DCIT CENTRAL CIRCLE 3(2), MUMBAI, AIR INDIA vs. AARTI INDUSTRIES LIMITED, MUMBAI

Be that as it may, the assessee contested the part disallowance of deduction claimed u/s. 80IA of the Act in an appeal preferred before ld. first appellate authority. Noticing that identical issue has been decided in favour of the assessee in preceding assessment years, ld. first appellate authority followed those decisions and allowed assessee’s claim of deduction u/s. 80IA of the Act fully.

We have considered rival submissions and perused the materials available on record. Undisputedly, in the year under consideration, the CPP had sold power/electricity to the manufacturing unit and has claimed deduction u/s. 80IA of the Act in respect of profit arising from such transaction. There cannot be any manner of doubt that the transaction relating to sale of electricity between CPP and the manufacturing unit is a Specified Domestic Transaction (‘SDT’ for short) coming within the ambit of section 92BA of the Act. Therefore, in terms with Explanation (ii) under section 80IA(8) of the (A.Y. 2015-16) Dy. CIT vs. Aarti Industries Limited Act read with clause (iii) to Explanation u/s. 80IA(6) of the Act, the deduction allowable u/s. 80IA of the Act should be equal to an amount which corresponds to the Arm’s Length Price (‘ALP’ for short) of the transaction determined in terms of section 92F(ii) of the Act and other transfer pricing provisions. In fact, in paragraphs 4.1 to 4.3 of the assessment order, the A.O. himself has observed that reference was made to the Transfer Pricing Officer (‘TPO’ for short) to determine the ALP of related party transactions. Notably, in terms with the reference made by the A.O., the TPO undertook analysis of the international transaction as well as SDTs between the related parties. Vide order dated 30.10.2018 passed u/s. 92CA(3) of the Act, the TPO finally concluded that the ALP of the international transactions as well as SDT undertaken by the assessee with its Associated Enterprises (AE)/related parties being at arm’s length, no further adjustment is required. For ease of reference, we deem it appropriate to reproduce the order passed by TPO: ORDER UNDER SECTION 92CA(3) OF THE I.T. ACT, 1961 1. A reference u/s. 92CA(1) of the Income Tax Act, 1961 (hereinafter referred to as the Act) in case of M/s. Aarti Industries Ltd., (hereinafter referred to as "the assessee) for A.Y. 2015-16 for computation of arm's length price in relation to the international transactions and specified domestic transactions was received from DCIT-15(1)(1), Mumbai/ Assessing Officer (hereinafter referred to as "Assessing Officer" or "AO") on 13.09.2017. The AO has made this reference for determination of Arm's Length Price (hereinafter referred to as ALP) with reference to all the transactions reported in Fortn 3CEB filed by the assessee.

A notice u/s 92CA(2) of the LT. Act, 196 i' was issued to the assessee on 16.01.2018 by the DCIT(TP)-1(1)(1), Mumbai (hereinafter referred to as the "Transfer Pricing Officer" or "TPO"). Notice u/s 92D(3) of the 1. T. Act was also issued to the assessee on 12.02.2018 and duly served upon the assessee. Thereafter, another notice u/s 92CA(2) of the 1.T. Act, 1961 was issued by the TPO on 10.07.2018. In all these notices including order sheet entries, the assessee was required to submit information/documents to support the arm's length price with reference to international transactions and specified domestic transactions entered into by the wasessee with its various associated enterprises during the previous year 2014-15 relevant to AY 2015-16.

In response to the notices issued, the authorized representative, Ms. Komal Mehta and Ms. Naini Savia from Dhruva Advisors LLP, attended from time to time and filed details and the case was discussed. The transfer pricing documentation and supporting details furnished by the assessce/authorized representative were examined during the course of the transfer pricing proceedings for determination of ALP of International transactions and specified domestic transactions.

Details of international transactions and specified domestic transactions entered into by the taxpayer: During the year under consideration, Assessee has entered into the following international transactions and specified domestic transactions with its AEs/ related parties: Nature of services Amount (Rs.) International Transaction Sale of organic and inorganic chemicals and 78,13,15,195 intermediates Total 78,13,15,195 Specified Domestic Transaction Purchase of Raw materials 4,55,45,317 Purchase of Finished goods 3,57,66,726 Purchase of Packing material 80,716 Rent for business premises 87,26,436 Managerial Remuneration 2,99,34,778 Sitting Fees 10,40,000 Commission payments 5,00,34,000 Payment of Professional fees 6,48,182 Payment of Salary 21,44,261 Sale of power from eligible business units to non- 181,65,20,754 eligible business units of the company Total 199,04,41,170 6. Details and information requested were furnished by the taxpayer from time to time, and issues relating to the arm's length price of the international transactions/ specified domestic transactions were discussed.

In view of the taxpayer's submissions and facts of the case, the Arm's Length Price of transactions as reported by the taxpayer is accepted and no adjustment is being made to the international transactions and specified domestic transactions undertaken by the taxpayer with its Associated Enterprises/related parties.

In ground no. 2, the Revenue has challenged the relief granted by ld. first appellate authority in the matter of disallowance made u/s. 14A of the Act read with Rule 8D(2).

We have heard the parties and perused the materials available on record. As discussed above, in case of Vireet Investment (P.) Ltd. (supra), the Special Bench of ITAT has held that while applying Rule 8D(2)(iii), only those investments which yielded exempt income during the previous year relevant to the assessment year under dispute can be considered in the average value of the investment for computing disallowance. Since the directions of ld. first appellate authority are in conformity with the ratio laid down in case of Vireet Investment (P.) Ltd. (supra), we do not find any reason to interfere with it. Hence, ground no. 2 is dismissed.

Ground no. 3 relates to the disallowance u/s. 14A of the Act while computing the disallowance u/s. 115J of the Act. We have heard the parties and perused the materials on record. The short issue arising for consideration is whether while computing book profit u/s. 115J of the Act, disallowance u/s. 14A can be made. As rightly observed by ld. first appellate authority, in case of Vireet Investment (P.) Ltd. (supra), the Special Bench of ITAT has held that the provisions of section 14A of the Act would not apply while computing book profit u/s. 115J of the Act. Notably, applying the same ratio, the co- (A.Y. 2015-16) Dy. CIT vs. Aarti Industries Limited ordinate bench in assessee’s own case in A.Ys. 2011-12, 2012-13 and 2014-15 has decided the issue in favour of the assessee. In view of the aforesaid, we do not find any reason to interfere with the decision of ld. first appellate authority. Hence, ground is dismissed.

In ground no. 4, the Revenue has challenged the deletion of disallowance made in respect of deduction claimed u/s. 35(2AB) of the Act. Briefly the facts are, in course of assessment proceeding, the A.O. noticed that in the year under consideration, the assessee had claimed weighted deduction u/s. 35(2AB) of the Act for an amount of Rs.26,69,58,914/- comprising both revenue and capital expenditure. He observed, though the assessee had fulfilled some of the conditions for claiming deduction, however, all the conditions have not been fulfilled. According to him, though the assessee is required to enter into an agreement with the prescribed authority and further, is required to furnish Form 3CL, containing approval by Department of Scientific and Industrial Research (‘DSIR’ for short), however, they were not furnished. Accordingly, he disallowed the weighted deduction claimed u/s. 35(2AB) of the Act at double the amount of expenditure actually incurred. However, he allowed the expenditure incurred in toto.

The assessee contested the aforesaid disallowance before ld. first appellate authority.

After considering the submissions of the assessee and in the context of facts and materials on record, ld. first appellate authority having found that the issue has been consistently decided in favour of the assessee till A.Y. 2014-15, allowed assessee’s claim of deduction in full.

In ground no. 5, the Revenue has challenged the deletion of disallowance in respect of additional depreciation claimed u/s. 32(1) of the Act.

Briefly the facts are, in course of assessment proceeding, the A.O. noticed that the assessee had purchased some plant and machinery during financial year 2013-14 after 01.10.2013 and had claimed additional depreciation at the rate of 10% of the actual cost. He observed that on the very same plant and machinery, the assessee had claimed 10% of additional depreciation in the impugned assessment year. Being of the view that the assessee cannot claim additional deprecation spread over two assessment years, the A.O. disallowed it.

The assessee contested the aforesaid decision of the A.O. before ld. first appellate authority. While deciding the issue, ld. first appellate authority found that in assessee’s own case, in preceding assessment years, the issue has been decided in favour of the assessee. Following them, ld. first appellate authority allowed assessee’s claim.

Facts being identical, respectfully following the decision of the co-ordinate bench, we uphold the decision of ld. first appellate authority by dismissing the ground.

In ground no. 6, the Revenue has challenged allowance of assessee’s claim of depreciation in respect of foreign exchange loss of earlier year. Briefly, the facts are, in course of assessment proceeding, the A.O. observed that in A.Y. 2009-10, the assessee had claimed unrealized forex loss of Rs.11,86,14,204/-. The said loss was treated as capital in nature and added to the value of the plant and machinery on which the assessee claimed depreciation. The A.O. was of the view that since the forex loss was unrealized, it cannot be added to the value of the block of plant and machinery in terms of section 43A of the Act. Accordingly, following the decision taken by the A.O. to disallow the claim of the assessee in A.Ys. 2009-10 and 2010-11, he made the disallowance.

The assessee contested the aforesaid disallowance before ld. first appellate authority. Having found that assessee’s claim has been allowed in the preceding assessment years, ld. first appellate authority allowed assessee’s claim.

We have considered rival submissions and perused the materials on record. On perusing the materials placed before us, we find that this is a recurring dispute between the (A.Y. 2015-16) Dy. CIT vs. Aarti Industries Limited parties since A.Y. 2009-10. In fact, the A.O. has accepted the aforesaid factual position. In the latest order passed in assessee’s case in A.Y. 2014-15, the co-ordinate bench, while dealing with the issue, has held as under: 25. With regard to Ground No. 6 which is in respect of depreciation of foreign exchange loss disallowed in earlier year, Ld. Counsel for the assessee submitted that no factual inaccuracy or confusion is there in the order of the authorities below. The assessee is granted depreciation allowance on the opening written down value (WDV) arising out of the foreign exchange difference of loans actually repaid. The depreciation allowance has been granted by the Assessing Officer himself in earlier Assessment Years. Ld. AR of the assessee brought to our notice that the issue in appeal has been considered by the Co-ordinate Bench of this tribunal in assessee's own case for the A.Y. 2011-12 in ITA.No. 4943/MUM/2017 dated 31.07.2020 (Copy of the order is placed on record) and for the A.Y. 2012-13 and 2013-14, and submitted that the Tribunal has decided the issue in favour of the assessee and Ld. Counsel for the assessee requested the same may be adopted for the appeal under consideration.

In view of the aforesaid, we do not find any reason to interfere with the decision of ld. first appellate authority, hence, ground no. 6 is dismissed.

Ground nos. 7 to 10 are on the common issue of the nature and character of Status Holder Incentive Scripts (SHIS) and Fertilizer Subsidy, whether capital or revenue. Briefly the facts are, in course of assessment proceeding, the assessee through letter dated 04.12.2018 claimed before the A.O. that though SHIS subsidy and fertilizer subsidy have been credited to the profit and loss account as revenue receipt, however, they are actually in the nature of capital receipts, hence, not taxable. Relying upon the decision of Hon'ble Supreme Court in the case of Goetze (India) Limited vs. CIT [2006] 157 Taxman 1 (SC), the A.O. declined to entertain the claim as it was not made through a revised return of income.

Against the aforesaid decision, the assessee approached ld. first appellate authority. While deciding the issue, ld. first appellate authority not only held that the fresh claim made by the assessee can be entertained by the appellate authorities, but on merits also he (A.Y. 2015-16) Dy. CIT vs. Aarti Industries Limited held that the nature and character of the subsidy being capital, is not taxable either under the normal provisions nor while computing book profit u/s. 115JB of the Act.

Before us, ld. Departmental Representative (ld. DR for short) submitted that firstly, the fresh claim made by the assessee without filing any revised return of income could not have been accepted by the A.O., hence, he was justified in disallowing assessee’s claim. Without prejudiced, he submitted that the nature and character of subsidy being revenue, it is taxable.

Per contra, ld. Counsel appearing for the assessee forcefully submitted that the issue being covered in favour of the assessee in its own case as well as in various other cases, the decision of ld. first appellate authority needs to be upheld.

We have considered rival submissions and perused the materials on record. Insofar as the power of ld. first appellate authority to admit assessee’s claim, which was not accepted by the A.O. at the first stage, we must observe that there is no restriction on the appellate authorities to entertain a fresh claim if facts relating to such claim are available on record. In the facts of the present appeal, undoubtedly, in course of assessment proceedings itself the assessee has made the claim that SHIS and fertilizer subsidies are taxable as they are capital in nature. All facts relevant to the aforesaid claim were available before the A.O. That being the case, in our considered opinion, ld. first appellate authority was wholly within his power to entertain the claim. Insofar as the merits of the issue is concerned, in our view, it squarely stands settled in favour of the assessee by virtue of the decisions of the co-ordinate bench in assessee’s own case in A.Ys. 2011-12 to 2014-15 (in (A.Y. 2015-16) Dy. CIT vs. Aarti Industries Limited to 4537/Mum/2024 vide order dated 04.04.2025), wherein while dealing with identical issue, the co-ordinate bench has held as under: 8. We shall now take up the appeal filed for AY. 2012-13 to 2014-15. In these three years, the Revenue is challenging the decision of the Ld.CIT(A) in excluding the incentives received under Status Holder Incentive Scrips (SHIS) and fertilizersubsidy received under NBS Scheme, treating both of them as capital receipts.

In all the three years, the Revenue is placing reliance on the amendment made to the definition of income by Finance Act, 2015 w.e.f. 01-04-2016. While adjudicating the appeal of the assessee for AY. 2011-12, in an earlier paragraph, we have held that the above said amendment cannot be applied retrospectively for the assessment years prior to AYs. 2016-17. Accordingly, we reject this ground of the Revenue in all the three years.

The next issue contested by the Revenue in all the three years is related to the subsidy received under SHIS Scheme. We notice that this issue is covered by the decision rendered by the Co-ordinate Bench in the case of Vinati Organics Limited (ITA No. 1667 to 1669/Mum/2021, dt. 28-04-2022), wherein it was held as under:- “7....... So far as the export incentive claim is concerned, the assessee was entitled the incentive under status holder incentive claim (SHIS), Incremental Export Incentivisation Scheme (IEIS) and Market Linked Focus Products Scheme (MLFPS). As regards SHIS, the incentive was given with the objective to promote investment in technology upgradation and was granted @ 1% of FOB value of Export. The investment in technology is clearly a capital expenditure. So far as the incremental incentive scheme is concerned, the incentive was linked with incremental export if a particular year, export sale was more than certain percentage of export in the preceding year, the assessee becomes entitled for this incentive. The said incentive was connected to expenses of investment in new plant and machinery, hence, the incentive is capital in nature. With regard to, Market Linked Focus Product Scheme (MLEPS) is concerned, the incentive was granted in order to export of products of high export intensity employment potential and is incentivized at 2% of FOB value of exports. This incentive was linked to employment generation by the company connected to the export of goods and mercantile. It is linked with capital in nature. The CIT(A)has placed reliance upon the decision of the Hon'ble Supreme Court in the case of CIT VS. Ponni Sugars& Chemicals Ltd. (2008) 306 ITR 392 (SC), Eastman Exports Global Clothing Pvt. Ltd. in ITA.No.47/MDS/2016 dated 17.05.2016 and Sutlej Textiles & Industries Ltd. (ITA. No. 5142/Del/2013) and M/s. Gloster Jute Mills Ltd. Vs. Addl. CIT in ITA.No. 687/Kol/2010. These issues have duly been examined and discussed by CIT(A) in his order. The copy of scheme has also been filed by Id. Representative of the assessee for examination. It is necessary to advert the contents on record: - 3.14... 3.15... 3.16 Status Holders Incentive Scrip (SHIS) 3.16.1 With an objective to promote investment in upgradation of technology of some specified sectors as dated in Para 3.16.4 below, Status Holders shall be entitled to incentive scrip @ 1% of FOB value of exports made during 2009-10, 2010-11 and during 2011-12, of these specified sectors, in the form of duty credit.

Factual position relating to the issue being identical in the impugned assessment year, respectfully following the decision of the co-ordinate bench, we uphold the order of ld. first appellate authority on the issue. Hence, grounds are dismissed.