of 2016 dated 20/07/2018 and in the case of PCIT vs. Manugraph India Ltd in Income Tax Appeal No.454 of 2016 dated 19/11/2018. Respectfully following the same, we direct the ld. AO to delete the TP adjustment made in respect of interest on loan advanced to AE in A.Y.2007-08. Accordingly, the ground No.1 raised by the assessee is allowed.

20. The ground No.2 raised by the assessee is challenging the disallowance u/s.14A of the Act which was stated to be not pressed due to smallness of the amount. We accordingly, dismiss the said ground as not pressed with an observation that the same shall not be construed as precedent for other years.

21. The ground No.3 raised by the assessee is challenging the disallowance of payments made to various clubs and institutions u/s.40A(9) of the Act.

21.1. We have heard rival submissions and perused the materials available on record. We find that assessee had made payments to the following clubs / institutions.

Corporate Office Tata Sports Club - Rs 3,30,000 Mithapur Mithapur Nutan Balshikshan Sangh - Rs 19,00,000 Kindergarten Primary School - Rs 10,75,000 Babrala Tatachem D A V Public School - Rs 47,89,989 Tatachem Sports and Cultural Club - Rs 83,260 Payments made to clubs towards entrance fees and subscription Wellington Sports club - Rs.8,85,000 Bombay Gymkhana club - Rs. 42,702 Cricket club of India - Rs.30,00,000 Poona club Ltd. - Rs. 3,50,000 Country Club India Ltd - Rs. 70,000 Total Rs 125,25,951 21.2. The said payments were sought to be disallowed by the ld. AO by applying the provisions of section 40A(9) of the Act pursuant to the directions of the ld. DRP. Both the parties mutually agreed that this issue has already been settled in favour of the assessee by the co- ordinate bench decisions of this tribunal in assessee’s own case as under:-

Contribution to Tata Sports Club Covered by Tribunal order for A.Y.2006-07 supra vide ground No.3 Mithapur Nutan Balshikshan Sangh Covered by Tribunal order for A.Y.2006-07 supra vide ground No.3 Kindergarten Primary School Covered by Tribunal order for A.Y.2006-07 supra vide ground No.3 Tatachem D A V Public School Covered by Tribunal order for A.Y.2006-07 supra vide ground No.3 Tatachem Sports and Cultural Club Covered by Tribunal order for A.Y.2006-07 supra vide ground No.3 21.3. With regard to payment made to various clubs as detailed above, we find that the Hon’ble Supreme Court in the case of CIT vs. United Glass Manufacturing Co. Ltd reported in 28 taxmann.com 429 had stated that club membership fees paid for employees for seeking membership in the clubs and accordingly payment of entrance fees and subscription made thereon are allowable business expenditure u/s.37 of the Act. Similar propositions were also laid down by the Hon’ble Jurisdictional High Court in the case of Otis Elevator Co. India Ltd. vs. CIT reported 195 ITR 682 (Bom).

21.4. Respectfully following the aforesaid decisions, we direct the ld. AO to delete the disallowance made in this regard. Accordingly, the Ground No. 3 raised by the assessee is allowed.

23. The ground No.6 raised by the assessee with regard to the claim in respect of amount paid on margin of FCCB, was stated to be not pressed by the ld. AR at the time of hearing. The same is reckoned as a statement made from Bar and accordingly, dismissed as not pressed.

25.1. We have heard rival submissions and perused the materials available on record. The assessee company has a scheme whereby the existing employees and employees who had retired from the services of the company on attainment of normal retirement age, are entitled for their medical check-up and medicines at the company hospital for the rest of their life. The defined obligation as on the opening of the financial year in respect of this expenditure was debited to general reserves as per the mandate provided in Accounting Standard-15 (AS-15) issued by Institute of Chartered Accountants of India (ICAI). Accordingly, the sum of Rs.6,23,86,226/- towards provision for post retirement medical benefits was debited to general reserve by the assessee in its books but since that expenditure had accrued for the year under consideration, in view of the mercantile system of accounting followed by the assessee, the assessee claimed the said provision for post retirement medical benefits in the sum of Rs.6,23,86,226 as a deduction while filing the return of income. The assessee submitted that the said provision has been made based on actuarial valuation report obtained by a registered valuer who is a Fellow Member of Institute of Actuaries, England and Fellow Member of Actuarial Society of India. The said Actuarial valuation report duly determined the provision figure to be made as on 31/03/2007 and as on 01/04/2006. The copy of the Actuarial valuation report was placed on record by the ld. AR based on the directions given by this Tribunal. This actuarial valuation report was prepared in accordance with the mandate provided in AS-15 issued by ICAI. In our considered opinion, this provision based on actuarial valuation would be clearly an ascertained liability for the assessee at the end of the year. The ld. AO however, strangely applied the provisions of Section 43B of the Act and held that since the said provision made for post retirement medical benefits had not been actually paid by the assessee, the same would become disallowable in terms of Section 43B of the Act. We are unable to comprehend ourselves to understand this contention of the Revenue. On perusal of the provisions of Section 43B of the Act, this expenditure provision made for post retirement medical benefits would not fall under any of the clauses provided in Section 43B of the Act. It is an admitted fact that no fund is created by the assessee in respect of this post retirement medical benefits. However, since the actuarial valuation report was placed before this Tribunal for the first time to justify the fact that the said provision has been made on a scientific basis by placing reliance on the registered valuation report, and also considering the fact that this report was not in the possession of the lower authorities, we deem it fit and appropriate in the interest of justice and fair play, to remand this issue to the file of the ld. AO for denovo adjudication in accordance with law. Accordingly, the ground No.10 raised by the assessee is allowed for statistical purposes.

27.1. We have heard rival submissions and perused the material available on record. We find that the assessee vide letter dated 27/12/2010 filed before the ld. AO during the course of assessment proceedings made a claim that it had incurred capital and revenue expenses on research and development which would be eligible for deduction u/s.35(1)(iv) / 35 (2AB) while completing the assessment. The assessee also drew the attention of the ld. AO to page 23 of the annual printed accounts. The break-up of the said expenditure was as under:-

Capital expenses - Rs.3.32 Crores Revenue expenses - Rs.6.02 Crores 27.2. The ld. AO did not agree to the contentions of the assessee on the ground that this claim is made for the first time before him during the course of assessment proceedings and since the claim was not made either in the return of income or in the revised return of income, applying the decision of the Hon’ble Supreme Court in the case of Goetze India Ltd reported in 284 ITR 323 (SC), denied to grant deduction for the same. We find that the decision of Goetze India Ltd does not prohibit an assessee who has a valid claim to be made before the appellate authorities. Moreover the restriction provided by the said decision, shall not apply to appellate authorities. This is provided in the last paragraph of the decision of the Hon’ble Supreme Court. However, the veracity of the claim had not been examined at all by the ld. AO. Hence, we deem it fit and appropriate, in the interest of justice and fairplay, to restore this issue to the file of the ld. AO for denovo adjudication in accordance with law. The assessee is at liberty to produce fresh evidences, if any, in support of its contentions. Accordingly, the ground No.12 raised by the assessee is allowed for statistical purposes.

1. The learned Assessing Officer erred in: A. Passing an order u/s 154 without appreciating that there is no mistake apparent from record. B. Passing an order u/s 154 on the basis of order of Addl. CIT TP- II(2), Mumbai which is without authority of law or as per the provisions of the Income Tax Act. C. Passing an order u/s 154 on the basis of an order of the TPO which was passed after the order of the Dispute Resolution Panel was received, though the directions of the Hon. Panel did not require him to pass any such order.

2. The learned assessing officer erred in adding a sum of Rs. 5,73,71,698 to the total income, in respect of the interest to be charged to the AE, on the basis of erroneous observations of the learned Transfer Pricing Officer, though the treatment in respect of the said addition had already been given at the time of passing the order u/s 143(3) read with section 144C, after due application of mind. 3. The appellant craves the leave to add amend, alter, modify or delete any of the above grounds, before or at the time of hearing of the appeal.

“In the facts and circumstances of the Appellant's case and in law, the order dated 31.07.2012 passed by the Ld. Assessing officer under provisions of section 154 of the Income-tax Act, 1961 is barred by limitation in view of section 144C(13) and is, therefore, bad in law and illegal.”

32.1. Since the additional ground goes to the root of the matter and does not require any verification of fresh facts, we are inclined to admit the same and take up the same for adjudication.

33.1. The ld. AR before us made submissions that once the final assessment order is framed on 19/10/2011, pursuant to the directions of the ld. DRP, the ld. TPO passing the order on 25/10/2011 has got no legs to stand in the eyes of law and the ld. AO erred in taking cognizance of the belated order passed by the ld. TPO and rectifying the same by way of an order u/s.154 of the Act.

33.2. In our considered opinion, this entire appeal becomes infructuous as there will be no grievance left to the assessee in view of our decision rendered in ground No.1 of assessee’s appeal for the A.Y.2007-08 in , wherein we have directed the ld. AO to completely delete the TP adjustment made in respect of interest on loans with AE. Hence, this entire appeal is hereby dismissed as infructuous. Accordingly, there is no need to go into the various legal arguments advanced by the ld. AR and they are left open.

Order pronounced on 31/03/2023 by way of proper mentioning in the notice board.