ACIT, CIRCLE - 2(1)(1) , MUMBAI vs. THE BOMBAY DYEING & MFG. CO. LTD. , MUMBAI

Per : Kuldip Singh, Judicial Member:

Aforesaid cross appeals filed by the appellant M/s. The Bombay Dyeing & Mfg. Co. Ltd (hereinafter referred to as ‘assessee company’) and Deputy Commissioner of Income Tax, Mumbai (hereinafter referred to as ‘Revenue’) bearing common question of law and facts are being disposed of by way of composite order to avoid repetition of discussion.

Revenue’s grounds of appeal ITA No.928/M/2020 for A.Y. 2009-10 “1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in holding that no disallowance can be made if there is no exempt income while CBDT circular no. 5/2014 dtd 11.02.2014 clearly specifies that even if no exempt income is earned on the investments for the purpose of calculation of disallowance u/s 14A r.w.r. 8D, these are to be included. 1.1 On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in not appreciating that from A.Y. 2008-09, the disallowance u/s. 14A is required to be computed as per rule 8D as held by the Bombay High Court in Godrej & Boyce and the method adopted by the assessee is not a valid method. 2. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in allowing relief to the assessee relying on the decision of Hon'ble Special Bench of ITAT Delhi in the case of

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Vireet Investment (P) Ltd., without appreciating the facts that the issue has not reached to its finality as the Hon'ble Delhi High Court in its decision in the case of Goetz India Ltd., reported in 361 ITR 505 held that while computing Book Profit disallowance u/s 14A is required to be made. However, in its later judgment the Hon'ble Delhi High Court in the case of Bhushan Steel Ltd. (ITA No. 593 & 594/2015) has taken a contrary view.

3.1 Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is correct in following the ITAT decision in assessee's own case for A.Y 2010-11 & 2012 13 in holding that, when recovery of principal is doubtful, the question of charging of interest thereon on hypothetical basis does not arise despite the fact that, assessee is following mercantile system of accounting and the very foundation of special provisions relating to avoidance of tax contained in chapter X of Income Tax Act, 1961 as introduced by Finance Act 2001 w.e.f 01.04.2002 lies on computation of income from international transaction having regard to Arm's Length Price to be determined as per section 92F(ii) in a third party uncontrolled scenario and consequently deleting the adjustment made u/s. 92CA(3) of the Act on account of charging of interest amounting to Rs.1,78,18,044/- on shareholder deposit of Rs.15,21,60,920/- placed with the assessee's Associate Enterprise (PT Five Star, Indonesia)?

3.2 Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is correct in following the ITAT decision in assessee's own case for A.Y. 2010-11 and A.Y 2012-13 in deleting the interest charged on the deposit on accrual basis as it is mandatory on the part of the companies to account only on mercantile basis as per Companies Act read with section 145 of the Income tax Act, more so when there is a provision to write off in the Act, if the interest could not be recovered conclusively at any later point of time?

3.3 Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is justified in following the ITAT decision in assessee's own case for A. Y 2010-11 & 2012-13 in deleting the interest charged basing its decision on the approval given by the RBI to treat the arrears of technical fees receivable by the assesses as "Shareholder Deposit" stating that the assessee is under statutory obligation not to charge interest, whereas RBI nowhere stated that the assessee should not charge interest on the said shareholder deposit?

3.4 Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is correct in following the ITAT decision in assessee's own case for A.Y 2010-11 & 2012-13 in assuming the permission given by the RBI to treat the arrears of technical fees receivable by the assessee as the shareholder deposit as a statutory bar on charging interest at arm's length on the said deposit under specific anti-avoidance provisions of Chapter X?

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3.5 Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is justified in following the ITAT decision in assessee's own case for A.Y 2010-11 & 2012-13 which in turn relies on RBI approval ignoring the decision of Hon'ble Punjab &, Haryana High Court in Coco cola case (309 ITR 194) wherein it has been held that the Income tax Authorities are not bound by the RBI for determining ALP?

3.6 Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is correct in following the ITAT decision in assessee's own case for A.Y 2010- 11 & 2012-13 in stating that the shareholder deposit is not the international transaction of the impugned assessment year, whereas the issue under consideration is whether the chargeable interest on the deposit is the international transaction and not the deposit?

3.7 Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is correct in following the ITAT decision in assessee's own case for A.Y 2010-11 & 2012-13 which in turn relied on the Hon'ble Supreme Court's decision in the case of UCO Bank Vs CIT (1999) 237 ITR 889 ignoring the fact that the said decision relates to banking companies with reference to accounting interest on cash basis on doubtful debts u/s 43D, whereas the assessee is not a banking company and hence the said section 43D and the said decision are not applicable in the present case?

3.8 Whether on the facts and in the circumstances of the case and in. law, the Ld. CIT(A) is correct in following the ITAT decision in assessee's own case for A.Y. 2010-11 & 2012-13 in deleting the interest even when the jurisdictional High Court in the case of Tata Aulocomp Systems Ltd. and jurisdictional ITAT in the case of Aurinpro Solution Ltd. Vs Addl.CIT (2013) 33 taxmann.com 187 have clearly held that AO/TPO can compute ALP in case of interest free loan to subsidiary and that the said deposit partakes the character of loan only?

3.9 Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is correct in not appreciating the basic tenet of Transfer Pricing as enshrined in Section 92F(ii) that no unrelated party in uncontrolled circumstances would have kept such huge money exceeding Rs. 15 Crores for no return for a long period?

3.10 Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is correct in not appreciating the facts that royalty on technical knowhow accrued to the assessee long back from the AE at Indonesia has not been received and such receivables left in Indonesia itself with the AE as shareholder deposit lead to base erosion in India which needs to be set right by transfer pricing provisions charging arm's length interest on the same?

ITA No.2741/M/2019 5 M/s. The Bombay Dyeing & Mfg. Co. Ltd.

3.11 Whether on the fresh facts and circumstances of the case and position of law brought in above relating to the impugned AY 2009- 10, the Ld. CIT(A) is correct in treating the issue as covered issue relying on the decision of the Hon'ble ITAT in assessee's own case for AYs 2010-11 & 2012-13 wherein the above facts and position of law have not been brought to the notice of the Hon'ble ITAT? 4.1 Whether on the facts and in the circumstances of the case and in law, the Ld. CJT(A) is justified in following the ITAT decision in assessee's own case for A. Y 2010-1 1 and A.Y. 2012-13 in holding that, the outstanding balances with Associated Enterprise-is outside the ambit of International Transaction, despite the existence of Explanation (c) to section 92B of the Act as inserted by the Finance Act 2012, with retrospective effect from 01.04.2002 and consequently deleting the adjustment made u/s.92CA(3) of the Act on account of interest on such outstanding balances amounting to Ks.51,13,361/-?

4.2 Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is correct in following the ITAT decision in assessee's own case for A.Y 2010-11 & 2012-13 in relying on Hon'ble Supreme Court's decision in the case of UCO Bank (supra) in deleting the interest charged on the receivables when the facts are completely distinguishable?

4.3 Whether on the fresh facts and circumstances of the case and position of law brought in above relating to the impugned AY 2009- 10, the Ld. CIT(A) is correct in treating the issue as covered issue relying on the decision of the Hon'ble ITAT in assessee’s own case for AYs 2010-11 & 2012-13 wherein the above facts and position of law have not been brought to the notice of the Hon’ble ITAT?

ITA No.2741/M/2019 6 M/s. The Bombay Dyeing & Mfg. Co. Ltd.

ITA No.3299/M/2019 for A.Y. 2010-11

“1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in holding that no disallowance can be made if there is no exempt income while CBDT circular no. 5/2014 dtd 11.02.2014 clearly specified that even if no exempt income is earned on the investments for the purpose of calculation of disallowance u/s 14A r.w.r. 8D, these are to be included ?

3.1 Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is correct in relying on Tribunal's decision in assessee's own case for AY 2012-13 wherein it is held that, when recovery of principal is doubtful, the question of charging of interest thereon on hypothetical basis does not arise despite the fact that, assessee is following mercantile system of accounting and the very foundation of special provisions relating to avoidance of tax contained in chapter X of Income Tax Act, 1961 as introduced by Finance Act 2001 w.e.f. 01.04.2002 lies on computation of income from international transaction having regard to Arm's Length Price which is hypothetical and not real income and consequently deleting the adjustment made u/s.92CA(3) of the Act on account of Charging of interest on shareholder deposits placed with the assessee's Associate Enterprises amounting to Rs.1,86,09,281/-?

3.2 Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is correct in deleting the interest charged on the deposit on accrual basis as it is mandatory on the part of the companies to account only on mercantile basis as per Companies Act read with section 145 of the Income tax Act, more so when there is a provision to write off in the Act, if the interest could not be recovered conclusively at any later point of time?

3.3 Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is justified in deleting the interest charged basing its decision on the approval given by the RBI to treat the arrears of technical fees receivable by the assessee as "Shareholder deposit" stating that the assessee is under statutory obligation not to charge

ITA No.2741/M/2019 7 M/s. The Bombay Dyeing & Mfg. Co. Ltd.

interest, whereas RBI nowhere stated that the assessee should not charge interest on the said shareholder deposit?

3.4 Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is correct in assuming the statutory permission given by the RBI to treat the arrears of technical fees receivable by the assessee as the shareholder deposit as a statutory bar on charging interest at arm's length on the said deposit? 3.5 Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is correct in stating that the shareholder deposit is not the international transaction of the impugned assessment year, whereas the issue under consideration is whether the chargeable interest on the deposit is the international transaction and not the deposit?

3.6 Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is correct in relying on Tribunal's decision in assessee's own case for AY 2012-13 wherein it is relying on the Hon'ble Supreme Court's decision in the case of UCO Bank Vs CIT (1999) 237 ITR 889 as the decision relates to banking companies with reference to accounting interest on cash basis on doubtful debts u/s 43D, whereas the assessee is not a banking company and hence the said section 43D and the said decision are not applicable in the present case?

3.7 Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is correct in deleting the interest even when the jurisdictional High Court in the case of Tata Autocomp Systems Ltd and jurisdictional ITAT in the case of Aurinpro Solution Ltd. Vs Addl.CIT (2013) 33 taxmann.com 187 have clearly held that AO/TPO can compute ALP in case of interest free loan to subsidiary?

3.8 Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is correct in not appreciating the basic tenet of Transfer Pricing as enshrined in Section 92F(ii) that no unrelated party in uncontrolled circumstances would have kept such huge money exceeding Rs. 15 Crores for no return for a long period?

3.9 Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is correct in not appreciating the facts that royalty on technical knowhow accrued to the assessee long back from the AE at Indonesia has not been received and left in Indonesia itself with the AE as shareholder deposit lead to base erosion in India which needs to be set right by transfer pricing provisions charging arm's length interest on the same?

4.1 Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is correct in holding that, when the financial position of Associated Enterprise is weak or bad non-recognition of income on account of Technical fees receivable from AE as per the

ITA No.2741/M/2019 8 M/s. The Bombay Dyeing & Mfg. Co. Ltd.

agreement for the F Y 2011- 12 on accrual basis is lawful despite the fact that, assessee is following mercantile system of accounting and the very foundation of special provisions relating to avoidance of tax contained in chapter X of Income Tax Act, 1961 as introduced by Finance Act 2001 w.e.f 01.04.2002 lies on computation of income from international transaction having regard to Arm's Lengths Price which is hypothetical and not real income and consequently deleting the adjustment made u/s.92CA(3) of the Act on account of Technical fees receivable from AE as per the agreement for the F Y 2011-12 amounting to Rs. 98,22,939/-?

4.2 Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is correct in holding that no technical fee accrues to the assessee based on business prudence, commercial expediency and exigency, when it is mandatory on the part of the assessee company to charge the fees on accrual basis for the impugned assessment year as per Companies Act read with section 145?

4.3 Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is correct in not appreciating the basic tenet of transfer pricing that the transaction has to be viewed by lifting the veil of related-nature and whether unrelated parties in uncontrolled circumstances would have behaved in such manner in view of Section 92F(ii)?

4.4 Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is correct in not appreciating the legal position that once the income has accrued to the assessee from the AE. it has to be necessarily booked as revenue in the books of assessee and if it is not recoverable from the AE, nothing prohibits the assessee to write off in its books as bad debt later subject to provisions of law?

5.1 Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is correct in following the ITAT decision in assessee's own case for A.Y 2012-13 in relying on Hon'ble Supreme Court's decision in the case of UCO Bank (supra) in deleting the interest charged on the receivables when the facts are completely distinguishable?

ITA No.2741/M/2019 9 M/s. The Bombay Dyeing & Mfg. Co. Ltd.

18,62,51,866/- as subsidy from the Government of Maharashtra under ' The Package Scheme of Incentive ('PSI') 2007' as capital receipt' whereas there is no obligation casted upon the assessee to apply the subsidy for any particular purpose?

ITA No.2779/M/2019 for A.Y. 2013-14

“1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is correct in relying on Tribunal's decision in assessee's own case for AY 2012-13 wherein it is held that, when recovery of principal is doubtful, the question of charging of interest thereon on hypothetical basis does not arise despite the fact that, assessee is following mercantile system of accounting and the very foundation of special provisions relating to avoidance of tax contained in chapter X of Income Tax Act, 1961 as introduced by Finance Act 2001 w.e.f. 01.04.2002 lies on computation of income from international transaction having regard to Arm's Length Price which is hypothetical and not real income and consequently deleting the adjustment made u/s.92CA(3) of the Act on account of Charging of interest on shareholder deposits placed with the assessee's Associate Enterprises amounting to Rs. 1,27,66,301/-?

ITA No.2741/M/2019 10 M/s. The Bombay Dyeing & Mfg. Co. Ltd.

is not the international transaction of the impugned assessment year, whereas the issue under consideration is whether the chargeable interest on the deposit is the international transaction and not the deposit?

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adjustment made u/s.92CA(3) of the Act on account of interest on such outstanding balances amounting to Rs.1,64,59,050/-?

ITA No.2741/M/2019 12 M/s. The Bombay Dyeing & Mfg. Co. Ltd.

Assessee’s grounds of appeal

ITA No.335/M/2020 for A.Y. 2009-10

“I.GROUND 1 - TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF RISK INVOLVED IN GIVING GUARANTEE ON LOAN ADVANCED TO ASSOCIATE ENTERPRISE 1. On the facts and circumstances of the case and in law, the Id. CIT(A) erred in disregarding the binding decision of the Hon'ble Jurisdictional Mumbai Tribunal in Appellant's own case for earlier order whereby the impugned transaction was held not to be falling within the purview of international transaction as defined u/s. 92B and thereafter directing the AO to make addition on account of risk involved in giving guarantee on loans advanced to the AE applying the rate of 0.5%. 2. The Appellant prays that the impugned direction of the Id. CIT(A) be deleted.

II. GROUND II - SUBSIDY RECEIVED UNDER PACKAGE INCENTIVE SCHEME AMOUNTING TO RS.27,43,53,333/- is A CAPITAL RECEIPT NOT CHARGEABLE TO TAX:

WIYHOUT PREJUDICE TO GROUND II,

IIII GROUND III: NOT ADMITTING AND ADJUDICATING THE ADDITIONAL GROUND PREFERRED BY THE APPELLANT IN RESPECT OF EXCLUSION OF SUBSIDY WHILE COMPUTING BOOK PROFITS U/S. 115JB OF THE ACT;

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I.V. GROUND IV: ADDITION OF INCREMENTAL LONG TERM CAPITAL GAIN ON ACCOUNT OF CONVERSION OF CAPITAL ASSET INTO STOCK-INTRADE - RS. 8,78,21,905/-:

ITA No.2741/M/2019 for A.Y. 2010-11

GROUND NO. 1: TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF RISK INVOLVED IN GIVING CORPORATE GUARANTEE ON LOANS ADVANCED TO THE AE:

On the facts and circumstances of the case and in law, the CIT(A) erred in disregarding the binding decision of the Hon’ble Jurisdictional Mumbai Tribunal in Appellant’s own case for earlier year whereby the impugned transaction was held not to be falling within the purview of international transaction as defined u/s. 92B and thereafter directing the AO to make addition on account of risk involved in giving guarantee on loans advanced to the AE applying the rate of 0.5%.

The Appellant prays that the impugned direction of the CIT(A) be deleted.

GROUND NO. 2: ADDITION OF INCREMENTAL LONG TERM CAPITAL GAINS ON ACCOUNT OF CONVERSION OF CAPITAL ASSET INTO STOCK-IN-TRADE:

On the facts and circumstances of the case and in law, the CIT(A) erred in confirming the addition made by the AO on account of

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incremental long term capital gains (LTCG) arising on account of conversion of capital asset, being land, into stock-in-trade, considering the fair market value as on 01.4.1981 applying the rate of Rs. 220/- per sq. ft. instead of Rs.293/- per sq. ft. as determined by the registered valuer.

The Appellant prays that the addition of Rs.12,59,15.556/- on account of incremental capital gains as determined by the AO be deleted.

GROUND NO.3: NOT ADMITTING AND ADJUDICATING THE ADDITIONAL ROUND PREFERRED BY THE APPELLANT IN RESPECT OF EXCLUSION OF SUBSIDY WHILE COMPUTING BOOK PROFITS U/S. 115JB OF THE ACT:

On the facts and circumstances of the case and in law, the CIT(A) erred in not admitting and adjudicating the additional ground preferred by the Appellant during the course of appellate proceedings in respect of exclusion of amount of subsidy credited to the Profit and Loss Account for the purpose of computing book profits u/s. 115JB of the Act.

The CIT(A) failed to appreciate and ought to have admitted and adjudicated the additional ground since the same was purely a legal ground, based on various recent judicial pronouncements and no factual verification was required.

The CIT(A) erred in not granting any opportunity of being heard after receiving the remand report of the AO and thereby violated the principles of natural justice.

The Appellant prays that the CIT(A) be directed to admit and adjudicate the said ground on merits of the case.

WITHOUT PREJUDICE TO GROUND NO. 3;

GROUND NO. 4: NON-EXCLUSION OF RS.18,62,51,866/- BEING SUBSIDY RECEIVED UNDER PACKAGE INCENTIVE SCHEME:

On facts and circumstances of the case and in law, the AO erred in not excluding the amount of Rs.18,62,51,866/- received towards subsidy under the Package Incentive Scheme, 2007 of Maharashtra while computing book profits u/s. 115JB of the Act.

The AO failed to appreciate and ought to have held that having regard to the purpose for which the said subsidy was granted to the

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Appellant, the same was capital in nature and therefore deserves to be excluded while computing the book profits. The Appellant prays that the AO be directed to exclude the amount of Rs.18,62,51,866/- received towards subsidy while computing the book profits u/s. 115JB.”

ITA No.2741/M/2019 16 M/s. The Bombay Dyeing & Mfg. Co. Ltd.

Grounds of Revenue’s appeal bearing ITA No.928/M/2010 for A.Y. 2009-10, ITA Nos.3299 & 2799/M/2019 for A.Y. 2010-11 & 2013-14

Ground No.1 of A.Y. 2009-10 & 2010-11 bearing ITA No.928/M/2010 & ITA No.3299/M/2019 respectively and Ground No.12 of A.Y. 2013-14 bearing ITA Nos.2799/M/2019

ITA No.2741/M/2019 17 M/s. The Bombay Dyeing & Mfg. Co. Ltd.

Ground No.2 of A.Y. 2009-10, 2010-11 bearing ITA No.928/M/2010 & ITA No.3299/M/2019 and Ground No.14 of A.Y. 2013-14 bearing ITA Nos.2799/M/2019

Ground No.3 of A.Y. 2009-10, 2010-11 bearing ITA No.928/M/2010 & ITA No.3299/M/2019 and Ground Nos.1 to 7 of A.Y. 2013-14 bearing ITA Nos.2799/M/2019

ITA No.2741/M/2019 18 M/s. The Bombay Dyeing & Mfg. Co. Ltd.

interest for not taking any security, to the amount of shareholders’ deposit.

ITA No.2741/M/2019 19 M/s. The Bombay Dyeing & Mfg. Co. Ltd.

vide approval to obtain repayment of the said deposits on or before 2010 or earlier as the case may be. This repayment date is extended to 2015 by RBI. Copy of relevant letters issued by RBI is enclosed at Annexure-4 of the assessee’s paper book. Under the facts of the case, we appreciate the argument of the assessee that the said interest free deposit cannot be considered as an international transaction for the previous year ended 31st March 2012 as the said transaction was entered into during the previous year ended 31 March 1998 with the approval of statutory authorities. The statutory permissions required under the foreign exchange laws of India, are equally applicable to controlled and uncontrolled enterprises i.e. they are universally applicable and hence the very restrictions for permissions would be deemed to encompass the principle of neutrality and hence, the standard of arms length is inherent in the provision of law. Hence the company has a contractual and statutory obligation with the PTFSI for not charging any interest on the shareholder deposits and thereby it cannot take any recourse for charging interest till the year 2015 by which PTFSI is required to make payment to the company. There has been no inflow or outflow relating to the above deposit during the Previous Year 2011-12 and hence it is outside the purview of transfer pricing provisions. We are of the view that the assessee cannot be asked to do something which is impermissible in law and expenditure incurred in compliance of law or the direction of the statutory authorities, the same is allowable. This view is supported by the case law relied on by the assessee of Hon’ble Bombay High court in the case of CIT vs. Hukumchand Mills Ltd. (1993) 202 ITR 474 (Bom.). Further, another aspect argued by the learned Counsel is that interest and principal amount itself is doubtful of recovery, the question of taxing hypothetical interest does not arise. This view is also supported by the decision of Hon’ble Supreme Court in the case of UCO Bank Vs. CIT (1999) 237 ITR 889 (SC). In view of the above discussion, we are of the considered opinion that no addition on account of transfer pricing adjustment can be made in relation to interest @ 8.39% amounting to Rs.1,27,66,301/- in relation to non-interest bearing shareholder’s deposits amounting to Rs. 15,21,60,920/- with an associate company. We reverse the orders of DRP and AO/TPO on this issue and allow this issue of the appeal of assessee.”

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and as such no addition on account of transfer pricing adjustment qua non-interest bearing shareholders’ deposit is sustainable in the eyes of law. Hence, ground No.3 of A.Y. 2009-10, 2010-11 & grounds No.1 to 7 of A.Y. 2013-14 of Revenue are determined against it.

Ground No.4 of A.Y. 2010-11 & Grounds No.8 to 9 of A.Y. 2013-14 bearing ITA No.3299/M/2019 & ITA Nos.2799/M/2019 respectively

“11. In view of the above facts and circumstances, we are of the view that since there is uncertainty involved in collection of the technical knowhow fees from the PTFSI due to its bad financial condition, the assessee has rightly not recognized the revenue. This view of ours is supported by the decision of Hon’ble Supreme Court in the case of Godhra Electricity Co. Ltd. vs. CIT (1997) 225 ITR 746 (SC), wherein the question whether there was real accrual of income to the assessee

ITA No.2741/M/2019 21 M/s. The Bombay Dyeing & Mfg. Co. Ltd.

company in respect of the enhanced charges for supply of electricity had to be considered by taking the probability or improbability of realisation in a realistic manner. If the matter was considered in this light it was not possible to hold that there was real accrual of income to the assessee company in respect of the enhanced charges for supply of electricity which were added by the AO while passing the assessment orders in respect of the assessment years under consideration. Hon’ble Supreme Court held that the Tribunal, therefore, had rightly held that the claim at the increased rates as made by the assessee-company on the basis of which necessary entries were made represented only hypothetical income and the impugned amounts as brought to tax by the Assessing Officer did not represent the income which had really accrued to the assessee- company during the relevant previous years. Taking the same principle, in the present case before us, we delete the addition made AO / TPO and confirmed by DRP on account of transfer pricing adjustment towards technical knowhow fees from its AE i.e. PTFSI. We direct the AO accordingly. This issue of assessee’s appeal is allowed.”

ITA No.2741/M/2019 22 M/s. The Bombay Dyeing & Mfg. Co. Ltd.

Ground No.4, 5 & 10 of A.Y. 2009-10, 2010-11 & A.Y. 2013-14 bearing ITA No.928/M/2010 & ITA No.3299/M/2019 and ITA No.2799/M/2019 respectively

ITA No.2741/M/2019 23 M/s. The Bombay Dyeing & Mfg. Co. Ltd.

attention to section 92B of the Act which defines the term "international transaction" used in section 92(1) of the Act as under:- "International transaction means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more enterprises." As will be observed from the above provision the outstanding debit balances with the associates is not directly covered within the ambit of 'international transaction'. Also, the terms "any other transaction having a bearing on the profits, income, losses or assets of such enterprises" must be interpreted ejusdem generis with the transactions mentioned in the preceding clause or at least analogous to it and therefore would not include the provision of guarantee for loans taken by associate enterprises. In view of the above, we are of the view that it is the real income and not the hypothetical income which is to be taxed and real income is to be ascertained from the realistic and practical point of view as held by Hon’ble Supreme Court in the case of UCO Bank (Supra). Hence, we delete the disallowance and reverse the orders of the lower authorities.”

ITA No.2741/M/2019 24 M/s. The Bombay Dyeing & Mfg. Co. Ltd.

Ground No.6 of A.Y. 2010-11 & ground No.11 of A.Y. 2013-14 bearing ITA No.3299/M/2019 & ITA Nos.2799/M/2019 respectively

ITA No.2741/M/2019 25 M/s. The Bombay Dyeing & Mfg. Co. Ltd.

Hon’ble Supreme Court in case of Saliney Steel and Press Works Ltd. (supra). Similarly, Delhi Tribunal in case of L G Electronics India Pvt. Ltd. v. Addl. CIT in ITA No. 1404/Del/2007 for AY 2002-03 vide order dated 26-02-2010, has held the sales tax subsidy availed by the assessee as revenue receipt since it was not linked with setting up of industry, rather linked with the production. Reliance was also placed on the decision of the Special Bench of Mumbai Tribunal Reliance Industries Limited (supra), wherein the Tribunal has, after considering the decision of the Supreme Court in Sahney Steels (supra), held that if a subsidy is received for development of industries in backward areas, it constitutes 'capital' receipt regardless of the fact that it has been received only after the commencement of production, as it is the 'purpose' of the scheme which is of fundamental importance in determining the nature of the subsidy as 'revenue' or 'capital'. This decision of the Special Bench has been upheld by Hon’ble Bombay High Court in CIT v. Reliance Industries Limited [2011] 339 ITR 632 (Bom.).

ITA No.2741/M/2019 26 M/s. The Bombay Dyeing & Mfg. Co. Ltd.

not for supplementing their profits, such subsidy can be regarded as 'capital' receipt in the hands of the recipient. Further, it has been time and again held by various Courts that Circulars issued by CBDT are binding on Revenue and it is not open to the Revenue even to raise a contention contrary to the binding circular. Therefore, it is the purpose' under the Scheme which is relevant to decide whether the incentives are 'capital' or 'revenue' receipt and other factors like the point of time when incentive is received, the form, etc are irrelevant considerations. For the same reasons, nomenclature given to any incentive/component of an incentive will not be decisive for determining the 'revenue' or 'capital' nature of such benefits. Thus, considering that the purpose of PSI is to enable the Company to set up a new unit or to expand an existing unit to encourage industrial development in the State, the subsidy / incentives received is on capital account in the present case of the assessee and hence, not chargeable to tax. Accordingly, this issue of the assessee’s appeal is allowed.”

Ground No.13 of A.Y. 2013-14 bearing ITA No.2799/M/2019

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completion method for the working of LTCG, the AO made addition of Rs.2,52,57,37,458/- being the differential amount in capital gain offered and thereby added the same to the income of the assessee.

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provides useful information on the extent of contract activity and performance during a period. 25. Under the percentage of completion method, contract revenue is recognised as revenue in the statement of profit and loss in the accounting periods in which the work is performed. Contract costs are usually recognised as an expense in the statement of profit and loss in the accounting periods in which the work to which they relate is performed. However, any expected excess of total contract costs over total contract revenue for the contract is recognised as an expense immediately in accordance with paragraph 35.

"5.1 The percentage completion method should be applied in the accounting of all real estate transactions/activities in the situations described in paragraph 3.3 above, i.e., where the economic substance is similar to construction contracts. Some further indicators of such transactions/activities are:

(a) The duration of such projects is beyond 12 months and the project commencement date and project completion date fall into different accounting periods.

(b) Most features of the project are common to construction contracts, viz., land development, structural engineering, architectural design, construction, etc.

(c) While individual units of the project are contracted to be delivered to different buyers these are interdependent upon or interrelated to completion of a number of common activities and/or provision of common amenities.

(d) The construction or development activities form a significant proportion of the project activity."

The accounting policy followed in respect of real estate activity as disclosed in Notes to Financial Statements at (d) under Significant Accounting Policies, is as under:

"(d) Revenue from real estate is recognized on the transfer of all significant risks and rewards of ownership to the buyers and it is not unreasonable to expect ultimate collection and no significant uncertainly exists regarding the amount of consideration.

The freehold land under Real Estate Development planned for sale is converted from fixed assets into stock-in-trade at market value. The difference between the market value and

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cost of that part of freehold land is credited to revaluation reserve. Revenue arising on sale of undivided interest in the underlying freehold land pertaining to fiats / office premises, which are under construction, is being accounted on the percentage of completion method.

Revenue from construction activity is recognized on the 'Percentage of Completion Method' of accounting. Revenue is recognized in relation to the sold areas only, on the basis of percentage of cost incurred as against the total cost of project (including land). Revenue is recognized if the cost incurred is in excess of 25% of the total estimated cost. The estimates of saleable area and cost of construction are revised periodically by the management. The effect of such changes to estimates is recognized in the period such changes are determined. The estimated cost of construction as determined is based on management's estimate of the cost expected to be incurred till the final completion and includes cost of materials, service and other related overheads. Unbilled costs are carried as real estate work in progress.

Determination of revenues under the percentage of completion method necessarily involves making estimates by the Company, some of which are of a technical nature, concerning, where relevant, the percentages of completion, costs to completion, the expected revenues from the project activity and the foreseeable losses to completion."

"transfer, in relation to a capital asset, includes, - …… …….

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"(iv) In a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment".

Hence, under section 45 of the Act, profits & gains arising from such transfer (conversion to stock in trade) is chargeable to tax in the year of transfer. However as per non obstante provision contained in sub section (2) of section 45, the capital gains shall be chargeable to income tax as income of the previous year in which such stock in trade is sold or otherwise transferred by him. Since the sale of Stock in Trade would actually happen when the flats are completed and ownership transferred, a strict interpretation of section 45(2) would suggest that the capital gains arising on conversion of stock in trade would be chargeable to tax when project is completed. However, it would be inconsistent to say that the business profits arising from real estate activity would be chargeable to tax on percentage completion method each year during the construction activity and the capital gains portion of there is chargeable to tax in a different year i.e. when the project is completed. A reading down of section 45(2) of the Act would therefore mean that the capital gains on conversion should be charge to tax in the same year in which the corresponding business income is offered to tax, on the same basis i.e. percentage completion method which the company is following. Further, the assessee has made disclosure by way of a note at serial no. 31 in Notes to Financial Statement in relation to the Revaluation Reserve and amount released from the revaluation reserve on credited to profit and loss account and which is read as under:

"31. The Company has during the year ended March 31, 2012 converted a part of the freehold land under real estate development from Fixed Assets to Stock in trade at market value and the difference between the market value and cost amounting to Rs. 764.30 crores (2010-11 Rs. 853.96 crores) has been credited to Revaluation Reserve. An amount of Rs.165.27 crores (2010-11 Rs. 70.57 crores) has been released from revaluation reserve to Statement of Profit and Loss in proportion of revenue recognized on the area sold in accordance with the accounting Policy.”

ITA No.2741/M/2019 31 M/s. The Bombay Dyeing & Mfg. Co. Ltd.

assessee’s appeal is set aside for verification purpose only with the above directions.”

Ground No.14 of A.Y. 2013-14 bearing ITA No.2799/M/2019

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Ground No.15 of A.Y. 2013-14 bearing ITA No.2799/M/2019 33. AO made disallowance of Rs.7,97,935/- made under section 14A read with rule 8D while computing the book profit under section 115JB of the Act. However, the Ld. CIT(A) deleted the same.

Ground No.5 of A.Y. 2009-10 bearing ITA No.928/M/2010 35. Assessee’s claim of deduction of Rs.34,06,295/- qua provision for inter corporate deposit written off has been disallowed by the AO. However, the Ld. CIT(A) decided the issue by directing the AO to verify the facts if the same were actually written off and if so allowed the same as deduction by returning following findings:

ITA No.2741/M/2019 33 M/s. The Bombay Dyeing & Mfg. Co. Ltd.

“14. The fact of the case is examined. The sum is titled as "Provision". The submission does speak on "writing off' or "written off' the debts due. Security Deposit forfeited is a deductible expenditure. Such a view is held in multitude of decisions including AT&T Communication Services India Limited vs ACIT(6016/Del/2015) dated 15.02.2018 in addition to case decisions relied upon by assessee. This covers Rs 15,00,965. Regarding Rs 19,05,221 it is a business advance, and if actually written off, is eligible for deduction. 15. The Assessing Officer disallowed the sum holding it as capital expenditure. In instant case, the sum is eligible for deduction if it is actually written off. Whether it is written off or not needs verification. The Assessing Officer is directed to merely verify (other aspects as held by me in preceding paragraph) whether the sums were actually written off and if so, allow the sum as a deduction. With this direction the ground is disposed of. No order prejudicial to assessee should be passed without granting opportunity of being heard. The ground is treated as partly allowed.”

Ground No.6 of A.Y. 2009-10 bearing ITA No.928/M/2010

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off' the debts due. Security Deposit forefeited is a deductible expenditure. Such a view is held in multitude of decisions including AT&T Communication Services India Limited vs ACIT(6016/Del/2015) dated 15.02.2018 in addition to case decisions relied upon by appellant. This covers Rs.21,57,000/-. 18. The Assessing Officer disallowed the sum holding it as capital asset. In instant case, the sum is eligible for deduction if it is actually written off. Whether it is written off or not needs verification. The Assessing Officer is directed to merely verify (other aspects as held by me in preceding para) whether the sums were actually written off and if so, allow the sum as a deduction. With this direction the ground is disposed of. No order prejudicial to assessee should be passed without granting opportunity of being heard. The ground is as treated as Partly Allowed.”

Assessee’s appeals bearing ITA No.335/M/2020 & ITA No.2741/M/2019 for A.Y. 2009-10 & 2010-11 respectively

Ground No.1 of A.Y. 2009-10 & 2010-11 bearing ITA No.335/M/2020 & ITA No.2741/M/2019 respectively

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amount of loan granted on account of arms length price by partly accepting the contention of the assessee.

“14. Before us assessee contended that DRP as well as AO/TPO failed to understand that the provision of counter guarantee to a third party for the loans borrowed by the JV of the assessee cannot be regarded as an 'International Transaction' within the meaning of section 92B of the Act. Furthermore, the assessee had already debited actual commission on counter indemnity charged by banks for the year ended 31.03.2012 to the associate company's account. It was claimed that similar issue had also arisen in the assessee's own case for AY 2006-07, wherein the DRP has deleted the said disallowance made by the AO on account of the counter guarantee charges and the relevant para of DRP order reads as under: -

"In view of the submissions made by the assessee that counter indemnity charges have already been debited to PTFS, the very basis on which the TPO has made the adjustment appears to have gone. As the TPO had merely taken a benchmark of 3% while the assessee has debited the actual expenses, the adjustment made on this account is directed to be deleted."

Further, in assessee’ own case for AY 2007-08, this transaction was accepted at arm's length and no addition was made. Further in assessee’ own case for AY 2008-09 addition was made by AO but deleted by CIT(A) on this ground. It was argued that the lower

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authorities observed that the assessee has assumed risk in providing the counter guarantee to bank for lending money to its subsidiary and for that it should have charged risk premium for assuming the risk by providing the counter guarantee. 15. It was argued that the transaction is not an international transaction per Section 92B of the Act, which defines an 'international transaction' as under: -

"International transaction means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more enterprises."

It is submitted that an 'international transaction' would arise only when the foreign subsidiary defaults in making the payment of loan to the bank. Therefore, section 92(1) of the Act would, primarily, not be applicable at all, till the guarantee is invoked.

"There can be number of situations in which an item may fall within the description set out in clause (c) of Explanation to Section 92B, and yet it may not constitute an international transaction as the condition precedent with regard to the 'bearing on profit, income, losses or assets' set out in Section 92B(1) may not be fulfilled. For example, an enterprise may extend guarantees for performance of financial obligations by its associated enterprises. These guarantees do not cost anything to the enterprise issuing the guarantees and yet they provide certain comfort levels to the parties doing dealings with the associated enterprise. These guarantees thus do not have any impact on income, profits, losses or assets of the Assessee. There can be a hypothetical situation in which a guarantee default takes place and, therefore, the enterprise may have to pay the guarantee amounts but such a situation, even if that be so, is only a hypothetical situation, which is, as discussed above, excluded.

In any event, the onus is on the revenue authorities to demonstrate that the transaction is of such a nature as to have "bearing on profits, income, losses or assets" of the

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enterprise, and there was not even an effort to discharge this onus. Such an impact on profits, income, losses or assets has to be on real basis, even if in present or in future, and not on contingent. or hypothetical basis, and there has to be some material on record to indicate, even if not to establish it to hilt, that an intra AE international transaction has some impact on profits, income, losses or assets. Clearly, these conditions are not satisfied on the facts of this case.

We have held that even after the amendment in Section 92 B'by amending Explanation to Section 92 B, a corporate guarantee issued for the benefit of the AEs, which does not involve any costs to the assessee, does not have any bearing on profits, income, losses or assets of the enterprise and, therefore, it is outside the ambit of ‘international transaction' to which ALP adjustment can be made. As we have decided the matter in favour of the assessee on this short issue, we see no need to address ourselves to other legal issues raised by the assessee and the judicial precedents cited before us.

For the reasons set out above, and as we have held that the issuance of corporate guarantees in question did not constitute ' international transaction' within meanings thereof under section 92B, we uphold the grievance of the assessee and direct the Assessing Officer to delete the impugned ALP adjustment of Rs 33,10,161. The assessee gets the relief accordingly."

ITA No.2741/M/2019 38 M/s. The Bombay Dyeing & Mfg. Co. Ltd.

"For the guarantee given to the bank against the financial assistance given to its AEs, no commission was charged by the assessee company on the ground that the said AEs were not benefited by the guarantee so given and it was the assessee who benefited as a result of commercial benefits secured for future. In support of this stand of the assessee, the assessee has contended that business strategy should be taken into consideration while making any TP adjustments in respect of such transactions and has relied on the OECD Transfer Pricing Guidelines issued in 2010. As stated in para 1.59 of the said guidelines, the business strategies should also be examined in determining comparability for transfer pricing purposes and certain illustrations of such business strategies are also given therein. As stated in para 1.60 of the said guidelines which has been relied upon by the assessee, business strategies also could include market penetration schemes and taxpayer seeking to penetrate a market or to increase its market share might temporarily charge a price for its product that is lower than the price charged for otherwise comparable products in the same market. As explained further, a taxpayer seeking to enter a new market or expand (or defend) its market share might temporarily incur higher costs and hence achieve lower profit levels than other taxpayers operating in the same market. The relevant facts of the present case do not indicate that there was any such business strategy adopted by the assessee in not charging

ITA No.2741/M/2019 39 M/s. The Bombay Dyeing & Mfg. Co. Ltd.

commission in respect of guarantees issued for its AEs. As a matter of fact, there is nothing to suggest that any such business strategy was adopted by the assessee with specific intention or motive and the case has been sought to be made out merely on the basis of commercial expediency by claiming that the assessee was benefited as a result of giving the guarantees in the form of commercial benefits secured for future." 20. Thus, the above decision of the Mumbai Tribunal reiterates the proposition of the assessee that when the guarantee has been given by 26 ITA No. 1716/ Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) the assessee results in a direct or indirect benefit to the assessee itself, then there arises no need to charge any commission on the same. Thus, following the decisions of the co- ordinates benches of the Tribunal (supra), we, in the present case are of the view that the above transaction does not fall within the purview of international transaction as defined under section 92B of the Act and hence, the orders of the lower authorities are reversed. This issue of assessee’s appeal is allowed.”

ITA No.2741/M/2019 40 M/s. The Bombay Dyeing & Mfg. Co. Ltd.

Ground No.2 of A.Y. 2009-10 bearing ITA No.335/M/2020, Ground No.3 of A.Y. 2009-10 & 2010-11 bearing ITA No.335/M/2020 & ITA No.2741/M/2019 respectivley & Ground No.4 of A.Y. 2010-11 bearing ITA No.2741/M/2019

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assessee’s own case for A.Y. 2012-13. Consequently, Ground No.2 of A.Y. 2009-10, Ground No.3 of A.Y. 2009-10 & 2010-11 & Ground No.4 of A.Y. 2010-11 are decided in favour of the assessee for statistical purposes.

Order pronounced in the open court on 05.07.2022.

Sd/- Sd/- (GAGAN GOYAL) (KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER

Mumbai, Dated: 05.07.2022. * Kishore, Sr. P.S. Copy to: The Appellant The Respondent The CIT, Concerned, Mumbai The CIT (A) Concerned, Mumbai The DR Concerned Bench

//True Copy//

By Order

Dy/Asstt. Registrar, ITAT, Mumbai.