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Facts
The appeals involve disputes over transfer pricing adjustments related to interest on loans and purchase of steel, disallowances under Section 14A of the Income Tax Act, and deduction claims under Section 80IA. The Assessing Officer and DRP made adjustments and disallowances, which the assessee contested.
Held
The Tribunal partly allowed the appeals. For the interest on loans, the matter was restored to the AO/TPO for fresh benchmarking as a long-term loan. For Section 14A disallowances, the Tribunal restricted it to income that actually yielded exempt income, following the Vireet Investment case. The grounds related to Section 80IA were dismissed. The grounds related to write-offs and gratuity claims were restored to the AO. The transfer pricing adjustment on steel purchase was set aside and restored to AO/TPO for re-analysis. The Section 14A disallowances for the second case were allowed, and the book profit disallowance was also allowed.
Key Issues
Key issues include the correct benchmarking of interest on international loans, the extent of disallowance under Section 14A, the computation of deductions under Section 80IA, and the treatment of expenditure on abandoned projects and write-offs.
Sections Cited
147, 148, 143(3), 14A, 115JB, 37, 80IA, 35D, 92C, 80AB, 80-I, 35, 57(iii)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, MUMBAI BENCH “K” MUMBAI
Before: SHRI OM PRAKASH KANT & MS. KAVITHA RAJAGOPAL
The captioned appeal appeals by the assessee(s) are directed against directed against respective final assessment assessment orders dated dated 12.06.2024 12.06.2024 and 27.05.2024, passed by the Ld. Assistant Commissioner of Income passed by the Ld. Assistant Commissioner of Income- passed by the Ld. Assistant Commissioner of Income tax, Central Circle 8(3), Mumbai [in short ‘the Ld. Assessing tax, Central Circle 8(3), Mumbai [in short ‘the Ld. Assessing tax, Central Circle 8(3), Mumbai [in short ‘the Ld. Assessing Officer’], for assessment year 2020 Officer’], for assessment year 2020-21 ,pursuant to the direction of pursuant to the direction of the Ld. Dispute Resolution Panel (DRP) the Ld. Dispute Resolution Panel (DRP). As common . As common issues in dispute are involved in these appeals, therefore, same were heard volved in these appeals, therefore, same were heard volved in these appeals, therefore, same were heard together and disposed off by way of this consolidated order for sake together and disposed off by way of this consolidated order for sake together and disposed off by way of this consolidated order for sake of convenience.
2. Firstly, we take up the appeal in for Firstly, we take up the appeal in for Firstly, we take up the appeal in ITA No. 3714/Mum/2024 for assessee in its appeal are AY 2021. The grounds raised by the The grounds raised by the assessee in its appeal are reproduced as under: reproduced as under:
1. On the facts and circumstances of the case as well as in On the facts and circumstances of the case as well as in On the facts and circumstances of the case as well as in law, the Hon'ble Disputed Resolution penal has erred in law, the Hon'ble Disputed Resolution penal has erred in law, the Hon'ble Disputed Resolution penal has erred in confirming the action of the Learned Assessing Officer in confirming the action of the Learned Assessing Officer in confirming the action of the Learned Assessing Officer in making an upward adjustment of Rs. 1 making an upward adjustment of Rs. 10,32,75,726/ 0,32,75,726/- to the Arm's Length Price in relation to providing guarantee the Arm's Length Price in relation to providing the Arm's Length Price in relation to providing to its Associated Enterprises, without considering the facts to its Associated Enterprises, without considering the facts to its Associated Enterprises, without considering the facts and circumstances and circumstances of the case.
2. On the facts and circumstances of the case as well as in On the facts and circumstances of the case as well as in On the facts and circumstances of the case as well as in law, the Hon'ble Disputed Resolu law, the Hon'ble Disputed Resolution penal has erred in tion penal has erred in confirming the action of the Learned Assessing Officer in confirming the action of the Learned Assessing Officer in confirming the action of the Learned Assessing Officer in making a disallowance of Rs. 41,81,59,866/ making a disallowance of Rs. 41,81,59,866/- u/s.14A of the Income Tax Act, 1961, without considering the facts the Income Tax Act, 1961, without considering the facts the Income Tax Act, 1961, without considering the facts and circumstances and circumstances of the case.
& 3713/MUM/2024 & 3713/MUM/2024
On the facts and circumstances o On the facts and circumstances of the case as well as in f the case as well as in law, the Hon'ble Disputed Resolution penal has erred in law, the Hon'ble Disputed Resolution penal has erred in law, the Hon'ble Disputed Resolution penal has erred in confirming the action of the Learned Assessing Officer in confirming the action of the Learned Assessing Officer in confirming the action of the Learned Assessing Officer in making an addition of Rs. 41,81,59,866/ making an addition of Rs. 41,81,59,866/- on account of on account of alleged disallowance of expenses u/s.14A of the Income alleged disallowance of expenses u/s.14A of the Income alleged disallowance of expenses u/s.14A of the Income Tax Act Tax Act, 1961, while computing the book profit u/s.115JB , 1961, while computing the book profit u/s.115JB of the Act, without appreciating the fact no such addition of the Act, without appreciating the fact no such addition of the Act, without appreciating the fact no such addition is to be made in computing the book profit u/s.115JB of is to be made in computing the book profit u/s.115JB of is to be made in computing the book profit u/s.115JB of the Income the Income Tax Act, 1961.
4. On the facts and circumstances of the case as well as in On the facts and circumstances of the case as well as in On the facts and circumstances of the case as well as in law, the law, the Hon'ble Disputed Resolution penal has erred in Hon'ble Disputed Resolution penal has erred in confirming the action of the Learned Assessing Officer in confirming the action of the Learned Assessing Officer in confirming the action of the Learned Assessing Officer in making a disallowance of Rs. 53,10,000/ making a disallowance of Rs. 53,10,000/- u/s.37 of the u/s.37 of the Income Tax Act, 1961, on the alleged plea that the same Income Tax Act, 1961, on the alleged plea that the same Income Tax Act, 1961, on the alleged plea that the same are capital in nature, without consider are capital in nature, without considering the facts and ing the facts and circumstances circumstances of the case.
On the facts and circumstances of the case as well as in On the facts and circumstances of the case as well as in On the facts and circumstances of the case as well as in law, the Hon'ble Disputed Resolution penal has erred in law, the Hon'ble Disputed Resolution penal has erred in law, the Hon'ble Disputed Resolution penal has erred in reversing the action of the Learned Assessing Officer reversing the action of the Learned Assessing Officer reversing the action of the Learned Assessing Officer in considering considering the disallowance of Rs.53,10 the disallowance of Rs.53,10,000/- as Short Term Capital Loss eligible to set off against the Short Short Term Capital Loss eligible to set off against the Short Short Term Capital Loss eligible to set off against the Short Term Capital Gain, without considering the facts and Term Capital Gain, without considering the facts and Term Capital Gain, without considering the facts and circumstances circumstances of the case. 6. On the facts and circumstances of the case as well as in On the facts and circumstances of the case as well as in On the facts and circumstances of the case as well as in law, the Hon'ble Disputed Resolution penal has erred in law, the Hon'ble Disputed Resolution penal has law, the Hon'ble Disputed Resolution penal has confirming the action of the Learned Assessing Officer in confirming the action of the Learned Assessing Officer in confirming the action of the Learned Assessing Officer in disallowing the deduction of Rs. 69,30,25,027/- claimed disallowing the deduction of Rs. 69,30,25,027/ disallowing the deduction of Rs. 69,30,25,027/ u/s.80IA of the Income Tax Act, 1961, without considering u/s.80IA of the Income Tax Act, 1961, without considering u/s.80IA of the Income Tax Act, 1961, without considering the facts and circumstances the facts and circumstances of the case. 7. On the facts and circumstances of On the facts and circumstances of the case as well as in the case as well as in law, the Hon'ble Disputed Resolution penal has erred in law, the Hon'ble Disputed Resolution penal has erred in law, the Hon'ble Disputed Resolution penal has erred in confirming the action of the Learned Assessing Officer in confirming the action of the Learned Assessing Officer in confirming the action of the Learned Assessing Officer in not allowing the claim of the assessee company to reduce not allowing the claim of the assessee company to reduce not allowing the claim of the assessee company to reduce the amount of Rs.29,48,977/ the amount of Rs.29,48,977/- on account of write off of on account of write off of Non-mo moving stores and spares which was inadvertently ving stores and spares which was inadvertently offered in the computation of income, without considering offered in the computation of income, without considering offered in the computation of income, without considering the facts and circumstances the facts and circumstances of the case. 8. On the facts and circumstances of the case as well as in On the facts and circumstances of the case as well as in On the facts and circumstances of the case as well as in law, the Hon'ble Disputed Resolution penal law, the Hon'ble Disputed Resolution penal has has erred in confirming the action of the Learned Assessing Officer in confirming the action of the Learned Assessing Officer in confirming the action of the Learned Assessing Officer in not allowing the claim of the assessee company to reduce not allowing the claim of the assessee company to reduce not allowing the claim of the assessee company to reduce the amount of Rs. 1,09,08,529/ the amount of Rs. 1,09,08,529/- on account of gratuity on account of gratuity routed through OCl which was inadvertently offered twice routed through OCl which was inadvertently offered twice routed through OCl which was inadvertently offered twice in the computation of inco in the computation of income, without considering the facts me, without considering the facts and circumstances and circumstances of the case 3. Before us, the assessee revised its ground No. 1 as under: Before us, the assessee revised its ground No. 1 as under: Before us, the assessee revised its ground No. 1 as under:
& 3713/MUM/2024 & 3713/MUM/2024
On the facts and circumstances of the case as well as in law, the On the facts and circumstances of the case as well as in law, the On the facts and circumstances of the case as well as in law, the Hon'ble Dispute resolution Panel has erred in confirming the Hon'ble Dispute resolution Panel has erred in confirming the Hon'ble Dispute resolution Panel has erred in confirming the action of the Learned Assessing Officer in making an upward ion of the Learned Assessing Officer in making an upward ion of the Learned Assessing Officer in making an upward adjustment of Rs 10,32,75,726/ adjustment of Rs 10,32,75,726/ - to the Arms Length Price in to the Arms Length Price in relation to providing interest to its associated enterprises relation to providing to its associated enterprises without considering the facts and circumstances without considering the facts and circumstances of the the case." 3.1 Further, the assessee also filed an additional ground in e assessee also filed an additional ground in e assessee also filed an additional ground in relation to issue of disallowance u/s 14A of the Act, which is relation to issue of disallowance u/s 14A of the Act relation to issue of disallowance u/s 14A of the Act reproduced as under: reproduced as under:
"On the facts and circumstances of the case as well as in law, "On the facts and circumstances of the case as well as in law,
On the facts and circumstances of the case as well as in law, the Hon'ble Dispute resolution Panel has erred in confirming th the Hon'ble Dispute resolution Panel has erred in confirming th the Hon'ble Dispute resolution Panel has erred in confirming the action of the Learned Assessing Officer without appreciating the action of the Learned Assessing Officer without appreciating the action of the Learned Assessing Officer without appreciating the decision of Delhi Tribunal Special bench in the case of Vireet decision of Delhi Tribunal Special bench in the case of Vireet decision of Delhi Tribunal Special bench in the case of Vireet Investment (58 /TRT) 313) wherein it has been concluded that Investment (58 /TRT) 313) wherein it has been concluded that Investment (58 /TRT) 313) wherein it has been concluded that only those investments are to be considered for computing only those investments are to be considered for computing only those investments are to be considered for computing average value value value of of of investment investment investment which which which yielded yielded yielded exempt exempt exempt income during during year.
We have heard rival submission of the parties on the issue of We have heard rival submission of the parties on the issue of We have heard rival submission of the parties on the issue of admissibility of the additional ground. We find that the ground admissibility of the additional ground. We find that the ground admissibility of the additional ground. We find that the ground raised being purely of legal nature without requiring investigation of raised being purely of legal nature without requiring investigat raised being purely of legal nature without requiring investigat fresh facts, therefore, same was admitted for adjudication in view of therefore, same was admitted for adjudication in view of therefore, same was admitted for adjudication in view of decision of Hon’ble Supreme Court in the case of NTPC Ltd. 229 NTPC Ltd. 229 decision of Hon’ble Supreme Court in the case of ITR 283 (SC).
Briefly stated, facts of the case are that the assessee company 5. Briefly stated, facts of the case are that the assessee company Briefly stated, facts of the case are that the assessee company is a public limited company involve is a public limited company involved in the business of generation d in the business of generation of power and operation and maintenance of power plants spread of power and operation and maintenance of power plants spread of power and operation and maintenance of power plants spread across India including in the states of Karnataka, Maharashtra, across India including in the states of Karnataka, Maharashtra, across India including in the states of Karnataka, Maharashtra, Rajasthan and Himachal Pradesh. For the year under Rajasthan Rajasthan and and Himachal Himachal Pradesh. Pradesh. For For the the year year under under income on 15.02.2021 consideration, the assessee filed its return of consideration, the assessee filed its return of income on 15.02.2021 & 3713/MUM/2024 & 3713/MUM/2024 declaring total income at Rs.145,43,82,260/ declaring total income at Rs.145,43,82,260/- under regular provisions of the Income provisions of the Income-tax Act, 1961 (in short ‘the Act’) and book tax Act, 1961 (in short ‘the Act’) and book profit of Rs.66,87,76,855/ profit of Rs.66,87,76,855/- u/s 115JB of the Act. The return of u/s 115JB of the Act. The return of income filed by the assessee was selected income filed by the assessee was selected for scrutiny and statutory for scrutiny and statutory notices under the Act were issued and complied with. In the course notices under the Act were issued and complied with. In the course notices under the Act were issued and complied with. In the course of scrutiny proceedings, the Assessing Officer noticed international of scrutiny proceedings, the Assessing Officer noticed international of scrutiny proceedings, the Assessing Officer noticed international transactions carried out by the assessee with its associated transactions carried out by the assessee with its associated transactions carried out by the assessee with its associated enterprises (AEs), , therefore, therefore, he he referred referred the the matter matter for for determination of arm’s length price of those international determination of arm’s length price of those international determination of arm’s length price of those international transactions to the ld. ld. Transfer Pricing Officer (TPO) Transfer Pricing Officer (TPO). On receipt of order dated 20/07/2023 dated 20/07/2023 of ld TPO, the Assessing Officer issued a , the Assessing Officer issued a draft assessment order draft assessment order to the assessee on 31.08.2023 incorporating to the assessee on 31.08.2023 incorporating the adjustments made by the Ld. TPO. Against the draft assessment the adjustments made by the Ld. TPO. Against the draft assessment the adjustments made by the Ld. TPO. Against the draft assessment order, the assessee preferred objection , the assessee preferred objections before the Ld. DRP before the Ld. DRP, which were disposed off on 30.05.2024. Pursuant to the direction of the disposed off on 30.05.2024. Pursuant to the direction of the disposed off on 30.05.2024. Pursuant to the direction of the Ld. DRP, the Assessing Officer passed the impugned final Assessing Officer passed the impugned final Assessing Officer passed the impugned final assessment order on 12.06.2024. A assessment order on 12.06.2024. Aggrieved with the impugned final the impugned final assessment order, the assessment order, the assessee is in appeal before us by way of assessee is in appeal before us by way of raising grounds as reproduced above. raising grounds as reproduced above.
Before us, the Ld. Before us, the Ld. Counsel for the assessee filed a Paper Book filed a Paper Book containing page 1 to 214. containing page 1 to 214.
The ground No. 1 (Revised) of the appeal of the assessee The ground No. 1 (Revised) of the appeal of the assessee The ground No. 1 (Revised) of the appeal of the assessee relates to upward adjustment of Rs.10,32,75,726/- to the arm’s relates to upward adjustment of Rs.10,32,75,726/ relates to upward adjustment of Rs.10,32,75,726/ & 3713/MUM/2024 & 3713/MUM/2024 length price in relation to provision of interest on loans on loans extended length price in relation to to its associated enterprises. d enterprises.
7.1 The facts in brief qua the issue in dispute The facts in brief qua the issue in dispute as noted by the AO as noted by the AO are that during the financial year 2019 are that during the financial year 2019-2020 i.e. relevant to the 2020 i.e. relevant to the , the assessee was to receive assessment year under consideration under consideration, the assessee interest of Rs.6,14 4,49,281/- in respect of loan(s) (s) granted vide agreement dated dated 26.07.2010 26.07.2010 entered entered into into with with associated associated enterprises namely JSW Energy Minerals enterprises namely JSW Energy Minerals (Mauritius) ) Ltd. As per the agreement, the borrower was required to pay interest to the lender borrower was required to pay interest to the lender borrower was required to pay interest to the lender at the rate of three month three month’s London Inter Bank Offered Rate( nk Offered Rate(LIBOR) , which would be computed on the basis of 360 days year computed on the basis of 360 days year computed on the basis of 360 days year. The interest on said loan on said loan was payable every year on 31st st December. The agreement also contained provision for charging of penal interest at agreement also contained provision for charging of penal interest at agreement also contained provision for charging of penal interest at the rate of one percentile at the discretion of lender in case of the rate of one percentile at the discretion of lender in case of the rate of one percentile at the discretion of lender in case of default in repayment of loan. default in repayment of loan. The said agreement was modified/ The said agreement was modified/ amended from time to time amended from time to time up to the year under consid up to the year under consideration. Under amendment dated 31.03.2012 amendment dated 31.03.2012, interest was interest was made payable at the rate of six months LIBOR and at the rate of six months LIBOR and period of interest payment was period of interest payment was made six monthly, simultaneously, simultaneously, the first payment for interest the first payment for interest due was deferred to 30.09.2012. Thereafter eferred to 30.09.2012. Thereafter, again agree again agreement was amended on 22.02.2012 amended on 22.02.2012 where loan amount limit was enhanced limit was enhanced from United Sates Dollar(U nited Sates Dollar(USD) 42 Million to USD 50 Million. 42 Million to USD 50 Million. Interest due date wa was further deferred to 30.09.2013 s further deferred to 30.09.2013 and tenure of loan was changed three years to four years from the date of loan was changed three years to four years from the date of loan was changed three years to four years from the date of & 3713/MUM/2024 & 3713/MUM/2024 disbursement. Again the loan agreement was modified on Again the loan agreement was modified on Again the loan agreement was modified on 18.07.2013 and 27.09.2013 18.07.2013 and 27.09.2013, revising the loan limit from USD 50 revising the loan limit from USD 50 Million to UDS 54 Million Million to UDS 54 Million and payment of interest due due was further 30.09.2014. The agreement was again amended on again amended on deferred to 30.09.2014. The 20.07.2014 on 31.07.2015 31.07.2015. As far as year under consideration is . As far as year under consideration is concerned, the loan agreement was lastly amended on 16.12.2016 amended on 16.12.2016 concerned, the loan agreement was and the assessee deferred the assessee deferred the first installment for payment of interest to 31.03.2019. The Assessing Officer has reproduced the 31.03.2019. The Assessing Officer has reproduced the 31.03.2019. The Assessing Officer has reproduced the suo-motu adjustment made ment made by the assessee to the international the international transaction of receipt of interest transaction of receipt of interest on each tranches of loan released on each tranches of loan released from 19/07/2010 to 25/2/2020, from 19/07/2010 to 25/2/2020, which is available on page which is available on pages 7 to 9 of the final assessment order. of the final assessment order.
7.2 The assessee benchmarked the international transaction of The assessee benchmarked the international transaction of The assessee benchmarked the international transaction of the interest payment under the interest payment under Comparable uncontrolled price( Comparable uncontrolled price(CUP) method. The assessee also submitted that d The assessee also submitted that during the financial year uring the financial year 2019-2020 the loan outstanding with associated enterprises was 2020 the loan outstanding with associated enterprises was 2020 the loan outstanding with associated enterprises was amounted to Rs.330.96 crores Rs.330.96 crores, which was disbursed to them disbursed to them from financial financial year year 2010-11 2010 onwards in tranches, tranches, based on agreement/amended agreements /amended agreements between assessee and Mauritius between assessee and Mauritius entity. The amendments include utilisation of loan for paying off The amendments include utilisation of loan for paying off The amendments include utilisation of loan for paying off debts and working c debts and working capital needs and also to increase the limits of apital needs and also to increase the limits of loan to be disbursed to AE with increase in time limit for repayment loan to be disbursed to AE with increase in time limit for repayment loan to be disbursed to AE with increase in time limit for repayment of loan. According t According to the assessee, the last amendment o the assessee, the last amendment to loan agreement was carried out on 16/12/2016 and said last amended carried out on 16/12/2016 and said last amended carried out on 16/12/2016 and said last amended & 3713/MUM/2024 & 3713/MUM/2024 agreement was in force during the year under consideration and in force during the year under consideration and in force during the year under consideration and therefore, there was no change in the terms and conditions of the therefore, there was no change in the terms and conditions of the therefore, there was no change in the terms and conditions of the loan agreement and hence the benchmarking analysis concluded in loan agreement and hence the benchmarking analysis concluded in loan agreement and hence the benchmarking analysis concluded in financial year 2016 financial year 2016-17, was applicable to the current financial was applicable to the current financial year. In the transfer pricing report transfer pricing report submitted, the assessee , the assessee referred to credit rating of AEs and compared loan transactions of the to credit rating of AEs and compared loan transactions of the to credit rating of AEs and compared loan transactions of the assessee with other assessee with other interbank loan transactions based on search based on search results carried out on databases and results carried out on databases and concluded that LIBOR interest concluded that LIBOR interest rate was the appropriate arms was the appropriate arms length rate considering the rate considering the commercial and economic reasons, however by abundant and commercial and economic reasons, however by abundant and commercial and economic reasons, however by abundant and precaution, the assessee further precaution, the assessee further suo-motu offered that that interest rate at LIBOR plus a m plus a median of 300 basis points (bps) basis points (bps) could be considered as an considered as an arm’s length interest rate for the loan arm’s length interest rate for the loans. Accordingly, the assessee submitted that interest amount at Accordingly, the assessee submitted that interest amount at Accordingly, the assessee submitted that interest amount at Rs.6,14,49,281/- charged charged by the assessee was justified by the assessee was justified in accordance with the arm’s length accordance with the arm’s length rate based on the commercial and based on the commercial and regulatory consideration. regulatory consideration.
7.3 However, the assessee considered additional spread However, the assessee considered additional spread However, the assessee considered additional spread of basis point on LIBOR and point on LIBOR and computed arms length price of interest computed arms length price of interest transaction at Rs. 16,59,18,029/ at Rs. 16,59,18,029/- in the return of income filed in the return of income filed and offered additional Rs. 10,44,68,748/ Rs. 10,44,68,748/- as quantum of arm’s length as quantum of arm’s length ce of the interest transaction as under: price of the interest transaction Particulars Particulars Amount in INR Amount in INR Amount in 3CEB (as reported in books) Amount in 3CEB (as reported in books) 6,14,49,281 6,14,49,281 Amount in 3CEB (with regards to ALP) Amount in 3CEB (with regards to ALP) 16,59,18,029 16,59,18,029 & 3713/MUM/2024 & 3713/MUM/2024
Difference offered to tax Difference offered to tax 10,44,68,748 10,44,68,748 7.1 The Ld. TPO however was not convinced The Ld. TPO however was not convinced with the explanation with the explanation of the assessee. The TPO rejected the comparables selected by the he TPO rejected the comparables selected by the he TPO rejected the comparables selected by the assessee, which were located in South Africa which were located in South Africa geography geography i.e. country of ultimate utilisation of loans of ultimate utilisation of loans instead of Mauritius i.e. the country instead of Mauritius i.e. the country in which loan was given. The T in which loan was given. The TPO observed that the assessee PO observed that the assessee should have searched for comparable interest on loan data should have searched for comparable interest on loan data should have searched for comparable interest on loan data applicable for borrowers in Mauritius geography from appropriate applicable for borrowers in Mauritius geography from appropriate applicable for borrowers in Mauritius geography from appropriate databases like Bloomberg. databases like Bloomberg. The ld TPO concluded that the assessee The ld TPO concluded that the assessee did not determine the arm’s length rat did not determine the arm’s length rate of interest receivable from e of interest receivable from the AE in accordance with the provisions of section 92C(1) and the AE in accordance with the provisions of section 92C(1) and the AE in accordance with the provisions of section 92C(1) and 92C(2) and also the information or data used by the assessee not 92C(2) and also the information or data used by the assessee not 92C(2) and also the information or data used by the assessee not being reliable, he rejected the comparison analysis made by the being reliable, he rejected the comparison analysis made by the being reliable, he rejected the comparison analysis made by the assessee. The ld TPO referred to assessee. The ld TPO referred to the loans taken by the assessee in the loans taken by the assessee in earlier years and proposed to compare earlier years and proposed to compare ‘Blooomberg database Blooomberg database’ rate keeping in mind currency of loan, geography of borrower, terms and keeping in mind currency of loan, geography of borrower, terms and keeping in mind currency of loan, geography of borrower, terms and conditions of tenor of loan, security given, repayment of loan etc. conditions of tenor of loan, security given, repayment of loan etc conditions of tenor of loan, security given, repayment of loan etc The ld TPO mentioned The ld TPO mentioned that ld TPO in earlier AYs 2012 that ld TPO in earlier AYs 2012-13, 2013-14, 2014-15, 2015-16 , 2016 16 , 2016-17 , 2017-18 and 2018-19 has held that 19 has held that the assessee had actually not received any interest from the AE, the assessee had actually not received any interest from the AE, the assessee had actually not received any interest from the AE, therefore, the floating rate of interest would not be applicable in the therefore, the floating rate of interest would not be applicable in the therefore, the floating rate of interest would not be applicable in the case of assessee and instead the appropriate fixed rate of interest essee and instead the appropriate fixed rate of interest essee and instead the appropriate fixed rate of interest was to be ascertained was to be ascertained from ‘Bloomberg database erg database’ using ‘Swap Manager’ tool and accordingly interest rates should be charged at and accordingly interest rates should be charged at and accordingly interest rates should be charged at the rates applicable for fixed rates loan. the rates applicable for fixed rates loan. He considered the He considered the & 3713/MUM/2024 & 3713/MUM/2024 Mauritius entity as the borrower and also considered loans issued entity as the borrower and also considered loans issued entity as the borrower and also considered loans issued in different tranches as well as no interest payment for more than in different tranches as well as no interest payment for more than in different tranches as well as no interest payment for more than five years. The ld TPO ld TPO used ‘Swap Manger’ tool ’ tool available in Bloomberg database for converting a floating rate of interest rate to Bloomberg database for converting a floating rate of interest rate to Bloomberg database for converting a floating rate of interest rate to fixed interest rate post inputting certain parameters. ed interest rate post inputting certain parameters. The ld TPO ed interest rate post inputting certain parameters. concluded that facts and circumstances for the year under concluded that facts and circumstances for the year under concluded that facts and circumstances for the year under consideration being same to AYs from 2012 consideration being same to AYs from 2012-13 to 2018 13 to 2018-19, fixed rate should be applied for different years of loan rate should be applied for different years of loan. The relevant part . The relevant part of order of ld TPO is reproduced as reproduced as under:
“6.4.3 As the facts of the case are same in this year as that were 6.4.3 As the facts of the case are same in this year as that were 6.4.3 As the facts of the case are same in this year as that were in AY 2012-13 to AY 2016 13 to AY 2016-17, accordingly, as per Bloomberg 17, accordingly, as per Bloomberg database the corresponding Fixed rates of interest applicable for database the corresponding Fixed rates of interest applicable for database the corresponding Fixed rates of interest applicable for loan transactions is loan transactions is stated below: Financial Floating rate of interest Floating rate of interest Fixed rate of interest Fixed rate of interest
2010-11 LIBOR + 389 bps 8.03% 8.03% 2011-12 LIBOR + 575 bps 9.40% 9.40% 2012-13 LIBOR + 600 bps 8.23% 8.23% 2013-14 LIBOR + 382 bps 5.43% 5.43% 2014-15 LIBOR + 352 bps 6.71% 6.71% 2015-16 LIBOR + 352 bps 6.71% 6.71% 2016-17 LIBOR + 612 bps 7.43% 7.43% 2017-18 LIBOR + 725 bps 9.11% 9.11% 7.2 The assessee objected of converting floating rate of The assessee objected of converting floating rate of The assessee objected of converting floating rate of interest to for the reasons, firstly, the ITAT in AY 2012 fixed interest rate for the reasons , the ITAT in AY 2012-13 already rejected the fixed rate of interest applied by the ld TPO and already rejected the fixed rate of interest applied by the ld TPO and already rejected the fixed rate of interest applied by the ld TPO and justified floating rate of interest in the case of the assessee for arm’s justified floating rate of interest in the case of the assessee for arm’s justified floating rate of interest in the case of the assessee for arm’s price computation. Secondly, while making search of length price computation. , while making search of & 3713/MUM/2024 & 3713/MUM/2024 comparables over the databa over the database, filters like country of risk se, filters like country of risk, country etc were not applied consistently, thirdly thirdly, criteria of incorporation etc were not applied consistently, used to arrive comparables was very broad and did not consider used to arrive comparables was very broad and did not consider used to arrive comparables was very broad and did not consider parameters like credit rating of borrower, country of borrower, parameters like credit rating of borrower, country of borrower, parameters like credit rating of borrower, country of borrower, loan etc., fourthly, rate of loan was applied on tenor/maturity of loan etc. rate of loan was applied on each loan/tranche based on the year in which said loan/tranche each loan/tranche based on the year in which said loan/tranche each loan/tranche based on the year in which said loan/tranche was first advanced to the AE, disregarding the fact that loan was first advanced to the AE, disregarding the fact that loan was first advanced to the AE, disregarding the fact that loan agreements had been amended to extend the tenure retrospectively been amended to extend the tenure retrospectively been amended to extend the tenure retrospectively issuance of respective tranche, lastly, while from the date of issuance of respective tranche, issuance of respective tranche, computing fixed rate of interest , various parameters required to be computing fixed rate of interest , various parameters required to be computing fixed rate of interest , various parameters required to be inputted in the Swap Manager tool need to be correct with the facts inputted in the Swap Manager tool need to be correct with the facts inputted in the Swap Manager tool need to be correct with the facts of the transaction.
7.3 But the ld TPO But the ld TPO rejected the contention of the assessee the contention of the assessee observing as under:
1. The objections of the 1. The objections of the assessee are dealt with as are dealt with as hereunder: 1. The assessee's claim that the search was undertaken on 1. The assessee's claim that the search was undertaken on 1. The assessee's claim that the search was undertaken on an inconsistent basis is not correct. an inconsistent basis is not correct. • The assessee has stated in his submission th • The assessee has stated in his submission th • The assessee has stated in his submission that the "Security Status" filter has not been applied for FY 2010 "Security Status" filter has not been applied for FY 2010 "Security Status" filter has not been applied for FY 2010-11. It was explained to the AR during the course of the hearing It was explained to the AR during the course of the hearing It was explained to the AR during the course of the hearing that the screenshot taken at the time of undertaking the that the screenshot taken at the time of undertaking the that the screenshot taken at the time of undertaking the search did not capture the said filter search did not capture the said filter - however, it was however, it was indeed applie indeed applied to "Include All" - which has also been done which has also been done for the other FY's. for the other FY's. • Furthermore, the Assessee has stated in his submission • Furthermore, the Assessee has stated in his submission • Furthermore, the Assessee has stated in his submission that for FY 2011 that for FY 2011-12, the country of incorporation (Mauritius) 12, the country of incorporation (Mauritius) has not been specified / not applied and instead, the has not been specified / not applied and instead, the has not been specified / not applied and instead, the & 3713/MUM/2024 & 3713/MUM/2024 country of risk country of risk has been taken as India. It was again has been taken as India. It was again explained to the AR during the course of the hearing that explained to the AR during the course of the hearing that explained to the AR during the course of the hearing that the interest spread taken for the said year (i.e. 575 BPS) the interest spread taken for the said year (i.e. 575 BPS) the interest spread taken for the said year (i.e. 575 BPS) pertains specifically to Mauritius only pertains specifically to Mauritius only - as can be verified as can be verified from the screenshot provided. Se from the screenshot provided. Se 1. Furthermore, given that the AE had taken the first hermore, given that the AE had taken the first hermore, given that the AE had taken the first tranche in 2010 (which at the time tranche in 2010 (which at the time - was for a period of 3 was for a period of 3 years) - the AE and the Assessee have time and again the AE and the Assessee have time and again the AE and the Assessee have time and again amended the agreement to increase the interest payment amended the agreement to increase the interest payment amended the agreement to increase the interest payment dates as well as the tenure of the loans. dates as well as the tenure of the loans. Given the above, Given the above, the search has been undertaken after considering all the the search has been undertaken after considering all the the search has been undertaken after considering all the loans to be repayable on 31.3.2020. loans to be repayable on 31.3.2020.
Ideally, the assessee should have searched for 2. Ideally, the assessee should have searched for 2. Ideally, the assessee should have searched for comparable interest on loan data applicable for borrowers comparable interest on loan data applicable for borrowers comparable interest on loan data applicable for borrowers in Mauritius geography from appropriat in Mauritius geography from appropriate databases like e databases like Bloomberg. This is because the repayments has to be done Bloomberg. This is because the repayments has to be done Bloomberg. This is because the repayments has to be done by the entity in Mauritius and it is in the cash flow of this by the entity in Mauritius and it is in the cash flow of this by the entity in Mauritius and it is in the cash flow of this entity which will repay the assessee's loan and not that of entity which will repay the assessee's loan and not that of entity which will repay the assessee's loan and not that of the entity in South Africa. External CUP has been correctly the entity in South Africa. External CUP has been correctly the entity in South Africa. External CUP has been correctly applied by the TPO by searching for appropriate interest applied by the TPO by searching for appropriate interest applied by the TPO by searching for appropriate interest rates prevailing in the borrower geography (Mauritius) rates prevailing in the borrower geography (Mauritius) rates prevailing in the borrower geography (Mauritius) 3. Since, the assessee had not determined the arms' length 3. Since, the assessee had not determined the arms' length 3. Since, the assessee had not determined the arms' length rate of interest receivable from the AE in accordance with rate of interest receivable from the AE in accordance with rate of interest receivable from the AE in accordance with the provisions of section the provisions of section 92C(1) and 92C(2), and also since 92C(1) and 92C(2), and also since the information or data used by the assessee in the information or data used by the assessee in the information or data used by the assessee in computation of the arms' length price is not reliable or computation of the arms' length price is not reliable or computation of the arms' length price is not reliable or correct, hence the same deserves to be rejected and correct, hence the same deserves to be rejected and correct, hence the same deserves to be rejected and provisions of section 92C(3)(a) and 92C(3)(c) are invoked to provisions of section 92C(3)(a) and 92C(3)(c) are invoked to provisions of section 92C(3)(a) and 92C(3)(c) are invoked to determine the ALP. rmine the ALP.
4. So far as the assessee's contention that the Hon'ble 4. So far as the assessee's contention that the Hon'ble 4. So far as the assessee's contention that the Hon'ble Mumbai ITAT has accepted the assessee's without prejudice Mumbai ITAT has accepted the assessee's without prejudice Mumbai ITAT has accepted the assessee's without prejudice Benchmarking Methodology for A.Y. 2011 Benchmarking Methodology for A.Y. 2011-12 and 2012 12 and 2012-13 is concerned, it is seen that the said is concerned, it is seen that the said issue is yet to achieve finality a achieve finality at the higher stages. Therefore, the t the higher stages. Therefore, the assessee's assessee's assessee's reliance reliance reliance on on on the the the above above above mentioned mentioned mentioned order order order is not accepted. accepted. Accordingly, Accordingly, the ld TPO calculated the adjustment the adjustment 7.4 to interest to be received from the AE be received from the AE as follows:
& 3713/MUM/2024 & 3713/MUM/2024
“1. 1. Accordingly, the adjustment is calculated as 1. Accordingly, the adjustment is calculate 1. Accordingly, the adjustment is calculate follows:
Amt Rate of Rate of Interest Amt FY of initial Date of initial Date of initial Disbursed Interest Interest (USD) Tranche disbursement Disbursement Disbursement (USD) (PA) 31.3.2020
1 19-Jul-10 10 FY 2010-11 17,50,000 8.03% 1,40,525 2 21-May-12 12 FY 2012-13 -10'000 8.23% 823
3 29-JUI-10 10 FY 2010-11 17,50,000 1,40,525 8.03% 10,00,000 4 1-Oct-10 10 8.03% 80,300 FY 2010-11 5 4-Nov-10 10 FY 2010-11 30,00,000 8.03% 2,40,900 6 3-Dec-10 10 FY 2010-11 2,00,00,000 8.03% 16,06,000 7 21-Mar-11 11 FY 2010-11 2,70,000 8.03% 21,681 8 27-Apr-11 11 FY 2011-12 25,00,000 9.40% 2,35,000 9 30-May-11 11 FY 2011-12 28,00,000 9.40% 2,63,200 10. 27-Jun-11 FY 2011-12 10,000 9.40% 940 11. 29-Aug-11 11 FY 2011-12 85,00,000 9.40% 7,99,000 12 11-Nov-11 11 FY 2011-12 4,000 9.40% 376 13. 18-Oct-12 12 FY 2012-13 12,00,000 8.23% 98,760 14 30-Nov-12 12 FY 2012-13 11,55,000 8.23% 95,057 15 7-Dec-12 FY 2012-13 58,20,000 8.23% 4,78,986 16 23-Jul-13 13 FY 2013-14 36,00,000 5.43% 1,95,480 17 24-Jun-14 14 FY 2014-15 25,000 6.71% 1,678 18 9-Oct-15 FY 2015-16 3,50,000 6.71% 1,678 19 9-May-16 16 FY 2016-17 50,000 7.43% 3,715 20. 6-Jun-16 16 FY 2016-17 50,000 7.43%% 3,715 21 19-Aug-16 16 FY 2016-17 3,00,000 7.43% 22,290 22. 30-Sep-16 16 FY 2016-17 1,85,000 7.43% 13,746 23 6-Jan-17 FY 2016-17 -10,69,519 7.43% 079,465 24 9-Jun017 Jun017 FY 2017-18 11,100 9.11% 1,011 25 19-Sep-17 17 FY 2017-18 04,50,000 9.11% -40,995 26 29-Nov-17 17 FY 2017-18 2,000 9.11% 182 & 3713/MUM/2024 & 3713/MUM/2024
27 25-Jan-18 18 FY 2017-18 4,00,000 9.11% 36,440 28 30-Jan-18 18 FY 2017-18 1,34,788 9.11% 12,279 29 15-Feb-18 18 FY 2017-18 10,95,681 9.11% 99,817 30 18.-Jun-18 18 FY 2018-19 -68,33,050 9.11% -6,22,491 31 11-Mar-19 19 FY 2018-19 -10,00,000 9.11% -91,100 32 2-Dec-19 FY 2019-20 -5,00,000 9.11% -45,550 33 24-Jan-20 FY 2019-20 -5,00,000 9.11% -45,550 34 13-Feb-20 FY 2019-20 -8,00,000 9.11% -72,880 35 25-Feb-20 FY 2019-20 -5,00,000 9.11% -45,550 Total Total 4,43,00,000 35,70,683
Exchange Rate as on 31/03/2020 Exchange Rate as on 31/03/2020 75.39 75.39 26,91,93,755 26,91,93,755 Arm's Length Interest (INR) Arm's Length Interest (INR) Amount offered by Assessee in Form 3CEB Amount offered by Assessee in Form 3CEB 16,59,18,029 16,59,18,029 (INR) Adjustment Adjustment (INR); 10,32,75,726 10,32,75,726 1. Summary of 1. Summary of Adjustments: In view of the above discussion the total adjustments made to the In view of the above discussion the total adjustments made to the In view of the above discussion the total adjustments made to the international transactions reported by the assessee for AY 2020 international transactions reported by the assessee for AY 2020-21 international transactions reported by the assessee for AY 2020 stands as below: Sr. International Transactions : International Transactions : Adjustment Amount (INR) 1. Interest Interest receivable receivable on on loans loans given given to to associated 10,32,75,726 associated enterprises Total 10,32,75,726 7.3 Before the Ld. DR Before the Ld. DRP, the assessee reiterated the submission reiterated the submission n the decision of Cotton made before the ld TPO and made before the ld TPO and relied on the decision of Natural India Pvt. Ltd. v. DCIT [ITA No. 5855/Del/2012]. But, Natural India Pvt. Ltd. v. DCIT [ITA No. 5855/Del/2012] Natural India Pvt. Ltd. v. DCIT [ITA No. 5855/Del/2012] the Ld. DRP rejected the contention of the assessee observing as Ld. DRP rejected the contention of the assessee observing as Ld. DRP rejected the contention of the assessee observing as under:
“With regard to the contention of conversion to fixed rate, With regard to the contention of conversion to fixed rate, With regard to the contention of conversion to fixed rate, the Panel is of the view that the terms of the agreement the Panel is of the view that the terms of the agreement the Panel is of the view that the terms of the agreement hugely differ from the actual conduct of the parties. hugely differ from the actual conduct of the parties. hugely differ from the actual conduct of the parties. Whereas the terms of the agreement requires that the Whereas the terms of the agreement requires that the Whereas the terms of the agreement requires that the & 3713/MUM/2024 & 3713/MUM/2024 interest payments have to be made interest payments have to be made within a fixed period in within a fixed period in each year, the conduct of the parties is contrary to the terms each year, the conduct of the parties is contrary to the terms each year, the conduct of the parties is contrary to the terms wherein no interest or capital has been paid till date. This wherein no interest or capital has been paid till date. This wherein no interest or capital has been paid till date. This has been the Department's contention in all years starting has been the Department's contention in all years starting has been the Department's contention in all years starting with AY 2012 with AY 2012-13 till AY 2018-19. The Hon'ble IT 19. The Hon'ble ITAT's order is for AY 2012 is for AY 2012-13 which is the first year of the loan 13 which is the first year of the loan transaction when actual facts would not have been transaction when actual facts would not have been transaction when actual facts would not have been different from the terms of the loan or considerable time has different from the terms of the loan or considerable time has different from the terms of the loan or considerable time has not elapsed from the advance of the first tranche. Hence the not elapsed from the advance of the first tranche. Hence the not elapsed from the advance of the first tranche. Hence the decision of the Ho decision of the Hon'ble ITAT for the said year is not n'ble ITAT for the said year is not applicable to the later years. In uncontrolled transactions applicable to the later years. In uncontrolled transactions applicable to the later years. In uncontrolled transactions whether the assessee would have agreed to receive the whether the assessee would have agreed to receive the whether the assessee would have agreed to receive the same interest rate under same facts and circumstances is same interest rate under same facts and circumstances is same interest rate under same facts and circumstances is the moot point. The answer is definitely no. Henc the moot point. The answer is definitely no. Henc the moot point. The answer is definitely no. Hence TPO's action of converting it to fixed interest rates terms is found action of converting it to fixed interest rates terms is found action of converting it to fixed interest rates terms is found to be in order. to be in order. As regards the claim that the country of risk and country of As regards the claim that the country of risk and country of As regards the claim that the country of risk and country of incorporation has not been applied uniformly over the incorporation has not been applied uniformly over the incorporation has not been applied uniformly over the years, it is fact that the loan was availed by the AE years, it is fact that the loan was availed by the AE years, it is fact that the loan was availed by the AE in Mauritius even though the ultimately it was used in projects Mauritius even though the ultimately it was used in projects Mauritius even though the ultimately it was used in projects for South Africa. Here the ultimate end user is not required for South Africa. Here the ultimate end user is not required for South Africa. Here the ultimate end user is not required to be considered as the loan was availed as part of the to be considered as the loan was availed as part of the to be considered as the loan was availed as part of the agreement between the assessee and the Mauritius entity agreement between the assessee and the Mauritius entity agreement between the assessee and the Mauritius entity and hence the count and hence the country of borrower is rightly taken as rightly taken as Mauritius. The other objections of the assessee is that credit rating of The other objections of the assessee is that credit rating of The other objections of the assessee is that credit rating of the AE has not been considered by the TPO. The assessee the AE has not been considered by the TPO. The assessee the AE has not been considered by the TPO. The assessee has arrived at the credit rating of the AE using the has arrived at the credit rating of the AE using the has arrived at the credit rating of the AE using the 'Riskcalc' application, whereas the TPO application, whereas the TPO has not considered the same. has not considered the same. In this regard, it is the observation of the Panel that even In this regard, it is the observation of the Panel that even In this regard, it is the observation of the Panel that even though credit rating of the borrower is an important criteria, though credit rating of the borrower is an important criteria, though credit rating of the borrower is an important criteria, the credit rating arrived at by the assessee is also not the credit rating arrived at by the assessee is also not the credit rating arrived at by the assessee is also not sacrosanct as it has not been provided by an sacrosanct as it has not been provided by an independent independent agency but by using a software called 'Riskcalc'. agency but by using a software called 'Riskcalc'. Moreover, it is seen that assessee has taken the credit rating for the it is seen that assessee has taken the credit rating for the it is seen that assessee has taken the credit rating for the AE's entities in South Africa, whereas it should have been AE's entities in South Africa, whereas it should have been AE's entities in South Africa, whereas it should have been for Mauritius. Hence the Id TPO's benchmarking using the for Mauritius. Hence the Id TPO's benchmarking using the for Mauritius. Hence the Id TPO's benchmarking using the Bloomberg database is found to be correct. rg database is found to be correct. With regard to the other contentions, the findings of the With regard to the other contentions, the findings of the With regard to the other contentions, the findings of the Panel are as follows: Panel are as follows:
& 3713/MUM/2024 & 3713/MUM/2024
Security status not applied uniformly Security status not applied uniformly - the Id TPO has the Id TPO has clarified that it was a mistake in the screenshot and the clarified that it was a mistake in the screenshot and the clarified that it was a mistake in the screenshot and the same has been applied unifo same has been applied uniformly. Country of borrower Country of borrower - As discussed it should be Mauritius As discussed it should be Mauritius as loan was availed by AE there and repayments are also as loan was availed by AE there and repayments are also as loan was availed by AE there and repayments are also to be made by the Mauritius entity to be made by the Mauritius entity Tenure - the Id TPO has applied the tenure as applicable for the Id TPO has applied the tenure as applicable for the Id TPO has applied the tenure as applicable for each year's tranches separately. each year's tranches separately. Hence the ground of objection he ground of objection is dismissed.” 7.4 Before us, the Ld. counsel for the assessee relied on the order Before us, the Ld. counsel for the assessee relied on the order Before us, the Ld. counsel for the assessee relied on the order of the Tribunal dated 07.11.2019 of the Tribunal dated 07.11.2019 for assessment year 2011 assessment year 2011-12 and 2012-13, wherein the wherein the Tribunal has rejected the Tribunal has rejected the benchmarking methodology adopted by th methodology adopted by the Ld. TPO i.e. using interest rate interest rate as ascertained from the Bloombe ascertained from the Bloomberg database using Swap M Swap Manager to benchmark the loan benchmark the loan given to the AE and upheld the methodology of the methodology of the assessee of benchmarking using floating rate interest. the assessee of benchmarking using floating rate interest the assessee of benchmarking using floating rate interest 7.5 On the contrary, the Ld. DR submitted that actual conduct of On the contrary, the Ld. DR submitted that actual conduct of On the contrary, the Ld. DR submitted that actual conduct of the parties significantly diverged from the contractual terms agreed the parties significantly diverged from the contractual terms agreed the parties significantly diverged from the contractual terms agreed upon stipulating fixed timeline for interest payment and in practice upon stipulating fixed timeline for interest payment and in practice upon stipulating fixed timeline for interest payment and in practice no such interest payment had been made. The Ld. DR submit payment had been made. The Ld. DR submitted payment had been made. The Ld. DR submit that the initial terms of t he initial terms of the loan, as agreed upon in the restatement he loan, as agreed upon in the restatement agreement dated 31 March 2012, provided that interest was payable 31 March 2012, provided that interest was payable 31 March 2012, provided that interest was payable semi-annually, with the first annually, with the first installment due by 30 due by 30th September 2012, based on the 6 2012, based on the 6-month LIBOR rate. The loan tenu month LIBOR rate. The loan tenure remained at 3 years from the original agreement, h ars from the original agreement, however, in reality, no owever, in reality, no interest payments were made as per the stipulated schedule, interest payments were made as per the stipulated schedule, interest payments were made as per the stipulated schedule, & 3713/MUM/2024 & 3713/MUM/2024 undermining the assessee's claim that the terms of the agreement undermining the assessee's claim that the terms of the agreement undermining the assessee's claim that the terms of the agreement were adhered to. The The ld DR referred numerous amendments numerous amendments over time to support that t to support that the loan transaction has undergone, indicating he loan transaction has undergone, indicating a continuous change in its structure and tenure, as detailed below: continuous change in its structure and tenure, as detailed below: continuous change in its structure and tenure, as detailed below:
Amendment No. 7 (22 November 2012): The original loan Amendment No. 7 (22 November 2012): The original loan limit of USD 42 million was increased to USD 50 million, an limit of USD 42 million was increased to USD 50 million, and limit of USD 42 million was increased to USD 50 million, an the first interest payment date was deferred to 30 September the first interest payment date was deferred to 30 September the first interest payment date was deferred to 30 September 2013. The tenure of the loan remained at 3 years, but the 2013. The tenure of the loan remained at 3 years, but the 2013. The tenure of the loan remained at 3 years, but the delay in the first payment indicated that the financial delay in the first payment indicated that the financial delay in the first payment indicated that the financial discipline required by the agreement was not followed. discipline required by the agreement was not followed. discipline required by the agreement was not followed.
Amendment No. 8 (18 July 2013) & Amendment No. 9 (27 Amendment No. 8 (18 Jul y 2013) & Amendment No. 9 (27 September 2013): The loan limit was further increased to September 2013): The loan limit was further increased to USD 54 million. The first installment for interest payment was USD 54 million. The first for interest payment was once again deferred to 30 September 2014, extending the once again deferred to 30 September 2014, extending the once again deferred to 30 September 2014, extending the timeline even though the official tenure remained timeline even though the official tenure remained at 3 years. timeline even though the official tenure remained
Amendment No. 10 (20 July 2014): The tenure of the loan Amendment No. 10 (20 July 2014): The tenure of the loan was extended from 3 years to 4 years, with the first interest was extended from 3 years to 4 years, with the first interest was extended from 3 years to 4 years, with the first interest payment now pushed to 30 September 2015. This formal payment now pushed to 30 September 2015. This formal payment now pushed to 30 September 2015. This formal extension highlights that the original loan terms were no longer extension highlights that the original loan terms were no longer extension highlights that the original loan terms were no longer reflective of the actual financial arrangement. ive of the actual financial arrangement.
Amendment No. 11 (31 July 2015): The loan tenure was Amendment No. 11 (31 July 2015): The loan tenure was further extended from 4 years to 5 years from the date of further extended from 4 years to 5 years from the date of further extended from 4 years to 5 years from the date of disbursement. The first installment for interest payment was disbursement. The first interest payment was & 3713/MUM/2024 & 3713/MUM/2024 now deferred to 31 March 2017, demonstrating a continued now deferred to 31 March 2017, demonstrating a continued now deferred to 31 March 2017, demonstrating a continued departure from the initial agreement. departure from the initial agreement. Amendment No. 12 (16 December 2016): The loan tenure Amendment No. 12 (16 December 2016): The loan tenure remained at 5 years, but the first interest payment was remained at 5 years, but the first interest payment was remained at 5 years, but the first interest payment was deferred yet again to 31 March 2019. deferred yet again to 31 March 2019.
7.6 According to the ld DR, t to the ld DR, this continuous extension of the due his continuous extension of the due date for interest payments reflects that the financial obligations date for interest payments reflects that the financial obligations date for interest payments reflects that the financial obligations were being postponed, contrary to the agreed were being postponed, contrary to the agreed-upon terms. upon terms. This pattern of repeated amendments to defer interest payments and pattern of repeated amendments to defer interest payments and pattern of repeated amendments to defer interest payments and extend the tenure of the loan demonstrates that the terms of the nure of the loan demonstrates that the terms of the nure of the loan demonstrates that the terms of the original loan agreement have been fundamentally altered over time. original loan agreement have been fundamentally altered over time. original loan agreement have been fundamentally altered over time. The consistent postponement of interest payments and changes to The consistent postponement of interest payments and changes to The consistent postponement of interest payments and changes to the loan terms suggest that the AE was not operating on an arm's the loan terms suggest that the AE was not operating on an arm's the loan terms suggest that the AE was not operating on an arm's length basis. Hence, the original facts upon which the Hon'ble ITAT asis. Hence, the original facts upon which the Hon'ble ITAT asis. Hence, the original facts upon which the Hon'ble ITAT based its decision for AY 2012 based its decision for AY 2012-13 have materially changed, making 13 have materially changed, making that decision inapplicable to the subsequent years. that decision inapplicable to the subsequent years.
7.7 Further, the Ld. DR submitted that Further, the Ld. DR submitted that the assessee had assessee had argued that the loan should have a floating rate of interest, citing that the hould have a floating rate of interest, citing that the hould have a floating rate of interest, citing that the original agreement was linked to the LIBOR rate (6 original agreement was linked to the LIBOR rate (6-months LIBOR). months LIBOR). However, the Department submits that while the agreement may However, the Department submits that while the agreement may However, the Department submits that while the agreement may have referred to a floating rate, the actual conduct and the financial have referred to a floating rate, the actual conduct and the financial have referred to a floating rate, the actual conduct and the financial arrangements between the assessee and its Associated Enterprise rangements between the assessee and its Associated Enterprise rangements between the assessee and its Associated Enterprise (AE) show that this is no longer applicable. Despite the terms (AE) show that this is no longer applicable. Despite the terms (AE) show that this is no longer applicable. Despite the terms & 3713/MUM/2024 & 3713/MUM/2024 requiring semi-annual interest payments, no interest has been annual interest payments, no interest has been annual interest payments, no interest has been received by the assessee from its AE for several years. This failure to received by the assessee from its AE for several years. This failure received by the assessee from its AE for several years. This failure comply with the interest payment schedule renders the floating rate comply with the interest payment schedule renders the floating rate comply with the interest payment schedule renders the floating rate structure ineffective.
7.8 The Ld. DR further submitted that The Ld. DR further submitted that in accordance with in accordance with established transfer pricing principles, the arm's length rate for the established transfer pricing principles, the arm's length rate for the established transfer pricing principles, the arm's length rate for the interest charged should be interest charged should be ascertained using the appropriate ascertained using the appropriate reference points for fixed reference points for fixed-rate loans. Bloomberg's Swap Manager, rate loans. Bloomberg's Swap Manager, which provides relevant data for fixed which provides relevant data for fixed-rate loan transactions, is a rate loan transactions, is a reliable source for determining such rates. Therefore, the interest reliable source for determining such rates. Therefore, the interest reliable source for determining such rates. Therefore, the interest should be computed ba should be computed based on the applicable fixed-rate loan terms, rate loan terms, which better reflect the economic reality of this transaction, rather which better reflect the economic reality of this transaction, rather which better reflect the economic reality of this transaction, rather than than than the the the floating floating floating rate rate rate originally originally originally agreed agreed agreed upon upon upon but but but never implemented.
7.9 The Ld. DR submitted that The Ld. DR submitted that the concept of "substance over he concept of "substance over form", should be acknowledged , ld be acknowledged , which has been emphasized by the which has been emphasized by the courts in several rulings, including Vodafone International Vodafone International courts in several rulings, including Holdings BV v. Union of India Holdings BV v. Union of India(2012) 341 ITR1 (SC) (2012) 341 ITR1 (SC) , where the Hon'ble Supreme Court held that tax liability must reflect the real Hon'ble Supreme Court held that tax liability must reflect the real Hon'ble Supreme Court held that tax liability must reflect the real and substantive aspects of a transacti ive aspects of a transaction rather than its legal form. on rather than its legal form. The ld DR relied upon relied upon the said decision to further buttress the to further buttress the submission that, given the lack of actual interest payments, a fixed submission that, given the lack of actual interest payments, a fixed submission that, given the lack of actual interest payments, a fixed rate of interest should be applied in order to accurately reflect the rate of interest should be applied in order to accurately reflect rate of interest should be applied in order to accurately reflect & 3713/MUM/2024 & 3713/MUM/2024 substance of the transaction, which better reflect the economic substance of the transaction, which better reflect the economic substance of the transaction, which better reflect the economic reality of this transaction. reality of this transaction.
7.10 The Ld. DR also rejected the The Ld. DR also rejected the arguments of assessee before s of assessee before lower authorities that the "Security Status" filter was not uniformly that the "Security Status" filter was not uniformly that the "Security Status" filter was not uniformly applied during the transfe applied during the transfer pricing analysis conducted by the r pricing analysis conducted by the Transfer Pricing Officer. Transfer Pricing Officer. She submitted that this contention is this contention is factually incorrect. She submitted that t She submitted that the TPO has clarified that he TPO has clarified that the non-capturing of the "Security Status" in the search results was capturing of the "Security Status" in the search results was capturing of the "Security Status" in the search results was due to a technical o due to a technical oversight in the screenshot, not in the actual versight in the screenshot, not in the actual application of the filter. application of the filter.
7.11 The Ld. DR further submits that The Ld. DR further submits that the correct borrower the correct borrower geography for determining the arm's length rate of interest is geography for determining the arm's length rate of interest is geography for determining the arm's length rate of interest is Mauritius, where the AE (i.e., the immediate borrower) is based, Mauritius, where the AE (i.e., the immediate borrower) is base Mauritius, where the AE (i.e., the immediate borrower) is base and not South Africa, where the funds were ultimately deployed. and not South Africa, where the funds were ultimately deployed. and not South Africa, where the funds were ultimately deployed. The transfer pricing rules mandate that external comparables The transfer pricing rules mandate that external comparables The transfer pricing rules mandate that external comparables should be based on the specific economic conditions and risk should be based on the specific economic conditions and risk should be based on the specific economic conditions and risk profiles associated with the borrower, not the ultimate destination profiles associated with the borrower, not the ultimate destination profiles associated with the borrower, not the ultimate destination of the funds. The repayment obligations of the loan are tied to the The repayment obligations of the loan are tied to the The repayment obligations of the loan are tied to the Mauritius-based AE, and it is the financial and economic conditions based AE, and it is the financial and economic conditions based AE, and it is the financial and economic conditions of this entity, not those of the South African operations, that should of this entity, not those of the South African operations, that should of this entity, not those of the South African operations, that should be considered for benchmarking the loan. The method applied by be considered for benchmarking the loan. The met be considered for benchmarking the loan. The met the TPO, which focused on interest rates prevailing in the Mauritius the TPO, which focused on interest rates prevailing in the Mauritius the TPO, which focused on interest rates prevailing in the Mauritius market, is appropriate and in line with international best practices market, is appropriate and in line with international best practices market, is appropriate and in line with international best practices as reflected in OECD Transfer Pricing Guidelines, which prioritize as reflected in OECD Transfer Pricing Guidelines, which prioritize as reflected in OECD Transfer Pricing Guidelines, which prioritize & 3713/MUM/2024 & 3713/MUM/2024 the geographic and risk profile of t the geographic and risk profile of the borrower in pricing such he borrower in pricing such transactions.
7.12 The Ld. DR further submitted that The Ld. DR further submitted that the tenure of the loans, as the tenure of the loans, as detailed in the previous paragraphs, has undergone multiple detailed in the previous paragraphs, has undergone multiple detailed in the previous paragraphs, has undergone multiple extensions over the years, which directly affects the determination extensions over the years, which directly affects the determination extensions over the years, which directly affects the determination of the arm's length of the arm's length interest rate. The TPO has interest rate. The TPO has considered the correct tenure applicable to each tranche of the loan based on the correct tenure applicable to each tranche of the loan based on the correct tenure applicable to each tranche of the loan based on the terms at the time of disbursement, and subsequent terms at the time of disbursement, and subsequent amendments. amendments.
We have heard rival submissions of the parties and perused We have heard rival submissions of the parties and perused We have heard rival submissions of the parties and perused the relevant materials the relevant materials on record. The issue in dispute . The issue in dispute involved in the grounds raised is regarding adjustment made by the Ld. TPO to is regarding adjustment made by the Ld. TPO to is regarding adjustment made by the Ld. TPO to the international transaction of the interest the international transaction of the interest to be received to be received from the associated enterprises applying fixed rate of interest as against the associated enterprises applying fixed rate of interest as against the associated enterprises applying fixed rate of interest as against the floating rate of interest i.e. LIBOR applied by the assessee. The floating rate of interest i.e. LIBOR applied by the assessee. The floating rate of interest i.e. LIBOR applied by the assessee. The primary contention of the assessee is that identical issue of primary contention of the assessee is that identical issue of primary contention of the assessee is that identical issue of applying floating rate of interest applying floating rate of interest vis-a-vis fixed rate of the interest ed rate of the interest has been decided by the Tribunal in assessment year 2011-12 and has been decided by the Tribunal in assessment year 2011 has been decided by the Tribunal in assessment year 2011 2012-13 in & 2316/Mum/2017 in & 2316/Mum/2017 in favour of assessee in favour of assessee.
8.1 The Tribunal(supra), (supra), in assessment year 2011-12 12 noted that the assessee advanced unsecured loans of assessee advanced unsecured loans of ₹ 115.19 crore 115.19 crores to associated enterprise namely M/s JSW Energy Minerals Mauritius limited and M/s JSW Energy Minerals Mauritius limited and M/s JSW Energy Minerals Mauritius limited and received interest of the 13.82 lakhs. received interest of the 13.82 lakhs. The said loan was in the nature was in the nature of unsecured loan having tenure of three years. The currency of of unsecured loan having tenure of three years. The currency of of unsecured loan having tenure of three years. The currency of & 3713/MUM/2024 & 3713/MUM/2024 interest payment as well as interest payment as well as principal repayment was said to be in principal repayment was said to be in US dollars. The interest rate was stated to be floating interest rate US dollars. The interest rate was stated to be floating interest rate US dollars. The interest rate was stated to be floating interest rate to be computed as per LIBOR to be computed as per LIBOR. The loan was advanced in five . The loan was advanced in five trenches during the year and accordingly, the interest was charged trenches during the year and accordingly, the interest was charged trenches during the year and accordingly, the interest was charged at three months averag at three months average LIBOR rate ranging between 0.29% to e LIBOR rate ranging between 0.29% to 0.30% for actual number number of days for which loan was used by the of days for which loan was used by the AE. The relevant facts for AY 2010 facts for AY 2010-11, reproduced by the Tribunal 11, reproduced by the Tribunal (supra), are extracted as under: extracted as under:
“2.9.2 The assessee explained that non The assessee explained that non-residents who wished residents who wished to invest in South Africa by means of loan capital needs to invest in South Africa by means of loan capital needs to invest in South Africa by means of loan capital needs approval from South African Reserve Bank particularly with approval from South African Reserve Bank particularly with approval from South African Reserve Bank particularly with reference to intended repayment dates and interest rates. The reference to intended repayment dates and interest rates. The reference to intended repayment dates and interest rates. The Reserve Bank will not ag Reserve Bank will not agree to interest rates in excess of prime ree to interest rates in excess of prime rate being charged by non rate being charged by non-resident shareholders on loans to resident shareholders on loans to the South African subsidiaries but loans from non the South African subsidiaries but loans from non-residents residents other than shareholder may be allowed to carry interest at other than shareholder may be allowed to carry interest at other than shareholder may be allowed to carry interest at prime +2%. The relevant extracts of prime +2%. The relevant extracts of the regulations were the regulations were provided to Learned TPO. It was submitted that intra provided to Learned TPO. It was submitted that intra provided to Learned TPO. It was submitted that intra-group loan advanced to Mauritius Entity was ultimately utilized in loan advanced to Mauritius Entity was ultimately utilized in loan advanced to Mauritius Entity was ultimately utilized in South Africa since JSWEMML further advanced the said loan South Africa since JSWEMML further advanced the said loan South Africa since JSWEMML further advanced the said loan to JSW Energy South Africa Ltd. [JSWENRSAL] and in view o to JSW Energy South Africa Ltd. [JSWENRSAL] and in view o to JSW Energy South Africa Ltd. [JSWENRSAL] and in view of the South African Reserve Bank regulation, the Mauritius the South African Reserve Bank regulation, the Mauritius the South African Reserve Bank regulation, the Mauritius entity would not be able to charge any interest more than entity would not be able to charge any interest more than entity would not be able to charge any interest more than LIBOR from South African Entity. In the aforesaid background, LIBOR from South African Entity. In the aforesaid background, LIBOR from South African Entity. In the aforesaid background, it was submitted that the intra group transaction was to it was submitted that the intra group transaction was to it was submitted that the intra group transaction was to acquire the asset is acquire the asset is South Africa and therefore, transaction South Africa and therefore, transaction was at Arm's Length Price as prescribed in the Indian was at Arm's Length Price as prescribed in the Indian was at Arm's Length Price as prescribed in the Indian Regulations. In nutshell, it was submitted that due to Regulations. In nutshell, it was submitted that due to Regulations. In nutshell, it was submitted that due to regulatory restraints of South Africa, the interest rate could not regulatory restraints of South Africa, the interest rate could not regulatory restraints of South Africa, the interest rate could not be more than LIBOR rate for any borrowi be more than LIBOR rate for any borrowings from any group ngs from any group companies outside South Africa. companies outside South Africa. 2.9.3 Without prejudice to the above submissions, the 2.9.3 Without prejudice to the above submissions, the 2.9.3 Without prejudice to the above submissions, the assessee benchmarked the loan transaction on the basis of assessee benchmarked the loan transaction on the basis of assessee benchmarked the loan transaction on the basis of External Comparable Uncontrolled Price [CUP] Method by External Comparable Uncontrolled Price [CUP] Method by External Comparable Uncontrolled Price [CUP] Method by & 3713/MUM/2024 & 3713/MUM/2024 comparing the interest rates at which comparing the interest rates at which the independent parties the independent parties with similar credit ratings would be able to obtain intra with similar credit ratings would be able to obtain intra with similar credit ratings would be able to obtain intra-group loans. The AE was selected as the tested party and its credit loans. The AE was selected as the tested party and its credit loans. The AE was selected as the tested party and its credit rating was determined to be Baa1 (Moody; equivalent to S&P rating was determined to be Baa1 (Moody; equivalent to S&P rating was determined to be Baa1 (Moody; equivalent to S&P BBB+) which fall in the lower medium investment BBB+) which fall in the lower medium investment BBB+) which fall in the lower medium investment grade. Selecting Selecting Selecting the borrower country the the borrower country borrower country to to be to be be Mauritius/South Mauritius/South Mauritius/South Africa/USA, the assessee arrived at mean ALP margin of Africa/USA, the assessee arrived at mean ALP margin of Africa/USA, the assessee arrived at mean ALP margin of 243.83 basis points over LIBOR. Applying the spread of 243.83 basis points over LIBOR. Applying the spread of 243.83 basis points over LIBOR. Applying the spread of 243.83 basis point to LIBOR, the ALP interest was computed to 243.83 basis point to LIBOR, the ALP interest was computed to 243.83 basis point to LIBOR, the ALP interest was computed to be US Dollars 367598 (I be US Dollars 367598 (INR Equivalent Rs.164.13 Lacs) as NR Equivalent Rs.164.13 Lacs) as against Rs.13.82 Lacs charged by the assessee from its AE. against Rs.13.82 Lacs charged by the assessee from its AE. against Rs.13.82 Lacs charged by the assessee from its AE. The assessee, in support of LIBOR, also submitted that the The assessee, in support of LIBOR, also submitted that the The assessee, in support of LIBOR, also submitted that the loans were advanced from internal accruals and it did not loans were advanced from internal accruals and it did not loans were advanced from internal accruals and it did not have any foreign borrowings. The weighted avera have any foreign borrowings. The weighted avera have any foreign borrowings. The weighted average of domestic borrowings was computed as 10.14% as per the domestic borrowings was computed as 10.14% as per the domestic borrowings was computed as 10.14% as per the workings submitted by the assessee. workings submitted by the assessee. 2.9.4 However, upon due consideration, the Ld. TPO opined 2.9.4 However, upon due consideration, the Ld. TPO opined 2.9.4 However, upon due consideration, the Ld. TPO opined that the regulatory restriction imposed under South African that the regulatory restriction imposed under South African that the regulatory restriction imposed under South African Regulations would not be determinative sin Regulations would not be determinative since the loan was ce the loan was advanced to Mauritius entity and not to South African entity. advanced to Mauritius entity and not to South African entity. advanced to Mauritius entity and not to South African entity. Further, the regulatory authority of any country would not take Further, the regulatory authority of any country would not take Further, the regulatory authority of any country would not take into account the transfer pricing provisions to determine the into account the transfer pricing provisions to determine the into account the transfer pricing provisions to determine the appropriate rates which could be considered as Arm' appropriate rates which could be considered as Arm' appropriate rates which could be considered as Arm' Length Price for interest payment. Drawing analogy from the decision Price for interest payment. Drawing analogy from the decision Price for interest payment. Drawing analogy from the decision rendered in Coca rendered in Coca-Cola India Inc. v. Asstt. CIT [2009] 177 [2009] 177 Taxman 103/309 ITR 194 (Punj & Har.) Taxman 103/309 ITR 194 (Punj & Har.) that the royalty rates that the royalty rates permitted by RBI would not represen permitted by RBI would not represent ALP of any international t ALP of any international transactions, Ld. TPO opined that determination of ALP was to transactions, Ld. TPO opined that determination of ALP was to transactions, Ld. TPO opined that determination of ALP was to be examined from the point of view of Transfer Pricing be examined from the point of view of Transfer Pricing be examined from the point of view of Transfer Pricing Provisions under the Income Tax Act. Provisions under the Income Tax Act. 2.9.5 Proceeding further, finding defects in the assessee's 2.9.5 Proceeding further, finding defects in the assessee's 2.9.5 Proceeding further, finding defects in the assessee's methodology to methodology to benchmark the same by External CUP in view benchmark the same by External CUP in view of the fact that comparable entities were based in USA of the fact that comparable entities were based in USA of the fact that comparable entities were based in USA whereas the loans was advanced to Mauritius entity and whereas the loans was advanced to Mauritius entity and whereas the loans was advanced to Mauritius entity and further, the credit rating of Mauritius AE would be much lower further, the credit rating of Mauritius AE would be much lower further, the credit rating of Mauritius AE would be much lower than BBB+ as adopted by the assessee for than BBB+ as adopted by the assessee for benchmarking, Ld. benchmarking, Ld. TPO concluded that the search process was not proper and TPO concluded that the search process was not proper and TPO concluded that the search process was not proper and was required to be rejected. The argument that the loans were was required to be rejected. The argument that the loans were was required to be rejected. The argument that the loans were advanced from internal accruals was also rejected since the advanced from internal accruals was also rejected since the advanced from internal accruals was also rejected since the assessee, in the opinion of Ld. TPO, failed to prove nexus assessee, in the opinion of Ld. TPO, failed to prove nexus assessee, in the opinion of Ld. TPO, failed to prove nexus & 3713/MUM/2024 ITA Nos. 3714 & 3713/MUM/2024 between interest free funds available with the assessee vis between interest free funds available with the assessee vis between interest free funds available with the assessee vis-à- vis loans advanced to its AE. vis loans advanced to its AE. 2.9.6 The Ld. TPO also came to a conclusion that interest on 2.9.6 The Ld. TPO also came to a conclusion that interest on 2.9.6 The Ld. TPO also came to a conclusion that interest on outbound loan was not to be benchmarked with LIBOR since outbound loan was not to be benchmarked with LIBOR since outbound loan was not to be benchmarked with LIBOR since no company would like to advance loans outsid no company would like to advance loans outside India without e India without security as the interest rate in India would be higher than security as the interest rate in India would be higher than security as the interest rate in India would be higher than those prevailing in the developed country. Therefore, the rates those prevailing in the developed country. Therefore, the rates those prevailing in the developed country. Therefore, the rates prevailing in India would be an appropriate benchmark to prevailing in India would be an appropriate benchmark to prevailing in India would be an appropriate benchmark to determine the ALP of loans advanced by Indian entities. determine the ALP of loans advanced by Indian entities. determine the ALP of loans advanced by Indian entities. Although the assessee placed reliance on certain judicial hough the assessee placed reliance on certain judicial hough the assessee placed reliance on certain judicial pronouncements for the submission that LIBOR would be pronouncements for the submission that LIBOR would be pronouncements for the submission that LIBOR would be appropriate benchmark rate, however Ld. TPO opined that appropriate benchmark rate, however Ld. TPO opined that appropriate benchmark rate, however Ld. TPO opined that certain vital aspects remained to be considered in the cited certain vital aspects remained to be considered in the cited certain vital aspects remained to be considered in the cited decisions. Rather reliance was decisions. Rather reliance was placed on the decision of placed on the decision of Tribunal rendered in Aurionpro Solutions Ltd. v. Addl. CIT Tribunal rendered in Aurionpro Solutions Ltd. v. Addl. CIT Tribunal rendered in Aurionpro Solutions Ltd. v. Addl. CIT [2013] 33 taxmann.com 187 (Mum. [2013] 33 taxmann.com 187 (Mum. - Trib.) for the conclusion for the conclusion that lending should not be below the cost of the borrowings of that lending should not be below the cost of the borrowings of that lending should not be below the cost of the borrowings of the assessee the assessee and the assessee should earn income which it and the assessee should earn income which it would have earned by advancing loans to third parties. would have earned by advancing loans to third parties. would have earned by advancing loans to third parties. 2.9.7 Finally, Ld. TPO proceeded to work out the mean ALP 2.9.7 Finally, Ld. TPO proceeded to work out the mean ALP 2.9.7 Finally, Ld. TPO proceeded to work out the mean ALP rate on the basis of above factors. The assessee was taken as rate on the basis of above factors. The assessee was taken as rate on the basis of above factors. The assessee was taken as the tested party and External CUP me the tested party and External CUP method was used for thod was used for benchmarking the aforesaid transaction. External CUP, as per benchmarking the aforesaid transaction. External CUP, as per benchmarking the aforesaid transaction. External CUP, as per Ld. TPO, could be the Bank Prime Lending Rate [PLR], Ld. TPO, could be the Bank Prime Lending Rate [PLR], Ld. TPO, could be the Bank Prime Lending Rate [PLR], Corporate Bond Rates or the cost of borrowings in the domestic Corporate Bond Rates or the cost of borrowings in the domestic Corporate Bond Rates or the cost of borrowings in the domestic market. Applying the average spread of 2.89% to assessee's market. Applying the average spread of 2.89% to assessee's market. Applying the average spread of 2.89% to assessee's cost of borrowing i.e. 10.14%, cost of domestic borrowings was st of borrowing i.e. 10.14%, cost of domestic borrowings was st of borrowing i.e. 10.14%, cost of domestic borrowings was worked out to be 13.03%. Relying upon safe harbor rules, worked out to be 13.03%. Relying upon safe harbor rules, worked out to be 13.03%. Relying upon safe harbor rules, Prime Lending Rate was worked out to be 10.50%, which was Prime Lending Rate was worked out to be 10.50%, which was Prime Lending Rate was worked out to be 10.50%, which was nothing but 3% spread over State Bank of India base rate of nothing but 3% spread over State Bank of India base rate of nothing but 3% spread over State Bank of India base rate of 7.5%. The ALP based 7.5%. The ALP based on Corporate Bond Rates was worked on Corporate Bond Rates was worked out to be 15%. Finally, the most conservative rate i.e. 10.5%, out to be 15%. Finally, the most conservative rate i.e. 10.5%, out to be 15%. Finally, the most conservative rate i.e. 10.5%, out of three rates, was adopted to benchmark the stated out of three rates, was adopted to benchmark the stated out of three rates, was adopted to benchmark the stated transactions. The ALP interest, thus, worked out to be transactions. The ALP interest, thus, worked out to be transactions. The ALP interest, thus, worked out to be Rs.441.61 Lacs as per computations made in para Rs.441.61 Lacs as per computations made in para Rs.441.61 Lacs as per computations made in para 5.8 of learned TPO's order. Adjusting the interest of Rs.13.82 Lacs as learned TPO's order. Adjusting the interest of Rs.13.82 Lacs as learned TPO's order. Adjusting the interest of Rs.13.82 Lacs as charged by the assessee from its AE, the net TP adjustment, charged by the assessee from its AE, the net TP adjustment, charged by the assessee from its AE, the net TP adjustment, thus proposed, worked out to be Rs.427.78 Lacs. thus proposed, worked out to be Rs.427.78 Lacs.
& 3713/MUM/2024 & 3713/MUM/2024
2.9.8. The aforesaid TP adjustment was incorporated in 2.9.8. The aforesaid TP adjustment was incorporated in 2.9.8. The aforesaid TP adjustment was incorporated in assessment assessment order order dated date d 17/04/2014. 17/04/2014. The The assessee assessee submitted that it did not want to pursue the matter before Ld. submitted that it did not want to pursue the matter before Ld. submitted that it did not want to pursue the matter before Ld. Dispute Resolution Panel and expressed its intention to contest Dispute Resolution Panel and expressed its intention to contest Dispute Resolution Panel and expressed its intention to contest the same through normal appellate channel of Ld. CIT(A). the same through normal appellate channel of Ld. CIT(A). the same through normal appellate channel of Ld. CIT(A). Accordingly, the assessment order was passed Accordingly, the assessment order was passed by Ld. AO on by Ld. AO on 17/04/2014 which was subjected to further appeal before Ld. 17/04/2014 which was subjected to further appeal before Ld. 17/04/2014 which was subjected to further appeal before Ld. first appellate authority. first appellate authority. 2.10 Before Ld. first appellate authority, the assessee, inter 2.10 Before Ld. first appellate authority, the assessee, inter 2.10 Before Ld. first appellate authority, the assessee, inter- alia, drew attention to the fact that similar benchmarking, in alia, drew attention to the fact that similar benchmarking, in alia, drew attention to the fact that similar benchmarking, in assessee's own case for immedi assessee's own case for immediately succeeding year i.e. AY ately succeeding year i.e. AY 2012-13, has been done by Ld. TPO himself in its subsequent 13, has been done by Ld. TPO himself in its subsequent 13, has been done by Ld. TPO himself in its subsequent order dated 29/01/2016 adopting LIBOR rates as the base order dated 29/01/2016 adopting LIBOR rates as the base order dated 29/01/2016 adopting LIBOR rates as the base rates and ruled out the application of Corporate Bond Rate, rates and ruled out the application of Corporate Bond Rate, rates and ruled out the application of Corporate Bond Rate, SBI PLR Rate or Cost of Borrowing rate etc. Relian SBI PLR Rate or Cost of Borrowing rate etc. Relian SBI PLR Rate or Cost of Borrowing rate etc. Reliance was placed, inter-alia, on the decision of Hon'ble Delhi High Court alia, on the decision of Hon'ble Delhi High Court alia, on the decision of Hon'ble Delhi High Court rendered in CIT v. Cotton Naturals (I) (P.) Ltd. rendered in CIT v. Cotton Naturals (I) (P.) Ltd. [2015] 55 [2015] 55 taxmann.com taxmann.com 523/231 523/231 Taxman Taxman 401 401 to to support support the the submissions that LIBOR would be appropriate be submissions that LIBOR would be appropriate benchmarking nchmarking rate on such outbound loan transactions. The list of other rate on such outbound loan transactions. The list of other rate on such outbound loan transactions. The list of other decisions which has also affirmed the said view, as relied decisions which has also affirmed the said view, as relied decisions which has also affirmed the said view, as relied upon by assessee during appellate proceedings, has also been upon by assessee during appellate proceedings, has also been upon by assessee during appellate proceedings, has also been tabulated on page nos. 18 tabulated on page nos. 18-19 of the appellate order. 19 of the appellate order. Concurring wi Concurring with assessee's submissions, Ld. CIT(A) allowed th assessee's submissions, Ld. CIT(A) allowed assessee's ground by observing as under: assessee's ground by observing as under: — I have considered the submissions of the assessee, the views I have considered the submissions of the assessee, the views I have considered the submissions of the assessee, the views of the AO in the assessment order and the material on record. of the AO in the assessment order and the material on record. of the AO in the assessment order and the material on record. It is apparent from the above that the end u It is apparent from the above that the end use of intra se of intra-group loan was to acquire the asset company in South Africa and it loan was to acquire the asset company in South Africa and it loan was to acquire the asset company in South Africa and it is clearly evident that the JSWEMML was not able to charge is clearly evident that the JSWEMML was not able to charge is clearly evident that the JSWEMML was not able to charge the interest more than LIBOR from JSW South Africa Ltd. the interest more than LIBOR from JSW South Africa Ltd. the interest more than LIBOR from JSW South Africa Ltd. (JSWENRSAL), which had a direct impact on the interest (JSWENRSAL), which had a direct impact on the interest (JSWENRSAL), which had a direct impact on the interest repayment capability of JSWEMML to JSWEL of not more than nt capability of JSWEMML to JSWEL of not more than nt capability of JSWEMML to JSWEL of not more than LIBOR. Further, the assessee submitted that with respect to cross Further, the assessee submitted that with respect to cross Further, the assessee submitted that with respect to cross border transactions, the interest rate is determined by using border transactions, the interest rate is determined by using border transactions, the interest rate is determined by using foreign currency rate (LIBOR/EURIBOR) and the same has foreign currency rate (LIBOR/EURIBOR) and the same has foreign currency rate (LIBOR/EURIBOR) and the same has & 3713/MUM/2024 & 3713/MUM/2024 been upheld as an appr been upheld as an appropriate benchmarking rate in variolous opriate benchmarking rate in variolous judicial decisions which have been mentioned above. judicial decisions which have been mentioned above. Thus, considering the above view taken by the appellant and Thus, considering the above view taken by the appellant and Thus, considering the above view taken by the appellant and the view taken by the TPO in appellant's own case for later the view taken by the TPO in appellant's own case for later the view taken by the TPO in appellant's own case for later years i.e. AY 12 years i.e. AY 12-13 & AY 13-14, the transaction of interest on on of interest on loan has been benchmarked using the LIBOR Rate and also it loan has been benchmarked using the LIBOR Rate and also it loan has been benchmarked using the LIBOR Rate and also it is a well settled law that with respect to the cross border is a well settled law that with respect to the cross border is a well settled law that with respect to the cross border transactions, LIBOR has been considered as an appropriate transactions, LIBOR has been considered as an appropriate transactions, LIBOR has been considered as an appropriate benchmarking and thus, this ground of appeal raised by the benchmarking and thus, this ground of appeal raised by the benchmarking and thus, this ground of appeal raised by the assessee is allowed. sessee is allowed. Aggrieved as aforesaid, the revenue is in further appeal before Aggrieved as aforesaid, the revenue is in further appeal before Aggrieved as aforesaid, the revenue is in further appeal before us.” 8.2 The Tribunal(supra) rejected the benchmarking applying The Tribunal(supra) rejected the benchmarking applying The Tribunal(supra) rejected the benchmarking applying fixed rate, of interest for the reason that in succeeding assessment years of interest for the reason that in succeeding assessment years of interest for the reason that in succeeding assessment years the learned TPO himself carried out benchmarking on the basis of the learned TPO himself carried out benchmarking on the basis of the learned TPO himself carried out benchmarking on the basis of LIBOR plus some spread over of basis points. But the Ld. CIT(A) LIBOR plus some spread over of basis points. But the Ld. CIT(A) LIBOR plus some spread over of basis points. But the Ld. CIT(A) benchmarked the transaction applying only the LIBOR. Though, the benchmarked the transaction applying only the LIBOR. Though, the benchmarked the transaction applying only the LIBOR. Though, the Tribunal supported the finding of the Ld. CIT(A) relying on the Tribunal supported the finding of the Ld. CIT(A) relying on the Tribunal supported the finding of the Ld. CIT(A) relying on the decision of the Hon’ble Delhi High Court in the case of CIT Vs decision of the Hon’ble Delhi High Court in the case of CIT Vs decision of the Hon’ble Delhi High Court in the case of CIT Vs Cotton Naturals (I) P Ltd(supra), but directed to determine the ALP Cotton Naturals (I) P Ltd(supra), but directed to determine the ALP Cotton Naturals (I) P Ltd(supra), but directed to determine the ALP on the basis of LIBOR plus some spread on the basis of LIBOR plus some spread over points, because points, because the LIBOR represents interbank rates which are applicable in case of LIBOR represents interbank rates which are applicable in case of LIBOR represents interbank rates which are applicable in case of entities having highest cre entities having highest credit rating. The Tribunal noted that the ribunal noted that the assessee itself has assigned a rating of Baa1 /BBB+ to its AE, while assessee itself has assigned a rating of Baa1 /BBB+ to its AE, while assessee itself has assigned a rating of Baa1 /BBB+ to its AE, while benchmarking the international transaction. The said rating being benchmarking the international transaction. The sai benchmarking the international transaction. The sai of ‘lower medium investment lower medium investment-grade’ rating, the Tribunal directed to ribunal directed to adopt certain spread over the LIBO adopt certain spread over the LIBOR. The relevant finding of the R. The relevant finding of the Tribunal is reproduced as under: ribunal is reproduced as under:
& 3713/MUM/2024 & 3713/MUM/2024
“2.14 2.14 2.14 Now Now Now the the the only only only question question question that that that survives survives survives for for for our our our consideration is the dete consideration is the determination of ALP rate keeping in view rmination of ALP rate keeping in view the facts and circumstances of the case. The Ld. first appellate the facts and circumstances of the case. The Ld. first appellate the facts and circumstances of the case. The Ld. first appellate authority has confirmed the determination of ALP on the basis authority has confirmed the determination of ALP on the basis authority has confirmed the determination of ALP on the basis of LIBOR only without any spread of LIBOR only without any spread-over. However, the said over. However, the said rate, in our opinion, represent in rate, in our opinion, represent inter-bank rates which are bank rates which are applicable in case of entities having highest credit rating. The applicable in case of entities having highest credit rating. The applicable in case of entities having highest credit rating. The same is also fortified by the fact that the assessee, itself, has same is also fortified by the fact that the assessee, itself, has same is also fortified by the fact that the assessee, itself, has assigned a rating of Baa1/BBB+ to its AE while benchmarking assigned a rating of Baa1/BBB+ to its AE while benchmarking assigned a rating of Baa1/BBB+ to its AE while benchmarking the transactions. The said rating repres the transactions. The said rating represents 'lower medium ents 'lower medium investment grade rating. Therefore, the determination of ALP investment grade rating. Therefore, the determination of ALP investment grade rating. Therefore, the determination of ALP merely on the basis of LIBOR, in our considered opinion, would merely on the basis of LIBOR, in our considered opinion, would merely on the basis of LIBOR, in our considered opinion, would not be justified. During the course of proceedings before Ld. not be justified. During the course of proceedings before Ld. not be justified. During the course of proceedings before Ld. TPO, the assessee had arrived at mean spread of 243 TPO, the assessee had arrived at mean spread of 243 TPO, the assessee had arrived at mean spread of 243.83 basis points over LIBOR which is evident from page nos. 5 basis points over LIBOR which is evident from page nos. 5 basis points over LIBOR which is evident from page nos. 5-6 of Ld. TPO's order. The computation of the same has nowhere Ld. TPO's order. The computation of the same has nowhere Ld. TPO's order. The computation of the same has nowhere been disputed by the revenue. Applying LIBOR + spread been disputed by the revenue. Applying LIBOR + spread been disputed by the revenue. Applying LIBOR + spread-over, ALP interest has been worked out to be Rs.1,64,13,241/ ALP interest has been worked out to be Rs.1,64,13,241/ ALP interest has been worked out to be Rs.1,64,13,241/-. We are of the c are of the considered opinion that this spread over as onsidered opinion that this spread over as computed by the assessee was undisputed, quite fair and computed by the assessee was undisputed, quite fair and computed by the assessee was undisputed, quite fair and reasonable and the same was to be accepted. Accordingly, we reasonable and the same was to be accepted. Accordingly, we reasonable and the same was to be accepted. Accordingly, we confirm the ALP rate of LIBOR + 2.4383% as computed by the confirm the ALP rate of LIBOR + 2.4383% as computed by the confirm the ALP rate of LIBOR + 2.4383% as computed by the assessee in the alternative submission assessee in the alternative submissions made before Ld. TPO. s made before Ld. TPO. The impugned order stand modified to that extent. The Ld. The impugned order stand modified to that extent. The Ld. The impugned order stand modified to that extent. The Ld. TPO/Ld. AO is directed to recompute the income of the TPO/Ld. AO is directed to recompute the income of the TPO/Ld. AO is directed to recompute the income of the assessee in terms of our direction. Accordingly, Ground Nos. 1 assessee in terms of our direction. Accordingly, Ground Nos. 1 assessee in terms of our direction. Accordingly, Ground Nos. 1 & 2 stands dismissed. Ground No.3 stand allowed. Ground & 2 stands dismissed. Ground No.3 stand allowed. Ground & 2 stands dismissed. Ground No.3 stand allowed. Ground No. 4 stands partly allowed. . 4 stands partly allowed.” 8.3 Based on the above finding for assessment year 2011 ased on the above finding for assessment year 2011 ased on the above finding for assessment year 2011-12, the Tribunal in assessment year 2012 ribunal in assessment year 2012-13 also accepted the floating rate 13 also accepted the floating rate of interest i.e. LIBOR with certain spread over of basis points as of interest i.e. LIBOR with certain spread over of basis points as of interest i.e. LIBOR with certain spread over of basis points as against the fixed rate of int against the fixed rate of interest adopted by the learned TPO. The erest adopted by the learned TPO. The relevant finding of the relevant finding of the Tribunal for assessment year 2012 ribunal for assessment year 2012-13 is reproduced as under: reproduced as under:
& 3713/MUM/2024 & 3713/MUM/2024
“3.7.4 Upon careful consideration, we find that the facts of this 3.7.4 Upon careful consideration, we find that the facts of this 3.7.4 Upon careful consideration, we find that the facts of this year are pari- year are pari-materia with the facts of AY 2011-12. The loan 12. The loan transactions arise out of same contractual terms and ctions arise out of same contractual terms and ctions arise out of same contractual terms and conditions. We also find force in the submissions that learned conditions. We also find force in the submissions that learned conditions. We also find force in the submissions that learned TPO proceeded on the basis of wrong parameters as pointed TPO proceeded on the basis of wrong parameters as pointed TPO proceeded on the basis of wrong parameters as pointed out by the assessee before lower authorities, completely out by the assessee before lower authorities, completely out by the assessee before lower authorities, completely disregarding the contractual te disregarding the contractual terms. It is settled position that rms. It is settled position that the contractual terms agreed to between the parties could not the contractual terms agreed to between the parties could not the contractual terms agreed to between the parties could not be rewritten or obliterated and reclassification or substitution be rewritten or obliterated and reclassification or substitution be rewritten or obliterated and reclassification or substitution of the transaction was not permitted. Nothing on record rebut of the transaction was not permitted. Nothing on record rebut of the transaction was not permitted. Nothing on record rebut the facts that as per the terms of the facts that as per the terms of the contract, the borrower the contract, the borrower had agreed to pay the lender interest at rates equal to 3 had agreed to pay the lender interest at rates equal to 3 had agreed to pay the lender interest at rates equal to 3 months' LIBOR prevailing on the date of each interest payment months' LIBOR prevailing on the date of each interest payment months' LIBOR prevailing on the date of each interest payment up to 31/03/2012. The said fact has also been noted by Ld. up to 31/03/2012. The said fact has also been noted by Ld. up to 31/03/2012. The said fact has also been noted by Ld. DRP at para 2.29 of its directions. The only alle DRP at para 2.29 of its directions. The only allegation is that gation is that the original agreement dated 26/07/2010 was not produced the original agreement dated 26/07/2010 was not produced the original agreement dated 26/07/2010 was not produced before Ld. DRP. However, the same would not make much before Ld. DRP. However, the same would not make much before Ld. DRP. However, the same would not make much difference since we have already confirmed the application of difference since we have already confirmed the application of difference since we have already confirmed the application of floating rates of interest for AY 2011 floating rates of interest for AY 2011-12. Since in AY 2011 12. Since in AY 2011-12, we have upheld the working made by assessee, taking the ave upheld the working made by assessee, taking the ave upheld the working made by assessee, taking the same view, we upheld the workings made by the assessee same view, we upheld the workings made by the assessee same view, we upheld the workings made by the assessee during proceedings before learned TPO. Accordingly, we direct during proceedings before learned TPO. Accordingly, we direct during proceedings before learned TPO. Accordingly, we direct lower authorities to accept alternative TP adjustment of lower authorities to accept alternative TP adjustment of lower authorities to accept alternative TP adjustment of Rs.491.07 Lacs as worked out b Rs.491.07 Lacs as worked out by the assessee during y the assessee during proceedings before Ld. TPO based on LIBOR + spread of proceedings before Ld. TPO based on LIBOR + spread of proceedings before Ld. TPO based on LIBOR + spread of 243.88 243.88 bps/163.8 bps/163.8 bps bps for for AYs AYs 2011-12 2011 12 & & 2012-13 2012 respectively. The interest already charged by the assessee respectively. The interest already charged by the assessee respectively. The interest already charged by the assessee would be adjusted from the same and the net amount shall be would be adjusted from the same and the net amount shall be would be adjusted from the same and the net amount shall be the amount of the amount of TP adjustment for the impugned AY. Ground TP adjustment for the impugned AY. Ground No.1 stand partly allowed. No.1 stand partly allowed.” 8.4 Thus, Tribunal (supra) has mainly applied the floating rate of the floating rate of the interest in assessment year 2012 the interest in assessment year 2012-13 for the reason that there 13 for the reason that there was no change in the contractual terms was no change in the contractual terms in AY 2012- -13 as compared to assessment year 2011 to assessment year 2011-12. The Tribunal(supra) has has particularly noted the terms of the contract that borrower had agreed to pay the noted the terms of the contract that borrower had agreed to pay the noted the terms of the contract that borrower had agreed to pay the & 3713/MUM/2024 & 3713/MUM/2024 lender interest rates equal to 3 months LIBOR prevailing on the lender interest rates equal to 3 months LIBOR prevailing on the lender interest rates equal to 3 months LIBOR prevailing on the date of the interest payment of two 31/03/2012. date of the interest payment of two 31/03/2012.
8.5 Before us, the Ld. DR however submitted that facts and Before us, the Ld. DR however submitted that facts and Before us, the Ld. DR however submitted that facts and circumstances in the year under consideration has under gone circumstances in the year under consideration has under gone circumstances in the year under consideration has under gone substantial change as compared to the assessment year 2011-12 substantial change as compared to the assessment year 2011 substantial change as compared to the assessment year 2011 and 2012-13. We find that in the beginning, the assessee and its 13. We find that in the beginning, the assessee and its 13. We find that in the beginning, the assessee and its associated enterprises agreed for a quarterly and six monthly ated enterprises agreed for a quarterly and six monthly ated enterprises agreed for a quarterly and six monthly interest payments with limited tenure of loan. Thereafter, assessee with limited tenure of loan. Thereafter, assessee with limited tenure of loan. Thereafter, assessee has amended agreement at least 10 as amended agreement at least 10 times and extended the first times and extended the first installment of payment of the interest from installment of payment of the interest from six months six months to 31.03.2019. The ld DR submitted that t The ld DR submitted that the floating rate of the floating rate of the interest i.e. LIBOR is charged in case of loan of small charged in case of loan of small tenure like the case of assessee in earlier years, where case of assessee in earlier years, where parties agreed for tenure up parties agreed for tenure up to three years at the time of entering the loan agreement for at the time of entering the loan agreement for the first at the time of entering the loan agreement for time. However in the current assessment year under consideration, time. However in the current assessment year under consideration, time. However in the current assessment year under consideration, the loan amount has amount has consistently increased and the tenure of the the tenure of the loan has got substantially changed and first installment has been loan has got substantially changed and first installment has been loan has got substantially changed and first installment has been made payable only on 31.03.2019 i.e. almost nine year after the made payable only on 31.03.2019 i.e. almost nine made payable only on 31.03.2019 i.e. almost nine first tranche of the loan agreement dated 26.07.2010. Therefore, all first tranche of the loan agreement dated 26.07.2010. Therefore, all first tranche of the loan agreement dated 26.07.2010. Therefore, all practical purposes, the loan extended to the associated enterprises , the loan extended to the associated enterprises , the loan extended to the associated enterprises is in the nature of long term loan is in the nature of long term loan.
8.6 Therefore, the facts and circumstances of the year under Therefore, the facts and circumstances of the year under Therefore, the facts and circumstances of the year under consideration being altered as compared to the facts and ideration being altered as compared to the facts and ideration being altered as compared to the facts and circumstances in asses circumstances in assessment year 2011-12 and 2012 12 and 2012-13, the ratio & 3713/MUM/2024 & 3713/MUM/2024 of the decision of the Tribunal (supra) is not applicable over the the decision of the Tribunal (supra) is not applicable over the the decision of the Tribunal (supra) is not applicable over the facts of the instant case. Accordingly, we reject the first contention facts of the instant case. Accordingly, we reject the facts of the instant case. Accordingly, we reject the of the assessee.
8.7 The next objection of the assessee is considering the Mauritius The next objection of the assessee is considering the Mauritius The next objection of the assessee is considering the Mauritius entity as the country of the loan borrower, the Ld. TPO has held entity as the country of the loan borrower, the Ld. TPO has held entity as the country of the loan borrower, the Ld. TPO has held that loan was availed by the AE in Mauritus even though it was that loan was availed by the AE in Mauritus even though it was that loan was availed by the AE in Mauritus even though it was used in South Africa. We are of the opinion used in South Africa. We are of the opinion that the Ld. TPO has that the Ld. TPO has correctly considered the Mauritius entity and the country of the correctly considered the Mauritius entity and the country of the correctly considered the Mauritius entity and the country of the borrower as Mauritius as the loan has been availed as part of the borrower as Mauritius as the loan has been availed as part of the borrower as Mauritius as the loan has been availed as part of the agreement between the assessee and the Mauritius entity. agreement between the assessee and the Mauritius entity. agreement between the assessee and the Mauritius entity. Accordingly, we reject the contention of the a Accordingly, we reject the contention of the assessee in this rega ssessee in this rega 8.8 Next contention of the assessee contention of the assessee is against application of the against application of the fixed rate of the interest by the Ld. TPO fixed rate of the interest by the Ld. TPO, using ‘Bloomberg Bloomberg’ data base applying ‘Swap M Swap Manager tool’, converting the floating rate into the floating rate into fixed rate of the interest. In our opinion, the loans granted by the fixed rate of the interest. In our opinion, the loans granted by the fixed rate of the interest. In our opinion, the loans granted by the assessee to its associated enterprises might be temporary or short assessee to its associated enterprises might be temporary assessee to its associated enterprises might be temporary term period loan in the beginning loan in the beginning years, but in view of subsequent but in view of subsequent amendments from time to time from time to time and adding of the further loans, nd adding of the further loans, ,by way of conduct of the parties, t way of conduct of the parties, the loans have become become long term period loans in nature in nature. Further, nonpayment of the interest of the interest or delay in repayment of installments has made the in repayment of installments has made the loan loans being in the nature of high risk loans loans. In such circumstances, comparability of comparability of assessee’s loan transaction loan transactions under CUP method under CUP method invoking only LIBOR rate i.e. floating rate of the LIBOR rate i.e. floating rate of the interest, may not be not be correct as & 3713/MUM/2024 & 3713/MUM/2024 the LIBOR interest rate interest rate is applied in interbank loan transactions loan transactions of short term nature, where where party’s credit score is very high. credit score is very high. In the case, the assessee itself has mentioned credit score of the Mauritius case, the assessee itself has mentioned credit score of the Mauritius case, the assessee itself has mentioned credit score of the Mauritius AE as below Baa1/BBB AE as below Baa1/BBB+, which is a ‘lower medium investment which is a ‘lower medium investment grade’. The assessee itself has also accepted the change in facts and The assessee itself has also accepted the change in facts and The assessee itself has also accepted the change in facts and circumstances as compared to the assessment year 2011 stances as compared to the assessment year 2011-12 and stances as compared to the assessment year 2011 itself has included 300 basis points to the LIBOR itself has included 300 basis points to the LIBOR along with along with certain additional spread over points to compensate high risk nature of the spread over points to compensate high risk nature of the spread over points to compensate high risk nature of the loan.
8.9 But, no instance of any loan transaction no instance of any loan transaction of long term nature of long term nature between two independent parties where floating rate of interest has between two independent parties where floating rate of interest has between two independent parties where floating rate of interest has been applied was brought to our notice was brought to our notice by the assessee by the assessee. Thus, the question is whether the assessee has relied is whether the assessee has relied on any of the CUP on any of the CUP transaction from database of long term n database of long term nature ature of loan where floating rate with appropriate appropriate spread has been applied by parties in spread has been applied by parties in an independent transaction transaction. The answer is in negative. The answer is in negative. The ld TPO has also not compared transactions of assessee with any has also not compared transactions of assessee with any has also not compared transactions of assessee with any transaction of long term loan between transaction of long term loan between two independent ndependent parties relying on CUP method. The relying on CUP method. The ld AO/TPO is bound to follow AO/TPO is bound to follow the methods prescribed under the law for determination of arms length prescribed under the law for determination of arms length prescribed under the law for determination of arms length price and can’t adopt arbitrary method of converting floating rate of price and can’t adopt arbitrary method of converting floating rate of price and can’t adopt arbitrary method of converting floating rate of interest into fixed rate of interest. interest into fixed rate of interest.
8.10 In view of above n view of above, we feel it appropriate to restore the matter feel it appropriate to restore the matter back to the file of the ld AO/TPO for benchmarking of the loan back to the file of the ld AO/TPO for benchmarking of the loan back to the file of the ld AO/TPO for benchmarking of the loan & 3713/MUM/2024 & 3713/MUM/2024 transaction of the assessee using appropriate method provided transaction of the assessee using appropriate method provided transaction of the assessee using appropriate method provided under the law treating the transaction ng the transaction of the assessee of the assessee as long term loan transaction with appropriate risk involved. loan transaction with appropriate risk involved. Accordingly Accordingly, we the ground No. 1 of the appeal is of the appeal is allowed for statistical puposes allowed for statistical puposes.
The ground No. 2 The ground No. 2 and additional ground of the appeal of the of the appeal of the assessee relates to disallowance of Rs.41,81,59 assessee relates to disallowance of Rs.41,81,59,866/ ,866/- u/s 14A of the Act. The brief facts qua the issue in dispute are that the the Act. The brief facts qua the issue in dispute are that the the Act. The brief facts qua the issue in dispute are that the Assessing Officer noted investment of Rs.5416.80 crores as on Assessing Officer noted investment of Rs.5416.80 crores as on Assessing Officer noted investment of Rs.5416.80 crores as on 31.03.2020 in exempt income yielding assets and dividend income 31.03.2020 in exempt income yielding assets and dividend income 31.03.2020 in exempt income yielding assets and dividend income of Rs.28,71,57,235/- - earned during the year under earned during the year under consideration, which was claimed as exempt. But against the said exempt income which was claimed as exempt. But against the said exempt income which was claimed as exempt. But against the said exempt income earned the assessee made disallowance of Rs.4,43,134/- on earned the assessee made disallowance of Rs.4,43,134/ earned the assessee made disallowance of Rs.4,43,134/ account of expenses incurred for carrying account of expenses incurred for carrying out the activity of the the activity of the investment. The Assessing Officer however investment. The Assessing Officer however was not sa was not satisfied with the suo-motu disallowance by the assessee and therefore, he disallowance by the assessee and therefore, he disallowance by the assessee and therefore, he rejected the suo-mot motu disallowance by the assessee and invoking ance by the assessee and invoking Rule 8D of Income-tax Rules, 1962( in short the ‘Rules’), tax Rules, 1962( in short the ‘Rules’), tax Rules, 1962( in short the ‘Rules’),computed disallowance of Rs.41,86,03,0 disallowance of Rs.41,86,03,000/- and after reducing the and after reducing the suo-motu disallowance disallowance of of Rs.4,43,134/-, Rs.4,43,134/ he he made made addition addition of of Rs.4,181,59,866/-. Before the Ld. DRP, t Before the Ld. DRP, the assessee submitted that he assessee submitted that disallowance should be restricted to the extent of exempted income. disallowance should be restricted to the extent of exempted income. disallowance should be restricted to the extent of exempted income. However, the Ld. DRP rejected the However, the Ld. DRP rejected the contention in view of amendment contention in view of amendment introduced to section 14A to section 14A from financial year 2001. The said year 2001. The said amendment was treated by the Ld. DRP as clarific was treated by the Ld. DRP as clarificato atory amendment & 3713/MUM/2024 & 3713/MUM/2024 necessitated due to wrong use and mis wrong use and misinterpretation interpretations. Accordingly, the Ld. DRP upheld the action o the Ld. DRP upheld the action of the Ld. AO.
9.1 Before us, the Ld. counsel for the assessee assailed the finding Before us, the Ld. counsel for the assessee assailed the finding Before us, the Ld. counsel for the assessee assailed the finding on the issue in dispute primarily on the ground that no on the issue in dispute primarily on the ground that no on the issue in dispute primarily on the ground that no dissatisfaction was recorded by the Assessing Officer qua the suo- dissatisfaction was recorded by the Assessing Officer qua dissatisfaction was recorded by the Assessing Officer qua motu disallowance computed based disallowance computed based by the assessee. the assessee. But the Ld. DR referred to the para 4.10 and 4.11 of the referred to the para 4.10 and 4.11 of the impugned assessment impugned assessment order and submitted that Assessing Officer has and submitted that Assessing Officer has referred to and submitted that Assessing Officer has financials of the company and financials of the company and duly expressed his dissatisfaction on issatisfaction on the suo-motu computation of disallowance by the asse computation of disallowance by the asse computation of disallowance by the assessee. For ready reference, relevant para of the relevant para of the assessment order assessment order is reproduced as under: reproduced as under:
“4.10 Further, it is also pertinent to mention that a company cannot 4.10 Further, it is also pertinent to mention that a company cannot 4.10 Further, it is also pertinent to mention that a company cannot make such huge investment without existence of a prudent make such huge investment without existence of a prudent make such huge investment without existence of a prudent management. Investment decisions are very complex in nature. management. Investment decisions complex in nature. They require substantial market research, day They require substantial market research, day-to-day analysis of day analysis of market trends and decisions with regard to acquisition, retention market trends and decisions with regard to acquisition, retention market trends and decisions with regard to acquisition, retention and sale of shares at the most appropriate time. It is therefore, not and sale of shares at the most appropriate time. It is therefore, not and sale of shares at the most appropriate time. It is therefore, not correct to say that investments are correct to say that investments are made without incurring no or made without incurring no or nominal expenditure. It is difficult to accept that a company can nominal expenditure. It is difficult to accept that a company can nominal expenditure. It is difficult to accept that a company can make investment without incurring any expenses whatsoever make investment without incurring any expenses whatsoever make investment without incurring any expenses whatsoever including management or including management or administrative expenses as investment administrative expenses as investment decisions are generally taken in the mee decisions are generally taken in the meetings of the Board of tings of the Board of Directors for which administrative expenses are incurred. The term Directors for which administrative expenses are incurred. The term Directors for which administrative expenses are incurred. The term "expenditure" occurring in section 14A would take in its sweep not "expenditure" occurring in section 14A would take in its sweep not "expenditure" occurring in section 14A would take in its sweep not only direct expenditure but also all forms of expenditure regardless only direct expenditure but also all forms of expenditure regardless only direct expenditure but also all forms of expenditure regardless of whether they are fixed, vari of whether they are fixed, variable, direct, indirect, administrative, administrative, managerial or financial. Assessee failed to consider all such managerial or financial. Assessee failed to consider all such managerial or financial. Assessee failed to consider all such expenses while calculating the disallowances made under section expenses while calculating the disallowances made under section expenses while calculating the disallowances made under section 14A of the Act. 14A of the Act. 4.11 On perusal of the Financial of the assessee company, it is 4.11 On perusal of the Financial of the assessee company, it is 4.11 On perusal of the Financial of the assessee company, it is noted that Assessee has borrowed funds of Rs. 1333.08 crore and Assessee has borrowed funds of Rs. 1333.08 crore and Assessee has borrowed funds of Rs. 1333.08 crore and also has incurred interest expenses & other borrowing cost on the also has incurred interest expenses & other borrowing cost on the also has incurred interest expenses & other borrowing cost on the & 3713/MUM/2024 & 3713/MUM/2024 same amounting to Rs. 321.95 crore Ae the assessee has not same amounting to Rs. 321.95 crore Ae the assessee has not same amounting to Rs. 321.95 crore Ae the assessee has not provided any nexus of source between borrowed funds and direct or provided any nexus of source between borrowed funds and direct or provided any nexus of source between borrowed funds and direct or indirect expenses, therefore, it can be considered that assessee has penses, therefore, it can be considered that assessee has penses, therefore, it can be considered that assessee has invested the funds out from common pool only. Hence, the weighted invested the funds out from common pool only. Hence, the weighted invested the funds out from common pool only. Hence, the weighted average cost of funds i.e. interest expense is also related to the average cost of funds i.e. interest expense is also related to the average cost of funds i.e. interest expense is also related to the exempt income yielding investments. But assessee failed to consid exempt income yielding investments. But assessee failed to consid exempt income yielding investments. But assessee failed to consider the interest expenses while calculating the disallowances made the interest expenses while calculating the disallowances made the interest expenses while calculating the disallowances made under section 14A of the Act. under section 14A of the Act. 4.12 In view of the aforesaid discussion and having regard to the 4.12 In view of the aforesaid discussion and having regard to the 4.12 In view of the aforesaid discussion and having regard to the accounts of the assesses of the previous year relevant to A.Y. 2020 accounts of the assesses of the previous year relevant to A.Y. 2020 accounts of the assesses of the previous year relevant to A.Y. 2020- 21, the undersigned is not 21, the undersigned is not satisfied with the action of the assessee satisfied with the action of the assessee for not offering disallowance accordance to section 14A of the Act for not offering disallowance accordance to section 14A of the Act for not offering disallowance accordance to section 14A of the Act r.w. Rule 8D of the Rules. For better clarity, Rule 8D is reproduced r.w. Rule 8D of the Rules. For better clarity, Rule 8D is reproduced r.w. Rule 8D of the Rules. For better clarity, Rule 8D is reproduced as under: 8D. (1) Where the Assessing Officer, having regard to the accounts 8D. (1) Where the Assessing Officer, having regard to the accounts 8D. (1) Where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with of the assessee of a previous year, is not satisfied with of the assessee of a previous year, is not satisfied with— (a) the correctness of the claim of expenditure made by the (a) the correctness of the claim of expenditure made by the (a) the correctness of the claim of expenditure made by the assessee; or (b) the claim made by the assessee that no expenditure has been (b) the claim made by the assessee that no expenditure has been (b) the claim made by the assessee that no expenditure has been incurred, in relation to income which does not form part of in relation to income which does not form part of the total income the total income under the Act for such previous year, he shall determine the amount under the Act for such previous year, he shall determine the amount under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the of expenditure in relation to such income in accordance with the of expenditure in relation to such income in accordance with the provisions of sub provisions of sub-rule (2). I (2) The expenditure in relation to income which does not form part I (2) The expenditure in relation to income which does not form part I (2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, tal income shall be the aggregate of following amounts, tal income shall be the aggregate of following amounts, namely:— (i) the amount of expenditure directly relating to income which does the amount of expenditure directly relating to income which does the amount of expenditure directly relating to income which does not form part of total not form part of total income; and (ii) an amount equal to one per cent of the annual average of the an amount equal to one per cent of the annual average of the an amount equal to one per cent of the annual average of the monthly (iaverage of monthly (iaverage of the opening and closing balances of the value the opening and closing balances of the value of investment. income from which does not or shall not form part of of investment. income from which does not or shall not form part of of investment. income from which does not or shall not form part of total income : Provided that the amount referred to in clause (i) and clause (ii) shall Provided that the amount referred to in clause (i) and clause (ii) shall Provided that the amount referred to in clause (i) and clause (ii) shall not exceed the total expenditure claimed by the assess not exceed the total expenditure claimed by the assess not exceed the total expenditure claimed by the assessee.] In view of the above, the amount of expenditure disallowable u/s. In view of the above, the amount of expenditure disallowable u/s. In view of the above, the amount of expenditure disallowable u/s. 14A of the Act in relation to such income is hereby determined in 14A of the Act in relation to such income is hereby determined in 14A of the Act in relation to such income is hereby determined in accordance with the provisions of Rule 8D of the Income Tax Rules, accordance with the provisions of Rule 8D of the Income Tax Rules, accordance with the provisions of Rule 8D of the Income Tax Rules, & 3713/MUM/2024 ITA Nos. 3714 & 3713/MUM/2024
1962. Further, in absence of the average of monthly 1962. Further, in absence of the average of monthly 1962. Further, in absence of the average of monthly investments provided by the assessee, when specifically asked in the show provided by the assessee, when specifically asked in the show provided by the assessee, when specifically asked in the show cause notice, the details of exempt yielding investment has been cause notice, the details of exempt yielding investment has been cause notice, the details of exempt yielding investment has been prepared on the basis of submission of the assessee and financial prepared on the basis of submission of the assessee and financial prepared on the basis of submission of the assessee and financial statements, which statements, which are as under: Figure in crore Figure in crore Sr. Nature of Investment Nature of Investment Name of the Company As on 31st As on 31st As on 31st No. March 2020 March 2020 March 2019 1 Unquoted Investment Unquoted Investment JSW Energy (Barmer) Ltd 1726.05 1726.05 (Formerly known as Raj Westpower Ltd) 2 Unquoted Investment Unquoted Investment Jaigad Power Transco Ltd 101.75 101.75
3 Unquoted Investment Unquoted Investment JSW Energy (Raigarh) Ltd 115.16 115.16 4 Unquoted Investment Unquoted Investment JSW Power Trading Co. Ltd 70.05 70.05 (formerly known as JSW Green Energy Ltd) 5 Unquoted Investment Unquoted Investment JSW Energy (Kutehr) Ltd 0 6 Unquoted Investment Investment JSW Hydro Energy Ltd 2046.01 2046.01 (Formerly known as Himachal Baspa Power Company Ltd) 7 Unquoted Investment Unquoted Investment JSW Solar Ltd 0.12 0.01 8 Unquoted Investment Unquoted Investment JSW Electric Vehicles Pvt Ltd 0.26 0.01
10 Unquoted Investment Unquoted Investment Toshiba JSW Power systems 100.23 100.23 Pvt Ltd 11 Unquoted Investment Unquoted Investment Power Exchange India Ltd 1.25 1.25 12 Unquoted Investment Unquoted Investment MJSJ Coal Ltd 6.52 6.52 13 Unquoted Investment Unquoted Investment JSW Power Trading Co. Lt 2.87 2.24
14 Unquoted Investment Unquoted Investment JSW Realty & Infrastructure 2.54 2.29 Pvt Ltd Total 4172.81 4199.26
The amount of expenditure The amount of expenditure disallowance u/s 14A of the disallowance u/s 14A of the Act in relation to such income is hereby determined in ch income is hereby determined in accordance with the accordance with the provisions of Rule 8D of the Income Tax Rules, 1962. provisions of Rule 8D of the Income Tax Rules, 1962.
& 3713/MUM/2024 & 3713/MUM/2024
Particulars Amount (Rs.) Amount (Rs.)
Any amount of expenditure which is directly relating to exempt Any amount of expenditure which is directly relating to exempt NIL NIL income Amount equal to 1% of annual average of opening and closing Amount equal to 1% of annual average of opening and closing 41,86,03,000 41,86,03,000 balances of value of investment whose income is or shall be exempt value of investment whose income is or shall be exempt as discussed above Month Opening yearly Closing yearly Average value value 4172.81 cr. 4199.26 cr. 4186.03 cr. Total monthly average Total monthly average Not available 14A disallowance 14A disallowance 41,86,03,000 Total amount disallowed under section 14A r.w. Rule 8D Total amount disallowed under section 14A r.w. Rule 8D 41,86,03,000 41,86,03,000 9.2 Accordingly, this contention of the Ld. counsel for the assessee Accordingly, this contention of the Ld. counsel for the assessee Accordingly, this contention of the Ld. counsel for the assessee for relying on the decision of the Hon’ble Bombay High Court in its relying on the decision of the Hon’ble Bombay High Court in its relying on the decision of the Hon’ble Bombay High Court in its own case (ITA No. 669 of 2018) cannot be own case (ITA No. 669 of 2018) cannot be considered being facts of considered being facts of the instant year distinguishable. distinguishable.
9.3 The next argument advanced by the Ld. counsel for the The next argument advanced by the Ld. counsel for the The next argument advanced by the Ld. counsel for the assessee is that only those investm assessee is that only those investment which has yielded exempt ent which has yielded exempt income need to be considered for the purpose of income need to be considered for the purpose of disallowance under disallowance under rule 8D(2) of the Rules. (2) of the Rules. In support of Ld. counsel relied on the In support of Ld. counsel relied on the decision of the Special Bench in the case of Vireet Investment Pvt. Vireet Investment Pvt. decision of the Special Bench in the case of Ltd. (82 taxmann.com 415) Ltd. (82 taxmann.com 415). In said case the core issue was he core issue was whether investments that did not yield exempt income should be whether investments that did not yield exempt income should be whether investments that did not yield exempt income should be considered while computing disallowance under considered while computing disallowance under Rule 8D of Section Rule 8D of Section 14A of the Income Tax Act. of the Income Tax Act. The Special Bench referred to the The Special Bench referred to the decision of Hon’ble Delhi High Delhi High Court in CIT vs. Holcim India (P) Ltd CIT vs. Holcim India (P) Ltd (ITA No. 486/2014 and 299/2014), (ITA No. 486/2014 and 299/2014), wherein it is ruled that ruled that if no & 3713/MUM/2024 & 3713/MUM/2024 exempt income (such as dividend) is earned in a financial year, exempt income (such as dividend) is earned in a financial year, exempt income (such as dividend) is earned in a financial year, Section 14A cannot be invoked Section 14A cannot be invoked. The Special Bench of Special Bench of Tribunal acknowledged conflicting view acknowledged conflicting views, particularly the s, particularly the Special Bench decision dated 5th August, 2009 August, 2009 in Cheminvest Ltd. Cheminvest Ltd., which had relied on CIT v. Rajendra Prasad Moody CIT v. Rajendra Prasad Moody [1978] 115 ITR 519 (SC) [1978] 115 ITR 519 (SC) to hold that even if no income was earned, hold that even if no income was earned, expenses could still be expenses could still be disallowed. However, the Tribunal followed the However, the Tribunal followed the Hon’ble Hon’ble Delhi High Court's ruling in Holcim India (P) Ltd Holcim India (P) Ltd (supra), as per the as per the principle of judicial hierarchy, making it binding within its jurisdiction. , making it binding within its jurisdiction. The , making it binding within its jurisdiction. Hon’ble Supreme Court's dec Supreme Court's decision in Rajendra Prasad Moody ision in Rajendra Prasad Moody was distinguished, as it related to distinguished, as it related to Section 57(iii) (deductions under (deductions under "Income from Other Sources") and not "Income from Other Sources") and not Section 14A Section 14A, which has different language and intent. different language and intent. The Special Bench noted that l Bench noted that Several High Court rulings (Punjab High Court rulings (Punjab & Haryana, Gujarat, and Allahabad) & Haryana, Gujarat, and Allahabad) supported the position that supported the position that disallowance under Section 14A cannot disallowance under Section 14A cannot be made if no exempt income is earned be made if no exempt income is earned and accordingly t nd accordingly the Assessing Officer’s stance that investments could have yielded Assessing Officer’s stance that investments could have yielded Assessing Officer’s stance that investments could have yielded exempt income was rejected exempt income was rejected because dividend income is not dividend income is not guaranteed and depends on company decisions. guaranteed and depends on company decisions. The The Special Bench Tribunal reaffirmed that Tribunal reaffirmed that business expenditure incurred for business expenditure incurred for investment purposes cannot be disallowed under Section 14A investment purposes cannot be disallowed under Section 14A investment purposes cannot be disallowed under Section 14A unless actual exempt income is generated unless actual exempt income is generated. The Special Bench of Special Bench of Tribunal accordingly, accordingly, ruled in favor of the assessee, stating that ruled in favor of the assessee, stating that investments that did not yield exempt income should not be investments that did not yield exempt income should not be investments that did not yield exempt income should not be & 3713/MUM/2024 ITA Nos. 3714 & 3713/MUM/2024 considered for disallowance under Rule 8D considered for disallowance under Rule 8D of Income of Income-tax Rules, 1962.
We have heard rival submission of the pa We have heard rival submission of the parties in relation to rties in relation to this argument, the Ld. DR submitted that this argument is contrary this argument, the Ld. DR submitted that this argument is contrary this argument, the Ld. DR submitted that this argument is contrary to the letter and spread of law letter and spread of law clarified by way of Circular No. 1 of by way of Circular No. 1 of 2014 of the CBDT and more recently by way of amendment brought 2014 of the CBDT and more recently by way of amendment brought 2014 of the CBDT and more recently by way of amendment brought in Finance Act, 2022 which was inse in Finance Act, 2022 which was inserted in the Explanation to rted in the Explanation to section 14A. The Ld. DR submitted that said explanation was section 14A. The Ld. DR submitted that said explanation was section 14A. The Ld. DR submitted that said explanation was inserted to clarify that the provisions of section 14A have always inserted to clarify that the provisions of section 14A have always inserted to clarify that the provisions of section 14A have always applied to the entire investment portfolio not merely to those applied to the entire investment portfolio not merely to those applied to the entire investment portfolio not merely to those investments that have yielded exempt in investments that have yielded exempt income during the year. The come during the year. The Ld. DR referred to the decision of the Ld. DR referred to the decision of the Guwahati Bench in the case Guwahati Bench in the case of ACIT v. Williamson Financial Services Ltd. reported in 140 of ACIT v. Williamson Financial Services Ltd. reported in 140 of ACIT v. Williamson Financial Services Ltd. reported in 140 taxmann.com 164 and held the amendme and held the amendment by way of Finance Act, nt by way of Finance Act, 2022 is having retrospective effect. But retrospective effect. But we find that Hon’ble Delhi we find that Hon’ble Delhi High Court in the case of High Court in the case of Era Infrastructure Pvt. Ltd. Era Infrastructure Pvt. Ltd. 448 ITR 674 has held that the explanation inserted by way of Finance Act, 2022 the explanation inserted by way of Finance Act, 2022 the explanation inserted by way of Finance Act, 2022 is prospective in nature and therefore, ratio in the decision of the prospective in nature and therefore, ratio in the decision of the prospective in nature and therefore, ratio in the decision of the ACIT v. Williamson Financial Services ACIT v. Williamson Financial Services (supra) being inconsistent (supra) being inconsistent with the higher judicial forum cannot be applied over the facts of with the higher judicial forum cannot be applied over the facts of with the higher judicial forum cannot be applied over the facts of the instant case. Accordingly, respectfully following the . Accordingly, respectfully following the . Accordingly, respectfully following the decision of the Hon’ble Special Bench in the case of Vireet Investment Pvt. Ltd. the Hon’ble Special Bench in the case of Vireet Investment Pvt. Ltd. the Hon’ble Special Bench in the case of Vireet Investment Pvt. Ltd. (supra), we direct the Assessing Officer to restrict the disallowance we direct the Assessing Officer to restrict the disallowance we direct the Assessing Officer to restrict the disallowance u/s 14A of the Act in respect of investment u/s 14A of the Act in respect of investments only which which had yielded & 3713/MUM/2024 & 3713/MUM/2024 exempted income. The ground No. 2 exempted income. The ground No. 2 and additional ground additional ground of the appeal of the assessee is accordingly allowed partly for statistical appeal of the assessee is accordingly allowed partly for statistical appeal of the assessee is accordingly allowed partly for statistical purposes.
The ground No. 3 of the appeal of the assessee relate to The ground No. 3 of the appeal of the assessee relate to The ground No. 3 of the appeal of the assessee relate to disallowance of expenses u/s 14A of the Act amounting to disallowance of expenses u/s 14A of the Act amounting to disallowance of expenses u/s 14A of the Act amounting to Rs.41,81,59,866/- while computin while computing the book profit u/s 115JB of g the book profit u/s 115JB of the Act.
We have heard rival submissions of the parties and perused We have heard rival submissions of the parties and perused We have heard rival submissions of the parties and perused the relevant materials on record the relevant materials on record. We find that an identical issue has dentical issue has been allowed in favour of the assessee by the Tribunal in been allowed in favour of the assessee by the been allowed in favour of the assessee by the assessment year 2008 assessment year 2008-09 in dated in dated 02.06.2017. Relevant finding of the Tribunal is reproduced as Relevant finding of the Tribunal is reproduced as Relevant finding of the Tribunal is reproduced as under:
“7. Next Ground is about computation of book profit u/s. 115JB 7. Next Ground is about computation of book profit u/s. 115JB 7. Next Ground is about computation of book profit u/s. 115JB of the Act. It was brought to our notice that the Tribunal in of the Act. It was brought to our notice that the Tribunal in of the Act. It was brought to our notice that the Tribunal in assessee's own case in 2006 assessee's own case in 2006-07 had decided the issue in favour had decided the issue in favour of the assessee, that the appeal filed by the department before of the assessee, that the appeal filed by the department before of the assessee, that the appeal filed by the department before the Hon'ble Bombay High Court (ITA No.1468 of 2013 dt. the Hon'ble Bombay High Court (ITA No.1468 of 2013 dt. the Hon'ble Bombay High Court (ITA No.1468 of 2013 dt. 30/4/2015) was dismissed. In these circumstances, we are of 30/4/2015) was dismissed. In these circumstances, we are of 30/4/2015) was dismissed. In these circumstances, we are of the opinion that the order of the FAA has to the opinion that the order of the FAA has to be confirmed. be confirmed. Respectfully following the order of the Tribunal for AY 2006 Respectfully following the order of the Tribunal for AY 2006 Respectfully following the order of the Tribunal for AY 2006-07, we decide the fifth Ground we decide the fifth Ground against the AO.” 12.1 A similar view has been has been taken in the assessment year 2010 taken in the assessment year 2010-11 in ITA No. 1336/Mum/2015. in ITA No. 1336/Mum/2015. Relevant finding of the Tribunal is Relevant finding of the Tribunal is reproduced as under: duced as under:
“7. In so far as the second Ground is concerned, the same relates 7. In so far as the second Ground is concerned, the same relates 7. In so far as the second Ground is concerned, the same relates to computation of ‘book profit’ in terms of section 115JB of the to computation of ‘book profit’ in terms of section 115JB of the to computation of ‘book profit’ in terms of section 115JB of the Act. The Assessing Officer, while computing book profit under Act. The Assessing Officer, while computing book profit under Act. The Assessing Officer, while computing book profit under & 3713/MUM/2024 & 3713/MUM/2024 section 115JB, added the amount of disallowance section 115JB, added the amount of disallowance section 115JB, added the amount of disallowance computed under section 14A of the Act. The assessee contended before the under section 14A of the Act. The assessee contended before the under section 14A of the Act. The assessee contended before the Assessing Officer that there was no justification for taking into Assessing Officer that there was no justification for taking into Assessing Officer that there was no justification for taking into consideration the disallowance under section 14A of the Act, consideration the disallowance under section 14A of the Act, consideration the disallowance under section 14A of the Act, while computing book profit under section 115JB of the while computing book profit under section 115JB of the while computing book profit under section 115JB of the Act. The CIT(A) has disagreed with the stand of the Assessing Officer on CIT(A) has disagreed with the stand of the Assessing Officer on CIT(A) has disagreed with the stand of the Assessing Officer on two counts Firstly, according to the CIT(A), in assessment year two counts Firstly, according to the CIT(A), in assessment year two counts Firstly, according to the CIT(A), in assessment year 2006-07, the Tribunal in assessee’s own case vide ITA 07, the Tribunal in assessee’s own case vide ITA 07, the Tribunal in assessee’s own case vide dated 22/2/2013 has considered a similar No.244/Banga/2010 dated 22/2/2013 has considered a similar No.244/Banga/2010 dated 22/2/2013 has considered a similar issue and upheld the stand of the assessee following an earlier and upheld the stand of the assessee following an earlier and upheld the stand of the assessee following an earlier decision of the decision of the Tribunal in the case of Essar Teleholdings Ltd. vs. Tribunal in the case of Essar Teleholdings Ltd. vs. DCIT, ITA No.3850/Mum/2010 dated 27/07/2011. Secondly, No.3850/Mum/2010 dated 27/07/2011. Secondly, No.3850/Mum/2010 dated 27/07/2011. Secondly, the CIT(A) noticed the CIT(A) noticed that in this year, assessee has not earned any that in this year, assessee has not earned any exempt income and, ncome and, therefore, no such income was credited to therefore, no such income was credited to the the P&L P&L Account. Account. As As a a consequence, consequence, no no corresponding corresponding expenditure can be identified and, expenditure can be identified and, thus, the provisions were thus, the provisions were unworkable. In this manner, the addition unworkable. In this manner, the addition made by the Assessing made by the Assessing Officer has been deleted. Officer has been deleted.
8. Before us, it was a common point between the parties that the 8. Before us, it was a common point between the parties that the 8. Before us, it was a common point between the parties that the decision of the Tribunal in assessee’s own case for assessment decision of the Tribunal in assessee’s own case for assessment decision of the Tribunal in assessee’s own case for assessment year 2006-07 dated 22/2/2013(supra) which has relied upon by 07 dated 22/2/2013(supra) which has relied upon by 07 dated 22/2/2013(supra) which has relied upon by the CIT(A), continues to hold the field as it has not been altered continues to hold the field as it has not been altered continues to hold the field as it has not been altered by any higher by any higher authority. As a consequence, we find no error on authority. As a consequence, we find no error on the part of the CIT(A) the part of the CIT(A) in relying upon the precedent and deleting in relying upon the precedent and deleting the impugned addition. the impugned addition. Moreover, even the factual aspect brought Moreover, even the factual aspect brought out by the CIT(A) is out by the CIT(A) is unexceptional and deserves to be upheld. unexceptional and deserves to be upheld. We hold so. Thus, on hold so. Thus, on Ground of Appeal No.2 also, the decision of the Ground of Appeal No.2 also, the decision of the CIT(A) is affirmed CIT(A) is affirmed.” 12.2 Respectfully following the same, the ground of appeal of the Respectfully following the same, the ground of appeal of the Respectfully following the same, the ground of appeal of the assessee is allowed and the Assessing Officer is directed to delete assessee is allowed and the Assessing Officer is directed to delete assessee is allowed and the Assessing Officer is directed to delete the disallowance while computing the disallowance while computing the book profit u/s 115JB of the the book profit u/s 115JB of the Act. The ground No. 3 of the appeal is accordingly allowed. The ground No. 3 of the appeal is accordingly allowed. The ground No. 3 of the appeal is accordingly allowed.
13. The ground No. 4 of the appeal relate to disallowance of The ground No. 4 of the appeal relate to disallowance of The ground No. 4 of the appeal relate to disallowance of Rs.53,10,000/- u/s 37 of the Act holding that expenditure incurred u/s 37 of the Act holding that expenditure incurred u/s 37 of the Act holding that expenditure incurred for abandoned project was in the nature of the capital expenditure. project was in the nature of the capital expenditure. project was in the nature of the capital expenditure. The brief facts qua the issue in dispute are that the Assessing The brief facts qua the issue in dispute are that the Assessing The brief facts qua the issue in dispute are that the Assessing Officer observed expenditure of Rs.51,10,000/ Officer observed expenditure of Rs.51,10,000/- on the project which on the project which & 3713/MUM/2024 & 3713/MUM/2024 was not materialized d. In response to the query of the Assessing . In response to the query of the Assessing Officer as why the said expenditure may not be treated as capital er as why the said expenditure may not be treated as capital er as why the said expenditure may not be treated as capital expenditure, the assessee responded that said expense was the assessee responded that said expense was the assessee responded that said expense was incurred for obtaining feas incurred for obtaining feasibility report for use of low ibility report for use of low calorific value(CV) coal in its existing high coal in its existing high CV coal based power generation coal based power generation plant to reduce dependency on high nt to reduce dependency on high CV coal which could not be coal which could not be implemented due to some technical reasons. The Ld. Assessing implemented due to some technical reasons. The Ld. Assessing implemented due to some technical reasons. The Ld. Assessing Officer rejected the contention of the assessee for two reasons. Officer rejected the contention of the assessee for two reasons. Officer rejected the contention of the assessee for two reasons. Firstly, the assessee itself has treated the same as capi , the assessee itself has treated the same as capital work-in- , the assessee itself has treated the same as capi progress in its books of accounts in its books of accounts and therefore, it was it was capital in nature though due to some technical reasons nature though due to some technical reasons said feasibility report feasibility report was was was not not not implemented. implemented. implemented. The The The Assessing Assessing Assessing Officer Officer Officer accordingly accordingly accordingly distinguished the decision of the Hon’ble Madras High Court in the distinguished the decision of the Hon’ble Madras High Court in the distinguished the decision of the Hon’ble Madras High Court in the case of Tamilnadu Magesite Ltd. v. ACIT (supra) relied upon by the case of Tamilnadu Magesite Ltd. v. ACIT (supra) relied upon by the case of Tamilnadu Magesite Ltd. v. ACIT (supra) relied upon by the assessee. Secondly, according to the Assessing Officer writing off of , according to the Assessing Officer writing off of , according to the Assessing Officer writing off of the expenditure being in the nature of capital expenditure was not the expenditure being in the nature of capital expenditure was not the expenditure being in the nature of capital expenditure was not allowable u/s 37 of the Act. The Ld. DRP rejected t allowable u/s 37 of the Act. The Ld. DRP rejected the contention of he contention of the assessee firstly firstly on the ground that expenses incurred on on the ground that expenses incurred on feasibility reports could be considered u/s 35D introduced w.e.f. feasibility reports could be considered u/s 35D introduced w.e.f. feasibility reports could be considered u/s 35D introduced w.e.f. 01.04.2013 wherein 1/ wherein 1/10th expenditure could be amortized subject expenditure could be amortized subject to the fulfillment of the conditions to the fulfillment of the conditions prescribed but the assessee did the assessee did not meet those conditions and attempted to get benefit u/s 37 of not meet those conditions and attempted to get benefit u/s 37 of not meet those conditions and attempted to get benefit u/s 37 of the Act, which is not allowable is not allowable as the expenses was incurred wholly as the expenses was incurred wholly and exclusively for the purpose of business. Secondly Secondly, the Ld. DRP and exclusively for the purpose of business also rejected the alternative cla alternative claim of the said expenses as short im of the said expenses as short & 3713/MUM/2024 ITA Nos. 3714 & 3713/MUM/2024 term capital loss on the ground that term capital loss on the ground that in view of project for which in view of project for which feasibility report was prepared, was abandoned, feasibility report was prepared, was abandoned, no capital asset no capital asset came into existence and therefore, came into existence and therefore, there could not be transfer of there could not be transfer of any capital asset, hence the treatment hence the treatment of item appearing of item appearing in the capital cannot be treated as short term capital loss. capital cannot be treated as short term capital loss. The Ld. counsel observed that capital expenditure as per accounting treatment and observed that capital expenditure as per accounting treatment and observed that capital expenditure as per accounting treatment and capital loss as per the Act capital loss as per the Act are altogether different. According to the According to the Ld. DRP while any expenditure which creates assets of the enduring . DRP while any expenditure which creates assets of the enduring . DRP while any expenditure which creates assets of the enduring value comes under capital expenditure whereas capital loss is value comes under capital expenditure whereas capital loss is value comes under capital expenditure whereas capital loss is triggered when there is a loss consequent to the transfer of asset. triggered when there is a loss consequent to the transfer of asset. triggered when there is a loss consequent to the transfer of asset. Before us, the ld. counsel for the assessee relied on the decision of Before us, the ld. counsel for the assessee relied on the dec Before us, the ld. counsel for the assessee relied on the dec the Hon’ble Madras High Court in the case Tamilnadu Magesite Ltd. the Hon’ble Madras High Court in the case Tamilnadu Magesite Ltd. the Hon’ble Madras High Court in the case Tamilnadu Magesite Ltd. (supra) and decision of the Hon’ble (supra) and decision of the Hon’ble High Court of Gauhati in the case of Deputy Commissioner of Income Deputy Commissioner of Income-tax v. Assam Asbestos Ltd. Assam Asbestos Ltd. (2003) 263 ITR 357 wherein it is held that such expenses are (2003) 263 ITR 357 wherein it is held that such ex (2003) 263 ITR 357 wherein it is held that such ex revenue in nature. On the contrary, the Ld. DR relied on the finding revenue in nature. On the contrary, the Ld. DR relied on the finding revenue in nature. On the contrary, the Ld. DR relied on the finding of the Ld. DRP and submitted that expenses incurred on feasibility of the Ld. DRP and submitted that expenses incurred on feasibility of the Ld. DRP and submitted that expenses incurred on feasibility reports are governed by the specific provision u/s 35D of the Act reports are governed by the specific provision u/s 35D of the Act reports are governed by the specific provision u/s 35D of the Act and therefore, not eligible u/s 37 of the A and therefore, not eligible u/s 37 of the Act which explicitly ct which explicitly express that expenses must be wholly and exclusively for the purpose of that expenses must be wholly and exclusively for the purpose of that expenses must be wholly and exclusively for the purpose of business and not to business and not to be capital or personal in nature. The Ld. DR capital or personal in nature. The Ld. DR submitted that the expenditure submitted that the expenditure was intended for enduring benefit was intended for enduring benefit purposes and hence purposes and hence capital in nature because the assessee was because the assessee was evaluating new business opportunity aimed new business opportunity aimed to create long term create long term benefit for the business. The Ld. DR submitted that feasibility benefit for the business. The Ld. DR submitted that feasibility benefit for the business. The Ld. DR submitted that feasibility & 3713/MUM/2024 ITA Nos. 3714 & 3713/MUM/2024 report in question was was obtained with the objective of obtained with the objective of evaluating the viability of an investment viability of an investment that would result in the acquisition of low esult in the acquisition of low (CV) coal which would direct impact on increasing profitability and (CV) coal which would direct impact on increasing profitability and (CV) coal which would direct impact on increasing profitability and thus the expenditure confers upon the enduring benefit to the thus the expenditure confers upon the enduring benefit to the thus the expenditure confers upon the enduring benefit to the assessee’s trade for securing long term advantage by reducing assessee’s trade for securing long term advantage by reducing assessee’s trade for securing long term advantage by reducing operational costs and the operational costs and therefore, such expenditure was aimed as expenditure was aimed as creating enduring benefit enduring benefit, therefore, it was capital in character. The therefore, it was capital in character. The Ld. DR relied on the decision of the Hon’ble Bombay High Court in Ld. DR relied on the decision of the Hon’ble Bombay High Court in Ld. DR relied on the decision of the Hon’ble Bombay High Court in the case of CIT v. J.K. Chemicals Ltd. reported in (1994) 207 ITR the case of CIT v. J.K. Chemicals Ltd. reported in (1994) 207 ITR the case of CIT v. J.K. Chemicals Ltd. reported in (1994) 207 ITR 985 and decision of the Hon’ble Gujarat High Court in the case of n of the Hon’ble Gujarat High Court in the case of n of the Hon’ble Gujarat High Court in the case of CIT v. Shri Digvijay Cement Co. Ltd. (1986) 53 CTR 274 (Gujarat). CIT v. Shri Digvijay Cement Co. Ltd. (1986) 53 CTR 274 (Gujarat). CIT v. Shri Digvijay Cement Co. Ltd. (1986) 53 CTR 274 (Gujarat).
We have heard rival submissions of the parties and perused We have heard rival submissions of the parties and perused We have heard rival submissions of the parties and perused the relevant materials on record the relevant materials on record. The section 37 of the Act clearly . The section 37 of the Act clearly provide for allowing the expenses as incurred wholly and exclusively for allowing the expenses as incurred wholly and exclusively for allowing the expenses as incurred wholly and exclusively for the purpose of the business and not being in the nature of for the purpose of the business and not being in the nature of for the purpose of the business and not being in the nature of capital or personal expenditure. Thus capital or personal expenditure. Thus, if expenditure expenditure is in the nature of capital or personal nature, it will go out of ambit of nature of capital or personal nature, it will go out of ambit of nature of capital or personal nature, it will go out of ambit of section 37 of the Act. Therefore, ction 37 of the Act. Therefore, in the case we have to examine in the case we have to examine whether the expenditure incurred on feasibility report is in the whether the expenditure incurred on feasibility report is in the whether the expenditure incurred on feasibility report is in the nature of the capital expenditure or not. The Ld. counsel for the nature of the capital expenditure or not. The Ld. counsel for the nature of the capital expenditure or not. The Ld. counsel for the assessee has filed a copy of the said feasibility report before us. On assessee has filed a copy of the said feasibility report befor assessee has filed a copy of the said feasibility report befor perusal of the same, we find that purpose behind perusal of the same, we find that purpose behind obtaining report obtaining report was to replace the raw material used for the power plants. In the was to replace the raw material used for the power plants. In the was to replace the raw material used for the power plants. In the existing plants, the assessee was using high calorific value (CV) coal existing plants, the assessee was using high calorific value existing plants, the assessee was using high calorific value & 3713/MUM/2024 & 3713/MUM/2024 and said feasibility report has been and said feasibility report has been obtained for substituting raw for substituting raw material as low calorific value and necessary changes in the entire material as low calorific value and necessary changes in the entire material as low calorific value and necessary changes in the entire plant and machinery for plant and machinery for power generation smoothly. In view of smoothly. In view of change of the raw material various components of the power plant change of the raw material various components of the power plant change of the raw material various components of the power plant were required to be changed. Thus the were required to be changed. Thus the feasibility/project report was feasibility/project report was intended for long term enduring benefit to the assessee and intended for long term enduring benefit to the assessee and intended for long term enduring benefit to the assessee and therefore, the expenditure incurred on the same is in the nature of therefore, the expenditure incurred on the same is in the therefore, the expenditure incurred on the same is in the capital expenditure.
14.1 Now, we find that the legislature has specifically allowed we find that the legislature has specifically allowed we find that the legislature has specifically allowed expenditure incurred on such feasibility/project report u/s 35D incurred on such feasibility/project report u/s 35D incurred on such feasibility/project report u/s 35D of the Act subject to fulfill subject to fulfilling certain conditions. The ld DRP has The ld DRP has rejected the eligibility of the assessee u/s 35D without examining or rejected the eligibility of the assessee u/s 35D without examining or rejected the eligibility of the assessee u/s 35D without examining or providing an opportunity of being heard on the issue. Therefore, we providing an opportunity of being heard on the issue. providing an opportunity of being heard on the issue. restore this matter back to the file of the Assessing Officer with the restore this matter back to the file of the Assessing Officer with the restore this matter back to the file of the Assessing Officer with the direction to the assessee to file necessary documents in support of direction to the assessee to file necessary documents in support of direction to the assessee to file necessary documents in support of its eligibility u/s 35D of the Act and the Assessing Officer after due its eligibility u/s 35D of the Act and the Assessing Officer after due its eligibility u/s 35D of the Act and the Assessing Officer after due verification may allow the deduction in acc verification may allow the deduction in accordance with law. ordance with law.
14.2 The alternative claim of the assessee raised in ground no. 5 of The alternative claim of the assessee raised in ground no. 5 of The alternative claim of the assessee raised in ground no. 5 of the appeal for allowing short capital loss is also not allowable as by the appeal for allowing short capital loss is also not allowable as by the appeal for allowing short capital loss is also not allowable as by way of feasibility report, report, no capital asset came into existence. We no capital asset came into existence. We agree with the finding of ld agree with the finding of ld DRP on the issue in dispute, accordingly DRP on the issue in dispute, accordingly we uphold the same. we uphold the same. The ground No. 4 of the appeal of the assessee The ground No. 4 of the appeal of the assessee are accordingly allowed for statistical purposes, whereas the ground llowed for statistical purposes, whereas the ground llowed for statistical purposes, whereas the ground no. 5 of the appeal is dismissed. no. 5 of the appeal is dismissed.
& 3713/MUM/2024 & 3713/MUM/2024
15. The ground No. 6 of the appeal relates The ground No. 6 of the appeal relates to deduction of to deduction of Rs.69,30,25,027/- claimed u/s 80IA of the Act disallowed by the claimed u/s 80IA of the Act disallowed by the claimed u/s 80IA of the Act disallowed by the lower authorities. The facts in brief qua the issue in dispute are lower authorities. The facts in brief qua the issue in dispute are lower authorities. The facts in brief qua the issue in dispute are that assessee claimed deduction of Rs.69,30,25,027/- u/s 80IA of that assessee claimed deduction of Rs.69,30,25,027/ that assessee claimed deduction of Rs.69,30,25,027/ the Act. The Assessing Officer further obser the Act. The Assessing Officer further observed that assessee was ved that assessee was having four units i.e. Unit No. 1, Unit No. 2, Unit No. 3 and Unit No. having four units i.e. Unit No. 1, Unit No. 2, Unit No. 3 and Unit No. having four units i.e. Unit No. 1, Unit No. 2, Unit No. 3 and Unit No. 4 eligible for claiming deduction u/s 80IA of the Act. The Assessing 4 eligible for claiming deduction u/s 80IA of the Act. The Assessing 4 eligible for claiming deduction u/s 80IA of the Act. The Assessing Officer noticed from the details of computation of deduction that Officer noticed from the details of computation of deduction that Officer noticed from the details of computation of deduction that earned income from three uni earned income from three units i.e. income of Rs.32,22,78,846/ ts i.e. income of Rs.32,22,78,846/- from Unit No. 2 ; Rs.33,54,25,991/ from Unit No. 2 ; Rs.33,54,25,991/- from Unit No. 3 ; from Unit No. 3 ; Rs.35,75,99,035/- from Unit No. 4 and incurred loss of from Unit No. 4 and incurred loss of from Unit No. 4 and incurred loss of Rs.92,11,43,970/- from Unit No. 1. The aggregate profit from all from Unit No. 1. The aggregate profit from all from Unit No. 1. The aggregate profit from all eligible SBU Units of Rs.9,41,59,903/ eligible SBU Units of Rs.9,41,59,903/- has been shown from the n shown from the profit and loss account and therefore, according to the Assessing profit and loss account and therefore, according to the Assessing profit and loss account and therefore, according to the Assessing Officer only said profit was eligible for deduction u/s 80IA of the Act Officer only said profit was eligible for deduction u/s 80IA of the Act Officer only said profit was eligible for deduction u/s 80IA of the Act as against the deduction of Rs.69,30,25,027/- claimed for as against the deduction of Rs.69,30,25,027/ as against the deduction of Rs.69,30,25,027/ deduction in respect from the profit from U deduction in respect from the profit from Unit No. 3 and Unit No. 4 nit No. 3 and Unit No. 4 without taking into consideration loss incurred from Unit No. 1. without taking into consideration loss incurred from Unit No. 1. without taking into consideration loss incurred from Unit No. 1. Thus, according to the Assessing Officer, the assessee has not set according to the Assessing Officer, the assessee has not set according to the Assessing Officer, the assessee has not set off losses incurred from Unit No. 1 off losses incurred from Unit No. 1 amounting to Rs.92,11,43,970/ amounting to Rs.92,11,43,970/- . In response to the show cause notice, the assessee relied on In response to the show cause notice, the assessee relied on In response to the show cause notice, the assessee relied on various decisions which have been cited in the submission of various decisions which have been cited in the submission various decisions which have been cited in the submission assessee reproduced by the Assessing Officer. After considering the assessee reproduced by the Assessing Officer. After considering the assessee reproduced by the Assessing Officer. After considering the submission, the claim of the assessee was rejected mainly on the submission, the claim of the assessee was rejected mainly on the submission, the claim of the assessee was rejected mainly on the ground that according to the Assessing Officer deduction u/s 80IA round that according to the Assessing Officer deduction u/s 80IA round that according to the Assessing Officer deduction u/s 80IA & 3713/MUM/2024 & 3713/MUM/2024 is in respect of eligible business, the Ld. Assessing Officer referred is in respect of eligible business, the Ld. Assessing Officer referred is in respect of eligible business, the Ld. Assessing Officer referred to 80AB of the Act and according to which deduction has to be of the Act and according to which deduction has to be of the Act and according to which deduction has to be allowed with reference to income included in the gross total income. allowed with reference to income included in the gross tot allowed with reference to income included in the gross tot According to the Assessing Officer According to the Assessing Officer ,the gross total income the gross total income includes net income after setting off of losses. Therefore, assessee is eligible net income after setting off of losses. Therefore, assessee is eligible net income after setting off of losses. Therefore, assessee is eligible for deduction in respect of aggregate profit from all the units after for deduction in respect of aggregate profit from all the units after for deduction in respect of aggregate profit from all the units after setting off loss of Unit No. 1 setting off loss of Unit No.
The Assessing Officer relied on the Assessing Officer relied on the decision of the Hon’ble High Court Punjab & Haryana High Court decision of the Hon’ble High Court Punjab & Haryana High Court decision of the Hon’ble High Court Punjab & Haryana High Court in the case of Bajaj Motors Pvt. Ltd. (supra) Bajaj Motors Pvt. Ltd. (supra) and decision of the and decision of the Hon’ble Supreme Court in the case of Synco Industries Ltd. Synco Industries Ltd. Hon’ble Supreme Court in the case of (supra). The Assessing Officer als The Assessing Officer also relied on the other decisions o relied on the other decisions cited in the impugned order. The Ld. DRP also upheld the finding of cited in the impugned order. The Ld. DRP also upheld the finding of cited in the impugned order. The Ld. DRP also upheld the finding of the Assessing Officer and rejected the objection of the assessee. the Assessing Officer and rejected the objection of the assessee. the Assessing Officer and rejected the objection of the assessee.
We have heard rival submissions of the parties and perused We have heard rival submissions of the parties and perused We have heard rival submissions of the parties and perused the relevant materials on the relevant materials on record. Before us, the Ld. counsel for the . Before us, the Ld. counsel for the assessee has relied on the decision which was cited before the lower assessee has relied on the decision which was cited before the lower assessee has relied on the decision which was cited before the lower authorities. The core issue in dispute is whether the deduction is to The core issue in dispute is whether the deduction is to The core issue in dispute is whether the deduction is to be computed in respect of profit of each undertaking engaged in be computed in respect of profit of each undertaking engaged in be computed in respect of profit of each undertaking engaged in eligible business or deduction has to be computed on aggregate usiness or deduction has to be computed on aggregate usiness or deduction has to be computed on aggregate profit of all the units engaged in eligible business. Fore ready profit of all the units engaged in eligible business. Fore ready profit of all the units engaged in eligible business. Fore ready reference, the relevant provisions of section 80IA of the Act are he relevant provisions of section 80IA of the Act are he relevant provisions of section 80IA of the Act are extracted as under: “Deductions in respect of profits and gains from Deductions in respect of profits and gains from Deductions in respect of profits and gains from industrial undertakings or ustrial undertakings or ustrial undertakings or enterprises engaged in enterprises enterprises engaged in engaged in infrastructure development, etc. infrastructure development, etc.
& 3713/MUM/2024 & 3713/MUM/2024
80-IA. [(1) Where the gross total income of an assessee [(1) Where the gross total income of an assessee [(1) Where the gross total income of an assessee includes any profits and gains derived by an undertaking or an includes any profits and gains derived by an undertaking or an includes any profits and gains derived by an undertaking or an enterprise from any business referred to in sub enterprise from any business referred to in sub-section section (4) (such business being hereinafter referred to as the eligible business), business being hereinafter referred to as the eligible business), business being hereinafter referred to as the eligible business), there shall, in accordance with and subject to the provisions of there shall, in accordance with and subject to the provisions of there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the this section, be allowed, in computing the total income of the this section, be allowed, in computing the total income of the assessee, a deduction of an amount equal to hundred assessee, a deduction of an amount equal to hundred assessee, a deduction of an amount equal to hundred per cent of the profits and gains derived from such business for ten of the profits and gains derived from such business for ten of the profits and gains derived from such business for ten consecutive assessment years.] consecutive assessment years.] (2) The deduction specified in sub (2) The deduction specified in sub-section (1) may, at the option section (1) may, at the option of the assessee, be claimed by him for any ten consecutive of the assessee, be claimed by him for any ten consecutive of the assessee, be claimed by him for any ten consecutive assessment years out of fifteen assessment years out of fifteen years beginning from the year years beginning from the year in which the undertaking or the enterprise develops and begins in which the undertaking or the enterprise develops and begins in which the undertaking or the enterprise develops and begins to operate any infrastructure facility or starts providing to operate any infrastructure facility or starts providing to operate any infrastructure facility or starts providing telecommunication service or develops an industrial park telecommunication service or develops an industrial park telecommunication service or develops an industrial park 47[or develops 48[***] a special economic zone referred to in clause (iii) [***] a special economic zone referred to in clause (iii) [***] a special economic zone referred to in clause (iii) of sub-section section section (4)] (4)] (4)] or or or generates generates generates power power power or or or commences commences commences transmission or distribution of power [or undertakes substantial transmission or distribution of power [or undertakes substantial transmission or distribution of power [or undertakes substantial renovation and modernisation of the existi renovation and modernisation of the existing transmission or ng transmission or distribution lines [***]] : distribution lines [***]] : [Provided that where the assessee develops or operates and that where the assessee develops or operates and that where the assessee develops or operates and maintains maintains maintains or or or develops, develops, develops, operates operates operates and and and maintains maintains maintains any any any infrastructure facility referred to in clause (a) or clause (b) or infrastructure facility referred to in clause (a) or clause (b) or infrastructure facility referred to in clause (a) or clause (b) or clause (c) of the Explanation to clause (c) of the Explanation to clause (i) of sub-section (4), the section (4), the provisions of this sub provisions of this sub-section shall have effect as if for the section shall have effect as if for the words "fifteen years", the words "twenty years" had been words "fifteen years", the words "twenty years" had been words "fifteen years", the words "twenty years" had been substituted.] substituted.]” (3)…………….. (3)…………….. (4)…………….. (4)…………….. (5) Notwithstanding anything contained in any other provision (5) Notwithstanding anything contained in any other provision (5) Notwithstanding anything contained in any other provision of this Act, the profits and gains of an eligible business the profits and gains of an eligible business the profits and gains of an eligible business to which the provisions of sub which the provisions of sub-section (1) apply shall, for the section (1) apply shall, for the purposes of determining the quantum of deduction under that purposes of determining the quantum of deduction under that purposes of determining the quantum of deduction under that sub-section for the assessment year immediately succeeding section for the assessment year immediately succeeding section for the assessment year immediately succeeding the initial assessment year or any subsequent assessment the initial assessment year or any subsequent assessment the initial assessment year or any subsequent assessment year, be comput year, be computed as if such eligible business were the as if such eligible business were the only source of income of the assessee during the previous only source of income of the assessee during the previous only source of income of the assessee during the previous year relevant to the initial assessment year ar relevant to the initial assessment year90 and to every subsequent assessment year up to and including the subsequent assessment year up to and including the subsequent assessment year up to and including the assessment y assessment year for which the determination is to be made. ear for which the determination is to be made.
& 3713/MUM/2024 & 3713/MUM/2024 16.1 The section 80IA(5) clearly specify that The section 80IA(5) clearly specify that for the purpose of for the purpose of determining quantum of deduction , the computation has to be determining quantum of deduction , the computation has to be determining quantum of deduction , the computation has to be made as if the eligible business is the only source of income. In the made as if the eligible business is the only source of income. made as if the eligible business is the only source of income. case of the assessee, all the three units are engaged in the ‘eligible ssessee, all the three units are engaged in the ‘eligible ssessee, all the three units are engaged in the ‘eligible business’ of generating electricity, therefore we are of the opinion business’ of generating electricity, therefore we are of the opinion business’ of generating electricity, therefore we are of the opinion that for the purpose of computation of deduction u/s 80IA of the that for the purpose of computation of deduction u/s 80IA of the that for the purpose of computation of deduction u/s 80IA of the Act in the case of assessee, the aggregate profit of the eligible Act in the case of assessee, the aggregate profit of the eligibl Act in the case of assessee, the aggregate profit of the eligibl business i.e. all the three units have to be taken. Certainly, loss business i.e. all the three units have to be taken. Certainly, loss business i.e. all the three units have to be taken. Certainly, loss from non eligible business can’t be set from non eligible business can’t be set-off against the aggregate off against the aggregate profit of eligible business for computing deduction u/s 80IA of the profit of eligible business for computing deduction u/s 80IA of the profit of eligible business for computing deduction u/s 80IA of the Act. The purpose of allowing deduction is for promo The purpose of allowing deduction is for promo The purpose of allowing deduction is for promotion of the manufacturing or generation or generation of the particular products and of the particular products and promotion of business of those products promotion of business of those products and not promotion of an and not promotion of an undertaking , therefore, aggregate profit therefore, aggregate profit of different undertaking of different undertaking of the assessee is eligible for deduction u/s 80IA should only be the assessee is eligible for deduction u/s 80IA sho the assessee is eligible for deduction u/s 80IA sho considered for the purpose of deduction. considered for the purpose of deduction. In support , we also rely In support , we also rely on the decision of Hon’ble Supreme Court in the case of on the decision of Hon’ble Supreme Court in the case of on the decision of Hon’ble Supreme Court in the case of Commissioner Of Income Tax Commissioner Of Income Tax-I vs M/S Reliance Energy Ltd I vs M/S Reliance Energy Ltd (Formerly Bses Ltd) on 28 April, 2021 in Civil Appeal No. 1328 (Formerly Bses Ltd) on 28 April, 2021 in Civil Appeal No. 1328 (Formerly Bses Ltd) on 28 April, 2021 in Civil Appeal No. 1328 of 2021, relevant part of which is evant part of which is reproduced as und der:
The other contention of the Revenue is that sub-section (5) of 13. The other contention of the Revenue is that sub section (5) of Section 80-IA refers to computation of quantum of deduction being limited fro refers to computation of quantum of deduction being limited fro refers to computation of quantum of deduction being limited from ‘eligible business’ by taking it as the only source of income. It is ‘eligible business’ by taking it as the only source of income. It is ‘eligible business’ by taking it as the only source of income. It is contended that the language of sub-section (5) makes it clear that contended that the language of sub section (5) makes it clear that deduction contemplated in sub-section (1) is only with respect to the deduction contemplated in sub section (1) is only with respect to the income from ‘eligible business’ which indicates that there is a cap in sub income from ‘eligible business’ which indicates that there is a cap in sub- section (1) that the deduction cannot exceed the ‘business income’. On the section (1) that the deduction cannot exceed the ‘business income’. On the section (1) that the deduction cannot exceed the ‘business income’. On the & 3713/MUM/2024 & 3713/MUM/2024
other hand, it is the case of the Assessee that sub-section (5) pertains other hand, it is the case of the Assessee that sub section (5) pertains only to determination of the quantum of deduction under sub only to determination of the quantum of deduction under sub-section (1) only to determination of the quantum of deduction under sub by treating the ‘eligible business’ as the only source of income. It was ng the ‘eligible business’ as the only source of income. It was ng the ‘eligible business’ as the only source of income. It was submitted by Mr. Vohra, learned Senior Counsel, that the final submitted by Mr. Vohra, learned Senior Counsel, that the final submitted by Mr. Vohra, learned Senior Counsel, that the final computation of deduction under Section 80-IA for the assessment year computation of deduction under for the assessment year 2002-03 as accepted by the Assessing Officer, was arrived at by taking 3 as accepted by the Assessing Officer, was arrived at by taking 3 as accepted by the Assessing Officer, was arrived at by taking into account the profits from the ‘eligible business’ as the ‘only source of into account the profits from the ‘eligible business’ as the ‘only source of into account the profits from the ‘eligible business’ as the ‘only source of income’. He submitted that, however, sub-section (5) is a step antecedent income’. He submitted that, however, sub section (5) is a step antecedent to the treatment to be given to the deduction under sub- section (1) and is to the treatment to be given to the dedu section (1) and is not concerned with the extent to which the computed deduction be not concerned with the extent to which the computed deduction be not concerned with the extent to which the computed deduction be allowed. To explain the interplay between sub-section (5) and sub allowed. To explain the interplay between sub section (5) and sub-section (1) of Section 80-IA, it wi , it will be useful to refer to the facts of this Appeal. ll be useful to refer to the facts of this Appeal. The amount of deduction from the ‘eligible business’ computed The amount of deduction from the ‘eligible business’ computed The amount of deduction from the ‘eligible business’ computed under Section 80- -IA for for the the assessment assessment year year 2002-03 2002 is Rs. 492,78,60,973 /-. There is no . There is no dispute that the said amount represents dispute that the said amount represents income from the ‘eligible business’ under Section 80-IA income from the ‘eligible business’ under and is the only source of income for the purposes of computing deduction under source of income for the purposes of computing deduction under Section source of income for the purposes of computing deduction under 80-IA. The question that arises further with reference to allowing the . The question that arises further with reference to allowing the . The question that arises further with reference to allowing the deduction so computed to arrive at the ‘total income’ of the Assessee deduction so computed to arrive at the ‘total income’ of the Assessee deduction so computed to arrive at the ‘total income’ of the Assessee cannot be determined by resorting to interpretation of sub cannot be determined by resorting to interpretation of sub- section (5). cannot be determined by resorting to interpretation of sub 14. It will be useful to refer to the judgment of this Court relied upon by will be useful to refer to the judgment of this Court relied upon by will be useful to refer to the judgment of this Court relied upon by the Revenue as well as the Assessee. In Synco Industries the Revenue as well as the Assessee. Synco Industries (supra), this Court was concerned with Section 80-I of the Act. Section 80 Court was concerned with Section 80-I(6), which is in pari materia to Section 80-IA(5), is as follows: “ 80-I(6) Notwithstanding anythi I(6) Notwithstanding anything contained in any other provision of ng contained in any other provision of this Act, the profits and gains of an industrial undertaking or a ship or this Act, the profits and gains of an industrial undertaking or a ship or this Act, the profits and gains of an industrial undertaking or a ship or the business of a hotel or the business of repairs to ocean the business of a hotel or the business of repairs to ocean-going vessels the business of a hotel or the business of repairs to ocean or other powered craft to which the provisions of sub-section (1) app or other powered craft to which the provisions of sub section (1) apply shall, for the purposes of determining the quantum of deduction under shall, for the purposes of determining the quantum of deduction under shall, for the purposes of determining the quantum of deduction under sub- section (1) for the assessment year immediately succeeding the section (1) for the assessment year immediately succeeding the section (1) for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be initial assessment year or any subsequent assessment year, be computed as if such industrial undertaking or ship or the business of the computed as if such industrial undertaking or ship or the business of the hotel or the business of repairs to ocean-going vessels or other powered hotel or the business of repairs to ocean going vessels or other powered craft were the only source of income of the assessee during the previous craft were the only source of income of the assessee during the previous craft were the only source of income of the assessee during the previous years relevant to the initial assessment year and to every subsequent years relevant to the initial assessment year and to every subsequent years relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the assessment year up to and including the assessment year for which the determination is to be made.” It was held in Synco Industries determination is to be made.” It was held in Synco Industries (supra) that for the purpose of calculating the deduction under Section 80 that for the purpose of calculating the deduction under Section 80-I, loss sustained in other divisions or units cannot be taken into account as sub sustained in other divisions or units cannot be taken into account as sub- sustained in other divisions or units cannot be taken into account as sub & 3713/MUM/2024 & 3713/MUM/2024 section (6) contemplates that only profits from the industrial undertaking section (6) contemplates that only profits from the industrial undertaking section (6) contemplates that only profits from the industrial undertaking shall be taken into account as it was the only source of income. Further, shall be taken into account as it was the only source of income. Further, the Court concluded that Section 80-I(6) of the Act dealt with actual the Court concluded that of the Act dealt with actual computation of deduction whereas Section 80-I(1) of the Act dealt with computation of deduction whereas of the Act dealt with the treatment to be given to such deductions in order to arrive at the total the treatment to be given to such deductions in order to arrive at the total the treatment to be given to such deductions in order to arrive at the total income of the assessee. The Assessee also relied on the judgment of this income of the assessee. The Assessee also relied on the judgment of this Court in Canara Workshops Canara Workshops (P) Ltd., Kodialball, Mangalore (P) Ltd., Kodialball, Mangalore (supra) to emphasize the purpose of sub-section (5) of Section 80- emphasize the purpose of sub -IA. In this case, the question that arose for consideration before this Court related to the question that arose for consideration before this Court related to the question that arose for consideration before this Court related to computation of the profits for the purpose of deduction under the profits for the purpose of deduction under Section 80- the profits for the purpose of deduction under E, as it then existed, after setting off the loss incurred by the assessee in , as it then existed, after setting off the loss incurred by the assessee in , as it then existed, after setting off the loss incurred by the assessee in the manufacture of alloy steels. Section 80-E of the Act, as it then the manufacture of alloy steels. of the Act, as it then existed, permitted deductions in respect of profits and gains attributable existed, permitted deductions in respect of profits and gains attributable existed, permitted deductions in respect of profits and gains attributable to the business of generation or distribution of electricity or any other form to the business of generation or distribution of electricity or any other form to the business of generation or distribution of electricity or any other form of power or of construction, manufacture or production of any one or more of power or of construction, manufacture or product ion of any one or more of the articles or things specified in the list in the Fifth Schedule. It was of the articles or things specified in the list in the Fifth Schedule. It was of the articles or things specified in the list in the Fifth Schedule. It was argued on behalf of the Revenue that the profits from the automobile argued on behalf of the Revenue that the profits from the automobile argued on behalf of the Revenue that the profits from the automobile ancillaries industry of the assessee must be reduced by the loss suffered ancillaries industry of the assessee must be reduced by the loss suffered ancillaries industry of the assessee must be reduced by the loss suffered by the assessee in the manufacture of alloy steels. This Court was not in see in the manufacture of alloy steels. This Court was not in see in the manufacture of alloy steels. This Court was not in agreement with the submissions made by the Revenue. It was held that agreement with the submissions made by the Revenue. It was held that agreement with the submissions made by the Revenue. It was held that the profits and gains by an industry entitled to benefit under the profits and gains by an industry entitled to benefit under Section 80- the profits and gains by an industry entitled to benefit under E cannot be reduced by the loss suffered by any other industry or cannot be reduced by the loss suffered by any other industry or cannot be reduced by the loss suffered by any other industry or industries owned by the assessee. industries owned by the assessee.
In the case before us, there is no discussion about 15. In the case before us, there is no discussion about Section 80- 15. In the case before us, there is no discussion about IA(5) by the Appellate Authority, n by the Appellate Authority, nor the Tribunal and the High Court. or the Tribunal and the High Court. However, we have considered the submissions on behalf of the Revenue However, we have considered the submissions on behalf of the Revenue However, we have considered the submissions on behalf of the Revenue as it has a bearing on the interpretation of sub-section (1) of as it has a bearing on the interpretation of sub section (1) of Section 80- IA of the Act. We hold We hold that the scope of sub-section (5) of Section section (5) of Section 80- IA of the Act is limited to determination of quantum of IA of the Act is limited to determination of quantum of IA of the Act is limited to determination of quantum of deduction under sub-section (1) of Section 80-IA deduction under sub of the Act by treating ‘eligible business’ as the ‘only source of income’ treating ‘eligible business’ as the ‘only source of income’. Sub-section (5) cannot be pressed into service for reading a limitation of section (5) cannot be pressed into service for reading a limitation of section (5) cannot be pressed into service for reading a limitation of the deduction under sub-section (1) only to ‘business income’. An attempt the deduction under sub section (1) only to ‘business income’. An attempt was made by the learned Senior Counsel for the Revenue to rely on the was made by the learned Senior Counsel for the Revenue to rely on the was made by the learned Senior Counsel for the Revenue to rely on the phrase ‘derived … from’ in ‘derived … from’ in Section 80-IA (1) of the Act in respect of his of the Act in respect of his submission that the intention of the legislature was to give the narrowest submission that the intention of the legislature was to give the narrowest submission that the intention of the legislature was to give the narrowest possible construction to deduction admissible under this sub possible construction to deduction admissible under this sub-section. It is possible construction to deduction admissible under this sub not necessary for us to deal with this submission in view of the findings not necessary for us to deal with this submission in view of the findings not necessary for us to deal with this submission in view of the findings & 3713/MUM/2024 & 3713/MUM/2024
recorded above. For the aforementioned reasons, the Appeal is dismissed recorded above. For the aforementioned reasons, the Appeal is dismissed recorded above. For the aforementioned reasons, the Appeal is dismissed qua the issue of the extent of deduction under Section 80 qua the issue of the extent of deduction under Section 80-IA of the Act. 16.2 The Hon’ble Supreme Court has rejected the plea of Revenue 16.2 The Hon’ble Supreme Court has rejected the plea of Revenue 16.2 The Hon’ble Supreme Court has rejected the plea of Revenue to take business income of the assessee i.e. income under the head to take business income of the assessee i.e. income under the head to take business income of the assessee i.e. income under the head profit and gain of the business or profession, instead directed to profit and gain of the business or profession, instead directed to profit and gain of the business or profession, instead directed to take profit of eligible b take profit of eligible business as a single source of income. usiness as a single source of income.
16.3 Accordingly, we do not find any infirmity in the order of the Accordingly, we do not find any infirmity in the order of the Accordingly, we do not find any infirmity in the order of the Ld. CIT(A) in the issue in dispute and accordingly we uphold the Ld. CIT(A) in the issue in dispute and accordingly we uphold Ld. CIT(A) in the issue in dispute and accordingly we uphold same. The ground No. 6 of the appeal of the assessee is accordingly The ground No. 6 of the appeal of the assessee is accordingly The ground No. 6 of the appeal of the assessee is accordingly dismissed.
The ground No. 7 of the appeal relate to claim of the assessee The ground No. 7 of the appeal relate to claim of the assessee The ground No. 7 of the appeal relate to claim of the assessee of write off non-moving stores and spares to Rs.29,48,977/ moving stores and spares to Rs.29,48,977/-. The moving stores and spares to Rs.29,48,977/ brief facts qua the issue in dispute are that it had debited actual brief facts qua the issue in dispute are that it had debited actual brief facts qua the issue in dispute are that it had debited actual write off Rs.2.01 crores towards write off of non write off Rs.2.01 crores towards write off of non-moving sto moving stores and spares and reduced Rs.1.71 crores being provision of non-moving spares and reduced Rs.1.71 crores being provision spares and reduced Rs.1.71 crores being provision spare recognized in earlier years. Hence, net expenses debited to net expenses debited to profit and loss account was of Rs.29,48,977/ profit and loss account was of Rs.29,48,977/- only. The assessee only. The assessee submitted during the assessment proceedings that it was by submitted during the assessment proceedings that it w submitted during the assessment proceedings that it w mistake added while computing taxable income under the normal mistake added while computing taxable income under the normal mistake added while computing taxable income under the normal provisions of the Act and requested to reduce the said amount of provisions of the Act and requested to reduce the said amount of provisions of the Act and requested to reduce the said amount of Rs.29,48,977/- out of total income. But said contention of the out of total income. But said contention of the out of total income. But said contention of the assessee was rejected by the Assessing Officer as same was not assessee was rejected by the Assessing Officer as same was n assessee was rejected by the Assessing Officer as same was n claimed by way of filing revised return. The Ld. DRP also rejected claimed by way of filing revised return. The Ld. DRP also rejected claimed by way of filing revised return. The Ld. DRP also rejected the contention of the assessee. Before us, the Ld. counsel for the the contention of the assessee. Before us, the Ld. counsel for the the contention of the assessee. Before us, the Ld. counsel for the & 3713/MUM/2024 & 3713/MUM/2024 assessee relied on the decision of the Hon’ble Bombay High Court in assessee relied on the decision of the Hon’ble Bombay High Court in assessee relied on the decision of the Hon’ble Bombay High Court in the case of Pruthvi Brokers and Shareholders reported in (2012) 23 the case of Pruthvi Brokers and Shareholders report the case of Pruthvi Brokers and Shareholders report taxmann.com 23 (Bombay) and decision of the Hon’ble Delhi High taxmann.com 23 (Bombay) and decision of the Hon’ble Delhi High taxmann.com 23 (Bombay) and decision of the Hon’ble Delhi High Court in the case of International Tractor Ltd. v. DCIT (ITA No. Court in the case of International Tractor Ltd. v. DCIT (ITA No. Court in the case of International Tractor Ltd. v. DCIT (ITA No. 35/2019).
We have heard rival submissions of the parties and perused We have heard rival submissions of the parties and perused We have heard rival submissions of the parties and perused the relevant materials on record the relevant materials on record. The claim of the assessee has been claim of the assessee has been rejected by the Assessing Officer mainly for the reason that said rejected by the Assessing Officer mainly for the reason that said rejected by the Assessing Officer mainly for the reason that said claim was not filed by way of revised return. We are of the opinion claim was not filed by way of revised return. We are of the op claim was not filed by way of revised return. We are of the op that if the claim is bona that if the claim is bonafide and within the provisions of the law fide and within the provisions of the law same should be examined same should be examined by the Assessing Officer and by the Assessing Officer and allowed subject to provisions of law. Therefore, we set aside the finding provisions of law. Therefore, we set aside the finding provisions of law. Therefore, we set aside the finding on the issue in dispute and restore the issue in dispute and restore the matter back to the Assessing the matter back to the Assessing Officer for examining the claim of the assessee of Rs.29,48,977/- on Officer for examining the claim of the assessee of Rs.29,48,977/ Officer for examining the claim of the assessee of Rs.29,48,977/ account of write off non te off non-moving stores and spares. Ground No. 7 of moving stores and spares. Ground No. 7 of the appeal is accordingly allowed for statistical purposes. the appeal is accordingly allowed for statistical purposes. the appeal is accordingly allowed for statistical purposes.
In ground No. 8 also the assessee is aggrieved with not ground No. 8 also the assessee is aggrieved with not ground No. 8 also the assessee is aggrieved with not allowing the claim of gratuity amounting to Rs.109,98,529/- which allowing the claim of gratuity amounting to Rs.109,98,529/ allowing the claim of gratuity amounting to Rs.109,98,529/ was inadvertently offered twice in the computation income. y offered twice in the computation income. y offered twice in the computation income.
19.1 We have heard rival submissions of the parties and perused We have heard rival submissions of the parties and perused We have heard rival submissions of the parties and perused the relevant materials on record the relevant materials on record. The issue in dispute being . The issue in dispute being identical to issue decided in ground No. 7 and therefore, this issue identical to issue decided in ground No. 7 and therefore, this issue identical to issue decided in ground No. 7 and therefore, this issue is also restored back to the file of the Assessing Officer for deciding ack to the file of the Assessing Officer for deciding ack to the file of the Assessing Officer for deciding & 3713/MUM/2024 & 3713/MUM/2024 afresh. Ground No. 8 of the appeal is accordingly allowed for Ground No. 8 of the appeal is accordingly allowed for Ground No. 8 of the appeal is accordingly allowed for statistical purposes
The grounds raised
by the assessee in its appeal are reproduced 20. The grounds raised by the assessee in its appeal are reproduced 20. The grounds raised by the assessee in its appeal are reproduced as under:
1. On the facts and circumstances of the case as well as in On the facts and circumstances of the case as well as in On the facts and circumstances of the case as well as in law, the Hon'ble Disputed law, the Hon'ble Disputed Resolution Panel has erred in Panel has erred in confirming the action of the confirming the action of the Ld. Assessing Officer in making an Assessing Officer in making an upward adjustment of Rs. 32.51,731/ upward adjustment of Rs. 32.51,731/- on account of on account of alleged transaction of purch transaction of purchases of steel from the Associate Associate Enterprises, without considering the f Enterprises, without considering the facts and circumstances acts and circumstances of the case.
2. On the facts and circumstances of the case as well as in On the facts and circumstances of the case as well as in On the facts and circumstances of the case as well as in law, the Hon'ble Disputed Resolution Panel has erred in not law, the Hon'ble Disputed Resolution Panel has erred in not law, the Hon'ble Disputed Resolution Panel has erred in not appreciating the fact that th appreciating the fact that the profit of the appellant is exempt e profit of the appellant is exempt w/s.801A and making any upward adjustment will not have w/s.801A and making any upward adjustment will not have w/s.801A and making any upward adjustment will not have any effect on the Tax any effect on the Tax 3. On the facts and circumstances of the ca acts and circumstances of the case as well as in se as well as in law, the Hon'ble Disputed Resolution Panel has erred in law, the Hon'ble Disputed Resolution Panel has erred in law, the Hon'ble Disputed Resolution Panel has erred in confirming the action of t confirming the action of the Learned Assessing Officer in he Learned Assessing Officer in making a disallowance of Rs.9,80.000/ making a disallowance of Rs.9,80.000/- u/s. 14A of the u/s. 14A of the Income Tax Act Income Tax Act 1961. without considering the facts and 1961. without considering the facts and circumstances of the case. circumstances of the case. 4. On the facts and circumstances of the On the facts and circumstances of the case as well as in case as well as in law, the Hon’ law, the Hon’ble Disputed Resolution Panel has erred in not esolution Panel has erred in not appreciating the fact that during the year under consideration appreciating the fact that during the year under consideration appreciating the fact that during the year under consideration the appellant has not earned any exempt income und the appellant has not earned any exempt income und the appellant has not earned any exempt income und amendment made in Finance Act, 2022 has not having any amendment made in Finance Act, 2022 has not having any amendment made in Finance Act, 2022 has not having any retrospective effect. retrospective effect. 5. On the facts and circumstance On the facts and circumstances of the case as well as in s of the case as well as in law, the Hon'ble Disputed Resolution Panel has erred in law, the Hon'ble Disputed Resolution Panel has erred in law, the Hon'ble Disputed Resolution Panel has erred in confirming the action of the confirming the action of the Ld. Assessing Officer in Assessing Officer in making an addition addition of Rs.9,80,000/- on account of alleged on account of alleged disallowance of expenses us. 14A of the Income Tux Aet. disallowance of expenses us. 14A of the Income Tux Aet. disallowance of expenses us. 14A of the Income Tux Aet. - & 3713/MUM/2024 & 3713/MUM/2024
1961, while computing the book profit w/s. 115J3 of the Act, 61, while computing the book profit w/s. 115J3 of the Act, 61, while computing the book profit w/s. 115J3 of the Act, without appreciating the fact no such addition is to be made in without appreciating the fact no such addition is to be made in without appreciating the fact no such addition is to be made in computing the book profit us. 115JB of the Income T computing the book profit us. 115JB of the Income T computing the book profit us. 115JB of the Income Tax Act, 1961. The appellant craves leave to ad The appellant craves leave to add, amend, alter or d, amend, alter or delete the said g id ground of appeal
.”
20. The briefly stated facts of the case are that the assessee was The briefly stated facts of the case are that the assessee was The briefly stated facts of the case are that the assessee was engaged in generation of power through power plants. The return of engaged in generation of power through power plants. The return of engaged in generation of power through power plants. The return of income filed by the assessee was subjected to scrutiny assessment. income filed by the assessee was subjected to scrutiny assessment. income filed by the assessee was subjected to scrutiny assessment. In the course of scrutiny proceedings In the course of scrutiny proceedings, a specified domestic specified domestic transaction of purchase of steel was sent to the Ld Transfer Pricing transaction of purchase of steel was sent to the Ld Transfer Pricing transaction of purchase of steel was sent to the Ld Transfer Pricing Officer (ld TPO) for arm’s length price determination. The Officer (ld TPO) for arm’s length price determination. The Officer (ld TPO) for arm’s length price determination. The adjustment made by the Ld. adjustment made by the Ld. TPO was included by the Assessing TPO was included by the Assessing Officer in the draft assessment order. The L Officer in the draft assessment order. The Ld. DRP upheld the said d. DRP upheld the said transfer pricing adjustment. Further, the Assessing Officer also transfer pricing adjustment. Further, the Assessing transfer pricing adjustment. Further, the Assessing made disallowance u/s 14A of the Act amounting to Rs.9,80,000/- made disallowance u/s 14A of the Act amounting to Rs.9,80,000/ made disallowance u/s 14A of the Act amounting to Rs.9,80,000/ in regular income as well as as well as in book profit.
20.1 The ground Nos s. 1 and 2 of the appeal relates to the transfer . 1 and 2 of the appeal relates to the transfer pricing adjustment to the specified domestic transaction of the pricing adjustment to the specified domestic transaction of the pricing adjustment to the specified domestic transaction of the purchase of steel. The brief facts qua the issue in dispute are that purchase of steel. The brief facts qua the issue in dispute are that purchase of steel. The brief facts qua the issue in dispute are that assessee operates eight numbers of power plants which comprises assessee operates eight numbers of power plants which comprises assessee operates eight numbers of power plants which comprises 135 MW each that produced 1008 MW power by using lignite that produced 1008 MW power by using lignite as the that produced 1008 MW power by using lignite fuel. During the year under consideration, t g the year under consideration, the assessee claimed tax he assessee claimed tax exemption benefit in respect of eight power generating units u/s benefit in respect of eight power generating units u/s benefit in respect of eight power generating units u/s 80IA of the Act. The assessee explained that for maintenance of 80IA of the Act. The assessee explained that for maintenance of 80IA of the Act. The assessee explained that for maintenance of those power plants, the assessee purchased r plants, the assessee purchased steel from its associated enterprises associated enterprises (AE). For the purpose of benchmarking these or the purpose of benchmarking these & 3713/MUM/2024 & 3713/MUM/2024 transactions, the assessee has submitted a comparison chart , the assessee has submitted a comparison chart , the assessee has submitted a comparison chart between price of associated enterprises and ALP for purchase of the price of associated enterprises and ALP for purchase of the price of associated enterprises and ALP for purchase of the steel plant. The assessee applied other method for benchmarking nt. The assessee applied other method for benchmarking nt. The assessee applied other method for benchmarking using quotation from the independent 3 using quotation from the independent 3rd parties. The assessee had The assessee had claimed that it accept accepted the lowest quotation which was from its the lowest quotation which was from its associated enterprises and therefore, steel was purchased from the associated enterprises and therefore, steel was purchased from the associated enterprises and therefore, steel was purchased from the associated enterprises sociated enterprises instead from the independent parties. the independent parties. The Ld. TPO noted that the profit of the assessee was Ld. TPO noted that the profit of the assessee was inflated resulting inflated resulting into higher deduction u/s 80IA of the Act. Before the Ld. TPO, the higher deduction u/s 80IA of the Act. Before the Ld. TPO, the higher deduction u/s 80IA of the Act. Before the Ld. TPO, the assessee submitted that being a prudent businessman goods are assessee submitted that being a prudent businessman assessee submitted that being a prudent businessman always purchased at the lower quotation and thus the allegation of at the lower quotation and thus the allegation of at the lower quotation and thus the allegation of the Ld. TPO/AO that assessee has earned more than ordinary profit the Ld. TPO/AO that assessee has earned more than ordinary profit the Ld. TPO/AO that assessee has earned more than ordinary profit was baseless by increasing the purchase price of the steel. The was baseless by increasing the purchase price of the steel. The was baseless by increasing the purchase price of the steel. The increase in expenses will reduce the gross total incom expenses will reduce the gross total incom expenses will reduce the gross total income and corresponding deduction u/s 80IA of the Act but the entire corresponding deduction u/s 80IA of the Act but the entire corresponding deduction u/s 80IA of the Act but the entire transaction is tax neutral and therefore, no adjustment to purchase transaction is tax neutral and therefore, no adjustment transaction is tax neutral and therefore, no adjustment price of the steel was was required. The Ld. TPO however rejected the required. The Ld. TPO however rejected the contention of the assessee. The Ld. DRP also upheld the same. The contention of the assessee. The Ld. DRP also upheld the s contention of the assessee. The Ld. DRP also upheld the s relevant observation of the Ld. DRP is reproduced as under: relevant observation of the Ld. DRP is reproduced as relevant observation of the Ld. DRP is reproduced as “The assessee's argument that a prudent businessman will “The assessee's argument that a prudent businessman will “The assessee's argument that a prudent businessman will always purchase goods at the least possible cost can be always purchase goods at the least possible cost can be always purchase goods at the least possible cost can be accepted in a situation when related party transaction is not accepted in a situation when related party transaction is not accepted in a situation when related party transaction is not there. In this case, the transaction is with a related party which there. In this case, the transaction is with a related party which there. In this case, the transaction is with a related party which is enjoying ta is enjoying tax holiday. In this case, the AE will be selling x holiday. In this case, the AE will be selling goods to tax holiday units at a lower cost reducing their goods to tax holiday units at a lower cost reducing their goods to tax holiday units at a lower cost reducing their revenue and consequently their profits leading to lower taxes. revenue and consequently their profits leading to lower taxes. revenue and consequently their profits leading to lower taxes. Further, the tax holiday units will show higher than ordinary Further, the tax holiday units will show higher than ordinary Further, the tax holiday units will show higher than ordinary profits and thus claiming profits and thus claiming greater deduction. Hence, as per the greater deduction. Hence, as per the & 3713/MUM/2024 ITA Nos. 3714 & 3713/MUM/2024 mandate of Section 80 mandate of Section 80-IA (10), the transaction price for an IA (10), the transaction price for an entity enjoying tax holiday should be the arm's length price. entity enjoying tax holiday should be the arm's length price. entity enjoying tax holiday should be the arm's length price. Also since only one unit is enjoying tax holiday, any sale by the Also since only one unit is enjoying tax holiday, any sale by the Also since only one unit is enjoying tax holiday, any sale by the non-eligible unit at a price l eligible unit at a price lower than the arm's length price ower than the arm's length price would decrease its profit and consequently its profit. Thus it is would decrease its profit and consequently its profit. Thus it is would decrease its profit and consequently its profit. Thus it is not tax neutral. not tax neutral. In the considered view of the panel, the Ld. TPO has taken the In the considered view of the panel, the Ld. TPO has taken the In the considered view of the panel, the Ld. TPO has taken the right recourse in determining the ALP and making the right recourse in determining the ALP and making the right recourse in determining the ALP and making the relevant adjustment.” adjustment.”
We have heard rival submissions of the parties and perused We have heard rival submissions of the parties and perused We have heard rival submissions of the parties and perused the relevant materials on record the relevant materials on record. In the case the purchase of the . In the case the purchase of the steel made from the associated enterprises steel made from the associated enterprises is below the independent below the independent quotation from third party quotation from third party. The Ld. AO and TPO observed that observed that by way of reducing purchase purchase price, the assessee has increased price, the assessee has increased profit which is exempted u/s 80IA of the Act and therefore, upward which is exempted u/s 80IA of the Act and therefore, upward which is exempted u/s 80IA of the Act and therefore, upward adjustment had been made on the basis of the data of the adjustment had been made on the basis of the data of the adjustment had been made on the basis of the data of the quotations received from the other parties. The purpose behind quotations received from the other parties. The purpose behind quotations received from the other parties. The purpose behind transferring the goods from the related party to the assessee is for ferring the goods from the related party to the assessee is for ferring the goods from the related party to the assessee is for increasing the profit in the hands of the entity i.e. the assessee increasing the profit in the hands of the entity i.e. the assessee increasing the profit in the hands of the entity i.e. the assessee which is tax exempt. The assessee has not able to controvert as why which is tax exempt. The assessee has not able to controvert as why which is tax exempt. The assessee has not able to controvert as why the goods have been transferred the goods have been transferred at price lower than the p price lower than the price quoted by the independent party. quoted by the independent party. But we find that the we find that the ld TPO has not examined the vera not examined the veracity of the independent parties city of the independent parties as the TPO should have examined the independent steel purchase transactions should have examined the independent steel purchase transactions should have examined the independent steel purchase transactions actually happened during the relevant period between independent actually happened during the relevant period between inde actually happened during the relevant period between inde parties and therefore, after applying the CUP parties and therefore, after applying the CUP method, arms length method, arms length price/ adjustment should adjustment should have worked out rather than relying have worked out rather than relying on data provided by the assessee using the other method. Therefore, data provided by the assessee using the other method. Therefore, data provided by the assessee using the other method. Therefore, & 3713/MUM/2024 & 3713/MUM/2024 the approach of the AO and the TPO which has been upheld by the the approach of the AO and the TPO which has been uph the approach of the AO and the TPO which has been uph Ld. DRP is fallacious and not reliable and accordingly, we set aside Ld. DRP is fallacious and not reliable and accordingly Ld. DRP is fallacious and not reliable and accordingly the finding of the Assessing Officer and restore the matter back to the finding of the Assessing Officer and restore the matter back to the finding of the Assessing Officer and restore the matter back to the AO/TPO for analyzing the transfer pricing adjustment using the the AO/TPO for analyzing the transfer pricing adjustment using the the AO/TPO for analyzing the transfer pricing adjustment using the CUP method by way of quoting data of the independent CUP method by way of quoting data of the CUP method by way of quoting data of the transactions for the sale of steel during relevant period. The ground for the sale of steel during relevant period. The ground for the sale of steel during relevant period. The ground Nos. 1 and 2 of the appeal of the assessee are accordingly allowed . 1 and 2 of the appeal of the assessee are accordingly allowed . 1 and 2 of the appeal of the assessee are accordingly allowed for statistical purposes. for statistical purposes.
The ground No. 3 and 4 of the appeal relates to disallowance The ground No. 3 and 4 of the appeal relates to disallowance The ground No. 3 and 4 of the appeal relates to disallowance u/s 14A of the Act amounting to Rs.9,80,000/ u/s 14A of the Act amounting to Rs.9,80,000/-. Undisputedly, . Undisputedly, there is no exempt income earned during the year under there is no exempt income earned during the year under there is no exempt income earned during the year under consideration by the assessee. consideration by the assessee. Respectfully following the decision of following the decision of Hon’ble Delhi High Court in the case of elhi High Court in the case of Chem invested ltd 378 ITR Chem invested ltd 378 ITR 33 , we hold that no addition could be made if no exempt income we hold that no addition could be made if no exempt income we hold that no addition could be made if no exempt income was by the assessee in year under consideration. Therefore, the was by the assessee in year under consideration. was by the assessee in year under consideration. ground No. 3 and 4 of the appeal are accordingly allowed. ground No. 3 and 4 of the appeal are accordingly allowed. ground No. 3 and 4 of the appeal are accordingly allowed.
The ground No. 5 of the appeal relates to making disallowance The ground No. 5 of the appeal relates to making disallowance The ground No. 5 of the appeal relates to making disallowance for earning exempted income u/s 14A while computing book profit for earning exempted income u/s 14A while computing book profit for earning exempted income u/s 14A while computing book profit u/s 115JB of the Act. The identical issue has been decided by the u/s 115JB of the Act. The identical issue has been decided by the u/s 115JB of the Act. The identical issue has been decided by the in in the case of JSW Energy Ltd. in in the case of JSW Energy Ltd. in ITA No. 3714/Mum/2024 in the case of JSW Energy Ltd. therefore, this ground is allowed in favour of the assessee. e, this ground is allowed in favour of the assessee. e, this ground is allowed in favour of the assessee.
& 3713/MUM/2024 & 3713/MUM/2024
In the result, both the appeals are allowed partly for statistical In the result, both the appeals are allowed partly for statistical In the result, both the appeals are allowed partly for statistical purposes.
Order pronounced in unced in the open Court on 26/03/2025. /03/2025.