DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-3(4), MUMBAI, MUMBAI vs. ESSAR PORTS LIMITED, MUMBAI

PER PAWAN SINGH, JUDICIAL MEMBER:

dated 10.02.2025 for A.Y. 2013-14. The assessee in its appeal has raised

following grounds of appeal:

"1. On the facts and in the circumstances of the case, the Ld. CIT(A) erred in restricting the disallowance u/s 14A of the Income Tax Act, 1961 to Rs. 20,70,56,528/-despite the fact that assessee itself has disallowed amount of Rs. 67,74,30,006/u/s 14A of the Income Tax Act, 1961 in its return of income and AO has done further disallowance of Rs. 18,72,11,265 u/s 14A of the Income Tax Act, 1961"

without appreciating the Circular No.5 of 2014 dated 11.02.2014 of CBDT and to this effect even an amendment was made by Finance Act, 2022 by way of insertion of Explanation to Section 14A of the Income Tax Act, 1961." 4. "On the facts and in the circumstances of the case, the Ld. CIT(A) erred in deleting the disallowance made u/s. 14A of the Income Tax Act, 1961 to the book profit of the assessee without appreciating the provisions of clause (f) of explanation i to section 115JB(2) of the Income Tax Act, 1961 and the decision of the Hon'ble ITAT Mumbai 'F' Bench in the case of Deputy Commissioner of Income Tax, Central Circle-18 & 19, Mumbai vs. Viraj Profiles Ltd. in ITA No. 4439/ (Mum.) of 2013."

shipping, logistic, oilfields drilling and port development through its

subsidiaries. The assessee filed its return of income for A.Y. 2013-14 on

30.11.2013 declaring loss of Rs. 3.02 crore. Case was selected for scrutiny.

During assessment, the assessing officer (AO) noted that assessee has

reported international transaction with its associate enterprises (AE) for

provision of Management Consultant Services. Consequent upon reporting

international transaction in its report in Form 3CEB, the AO made reference to

Transfer Pricing Officer (TPO) for computation of Arms’ Length Price (ALP). The

TPO entered into reference under section 92CA. During transfer pricing

proceeding, the TPO noted that assessee has entered into service agreement

with its Essar Africa Holdings Ltd. (EAHL) in January, 2012 for providing

Management Consultant Services to its associate enterprises / subsidiaries. The

assessee has received a service fee at a cost plus mark-up of 17% for said

services. The assessee has charged Rs. 4.61 crore as fees for provision of

management consultant services. The assessee benchmarked its transaction by

adopting Transaction Net Margin method (TNMM). The assessee selected five 3

comparable company, operating profit / operating cost (OP/OC) and weighted

average of such comparables were at Rs. 13.52%. The OP/OC of assessee is at

17%, thus, the assessee claimed its transaction at arm’s length price. The TPO

ejected all five comparable companies selected by assessee and selected five

new comparable companies which were having weighted average of three

years at 25.62% and after considering the submission of assessee suggested

adjustment of Rs. 26,48,113/- in respect of transaction of Management

Consultancy Services by assessee to its Africa based AE. The copy of order of

TPO was sent to AO. On receipt of report of TPO, the AO also examined other

corporate issues. The AO noted that assessee has shown investment in equity

share of Rs. 3,54,392/- lakhs and has earned dividend of Rs. 2078.57 lakhs,

which is claimed as exempt. The assessee was asked to provide working of

inadmissible expenses under section 14A r.w.r. 8D. In response to show cause

of AO, the assessee furnished its reply dated 31.12.2016 and submitted that

they have disallowed Rs. 67.74 crore under section 14 and furnished detailed

calculation. The assessee also furnished the working of such disallowance. The

assessee stated that total interest and finance cost of the assessee for relevant

financial year was Rs. 72.46 crore, out of which Rs. 11.08 crore were directly

connected with the loan for purchase of fixed asset and for the operation of

company. The balance finance cost of Rs. 61.38 crore have been allocated over

the average investment of Rs. 3660.04 crore. Hence interest disallowance

amounts to Rs. 58,93,89,441/-. The assessee also relied upon certain decision.

The explanation of assessee was not accepted by assessing officer. The

assessing officer worked out disallowance under section 14A by invoking the

formula prescribed in Rule 8D at Rs. 86.46 crore. After allowing set off of suo

moto disallowance by Rs. 67.74 crore, the assessing officer worked out the

disallowance of Rs. 18.72 crore. Thus, apart from other addition, the assessing

officer made TP adjustment of Rs. 26,48,113/- and disallowance under section

14A of Rs. 18.72 crore and passed the draft assessment order on 29.06.2016.

On service of draft assessment order, the assessee filed its response dated

24.01.2017 for requesting the AO to pass final assessment order and expressed

their intention for filing appeal before ld CIT(A), instead of filing objection

before DRP. Consequently, the AO passed final assessment order on 28.02.2017

under section 143(3) r.w.s. 144C(3).

before ld. CIT(A). Before ld. CIT(A), the assessee filed detailed submission on

disallowance under section 14A as well as against the TP adjustment on

account of provision for Management Consultancy Services. The ld. CIT(A) on

considering the submission of assessee and the assessment order,allowed relief

on the disallowance of section 14A. However, transfer pricing adjustment was

upheld. Thus, further aggrieved both the parties have filed their respective

appeals raising the various grounds of appeal which we have recorded above.

the assessee and the ld. Senior Departmental Representative (ld. Sr. DR) for

the Revenue. Firstly, we are considering the appeal of Revenue in ITA

2544/Mum/2025. At the outset of hearing, the ld. AR of the assessee submits

that the grounds of appeal raised by the revenue is covered in favour of the

assessee. Initially the similar disallowance was made by AO in A.Y. 2010-11,

however, on appeal before Tribunal in ITA No. 1831/Mum/2020 in order dated

06.01.2020, the disallowance was restricted to the exempt income. Similar

order was passed by Tribunal in appeal for A.Y. 2012-13 in ITA No.

4103/Mum/2025 and in A.Y. 2015-16 in ITA No. 406/Mum/2024 dated

09.05.2024. further, similar disallowance was made by AO in A.Y. 2014-15 and

deleted by ld. CIT(A) in order dated 30.08.2024 and no other appeal was filed

by Revenue. Thus, the grounds of appeal raised by Revenue is squarely

covered in favour of assessee and against the Revenue. The ld. AR of the

submits that Hon’ble Bombay High Court in Nirved Traders (P) Ltd. vs DCIT

(2020) 421 ITR 142 (Bombay) also held that disallowance under section 14A

cannot be more than the exempt income.

the revenue relied upon the order of assessing officer. The ld. Sr. DR for the

Revenue submits that assessing officer followed the legislative intend as

prescribed in Rule 8D.

through the orders of lower authorities carefully.We find that there is no dispute

about the exempt income of Rs. 20.78 crore. We find that during the

assessment, the assessee furnished working of disallowance under section 14A

at Rs. 67.74 crore along with detailed working and justification thereof vide

their letter dated 21.12.2016 and 28.12.2016. The AO disregarded such

submission and worked out the disallowance by invoking formula of Rule 8D

and recomputed total disallowance at Rs. 86.46 crore after allowing set off of

suo moto disallowance the assessing officer made additional disallowance of

Rs. 18.72 crore. We find that before ld. CIT(A) the assessee made submissions

that disallowance should be restricted to the exempt income. The assessee also

explained before the AO that assessee has earned total exempt income of Rs.

20.78 crore only and disallowance should be restricted to that extent only. We

find that ld. CIT(A) while following the decision of Tribunal in assessee’s own

case for A.Y. 2010-11 in ITA No. 183/um/2015 dated 06.01.2020 directed the

AO to restricted the exempt income. We may repeat that there is no dispute

about the exempt income of Rs. 20.78 crore. We find that in assessee’s own

case, similar view was followed for A.Y. 2015-16 and 2012-13. We also find that

Hon’ble Jurisdictional High Court in Nirved Traders (P) Ltd. vs DCIT (supra) also

held the similar view. Thus, respectfully following the decision of co-ordinate

bench of Tribunal in assessee’s own case as well as by Jurisdictional High Court,

we upheld the order of ld. CIT(A). No contrary facts or law is brought to our

notice to take other view. In the result, grounds of appeal raised by Revenue

are dismissed.

ITA No. 2997/Mum/2025 by assessee

pressing ground No. 1 of the appeal. On the other hand, the ld Sr DR for the

revenue submits that he has no objection, if this ground of appeal is dismissed

as not pressed. Considering the submissions of ld AR of the assessee ground

No.1 of the appeal is dismissed as not pressed.

TPO and inclusion of five comparable selected by assessee. The ldAR of the

assessee submits that the assessee would be fully satisfy, if two comparable i.e.

Axis Integrated System Limited (Axis) and Inmacs Management Services

Limited (Inmacs) are excluded from final set of comparables. The assessee will

not press for inclusion of any of the five comparable selected by them. The ld

AR of the assessee submits that Axis is not comparable with the assessee. Axis

in engaged in the business of trading in digital certificate and providing

liaisoning services like verification of services, tax etc. The financial of such

comparable are were furnished to the lower authorities and is also filed at page

No. 49 of paper Book(PB). However, the assessee company provided support

services to it AE. Further, about 73% of Axis is from liaisoning services. Axis

was excluded (rejected) by Tribunal Li &Fung (India) P. Limited Vs ACIT in ITA

No.7549/Delhi/2017 dated 14.05.2018, Honda R & d (India) P Limited Vs DCIT

in ITA No 7419/ Delhi/ 2017, Sabri Travel Network (India) P Limited Vs DCIT in

ITA No. 7306/Mum/2017 dated 14.07.2021, Asian Paints Limited Vs ACIT in ITA

No.268 & 841/Mum/2018 and in Reliance Corporate IT Park Limited Vs ACIT

(168 taxmann.com 235). For exclusion of Inmacs, the ld AR of the submits that

this company started its professional services in 1984. This company provides

professional services in the fields of corporate taxation, audit, vat and service

tax. Inmacs India hired professional such as Chartered Accountants, Company

Secretary, Engineers and MBAs to render such services. All these services are in

the nature of consultancy and technical services which cannot be considered as

business support services. Thus, such comparable is also not functionally

comparable with the assessee.

authorities. The ld Sr DR for the revenue further submits that as per service

agreement of assessee withs its AE, the assessee is also providing services

such as legal, tax, financial transaction processing and financial reporting

services and all allied services. Apart from such services, the assessee also

provide assistance in development of new business and broadly comparable

with the assessee. Thus, both the comparable are broadly and functionally

comparable with the assessee company.

through the order of lower authorities. There is no dispute that the assessee

has provided management support services to its AE. The assessee while bench

marking its transaction considered itself as tested party. Before us, the ld AR of

the assessee raised a limited plea that Axis and Inmacs is not functionally comparable with the assessee. We find that in a recent decision in Asian Paints

Limited (supra) the coordinate bench of Mumbai Tribunal excluded Axis by

holding that this company traded in digital certificate and qualitative details of

the trade as mentioned in Note-26 of financial statement. Further complete

business details are not available. The operative part of the order of Tribunal is

extracted below;

“17. We have considered the submissions of both sides and perused the material available on record. As per the assessee, it is difficult to trace the exact business description/activity of the company undertaken during the year, and therefore this company cannot be considered as comparable to the assessee. From the perusal of the annual report of Axis Integrated Systems Ltd., for the year ending 31/03/2013, forming part of the supplementary factual paper book from pages 8-30, we find that there is no description of the business undertaken by this company during the year under consideration. Further, the company has claimed to have earned its revenue from operations from sales, liaison charges, and reimbursement of expenses. It is pertinent to note that there are no details as to from where these liaison charges were earned. From Note 26 of the financial statement pertaining to additional disclosure, we find that the company has traded in Digital Certificate and quantitative details of the trade have been mentioned therein. Accordingly, in view of the information as provided in the annual report of this company, we agree with the submissions of the assessee that the nature of activities undertaken by this company is ambiguous and, in any case, cannot be said tobe similar to the business support services rendered by the assessee, during the year under consideration, to its associated enterprises. Further, there is no material available on record to show that this company is engaged in the activities noted by the TPO in para-5.3 of its order. In view of our aforesaid findings, we are of the considered view that Axis Integrated Systems Ltd. is not comparable to the assessee, and accordingly, we direct the exclusion of this company for benchmarking the international transaction of provision of support services and intragroup services.”

Management Services Limited by taking view that complete details of business

activities are not available on public domain. The relevant part of the decision is

extracted below;

“19. We have considered the submissions of both sides and perused the material available on record. With respect to this company also, the assessee raised a similar plea that it is difficult to trace the exact business description/activity of the company undertaken during the year, and therefore this company cannot be considered comparable to the assessee. From the perusal of the annual report of Inmacs Management Services Ltd. for the year ending 31/03/2013, forming part of the paper book from pages 31-50, we find that the company has claimed that its consultancy business has grown significantly as many renowned companies have been added to its clientele list. Further, the company has declared its revenue from operations from the professional income. Apart from the above details, there is no description of the activities undertaken by the company during the year under consideration. We find that the TPO has placed reliance upon the services offered by this company as mentioned on its website, however, there are no details as to whether these services were rendered in the year under consideration.Therefore, the nature of the consultancy business is not clear in the case of this company. Accordingly, due to the lack of complete data being available in the public domain, pertaining to the year under consideration, we are of the considered view that this company cannot be considered comparable to the assessee. Therefore, we direct the exclusion of this company for benchmarking the international transaction of provision of support services and intragroup services.” 14. We also find that Inmacs was also excluded by Tribunal as comparable with

‘business support services’ in Reliance Corporate I.T. Park in ITA No.

1195/Mum/2020 dated 05.09.20222. Similarly, Axis was excluded by Tribunal in

Relance Industries Limited Vs ACIT (supra) by holding that wherein the assessee was providing back officer support services, which were mostly

internal services and on the other hand, comparable company (Axis) was

providing services in respect of regulatory and licencing requirements by

liaisoning with the Government and regulatory authorities and excluded the

said company. Thus, in view of the consistent decision of Tribunal on

comparability of Axis and Inmacs, we direct AO/TPO to exclude both these two

comparable from final set of comparable and recompute the transfer pricing

adjustment.

the assessee, therefore, adjudication for inclusion of various other comparable

have become academic. In the result, ground No.2 of the appeal is allowed.

Order was pronounced in the open Court on 08/06/2026.

/- S/- /- SSd/- Sd/- MAKARAND VASANT MAHADEOKAR PAWAN SINGH ACCOUNTANT MEMBER JUDICIAL MEMBER

Mumbai, Dated: 08/06/2026 Biswajit

Copy of the order forwarded to: (1) The Assessee; (2) The Revenue; (3) The PCIT / CIT (Judicial); By order (4) The DR, ITAT, Nagpur; and (5) Guard file.

Assistant Registrar / DDO ITAT, Mumbai