SRF LTD.,NEW DELHI vs. DCIT (LTU), NEW DELHI

Following grounds have been raised in the assessee's appeal in for the assessment year 2012-13: The Ld DRP/AO have erred in law and on facts, 1.

We hereunder undertake transfer pricing issues first and thereafter corporate tax issues are dealt in separately. Ground no. 1 t0 3 are general in nature and therefore are not adjudicated upon. We proceed to deal with specific grounds.

We have heard the rival contentions, perused the relevant findings and as well as material referred to before us at the time of hearing. We have examined identical issue in detail in the assessee’s own case for AY 2010-11 (ITA no. 356/Del/15) upholding the corporate guarantee fee at 0.25% as arm’s length rate of such transaction. Since facts, legal position and other factors are same for this year, we uphold the transaction of corporate guarantee fee at 0.25% charged by the assessee from its AE at arm’s length and thus addition of Rs.1,27,82,374/- made by TPO on this account is deleted.

The ld. counsel for assessee argued that no disallowance in respect of Rule 8D(2)(ii) can be made in respect of interest expenses as interest was paid for loan taken for specific business purposes. Chart depicting actual utilization and purpose of loans for which interest was paid as given to AO and DRP is as under: Utilisation/ Interest on AY 2012- Justification by Loan/ Purpose 13 assessee Loan under TUF Fixed Assets under TUF scheme of Govt. 377.66 scheme administered by of India Government Fixed Assets : specific Rupee term loan 3439.36 loans for purchase of other than TUF fixed assets Foreign Currency Loan 684.63 Fixed Assets : specific (Term Loan) loans for purchase of Buyer’s Credit fixed assets for Capital 95.35 Goods Interest on Cash 43.74 Day to day operations by Credit manufacturing units. For exports - granted under Govt. policy for Exports Packing 159.64 the sole purpose of Credit financing export of goods or services. Bill Discounting 8.05 For exports - for early charges cash requirement. Procurement of imported Buyer's Credit Raw material - such loan for Purchase of - does not even come in Raw Material the bank accounts of the assessee. WC 149.94 For working capital Requirement requirement For delay in payments to Paid to supplier. Purely suppliers for business purpose. 1,652.52 delay in Hercules Hoists payments Limited v ACIT [TS-58- ITAT-2013(Mum)] Total 6,610.89 Investments made out of surplus funds.

The ld. counsel further argued that no further disallowance u/s 14A was warranted in the assessee’s case as assessee’s own funds are much higher than the investments made by it from which the exempt income could arise. The ld AR pointed out that amount of investments in respect of which tax free income could have been received is Rs.107.02 Crores (Page no. 10 of AO’s order), while on the other hand the total amount of reserve and surplus of the assessee as on 31st March, 2010 as per the audited balance sheet was Rs.1788.26 Crores (Page no.1 of Paper Book). He highlighted that assessee’s reserve and surplus was around 16.70 times of aforesaid investments. Further, the assessee has cash profits of Rs.831.64 Crores for the year under consideration. The whole purpose of above submission of AR was to demonstrate that assessee had adequate surplus funds in fact much higher than the investments.

The ld. AR has submitted that DRP in assessee’s own case for AY 2014-15 deleted the identical enhanced disallowance u/s 14A rwr 8D(2)(ii) after examining the facts in details. The AR submitted that there is no change in facts for the year under consideration as well.

The assessee further relied upon various judgments of Hon’ble courts to support its contentions for deletion of disallowance u/s 14A. The ld. CIT-DR relied upon the order of AO.

We have heard the rival contentions, perused the relevant findings and as well as material referred to before us at the time of hearing. The interest paid by the assessee is in respect of loans taken for specific business purposes and thus to earn non-exempt business income. The DRP has given its finding in assessee’s own case for AY 2014-15 that loans were taken for specific business purposes. Moreover, the assessee’s own funds in form reserves and surplus profits of Rs.1788.26 Crores are much higher than the investments of Rs.107.26 Crores. Moreover, we have already examined this issue in this assessee’s own case for AY 2010-11 (ITA no. 356/Del/15) and on identical facts we held that disallowance u/s 14A read with rule 8D(2)(ii) is not sustainable. In view of above, the disallowance of Rs.1,54,16,743/- u/s 14A made by the assessing officer is therefore deleted.

In this regard the Ld. Counsel submitted that scrap has been generated out of manufacturing activities carried on by the SEZ Unit. The assessee placed reliance on the judgment of Karnataka HC in GE BE (P) Ltd vs ACIT [2014] 49 taxmann.com 348 (Karnataka) wherein it was held that scrap generated during manufacturing or production activities of unit is eligible for profit based deduction. The assessee further placed reliance on the following judgments: • CIT vs Sadhu Forging Ltd [2011] 336 ITR 444 (Delhi-HC) - scrap sale receipts entitled for exemption u/s 80-IB • WIPRO Ltd [(2006) 5 SOT 805 (Bang)] - scrap sale income is eligible for deduction u/s 10A.

The ld. counsel of assessee submitted that the DRP relying on the Hon’ble Delhi High Court in case of CIT vs Sadhu Forging Ltd [2011] 336 ITR 444 (Delhi- HC) has given finding in assessee’s own case for AY 2011-12 that scrap is by-product of its eligible activity and therefore eligible for deduction.

We have heard the rival contentions, perused the relevant findings and as well as material referred to before us at the time of hearing. There is no dispute that scarp has been generated out by the normal production activities of the eligible unit. The amount realized from sale of scarp has been shown as other income in profit & loss account of such unit. Alternatively, the same could have been reduced from the cost of production and in that case profits of eligible would remain unaffected for the purpose of deduction u/s 10(1A). Thus, respectfully following the Hon’ble Jurisdictional High Court in case of Sadhu Fording Ltd. (Supra) the disallowance of deduction u/s 10(1A) of Rs. 49,32,423/- made by the AO is hereby deleted.

The assessee has two separate manufacturing units, one in Kashipur and the other in Indore (SEZ unit eligible unit u/s 10AA). During the year, based on the requirement of Kashipur unit of the assessee, the SEZ unit in Indore has transferred certain semi-finished goods (polyester Chips) to Kashipur unit of the assessee amounting to Rs. 7,52,64,246/-. The assessee had claimed the deduction after taking into account such inter unit transfer. The AO proceeded to reduce the amount of deduction claim u/s 10A(1A) by the amount of such inter-unit sales, which was further upheld by the DRP. Aggrieved the assessee is before us in the appeal on aforesaid grounds.

In this respect the Ld. Counsel submitted that Indore SEZ unit based on the requirement of Kashipur unit transferred semi-finished goods at its market value. The market value has been determined with reference to the rates at which similar goods are purchased by the Kashipur unit from unrelated parties. The AR has submitted that average rate of inter-unit transfer of goods is Rs.85.22 per unit while the third party rate of same goods was Rs. 85.5 and 86.5 per unit. The copies of invoice of third parties –JBF Industries were submitted (Page no. 404-405 of Paper Book). It was further submitted that the assessee has fulfilled the conditions of section 10A(7) read with section 80-IA of the Act- transfer of goods between eligible business and any other business of assessee have been undertaken at market value. The assessee vide its ground no.18 also submitted without prejudice to other grounds that only the deduction claimed on the profits element attributable to aforesaid inter-unit transfer could have been disallowed at best and not whole the amount of inter-unit transfer.

We have heard the rival contentions, perused the relevant findings and as well as material referred to before us at the time of hearing. The provisions of section 10A(7) read with section 80-IA(8) of the Act are there to ensure that profits of eligible unit are not overstated. These provisions specifically provides for the purpose of deduction under aforesaid section that transactions in the nature of transfer of goods and services between eligible unit and other non-eligible unit should be entered into at market value or arm’s length price. In the case on hand, the assessee has entered into transactions at the market price and therefore profits of Indore SEZ units are not overstated. Therefore, the disallowance made by AO of Rs.7,52,64,246/- u/s 10(1A) in respect of inter-unit transfers is hereby deleted. In view of above, the ground no.18 raised by assessee becomes academic and is therefore dismissed.

In assessee’s appeal for AY 2010-11 (ITA no. 356/Del/15) we have dealt this issue of admission of additional claims. In the said case for AY 2010-11, we had relied on the judgment of Hon’ble Supreme Court in case of NTPC Ltd [229 ITR 383 (1998)] and other judgments holding that tribunal’s power are wide enough to admit any additional claim/ ground. The additional claims of the assessee are thereby dealt as under: Claim 1. Receipt from transfer of Carbon emission reduction (CER) certificates: 21. The facts as submitted are that assessee has received carbon emission reduction (‘CER’ or ‘carbon credits’) certificates on account of its efforts to reduce the emission of greenhouse gases in terms of Kyoto Protocol. During the relevant year the assessee transferred such certificates for a consideration. For the relevant assessment year 2012-13 the assessee received an amount of Rs. 439.73 crores in respect of sale of such CERs. The income from CERs has been disclosed in profits & loss accounts and various notes and annexure of annual report of the assessee. The assessee originally included the above receipts in its total income while filing the return of income. Subsequently the decision reported in My Home Power Ltd. vs DCIT [2012] 27 taxmann.com 27 151 TTJ 616 subsequently confirmed by the Hon’ble Andhra Pradesh High Court in CIT vs My Home Power Ltd. [2014] 365 ITR 82, described carbon credits as an offshoot of environmental concerns and not offshoot of business and hence held as capital receipt in nature. In light of above judgment the assessee claimed before AO that such receipts from sale of CER certificates are not chargeable to tax being such receipts capital in nature and hence should be excluded from the total income of assessee.

The AO however did not entertain the additional claim of the assessee. The DRP did not adjudicate the additional claim of the assessee relying on the judgment in Goetze (India) Limited vs CIT 284 ITR 323.

We have heard the rival contentions, perused the relevant findings and as well as material referred to before us at the time of hearing. The facts and issue involved are identical the assessee’s own case for AY 2010-11, which we have dealt in ITA no. 356/Del/15. In the said case we allowed the assessee’s plea for admission of admission claim in respect of CERs and remitted back the issue to the file of AO. Similarly in this year, we allow the assessee’s ground for entertainment of above additional claim and remit the issue back to the file of AO to decide the same in accordance with law after granting a reasonable opportunity of being heard to the assessee. The assessee shall be free to file such documents, explanations, submissions as it deems fit in respect of this claim.

Going into the details, the Ld. Counsel argued that the Objective of the subsidy/incentive under TUF scheme was expansion of capacities, modernisation and up-gradation of facilities and hence nature of subsidy was capital in nature not revenue in nature. The assessee also placed reliance upon the following judgments wherein such subsidy was held to be as a capital receipt: • CIT –vs.- Sh. Sham Lal Bansal (Hon’ble Punjab & Haryana High Court, of 2010) • PCIT v. Ankit Metal & Power Ltd. [416 ITR 591 2019] Cal High Court • CIT vs.- Ponni Sugars & Chemicals Ltd. reported in (2008) 306 ITR 392 (SC) • CIT vs.- Rasoi Ltd. [(2011) 335 ITR 438 (Cal.)] • CIT v. Chaphalkar Brothers [2017] 88 taxmann.com 178 (SC)/ (2018) 400 ITR 279 (SC) • DCIT vs.- Reliance Industries (2004) 88 ITD 273 (Mum.)(SB); • CIT vs. Birla VXL Lt d. (2013) 90 DTR 376 (Guj.)(HC); • Hydro Carbons & Chemicals vs.- ACIT (ITA No. 1982-86/Kol/09);

The ld. AR has further submitted the department has in subsequent years accepted the assessee’s claim of interest subsidy on TUF scheme as capital in nature as no addition has been made in subsequent years.

Ld DR relied upon the orders of authorities below.

We have heard the rival contentions, perused the relevant findings and as well as material referred to before us at the time of hearing. It is a settled position that purpose of subsidy or incentive and not the nomenclature of such incentive have to be seen for the purpose of deciding its nature as capital or revenue. In the judgment of Ponni Sugars & Chemicals Ltd. (Supra), the Hon’ble Apex Court have held that character of the receipt of a subsidy in the hands of recipient assessee has to be decided with respect to the purpose for which subsidy is granted. If the subsidy is received to enable the assessee to run its business more profitably then such subsidy is revenue in nature. While, if the subsidy has been received by the assessee to set up a new unit or for expansion of existing unit then such subsidy would be capital in nature. We find form the objective of TUF scheme that interest subsidy under such scheme was granted for expansion of capacities, modernisation and up gradation of facilities. In case of CIT v. Sham Lal Bansal (Supra), the Hon’ble Punjab & Haryana High Court on similar facts held subsidy received under TUF Scheme as capital receipt. Since the issue under hand is related to additional claim which was not entertained by the lower authorities, we therefore allow the assessee’s ground for entertainment of above additional claim and remit the issue back to the file of AO to decide the same in accordance with law after granting a reasonable opportunity of being heard to the assessee. The assessee shall be free to file such documents, explanations, submissions as it deems fit in respect of this claim.

The Ld. Counsel has placed reliance on following judicial pronouncements: • Apollo Tyres ltd vs ACIT (2014) 64 SOT 203 • CIT vs Cosmo Films Ltd(2012) (ITA 1404/2008) • CIT Vs SIL Investment Limited(2012) (ITA No. 24319 (Del) 2010) • M/s TCPL PACKAGING LTD vs Deputy Commissioner Of Income Tax [2019-TIOL-907- ITAT-MUM] • The Commissioner Of Income Tax Vs Kalpataru Power Transmission Ltd [2019-TIOL-1424-ITAT- AHM]

The AR further pointed out that the Finance Act, 2015, has amended the law by inserting third Proviso to section 32(1)(iia) - applicable w.e.f. 1st April 2016 to allow the claim of additional depreciation for assets put to use for less than 180 days in subsequent Assessment Year.

We have heard the rival contentions, perused the relevant findings and as well as material referred to before us at the time of hearing. We have dealt the identical issue in the assessee’s own case for AY 2010- 11 (ITA no. 356/Del/15) and set aside the issue to the file of AO to consider the claim of the assessee. Following the same, we hereby direct the AO to consider the claim of the assessee and give his findings thereon. For this purpose this issue is set aside to the file of AO. The AO shall be free to call for such information and explanation as he deems fit in order to adjudicate this claim of the assessee after granting reasonable opportunity to the assessee of being heard. The assessee is also free to file such documents, explanations, submissions as it deems fit in respect of this claim.

It was submitted that amount of goodwill represents the excess of consideration paid for purchase of such businesses over the value of assets acquired. Valuation reports for various assets acquired were placed on record by the assessee during the proceedings. The assessee made such additional Claim made vide letter dated 09.02.2016 before the AO stating that excess amount paid for purchase of business of Rs. 3,68,94,006/- be treated as goodwill and depreciation be allowed thereon. The AO did not entertain the additional claim of the assessee. The DRP did not admit the additional claim of the assessee relying on the judgment in Goetze (India) Limited vs CIT 284 ITR 323.

In this respect the assessee placed reliance on the following judicial precedents for such claim: • Alapati Venkataramiah V/s. CIT (57 ITR 185) • Evans Fraser and Co. Ltd. (in liquidation) V/s. CIT (137 ITR 493) • Smifs securities [TS-639-SC-2012] • Birla Global Asset Finance Co. Ltd [TS-791-HC- 2012 (BOM)] • Worldwide Media Pvt Ltd [TS-56-ITAT-2014 (Mum)] • DCIT v. Intertek India Pvt. Ltd. [2014-TIOL-442- ITAT-DEL] confirmed by Hon'ble Delhi High Court. • Dy. CIT v. Zydus Wellness Ltd. [2017] 162 ITD 604 (Ahmedabad - Trib.) • CIT v. B.C. Srinivasa Setty [1981] 128-ITR-294 • Toyo Engineering India Ltd. [TS-655-ITAT- 2014(Mum)] • Hindustan Coca Cola Beverages Pvt. Ltd. [TS-7-

We have heard the rival contentions, perused the relevant findings and as well as material referred to before us at the time of hearing. In case of Smifs securities (supra), the Hon’ble apex court has held that goodwill amounts to intangible assets which are eligible for depreciation. The issue is however an additional claim and require examination by AO, we therefore set aside this issue back to the file of AO to decide the same in accordance with law after granting a reasonable opportunity of being heard to the assessee. The assessee shall be free to file such documents, explanations, submissions as it deems fit in respect of this claim.

Having heard the assessee, we hereby remand back the issue to the file of the AO for fresh adjudication. The assessee shall be free to file such documents, explanations, submissions as it deems fit in respect of this claim.

In grounds no. 21 and 22 the assessee has pleaded to exclude certain receipts viz., CER receipts, subsidy under TUF, from the computation of book profits u/s 115JB. Further assessee has sought to exclude/include certain provisions written back /created from the computation of book profits u/s 115JB of the Act. The claim for exclusion/inclusion of such items in computation of book profits was made by the assessee before lower authorities. However the lower authorities did not entertain the additional claim of the assessee. The items sought to be excluded / included through above grounds are as under: Capital receipts Exclusion of Rs. 4,39,72,72,157/- received by a) the assessee on account of transfer of Carbon emission reductions (CERs) from the book profit of the assessee. Exclusion of Rs. 3,08,96,338/- on account of b) interest subsidy received under the TUF Scheme. Exclusion of excise duty component c) amounting to Rs.11,81,58,510/- on sale affected by eligible unit u/s 80-IC (Kashipur unit) of worked out on reverse calculation mechanism being capital receipt in nature. Other exclusions/inclusions Exclusion of Rs. 35,02,570/- on account of d) provisions for doubtful debts written back. Exclusion of Rs. 4,00,00,000/- on account of e) provisions for doubtful advances written back. Exclusion of Rs. 1,54,10,239/- on account of f) provisions for investments written back. Inclusion of Rs. 22,66,432/- on account of g) provision for doubtful debt created Inclusion of Rs. 7,64,706/- on account of h) provision for doubtful advances created Inclusion of Rs. 9,07,600/- on account of i) provision for doubtful advances created

The assessee placed reliance upon the following judgments to exclude capital receipts from book profits u/s 115JB. • Binani Industries Ltd. [TS-111-ITAT-2016(Kol) • L.H. Sugar Factory Ltd. (ITA Nos 417, 418 & 339/LKW/2013) also approved by Hon'ble Allahabad High Court [2016-TIOL-1942-HC-ALL High Court-IT]. • PCIT v. Ankit Metal & Power Ltd. [416 ITR 591 2019] Cal High Court • Alok Industries Ltd. [TS-313-ITAT-2018]

In respect of exclusion of other items from book profits the assessee has submitted that as per Explanation 1 to section 115JB of The Income Tax Act, 1961, the amount withdrawn from any reserves should be reduced from the net profit to determine book profits. It was argued that when such provision was originally made, the same was added to the book profits u/s 115JB and thus it is logical to reduce the amount of provisions written back from such book profits.

We have heard the rival contentions, perused the relevant findings and as well as material referred to before us at the time of hearing. The issue involves additional claim which were not adjudicated by the lower authorities. We therefore set aside the issues relating to computation of books profits back to the file of AO to decide the same in accordance with law after granting a reasonable opportunity of being heard to the assessee. The assessee shall be free to file such documents, explanations, submissions as it deems fit in respect of this claim.

Other grounds are either consequential or have become academic, hence same are treated as infructuous.

In the result, the appeal of the appellant- assessee is partly allowed. Order pronounced in the open Court on 24th February, 2020.