ACIT-6(1)(1),MUMBAI, MUMBAI vs. M/S ESSAR POWER LIMITED, MUMBAI

The brief facts of the case pertaining to this issue are that the assessee is a part of the Essar Group and one of the largest players in the Indian Power Industry. The assessee is engaged in the power transmission and distribution segment in India. For the year under consideration, the assessee filed its return of income on 27.11.2015, declaring a total income at Rs. Nil. The return filed by the assessee was selected for scrutiny, and statutory notices were issued and served on the assessee. The Transfer Pricing Officer (“TPO”), pursuant to the reference by the assessee (“AO”) under section 92CA(1) of the Act, noticed that the assessee has shown outstanding receivables from its associated enterprises. Accordingly, the assessee was asked to show cause as to why the interest on outstanding receivable should not be charged. In response, the assessee submitted that the outstanding receivables from Essar Africa Holding Limited are not a separate international transaction, and therefore, notional interest cannot be charged. The assessee further submitted that the delay or late realisation of sale/service proceeds is incidental to the transaction of sale/service and not a separate international transaction in itself. Thus, it was submitted that no interest needs to be charged on delayed receivables, as the amount charged for sale/service covers every aspect of the transaction, including the time lag between the date of invoice and the date of receipt.

The TPO, vide order dated 30.10.2018 passed under section 92CA(3) of the Act, disagreed with the submission of the assessee and treated the outstanding receivables from associated enterprises as a separate international transaction, computing the interest as per Bloomberg data base at 4.83% per annum considering the credit period of 30 days while computing the interest chargeable on outstanding receivable from the associated enterprises. Accordingly, the TPO computed the interest on outstanding receivables at Rs.2,79,948/-. In conformity, the AO passed the assessment order under section 143(3) read with section 144C(3) of the Act, inter alia, incorporating the transfer pricing adjustment proposed by the TPO.

The learned CIT(A), vide impugned order, granted partial relief on this issue, and following the decision of the Tribunal in assessee’s own case for the preceding year, considered the LIBOR rates for computation of the interest on outstanding receivables. Accordingly, the learned CIT(A) directed the TPO/AO to restrict the addition to Rs.43,958/-. Being aggrieved, the Revenue is in appeal before us.

We have considered the submissions of both sides and perused the material available on record. We find that the Co-ordinate Bench of the Tribunal in assessee’s own case in Essar Power Ltd. vs. ACIT, in for the assessment year 2013-14, vide order dated 15.04.2019, while deciding a similar issue pertaining to the chargeability of interest on outstanding receivable from the associated enterprises, observed as follows: - “9. We have considered rival submissions and perused material on record. Undisputedly, the Transfer Pricing Officer has determined the arm's length price of the interest chargeable on outstanding receivable from the AE by applying the rate of 6.56% as per Bloomberg database. However, it is noticed that before the Transfer Pricing Officer or La and learned DRP the assessee had submitted that as per LIBOR rate of interest the interest chargeable on such outstanding receivable is IBOR. plus 0.5%. The aforesaid contention of the assessee has not at wall been considered by the Transfer Pricing Officer and learned DRP. As held in various judicial precedents, interest on outstanding receivables has to be charged by applying LIBOR rate as applicable in the country of residence of AE. In view of the aforesaid, we direct the Assessing Officer to compute the interest chargeable on outstanding receivables at LIBOR plus 0.5%. This ground is partly allowed.”

We find that following the aforesaid decision, the Co-ordinate Bench of the Tribunal in assessee’s own case in for the assessment year 2014-15, vide order dated 25.08.2020, passed similar directions and directed the AO to compute the adjustment by applying the interest rate of LIBOR + 0.5% basis point.

During the hearing, the learned Departmental Representative (“learned DR”) submitted that though LIBOR rates can be considered for computing the interest on outstanding receivables from the associated enterprises, as these receivables were outstanding from the foreign subsidiary of the assessee, however, objected to considering 0.5% as the Basis Points over and above the LIBOR rate for computing the interest. The learned DR submitted that in the order of the Co-ordinate Bench of the Tribunal in preceding years, in the assessee’s own case, there is no basis for considering 0.5% as the Basis Point. On the other hand, the learned Authorised Representative (“learned AR”) submitted that in the absence of any material contrary to the findings of the Co-ordinate Bench in preceding years, the interest should be computed by considering 0.5% as the Basis Point over and above the LIBOR rates.

Having considered the submissions of both sides, we find that there is no dispute in considering the LIBOR rate for computing the interest on outstanding receivables from the associated enterprise, and the same is also in line with the ratio of the decision of the Hon’ble Delhi High Court in CIT vs. Cotton Naturals India Pvt. Ltd., reported in (2015) 55 taxman.com 523 (Del). However, in the present case, the issue arises as to what Basis Point should be adopted, in addition to the LIBOR rates, for computing the interest on outstanding receivables. It is not disputed by any of the parties that the rate of interest fluctuates every month, and thus, the rate of interest considered appropriate in one year cannot be applied in the subsequent year. From the details of LIBOR rates as applicable in the financial year 2014-15, reproduced on pages 6 and 7 of the impugned order, we find that the said rates increased from 0.550% to 0.700% (i.e. 0.15% increment) during the year. Therefore, we agree with the submissions of the learned DR that the Basis Point, which was considered appropriate by the Co-ordinate Bench in the year 2013-14, cannot be applied for the computation of interest on outstanding receivables in the year under consideration. However, neither party presented any material that could help determine the applicable Basis Point over and above the LIBOR rate for the computation of interest on outstanding receivables during the year under consideration. Therefore, in the peculiar facts of the present case, only to put a quietus to this issue as the addition is very small, considering the appreciation of LIBOR rates by 0.15% during the year, as noted above, to be reasonable increase in the interest rates, we direct the TPO/AO to computed the interest chargeable on outstanding receivable at LIBOR + 0.65% instead of LIBOR + 0.5% applied the learned CIT(A). Accordingly, Grounds No.1 and 2 raised in Revenue’s Appeal are partly allowed.

The issue arising in Grounds No.3 and 4, raised in Revenue’s appeal, pertains to the deletion of the transfer pricing adjustment on account of interest on outstanding share application money.

The brief facts of the case pertaining to this issue are that during the financial year 2013-14, the assessee paid share application money to its associated enterprise, Essar Power Overseas Ltd., which is a British Virgin Island entity. The share application money was paid by the assessee to the associated enterprise on 29.01.2014, and the shares were allotted to the assessee on 25.07.2014. Similarly, the assessee paid share application money to Essar Power Overseas Ltd. on 08.09.2014 and the shares were allotted on 05.01.2015. Accordingly, the assessee was asked to show cause as to why the interest should not be charged against the said share application money, given the delay in allotment of shares by the associated enterprise. In response, the assessee submitted that there is no impact on the profit and loss account or taxable income of the associated enterprise under the Act. Furthermore, the assessee also relied on the RBI notification, which states that an Indian party making a direct investment outside India should receive share certificates within six months of the investment. Accordingly, the assessee submitted that since the shares were allotted to the assessee within six months, no interest should be charged on the share application money. The TPO, vide order passed under section 92CA of the Act, disagreed with the submissions of the assessee and held that the RBI notification merely indicates the time frame within which the share certificate should be in possession of the Indian investor, and apart from the above, they do not have any other relevance. The TPO further held that there is no evidence to suggest that the associated enterprise was barred from using this amount for its own purposes during the period between the actual subscription and allotment. Thus, it was held that for the period during which the amount was lying with the associated enterprises without allotment of shares to the assessee, it represents an amount lent on which the assessee was entitled to receive interest. Accordingly, in respect of share application money paid by the assessee on 29.01.2014, the TPO applied the interest @ 4.19% per annum for the period of 116 days, which is the period of outstanding share application money, and computed in the adjustment of Rs. 5,32,24,176/-. Further, in respect of share application money paid on 08.09.2015, the TPO applied the interest @ 3.69% per annum for 119 days, which is a period of outstanding share application money, and computed the transfer pricing adjustment of Rs. 1,84,329/-.

The learned CIT(A), vide impugned order, deleted the transfer pricing adjustment made by the TPO on this issue following the decisions of the Hon’ble High Courts and various benches of the Tribunal. Being aggrieved, the Revenue is in appeal before us.

We have considered the submissions of both sides and perused the material on record. We find that, in respect of the share application money paid by the assessee to Essar Power Overseas Ltd. on 29.01.2014, and the shares allotted on 27.05.2014, a transfer pricing adjustment was also made in the assessment year 2014-15. We find that while deleting a similar transfer pricing adjustment, the Co-ordinate Bench of the Tribunal in assessee’s own case for the assessment year 2014-15, vide order dated 25.08.2020, observed as follows: - “21. We found that similar issue has been considered by the Coordinate Bench in the case of Aegis Limited Vs Addl. CIT in order dated 27/07/2015. The precise observation of the Tribunal was as under: "27. We have heard the rival submissions and also perused the relevant findings in this regard in the impugned orders. The assessee has subscribed to redeemable preference shares of its AE, Essar Services, Mauritius and has also redeemed some of these shares at par. The TPO has redeemed some of these shares at par. The TPO has re-characterized the said transaction of subscription of shares into advancing of unsecured loan by terming it as an exceptional circumstance and has charged /imputed interest, on the reasoning that in an uncontrolled third party situation, interest would have been charged. We are unable to appreciate such an approach of TPO and under what circumstances, leave above any exceptional circumstances, a transaction of subscription of shares can be re-characterized as Loan transaction. The TPO /Assessing Officer cannot disregard any apparent transaction and substitute it, without any material of exception circumstance highlighting that assessee has tried to conceal the real transaction or some sham transaction has been unearthed. The TPO cannot question the commercial expediency of the transaction entered into by the assessee unless there are evidence and circumstances to doubt. Here it is a case of investment in shares and it cannot be given different colour so as to expand the scope of transfer pricing adjustments by re-characterizing it as interest free loan. Now, whether in a third party scenario, if an independent enterprise subscribes to a share, can it be characterized as loan. If not, then this transaction also cannot be inferred as loan. The contention of the Ld. Counsel is also supported by the Hon'ble jurisdictional High Court in the case of DexiskierDhboal SA, of 2011 order dated 30th August, 2012 and by various other decisions, as cited by him. The Coordinate Benches of the Tribunal have been consistently holding that subscription of shares cannot be characterizes as loan and therefore no interest should be imputed by treating it as a loan. Accordingly, on this ground alone, we delete the adjustment of interest made by the Assessing Officer. Thus, ground no. 14 is treated as allowed."

Respectfully following the proposition laid down by the Coordinate Bench in the order, we do not find any merit in the adjustment made by the TPO on account of interest for the money paid for allotment of shares which was allotted within the period of 6 months.”

During the hearing, the Revenue did not bring any material to deviate from the findings of the Co-ordinate Bench in the preceding year. As in respect of both transactions, the shares were allotted to the assessee within a period of six months, therefore, respectfully following the decision of the Tribunal in assessee’s own case for the assessment year 2014-15, we do not find any infirmity the findings of the learned CIT(A) in deleting the transfer pricing adjustment made on account of interest on outstanding share application money. As a result, Grounds No.3 and 4 raised in Revenue’s appeal are dismissed.

The issue arising in Grounds No.5 and 6, raised in the Revenue’s appeal, pertains to the deletion of disallowance under section 14A read with Rule 8D of the Income Tax Rules.

The brief facts of the case pertaining to this case are that during the assessment proceedings, from the perusal of the balance-sheet of the assessee, it was observed that the assessee has shown investment in equity shares of Rs. 8719.59 crore. It was observed that in its computation of income, the assessee did not disallow any expenditure in respect of exempt income. Accordingly, the assessee was asked to show cause as to why the disallowance under section 14A, read with Rule 8D of the Rules, should not be made. In its reply, the assessee submitted that during the year under consideration, the company did not earn any exempt income, and therefore, no disallowance can be made under section 14A of the Act. The AO, vide order passed under section 143(3) read with section 144C(3) of the Act, disagreed with the submission of the assessee and placing reliance upon CBDT Circular No.5 of 2014, which provides that the provisions of section 14A of the Act read with Rule 8D of the Rules shall be applicable for disallowance of expenditure even where tax payer in a particular year has not earned any exempt income, computed the disallowance of Rs.133,79,75,727/- under section 14A read with Rule 8D of the Rules.

The learned CIT(A), vide impugned order, deleted the disallowance made by the AO on this issue. Being aggrieved, the Revenue is in appeal before us.

We have considered the submissions of both sides and perused the material available on record. In the present case, there is no dispute regarding the fact that during the year under consideration, the assessee did not earn any exempt income, and thus, claimed no exemption under section 10(34) of the Act while filing its return of income. We find that the Hon'ble Delhi High Court in Cheminvest Ltd. vs. CIT, reported in [2015] 378 ITR 33 (Delhi), held that section 14A will not apply if no exempt income is received or receivable during the relevant previous year. We further find that the Hon'ble Jurisdictional High Court in Pr. CIT v/s Kohinoor Project (P) Ltd., reported in [2020] 121 taxmann.com 177 (Bom.), rendered similar findings and dismissed the Revenue's appeal on a similar issue. Since, in the present case, the assessee has not earned any dividend income, therefore, respectfully following the aforesaid judicial pronouncements, disallowance of expenditure under section 14A read with Rule 8D is not sustainable.

We further find that vide amendment by the Finance Act, 2022, the non- obstante clause and explanation were inserted in section 14A of the Act to the effect that the section shall apply even if no exempt income has accrued or arisen or has been received during the year. We find that while dealing with the issue of whether the aforesaid amendment by the Finance Act, 2022 is prospective or retrospective in operation, the Hon'ble Delhi High Court in PCIT vs M/s Era infrastructure (India) Ltd, reported in [2022] 288 Taxman 384 (Delhi) held that the amendment by Finance Act, 2022 in section 14A is prospective and will apply in relation to the assessment year 2022-23 and subsequent assessment years. Thus, even in view of the aforesaid amendment, the disallowance under section 14A read with Rule 8D is not permissible in the present case.

The issue arising in Ground No. 7, raised in Revenue’s appeal, pertains to the disallowance of depreciation on major overhauling expenditure and capitalised in the assessment year 2003-04.

We have considered the submissions of both sides and perused the material available on record. The brief facts of the case pertaining to this issue are that during the assessment proceedings, the assessee was asked to submit the details and justification for the depreciation claimed under major overhauling expenses in the computation of income. In response, the assessee submitted that these expenses were incurred for the major overhaul of the plant and machinery and were debited to the profit and loss account in the assessment year 2003-04. However, vide order passed under section 143(3) of the Act, only 12.5% of the said expenses were allowed by capitalizing the same, assets used for less than 180 days. The AO further directed the assessee to claim depreciation on the written-down method for the balance amount for the subsequent period. Therefore, as per the assessee, since the major overhauling expenses were debited to the profit and loss account for the financial year 2003-04 and a portion of the same was allowed in that year, the remaining portion is claimed in subsequent years, including the assessment year 2015-16. The AO, vide order passed under section 143(3) read with section 144C(3) of the Act, disagreed with the submissions of the assessee and held that depreciation is allowable at 15%. Accordingly, the AO made an addition of Rs.7,72,375. The learned CIT(A), vide impugned order, deleted the addition on this issue. Being aggrieved, the assessee is in appeal before us.

As the overhauling expenditure was incurred on the plant and machinery, and the same was capitalised in the assessment year it was incurred, therefore, we are of the considered view that the depreciation is allowable at the same rate at which it is allowable on the plant and machinery, which is 15% in the year under consideration. Accordingly, we do not find any merit in the findings of the learned CIT(A) in deleting the addition on this issue. Therefore, the addition made by the AO on this issue is sustained, and Ground No. 7 raised in Revenue’s appeal is allowed.

In the result, the appeal by the Revenue is partly allowed. Order pronounced in the open Court on 11/09/2025