PRAMOD LAKRA, DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 11(1), KOLKATA, KOLKATA vs. PHILLIPS CARBON BLACK LTD, KOLKATA

Aggrieved by the said order the assessee preferred an appeal before the Ld. CIT(A) wherein the appeal of the assessee has been allowed on the issue relates to the deduction u/s 80IA, addition made on ICDS and partly allowed the disallowance u/s 80G and delay deposit of employees contribution and dismissed the appeal of the assessee u/s 14A, 35(2)(ab), disallowance in relation to education u/s 37 or denial of to 2459/Kol/2024 Assessment Years: 2017-18, 2018-19, 2020-21, 2021-22 Phillips Carbon Black Ltd. exclusion of provision for deferred taxes in computation of book profit u/s 115JB of the Act and according to the short granting of MAT credit.

The Ld. D.R challenges the very impugned order thereby submitting that the Ld. CIT(A) has erred on facts in not appreciating that the TPO has applied external CUP as the most appropriate method which is one of the safe methods or determining ALP as laid down in the Act and the Ld. CIT(A) has not discussed in the body of the order as to why the same is not the MAM. The Ld. D.R has further submitted that the Ld. CIT(A) has erred in law upholding the method adopted by the assessee to bench mark transaction wherein the average annual land cost of electricity purchased consuming unit from SEB is taken as market value whereas as per explanation to section 80IA(8) of the Act market value in relation to any goods or services meant the prices that such goods or services to the ordinarily fetched in the open market or Arm’s Length Price as defined in clause (4) of Section 92f of the Act, where the transfer of such goods or services is a specified domestic transaction referred to Section 92BA. The Ld. D.R has further submitted that the Ld. CIT(A) has further committed wrong in not appreciating the fact that the assessee is generating unit [CPP] account as such claim of any benefit u/s 80IA of the Act and further did wrong by not appreciating that the manufacturer cannot be compensated based on rate meant for distributor and thereby ignoring the clear provision of Rule 10B(2)(b) of the Rule, 1962 that specifies the function, assets and risks to be essential comparability factors for reference. The Ld. D. R has further submitted that the Ld. CIT(A) erred in fact and law by allowing CSR expenditure to the extent of Rs. 1,16,00,000/- to be allowable for claiming deduction u/s 80G of the Act. The Ld. D.R has further submitted that the Ld. CIT(A) has erred in law by allowing deduction u/s 80IA of the Act against the gross total income as against deduction restricted to profit and gains from specified business as per provision of Section 80IA of the Act. His further submission is that the Ld. CIT(A) did wrong in fact and law in deleting the addition u/s 14A read with Rule 8D of the Act. The Ld. D.R has further to 2459/Kol/2024 Assessment Years: 2017-18, 2018-19, 2020-21, 2021-22 Phillips Carbon Black Ltd. argued that the Ld. CIT(A) erred in law for deleting the club expenses and club membership expenses without any verification and in absence of documentary evidences in respect of such expenses. The prayer of the Ld. D.R is to set aside the order passed by the Ld. CIT(A).

Contrary to that the Ld. A. R supports the impugned order of Ld. CIT(A) thereby submitting that the TPO has passed an order making his reliance on the decision of Hon’ble Calcutta High Court passed in the case of ITC Ltd. in 236 Taxman 612 ignoring the fact that the decision of the Hon’ble Calcutta high Court has been reversed by the Hon’ble Supreme Court in the case of CIT vs. Jindal Steel & Power Ltd. reported in 157 taxmann.com 207 (SC). The Ld. A.R submits that the decision passed by the Hon’ble Apex Court is binding upon the AO as well as TPO and the Ld. CIT(A) has rightly passed an order in favour of the assessee. The Ld. A.R has further submitted that the Hon’ble Calcutta High Court in the case of CIT vs. Star Paper Mills Ltd. has followed the decision of Hon’ble Apex Court on the same issue and decide the case in favour of the assessee The further submission of the assessee is that the Ld. CIT(A) has further made reliance on the decision rendered by the Hon’ble ITAT, Kolkata in the assessee’s own case for AY 2013-14 passed in ITA No. 2628/Kol/2009. The Ld. A.R has further submitted that on the issue of partial disallowance u/s 80IA of the Act that the Ld. CIT(A) has placed his reliance on the decision of Hon’ble Supreme Court passed in the case of CIT vs. Reliance Energy Ltd. and also placed reliance on the decision of Hon’ble Bombay High Court. The further submission of the Ld. A.R is that the Ld. CIT(A) has passed an order in favour of the assessee in the issue by giving their complete reliance on the decision passed by the Hon’ble apex Court, High Court as well as decision passed by the ITAT in the assessee’s own case, so there is no infirmity in the impugned order of the Ld. CIT(A).

Upon hearing the submission of the counsel of the respective parties, we have perused the impugned order and find that the sole grievance of the revenue in the several grounds raised

The facts of the case are that, the assessee is engaged in the business of manufacture of carbon blank having its factories at Durgapur, Kochi and Mundra. The assessee operates four (4) power plants whose profits are eligible for deduction u/s 80- IA of the Act. During the relevant year, these power plants had generated and distributed power which was entirely consumed by the manufacturing unit of the assessee. Having regard to the provision of Sec. 801A(8), the electricity transferred from the power plants to the carbon black manufacturing units was benchmarked at the rates of Rs.5.49/unit, Rs.5.50/unit & Rs.5.91/unit by applying the CUP Method viz., the landed price at which the manufacturing unit would have procured power from the respective SEBs at West Bengal, Kerala & Gujarat. After deducting the expenses incurred by these three power plants, the aggregate stand-alone profits of all the eligible units worked out to Rs. 102,48,62,650/- which was claimed as deduction u/s 80-IA of the Act. On perusal of the order of the Ld. TPO, it shall be noted that he had rejected the assessee's benchmarking methodology by relying on to the decision of Hon'ble Calcutta High Court in the case of ITC Limited (supra) and has followed the ratio laid down therein to justify his own benchmarking analysis The entire rationale and line of reasoning given by the Ld. TPO to negate the appellant's benchmarking analysis and propound his theory of taking the rate at which the power generating station/s was supplying power to the Grid as ALP rate was based on the observations and findings rendered by the to 2459/Kol/2024 Assessment Years: 2017-18, 2018-19, 2020-21, 2021-22 Phillips Carbon Black Ltd. Hon'ble Calcutta High Court in the case of CIT Vs ITC Ltd (supra) wherein also the price at which power is sold by power generation stations to distribution companies was taken as comparable ALP price as opposed to the price at which SEB sells power electricity to the manufacturing units. It is important to mention here that the reliance placed by the Ld. TPO on the decision of the Hon'ble Calcutta High Court in the case of ITC Limited (supra) was misplaced since the decision of the Hon'ble Calcutta High Court has since been reversed by the Hon'ble Supreme Court in their lead order in the case of CIT Vs Jindal Steel & Power Ltd (157 taxmann.com 207). The Hon'ble Supreme Court has held that the assessee who are engaged in industrial activities and have set up captive power plants, then the market value of power supplied by assessee's CPP to its industrial units should be computed by considering the rate of transfer of power at which the State Electricity Board supplied power to consumers in the open market and not comparing it with the rate of transfer of power when sold by the assessee or power generation station to the State Electricity Board. The Hon'ble Apex Court noted that the price at which surplus power was supplied by the assessee to the State Electricity Board was determined entirely by State Electricity Board in terms of statutory regulations and contractual terms and that such a price could not be equated with market value as was understood for purpose of Section 80-IA(8) of the Income Tax Act, 1961. Instead, the Hon'ble Apex Court held that the rate at which the State Electricity Board supplied electricity to industrial consumers would have to be taken as market value for computing deduction u/s 80-IA. Thus, in totality, the Hon'ble Apex Court has concluded that the market value of the power supplied by CPP to an industrial unit should be computed by considering the rate at which the State Electricity Board supplied power to the industrial consumers in the open market and not by comparing it with the rate of power when sold by the Assessee to the State Electricity Board. The Hon'ble Supreme Court emphasized that the rate contended by the Revenue was not the rate at which an industrial consumer could have purchased power in the open market.

In this regard we have gone through a later judgment of the Hon'ble Calcutta High Court in the case of CIT Vs Star Paper Mills Ltd. (172 taxmann.com 391) filed by to 2459/Kol/2024 Assessment Years: 2017-18, 2018-19, 2020-21, 2021-22 Phillips Carbon Black Ltd. the assessee [Page 1-19 of the Judicial PB]. In the decided case the assessee who was engaged in manufacture of paper had set up a captive power plant to supply power to its paper manufacturing units. The assessee had benchmarked the transfer of power from its power unit to its manufacturing unit at the price at which the paper manufacturing unit was procuring power from the State Electricity Board. In this decided case also, the TPO had benchmarked the transfer of power at which the power generating stations was supplying power to the State Electricity Board by following the earlier decision of Hon'ble Calcutta High Court in the case of ITC Ltd (supra). On appeal, the Hon'ble ITAT, Kolkata following their earlier decision rendered for AY 2016-17 in 134 taxmann.com 177 upheld the benchmarking methodology adopted by the assessee to value the transfer of power at the rate at which the manufacturing unit was procuring power from the Grid. On further appeal by the Revenue, the Hon'ble Calcutta High Court after taking note of the decision of CIT Vs Jindal Steel & Power Ltd (supra) wherein their earlier decision in the case of ITC Ltd (supra) was reversed, since upheld the decision of the Hon'ble ITAT vide its recent order dated 05.02.2025 passed in ITAT/214/2024. It is also material to mention that the Hon'ble ITAT, Kolkata in ITC Ltd's own case for subsequent AY 2009-10 in ITA Nos.685/Kol/2014 & 1267/Kol/2014 read with MA Nos. 17-18/Kol/2019 have also expressed a divergent view as expressed in their own case by Hon'ble Calcutta High Court in FY 2001-02 by holding that the said judgment has since been reversed by Hon'ble Supreme Court and following the ratio decidendi laid down therein, the assessee's benchmarking methodology viz., the price at which the manufacturing units procures power from SEB, was held to be appropriate ALP.

Going over the above discussion, we do not find anything to interfere in the order of Ld. CIT(A) on this issue.

This ground raised

This ground is against the Ld. CIT(A)'s action of deleting the disallowance made by the AO in respect of CSR donations whose 50% of the sum i.e. Rs.58,00,000/- [1,16,00,000 X 50%] was claimed as deduction u/s 80G of the Act. The facts of the case are that, during the year the assessee had made CSR contributions of Rs. 1,60,96,048/- , out of which sum to the extent of Rs. 1,16,00,000/- was paid to charitable institution registered u/s 80G of the Act. The assessee had inter alia disallowed the entire CSR expenditure of Rs. 1,60,96,048/- in terms of Explanation 2 to Section 37(1) of the Act. However, since donation to the extent of Rs. 1,16,00,000/- qualified for specific deduction u/s 80G of the Act, it was separately claimed by way of deduction in the manner as prescribed therein i.e. 50% of Rs. 1,16,00,000/- being Rs.58,00,000/-. The AO however held that the CSR donations were a mandatory obligation u/s 135 of the Companies Act, 2013 and was not voluntary in nature and thus did not qualify for deduction u/s 80G of the Act. The AO accordingly disallowed the same. It is submitted that the reason given by the AO for disallowing the deduction claimed u/s 80G in respect of CSR donations to registered charitable trusts is unjustified as nowhere do the provisions of Section 80G provide that the sums paid to charitable trusts have to be 'voluntary' in nature so as to become eligible for deduction under the said provision. It is further submitted that, it was the assessee's sole prerogative to decide as to the manner in which it proposes to contribute towards CSR activities. It was not a case that the assessee has contributed to the registered charitable trust in question under any specific mandate or compulsion. Instead, the appellant has voluntarily decided to contribute to the registered charitable trust(s). Hence, the AO's action that the donation was not made at the assessee's own volition was untenable.

In view of the above table, it would be noted that the club expenses have been consistently incurred by the assessee over the years and there has not been any major variation and/or change in the trend of expenses. It is pertinent to submit that, in none of the past or succeeding years, whose assessments were completed u/s 143(3) of the Act, has the Department disputed the allowability of the club expenses and full deduction in respect of the same has been allowed.

Going over the discussion made above, we do not find any infirmity in the impugned order passed by the Ld. CIT(A) on the issued involved except the issue relates to the disallowance u/s 14A of the Act that will discuss in deciding the appeal of the assessee. Accordingly, the appeal filed by the revenue is hereby dismissed to the extent of issue as discussed above.

Now we shall take other revenue’s appeals and find that the issues are similar to one as decided by us in for AY 2018-19 .Since we have decided the similar issue in for AY 2018-19 in favour of the revenue, therefore our findings/decisions in the above ITA No. 2457/Kol/2024 for AY 2018-19 to 2459/Kol/2024 ITA No. 2034/Kol/2024 Assessment Years: 2017-18, 2018-19, 2020-21, 2021-22 Phillips Carbon Black Ltd. would, mutatis mutandis, apply to these appeals as well. Consequently all the appeals of the revenue are dismissed.

In this appeal the assessee preferred an appeal by submitting that that the Ld. CIT(A) has erred in upholding the action of the AO in not allowing the weighted deduction claimed u/s 35(2)(ab) of the Act and added Rs. 4,19,55,525/- and further the Ld. CIT(A) has erred in upholding the action of AO in invoking Rule 8D before pointing out any infirmity in not accepting the suo-moto disallowance of Rs. 11,54,387/- made by the assessee u/s 14A of the Act thereby resulting in further addition of Rs. 44,96,573/-. The Ld. A.R submits that there was no objective satisfaction recorded by the AO before invocation of Rule 8D, therefore, disallowance made u/s 14A was bad in law. The submission of the assessee is that the assessee had explained that no part of any other item of expenditure was relatable to component of dividend income and in that view of the matter no further disallowance is called for in this regard. The Ld. A.R has also placed reliance on the decision passed by the Hon’ble Calcutta High Court in the case of Kesoram Industries Ltd. vs. PCIT and decision of Hon’ble supreme Court in the case of Maxopp Investment ltd. vs. CIT 402 ITR 640. The Ld. A.R has further submitted that the disallowance u/s 14A in terms of formula laid down in Rule 8D(2)(ii) should be computed only with reference to the cost of dividend yielding investment. The further submission of the Ld. AR with regard to the disallowance of weighted component of deduction u/s 35(2)(ab) of the Act is concerned that the Ld. CIT(A) confirmed the order of AO on this issue for want of form 3CL. The submission of AR is that the assessee in now in receipt in form 3CL issued from DSIR, hence, his prayer is to send back the same to the file of AO for reverification and by giving an opportunity to the assessee to submit form 3CL. We have perused the order and find that in the first issue raised by the assessee with respect to disallowance made u/s 14A that the Ld. CIT(A) has directed the AO to recompute the disallowance under rule 8D(2)(iii) with reference to the component closing value of this investment which actually yielded to 2459/Kol/2024 Assessment Years: 2017-18, 2018-19, 2020-21, 2021-22 Phillips Carbon Black Ltd. dividend income during the year. It is important to mention here that the assessee has made suo-moto disallowance of Rs. 11,54,387/-. The assessee is a public asset company has followed the decision of Hon’ble ITAT, Kolkata in assessee’s own case for AY 2009-10 and thereafter directed the AO to recompute the disallowance. Hence, we do not find any infirmity in the impugned order of Ld. CIT(A) on this issue, accordingly, this issue goes against the assessee and the order passed by the Ld. CIT(A) is upheld.

So far the issue with respect to deduction u/s 35(2)(ab) of the Act is concerned. We find substance in the argument of the assessee that the assessee has to give an opportunity to place form 3CL as the assessee received form 3CL issued by DSIR from 04.04.2024 as the order passed by the Ld. CIT(A) only on this ground that the assessee did not file form 3CL. Accordingly, we are restoring the appeal of the assessee to the file of AO on this issue to decide afresh. Accordingly the appeal filed by the assessee is partly allowed.