ESSEL PROPACK LIMITED,MUMBAI vs. DEPUTY COMMISSIONER OF INCOME TAX RANGE-6(3)(2), MUMBAI

PER PAWAN SINGH, JUDICIAL MEMEBR : 1. This appeal by assessee is directed against the assessment order dated

28.01.2016 passed u/s 143(3) read with section (r.w.s.) 144C (13) of

Income tax Act (Act), passed in pursuance of direction of dispute

resolution penal (DRP-2) dated 15.12.2015 for assessment year 2011-12.

The assessee has raised the following grounds of appeal

“1. Transfer Pricing Adjustment - Guarantee Fees a) The Ld. DRP/TPO/AO erred in law and facts in making addition of Rs. 27,75,3347- on account of difference in arm's length fees for Stand By Letter of Credit (SBLC) provided by the assessee for loan availed by AE from the Banks. The reasons given by him for doing so are wrong, contrary to the facts of the case and against the provisions of law.

ITA 2068 /Mum/2016 Essel Propack Limited b) The Ld. DRP/TPO/AO erred in law and facts in making addition of Rs. 2,09,85,206A on account of difference in arm's length fees on corporate guarantee provided by the assessee for loan availed by the AE, secured by Tangible Assets of the AE. The reasons given by him for doing so are wrong, contrary to the facts of the case and against the provisions of law. c) Without prejudice to above, the Guarantee commission charged by bank @ 0.75% to the assessee ought to have been accepted as Internal Cup for the commission charged by assessee to its AE @ 1 %. d) The Ld. DRP/TPO/AO erred in law and facts in making addition of Rs. 96,63,002/- on account of difference in arm's length fees for Corporate Guarantee issued by the assessee for loan availed by AE. The reasons given by him for doing so are wrong, contrary to the facts of the case and against the provisions of law. e) The Ld. DRP/TPO/AO erred in law and facts in making addition of Rs. 25,90,376/- being difference in arm's length fees for Guarantee issued by the assessee for operating lease arrangement provided to the AE. The reasons given by him for doing so are wrong, contrary to the facts of the case and against the provisions of law. f) Without prejudice to above, issuing a corporate guarantee for AE does not constitute an International Transaction as it does not involve any cost to assessee and not having any bearing on profit, income, losses or assets of enterprise. The assessee rely upon decision of Ahmedabad Tribunal in case of 'Micro Ink Ltd Vs ACIT' (ITA No. 2873/Ahd/10) and decision of Delhi Tribunal in the case of 'Bharti Airtel Ltd Vs ACIT (43taxmann.com 150). 2. Disallowance u/s 14 A - Rs. 1,72,03,566/- a) The Ld. DRP/ A.O erred in law and fact?; in disallowing Rs. 1,32,85,658/- out of interest and Rs. 39,17.908A out of expenses u/s 14 A of the Act. The reasons given by DRP for doing so are wrong, contrary to the facts of the case and against the provisions of law. b) The Ld. DRP/A.O erred in law and facts in disallowing interest of Rs. 1,32,85,658/- u/s 14A of the Act without considering the fact that all investments are made out of internal accruals and assessee has interest free funds and internal accruals far in excess of these investments.

ITA 2068 /Mum/2016 Essel Propack Limited c) The Ld. DRP/A.O erred in law and facts in making disallowance u/s 14A of the Act even though investment are made in subsidiary/associate where the assessee has deep business interests. The reasons given by her for doing so are wrong, contrary to the facts of the case and against the provisions of law. d) The Ld, DRP/A.O erred in law and facts in making notional allocation of expenses to tax free income and disallowance of Rs. 39,17,908/- out of expenses without proving nexus of expenses with tax free income and without recording reasons of rejecting assessee's claim that no expenditure incurred to earn exempt income. 3. Disallowance of Interest u/s 36 (1) (iii) Rs. 1,32,85,658/- a) The Ld. DRP/A.O. erred in law and facts in disallowing Rs. 1,32,85,658/- out of interest u/s 36(1)(iii) of the Act. The reasons given by him for doing so are wrong, contrary to the facts of the case and against the provisions of law. b) The Ld. DRP/A.O failed to appreciate that the assessee had sufficient internal accruals and interest free funds to make these investments and hence no part of interest can be disallowed u/s 14A of the Act. Following the decisions in the case of Reliance Utilities / HDFC of Bombay HC. c) The Ld. AO failed to appreciate that all the investments held by the assessee are strategic investments in subsidiaries promoted by it to take up its own business in different jurisdictions and not for earning exempt income. Hence disallowance u/s 14A is unwarranted and misplaced. d) The Ld. DRP/A.O erred in law and facts in disallowing interest of Rs. 1,32,85,658/- u/s 36(1)(iii) of Act which is also disallowed u/s 14A resulting in to double disallowance of same expenditure. 4. Addition on account of inclusion of cenvat credit in valuation of Closing Stock - Rs. 92,00,204/- a) The Ld. DRP / AO erred in law and facts in confirming the addition of Rs. 92,00,204/- to total income by adding CENVAT credit to stocks. The reasons given by her for doing so are wrong, contrary to the facts of the case and against the provisions of law. b) The Ld. DRP/ AO ought to have accepted that as per accounting policy consistently followed by the assessee and grossing up purchases, sales and

ITA 2068 /Mum/2016 Essel Propack Limited stocks as provided in Section 145A, worked out in Form 3CD, there would be no impact on the taxable income of the year. c) The Ld. DRP / AO erred in law and facts in not following the order of Hon'ble ITAT in A.Y. 2006-07 in the assessee's own case wherein the ITAT has given direction to A.O. to make adjustments as per section 145A on account of cenvat credit to the value of purchases / sales, opening stock and closing stock. 5. Disallowance of Interest u/s 36 (1) (iii) - Rs. 25,01,460/- a) The Ld. DRP / AO erred in law and facts in disallowing Rs. 25,01,460/- out of interest u/s 36(1)(iii) of the Act in respect of business advances and other receivables from subsidiaries. The reasons given by him for doing so are wrong, contrary to the facts of the case and against the provisions of law. b) The Ld. DRP/ AO erred in law and facts in not following the order of appellate authorities in the assessee's own case deleting such disallowance in asst. year 2007-08 onwards and accepted by the department. c) The Ld. A.O is erred in law and facts by not following the directions of DRP to verify whether similar addition has been deleted in A.Y. 2007-08. 6. Set-off of brought forward MTM loss against MTM gain of Rs. 3,91,97,1067- a) The Ld. DRP / A.O. erred in law and facts in denying set off of brought forward (speculation) Mark to Market (MTM) loss against MTM Profit of Rs. 3,91,97,106/-. The reasons given him for doing so are wrong and improper. b) The Ld. DRP / A.O. erred in law and facts in treating MTM (Foreign exchange (FX) Loss as speculation loss in A.Y. 2008-2009 & 2009-2010 and MTM (FX) gain during the year as normal income for denying set off of gain against brought forward loss of same nature. The reasons given by her for doing so are wrong, contrary to the facts of the case and against the provisions of law. c) Without prejudice to other grounds of appeal, the Ld. DRP /A.O. ought to have allowed set-off of brought forward MTM loss (FX Loss) on open forward contracts treated as speculation loss against MTM gain (FX gain) on the same nature of transactions in the year under appeal. The reasons given by

ITA 2068 /Mum/2016 Essel Propack Limited

her for doing so are wrong, contrary to the facts of the case and against the provisions of law. d) Without prejudice to above, the Ld. DRP/ AO erred in law and facts in not reversing / set off speculation loss brought forward when the MTM loss is reversed and netted off against other business loss in the subsequent year.” 2. Brief facts of the case are that the assessee is a company engaged in

manufacturing of multi laminated collapsible and seamless plastic

tubes catering to oral care, cosmetic personal care, pharmaceutical,

food and industrial sector. The assessee is one of the entity of Essel

Group having its head quarter in Mumbai. The assessee, while filing

return of income in its Form 3CEB reported transaction with its

associated enterprises (AE) that assessee has given corporate guarantee

to its following associate enterprises:-

No. Type of Corporate No of Corporate Guarantee Commission Charged by Assessee Guarantee provided by the guarantees to its AE assessee 1 Loans to AE backed by 4 The assessee has recovered from its AE the amount of SBLCs commission charged by Indian bank in relation to SBLC issued 2 Loans to AE backed by 4 Out of the four cases, tangible assets of guarantee In one case, the assessee has charged 1% commission from its issued by the assessee AE, For the three cases, no corporate Guarantee commission has been charged 3 Loans to AE backed by only 3 The assessee has charged 1.5% commission from its AE corporate guarantee issued by the assessee 4 Guarantees for operating 3 Out of the three cases, lease arrangement for assets In one case, the assessee has charged 1% commission from its provided to AE AE, For the two cases, , no corporate Guarantee commission has been charged

Loans back by Stand by Letter of Credits (SBLCs)

S.No Name of Name of Guarantee Name of Currency Guarantee Loan Security Provided Borrower AE the Indian fee Banks / Amount Amount as Bank charged by FIs (Rs) on the Indian 31.03.2011

ITA 2068 /Mum/2016 Essel Propack Limited

bank from (INR) assessee 1. Lamitube Standard 1.25% Standard USD 189,974,700 185,226,752 Secured against Technologies Chartered Chartered SBLC issued by Limited, Bank, Bank, SCB Mumbai and Mauritius Mumbai Mauritius in India. It is unsecured facility. There is no cross linking with any other secured facility sanctioned by SCB India to Essel Propack Limited. 2 Laqmitube -do- 1.25% -do- USD 89,635,950 88,437,715 -do- Technologies Limited, Mauritius 3 -do- -do- 1.25% -do- USD 88,298,100 88,437,715 -do- 4 Essel Propack ING 1.40% Barclays USD 222,975,000 216,285,750 Secured against America LLC Vysya Bank PLC SBLC issued by USA Bank, Mauritius ING India and Mumbai further there is a mortgage of land owned by Aqualand India Limited. Essel Propack Limited has not given any asset as security for this loan. Loans back by tangible assets of borrower and corporate guarantee issued by the assessee Sr.No. Name of borrower Name of Rate Currency Guarantee Loan Security AE Banks / FIs charged Amount Amount as Provided (Rs) on 31.03.11 1 Lamitube Punjab 1% USD 535,140,000 468,247,500 Pledge of Technologies National shares of Limited, Mauritius Bank, UK Essel Propack, UK Limited and EPGL China along with Fixed assets of EP UK and Corporate Guarantee 2 Arista Tubes INC ICICI Bank Nil USD 512,842,500 423,652,500 Charge on USA Limited moveable Canada and immovable properties of the borrower and corporate guarantee 3 Essel Propack BNP Paribas Nil USD 356,760,000 252,419,328 -do- Polska Zoo Poland Singapore 4 Essel Propack Raiffesen Nil PLN 199,405,000 56,108,514 -do- Polska Zoo Bank Poland

ITA 2068 /Mum/2016 Essel Propack Limited

Loans backed by corporate guarantee issued by the assessee

Sr.No. Name of Name of Rate Currency Guarantee Loan Security borrower AE Banks / FIs charged Amount Amount as Provided (Rs) on 31.03.11 1 Lamitube SBI 1.5% USD 222,975,000 167,231,250 Corporate Technologies Mauritius Guarantee Limited, Mauritius 2 Lamitube Axis Bank 1.5% USD 535,140,000 535,140,000 ESCROW on Technologies HK dividend Limited, Mauritius receipt of LTL Mauritius and Corporate guarantee 3 Lamitube DBS 1.5% USD 557,437,500 535,140,000 ESCROW on Technologies Singapore dividend Limited, Cyprus receipt of LTCL Cyprus and Corporate guarantee Guarantees for operating lease arrangement

Sr.No. Name of borrower Name of Rate Currency Guarantee Loan Security AE Banks / FIs charged Amount Amount as Provided (Rs) on 31.03.11 1 Essel Propack De Lage 1% USD 387,976,500 50,724,262 Charge on America LLC Lande machine. Financial Corporate Services Guarantee for additional comfort 2 Arista Tubes INC -do- NIL USD 379,057,500 54,829,472 -do- 3 Arista Tubes Ltd, GE Capital Nil USD 160,943,355 160,943,355 -do- UK 3. Consequent upon the reference to the Transfer Pricing Officer (TPO)

under section (u/s) 92CA by AO was made for computation of arm’s

length price (ALP). The TPO after considering the explanation

suggested transfer pricing adjustment in respect of guarantee

commission (s) of Rs.3,83,02,220/-. On receipt of order of TPO dated

27.01.2015, the AO included the adjustment on account of corporate

guarantee commission(s). The AO also made disallowance u/s 14A

r.w.r. 8D of Rs.1,72,03,566/- and disallowance u/s 36(1)(iii) of

Rs.1,32,85,658/-, addition on account of CENVAT credit in valuation

ITA 2068 /Mum/2016 Essel Propack Limited of closing stock of Rs.92,00,204/- and further disallowance u/s

36(1)(iii) of Rs.25,01,460/- and denied the marked to market loss of

Rs.3,91,97,106/-. The assessee exercised its option and filed objection

before the DRP. The DRP, after considering the submission of

assessee granted partial relief on charging corporate guarantee

commission. However, all remaining additions / disallowances were

confirmed. On receipt of direction of ld. DRP, the AO passed the final

assessment order under section 143(3) rws 144C(13) on 28-01-2016.

Aggrieved by various additions / disallowances, the assessee has filed

this appeal before the Tribunal.

(ld.AR) of the assessee and the learned departmental representative (ld.

DR) for the revenue and perused the material available on record. At

the outset of hearing, the Ld.AR of the assessee submits that grounds 2,

4 & 5 are covered by the decision of Tribunal for earlier assessment

years. Ground 6 will not arise in view of earlier years’ orders of

Tribunal.

authorities were not justified in making transfer pricing adjustment on

account of various corporate guarantees. The ld AR for the assessee

submits that Lamitubes Technology Limited Mauritius (LLTM), which 8

ITA 2068 /Mum/2016 Essel Propack Limited is wholly owned subsidiary of the assessee and its associated enterprises (AE) as obtained the bank loan of USD 4,260,000/- from

Standard Chartered Bank, Mauritius. The amount outstanding as on 31st March 2011 was USD 4,153,531 (₹ 18.52 crore). The bank of assessee, Standard Chartered Bank SCB), Mumbai issued a Stand by

Letter of Credit (SBLC) on behalf of assessee’s AE. The assessee’s bank SCB, Mumbai charged fee of 1.25% of the guarantee amount to the assessee. The assessee has intern recover the same from its AE,

LTLM. Similarly, Essel Propack America LLC USA (EP USA), which is also a wholly-owned subsidiary of assessee also obtained a bank loan of USD 5000000 from Barclays Bank PLC, Mumbai. The amount outstanding as on 31st March 2011 is USD 4850000 (₹ 21.63 crore). The bank of assessee, ING Vyasya Bank, Mumbai has issued a SBLC on behalf of the assessee’s AE. The assessee’s bank ING Vyasya Bank,

Mumbai has charged a fee of 1.40% of the guarantee amount to the assessee. The assessee has intern recover the same from its AE, EP USA. The learned AR submitted that in both the above cases, the TPO

computed the ALP at 2% and held that the assessee ought to have charged the same to its AEs. The TPO suggested TP adjustment of ₹ 39,17,295/-. On objection before the DRP, DRP directed the AO to consider 0.5% in addition to the reimbursement of 1.25% and 1.40% 9

ITA 2068 /Mum/2016 Essel Propack Limited already received by the assessee as the ALP and directed the TPO to

compute the transfer pricing adjustment accordingly.

assessee has charged guarantee commission at 1%, while in other cases

the assessee has not charged any guarantee commission. The TPO

computed the ALP at 2% and held that the assessee ought to have

charged the same to its AEs. The TPO suggested the TP adjustment of

Rs. 2,09,85,206 /-. On objections before the DRP the adjustments

suggested by TPO was affirmed. The other loans taken by AEs, which

were backed by corporate guarantee of the assessee that is LTL

Mauritius and LTL Cyprus, the assessee charged guarantee

commission of 1.5%. The TPO suggested ALP at 2.5% by taking view

that the assessee ought to have charged the same to its AEs. The TPO suggested transfer pricing adjustment of ₹ 96,63,002/-. This adjustment

was also upheld by DRP.

entered into operating lease for taking machinery/equipment on lease.

The rental payment of such lease is backed by corporate guarantee of

the assessee. In case of default by AE, the lessor will terminate the

lease agreement, take back the machinery or equipment on lease and

can recover the rental outstanding dues from the assessee. In case of 10

ITA 2068 /Mum/2016 Essel Propack Limited Essel Propack USA (EP USA), the assessee has charged a guarantee

commission of 1%, however, in other cases the assessee has not

charged any guarantee commission. The TPO computed the ALP at 2%

that too on the aggregate future rental payables, although currently no

due and have held that the assessee ought to have charge the same to

its ease. The TPO proceeded in computing the transfer pricing adjustment of ₹ 2,09,85,206/-. The DRP upheld the adjustments

suggested by TPO.

guarantee for loans obtained by the AE’s is not an international

transaction, and, hence, provisions of chapter X of Income tax Act will

not apply. It was submitted that the issue has been decided by Tribunal

in case of Marico Ltd versus ACIT (70 taxmann.com 214) (Mum) and

Bombay Dyeing & Manufacturing Co Ltd versus DCIT (87

taxman.com 213) (Mum) wherein it was held that giving of Corporate

guarantee does not fall within the purview of international transaction

as defined under section 92B of the Act and accordingly provision of

transfer pricing will not apply.

AR for the assessee submits that the benches of Tribunal in a number

of other decisions, 0.5% of guarantee amount has been held to be in 11

ITA 2068 /Mum/2016 Essel Propack Limited arm’s length commission for giving corporate guarantee. In support of

his submission the learned AR of the assessee relied upon the decision

of Bombay High Court in CIT versus Everest Kento Cylinders Ltd

(378 ITR 57 Bombay) and Zee Entertainment Enterprises Ltd versus

ACIT (81 taxmann.com 379) (Mumbai). The learned AR of the

assessee finally prayed that in view of the consistent finding of various

courts and benches of Tribunal that 0.5% of guarantee amount is the

ALP for guarantee commission, in case where the assessee has charged

guarantee commission in excess of 0.5% no further transfer pricing

adjustment is warranted as the commission charged by assessee is it

arm’s length price. In case where no guarantee commission had been

charged by the assessee, the adjustment made by TPO and upheld by

DRP to 2-2.5% of the guarantee amount is not warranted and the

adjustment to be restricted to 0.5% of the commission amount. With

regard to guarantee given in relation to operating lease taken by AEs ,

the learned AR for the assessee submits the transfer pricing adjustment

ought to be computed on the basis of lease rental outstanding lease and

not the aggregate of future lease rental. Because, on default by the AE

would not exceed the outstanding lease as the lessor has an option to

take back the machine or equipment given on lease. Accordingly there

ITA 2068 /Mum/2016 Essel Propack Limited was no justification for charging guarantee commission on the

aggregate of all the future lease rentals.

of TPO and DRP. The learned DR for the revenue submits that the

DRP has already very considerate while granting partial relief to the

assessee and that the assessee is not entitled for any further relief.

through the orders of authorities below. We have also deliberated on

various case laws relied by learned AR of the assessee. In our view

there is no dispute about the various types of corporate guarantee(s)

extended by assessee to various banks on behalf of its AEs. The limited

dispute is with regard to the rate of the guarantee commissions only.

The TPO suggested adjustment at different rate on various guarantee

i.e 2 to 2.5%. The ld. DRP granted relief in restricting the guarantee

commissions with regard to stand by letter of credit (SBLC), by

directing the AO/TPO to consider 0.5% in additions of reimbursement

of 1.25% and 1.40% which is already received by the assessee. Rest of

the adjustments suggested by the TPO is affirmed by ld. DRP. The ld.

AR for the assessee has not made any specific submission against

affirming the commission @ 0.5% with regards to SBLC, which we

affirmed. 13

ITA 2068 /Mum/2016 Essel Propack Limited 12. For rest of the guarantee commissions, before us, the ld AR for the

assessee made two fold submissions; i.e. in first set of submissions the

ld AR submits that extending corporate guarantee is not an

international transaction and that the provisions of Chapter X is not

applicable and buttress his submissions on the basis of decision of

Tribunal in case of Marico Ltd Vs ACIT (supra) and Bombay Dying

and Manufacturing Co Ltd (supra). This submission of the ld. AR for

the assessee is not acceptable to us, as there is numerous contrary

decision of Tribunal on the issue. Otherwise, this fact was also fairly

accepted by ld. AR for the assessee during his submission. However,

we find merit in the alternative submissions of the assessee that

Hon’ble Bombay High Court in CIT Vs Everest Kanto Cylinders Ltd

(supra) held that 0.5% of guarantee commissions is at arm’s length

price. Thus, we accept the alternative submission of the ld. AR for the

assessee and direct the AO/TPO to recompute the adjustment on

account of other guarantee commissions @ 0.5% in additions to the

commissions already charged by the assessee. We also accept the

submission of learned AR of the assessee that guarantee commission

on the operating lease must be computed on the basis of lease rental

outstanding only, and not on the aggregate of all future lease rentals.

Needless to direct that before fresh computation the TPO /AO shall 14

ITA 2068 /Mum/2016 Essel Propack Limited grant a fair and proper hearing to the assessee. The assessee is also

directed to provide the necessary details to the TPO/AO. In the result

ground No. 1 of the appeal is partly allowed.

(rwr) 8D. The learned AR of the assessee submits that this ground of

appeal is covered in favour of assessee in assessee’s own case for

assessment year (AY) 2007-08 in ITA No. 1397/M/2017, for a AY

2008-09 in ITA No 4116/M/2013. The learned AR of the assessee

further submits that during the relevant. The assessee earned dividend income on foreign subsidiaries of ₹ 16.77 crore which has been offered

to tax, which can be seen from the computation of total income and in

the return of income. Thus, the assessee has not earned any exempt

income i.e. no dividend income has been and from the Indian

subsidiary. Accordingly the provisions of section 14A read with Rule

8D is not applicable in absence of any exempt income. The dividend

income earned from foreign subsidiary has already been offered to tax.

On similar issue the tribunal in assessee’s own case for assessment

year 2008-09, in 2009-10 and again in AY 2010-11 deleted the similar

addition under section 14A.

of lower authorities. The ld DR also failed to controvert the contention 15

ITA 2068 /Mum/2016 Essel Propack Limited of the ld AR for the assessee that during the relevant period the assessee has not earned any exempt income. 15. We have considered the rival submission of the parties and perused the

orders of lower authorities. We have noted that the assessing officer

made addition/disallowance under section 14A by taking view that the

assessee has made huge investment in equity/preference shares. The

assessing officer nowhere identified/recorded that assessee earned any

exempt income during the relevant financial year. Further, we have

noted that the dividend income earned by the assessee from foreign

subsidiaries has been offered to tax. It is now settled law that in absence of any exempt income no disallowance under section 14A is

attracted. Similar view was taken by Tribunal in assessee’s own case for assessment year 2008-09 in ITA No. 4116/Mum/2013 dated 11th

September 2017, in appeal for AY 2009-10 in ITA No. 5312/Mum/2015 dated 8th January 2018 and again for 2007-08 in ITA No. 1397/Mumbai/2017 dated 28th September 2018. Considering the

aforesaid factual and legal discussion, we direct the assessing officer to

delete the disallowance under section 14A. In the result this ground of

appeal is allowed. 16. Ground No. 3 relates to disallowance of interest under section 36

(1)(iii) of Rs. 1.32 Crore. The learned AR of the assessee submits that 16

ITA 2068 /Mum/2016 Essel Propack Limited DRP while confirming the disallowance under section 14A, further held that in case, interest of ₹ 1.32 crore, computed by AO as per rule 8D2(ii) was not disallowable is disallowable under section 36(1)(iii). The learned AR of the assessee submits that once disallowance has been proposed under section 14A of the Act, there is no question of stating that without prejudice, the same is disallowable under section 36(1)(iii) of the Act. The learned AR further submits that there is no question of applicability of disallowance of interest expenditure as the reserve and surplus of the assessee are in far excess of the investment made during the year. 17. In his without prejudice submission the ld AR for the assessee submits that since the own fund of the assessee is more than the investment made by the assessee, therefore, there is no question of disallowance under section 36(1)(iii). The learned AR further submits that as on 31st March 2011 the assessee has Share Capital of ₹ 31.31 Crore and the reserve and surplus of Rs 612.88 Crore. Thus, total interest free funds i.e. surplus were more than Rs. 644 crore. The assessee has made total investment in foreign subsidiary of ₹ 489 crore and in Indian subsidiary of ₹ 78 crore only. In support of his submission the learned AR of the assessee relied upon the decision of Bombay High Court in CIT versus Reliance Utility & Power Ltd (313 ITR 340 Bom), CIT 17

ITA 2068 /Mum/2016 Essel Propack Limited versus Reliance Industry Ltd (410 ITR 466 SC) and HDFC Bank

Versus DCIT (383 ITR 529 Bom).s

of lower authorities.

through the orders of lower authorities. We have also deliberated on

the various case laws relied by learned AR of the assessee. The ld.

DRP while confirming the interest disallowance under section 14A

[Rule 8D (2)(ii)] held that in any case the interest of Rs.1.32 Crore

computed by AO is disallowable under section 36(1)(iii). Before us the

ld AR for the assessee vehemently submitted that the reserve and

surplus are in far excess than the investment made by the assessee and

hence, no interest disallowance even under section 36(1)(iii) is

warranted in view of the decision of Bombay High Court in Reliance

Utilities and Power Ltd (supra). The ld AR for the assessee had

invited our attention on the balance sheet of the assessee as on

31.03.2010 and on 31.03.2011, which is as under ;

Sr Particulars As on 31.03.2011 On 31.03.2010 No. 1 Share capital 31,31,30,610/- 31,31,30,610/- 2 Reserve &surplus 612,88,04,018/- 579,71,79,989/- Total 644,19,34,628/- 611,03,10,599/- Investments 1 Foreign subsidiary 489,86,05,660/- 495,41,55,660/- 18

ITA 2068 /Mum/2016 Essel Propack Limited 2 Indian subsidiary 78,73,31,638/- 77,98,31,638/- 3 Total 568,59,37,298/- 573,39,87,298/- 20. Considering the aforesaid factual position that that the reserve and

surplus funds with the assessee are in far excess than the investment made

for subsidiaries. Therefore, respectfully following judgment of Hon’ble

Bombay High Court in the case of Reliance Utilities & Power Ltd.

(supra), it would have to be presumed that the investment made by the

assessee would be out of the interest-free funds available with the

assessee. Hence, we direct the AO even to delete the disallowance under

section 36(1)(iii). In the result this grounds of appeal is allowed.

valuation of closing stock. The learned AR of the assessee submits that

the assessee follows exclusive method of accounting wherein purchase,

sale, stock are recorded exclusive of indirect taxes. However, the Income

tax Act requires the assessee to follow inclusive method of accounting.

The assessee submits that whether one follows inclusive method of

accounting or exclusive method of accounting, it is tax neutral and there

would be no addition to the total income. The assessing officer however

made adhock adjustment only with respect to closing stock of the assessee and made addition to the total income of ₹ 92,00,204/-. The

action of assessing officer was confirmed by DRP. The learned AR of the

assessee further submits that similar addition was made against assessee

ITA 2068 /Mum/2016 Essel Propack Limited for assessment year 2007-08 and in AY 2008-09, on appeal before

Tribunal the additions were deleted by holding that whether the assessee

follows inclusive method of accounting or exclusive, the same is tax

neutral and therefore no addition to the total income should be made in

that count.

lower authorities.

through the orders of authorities below. We have noted that similar

addition was made in assessment year 2007-08 and again in 2008-09.

The appeal of AY 2008-09 in ITA No. 4116/Mum/2013 was adjudicated first vide order dated 11th September 2017, wherein similar

addition was deleted. Following the order for AY 2008-09, the

identical addition in appeal for AY 2007-08 were also deleted in ITA

No. 1397/Mum/2017 in order dated 28 September 2018 by passing the

following order.

ITA 2068 /Mum/2016 Essel Propack Limited

“52.1 Method of accounting in certain cases:-52.1 The issue relating to whether the Value of the closing stock of the inputs, work-inprogress and finished goods must necessarily include the element for which MODVAT credit is available, has been a matter of considerable litigation over the years. 52.2 Consistent with the other provisions of the Finance (No.2) Act, 1998, with a view to put an end to this point of litigation and in order to ensure that the value of opening and closing stock reflect the correct value, a new section 145A is inserted. The section provides that the valuation of purchase, sale and inventory shall be made in accordance with the method of accounting regularly employed by the assessee and such valuation shall be further adjusted to include the amount of any tax, duty, cess or fee (by whatever name called), actually paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation.” From the said circular it is apparent that the main object to introduce section 145A is to ensure that value of opening and closing stock reflect the correct value so that there is no unnecessary litigation. The assessee in the instant case is following exclusive method. If the AO had to increase the value of closing stock by taking into consideration the Cenvat credit then he has to take into consideration all purchases also to include the Cenvat credit. Had once that included in the purchases ultimately there is no effect on the profit and understatement of the profit would not arise. Similar view has been taken by the Hon'ble Supreme Court in the case of CIT vs. Indo Nippon Chemicals Co. Ltd. 261 ITR 275. Similar view was also taken by the Hon'ble Calcutta High Court in the case of CIT vs. Berger Paints India Ltd. 264 ITR 503. The Hon'ble Bombay High Court in the case of CIT vs. Mahalaxmi Glass Works (P) Ltd. 318 ITR 116 following the Hon'ble Delhi High Court decision in the case of Mahavir Alluminimum Limited 297 ITR 77 held that to give effect to section 145A if there is a change in the closing stock at the end of the year, there must necessarily be a corresponding adjustment made in the opening stock of that year. This does not amount to giving total benefit to the assessee. It would be necessary to compute the true and correct profit for the purpose of the assessment.” Facts being identical, we follow the above order of the Coordinate Bench and allow the 2nd ground of appeal.”

ITA 2068 /Mum/2016 Essel Propack Limited 24. Considering the similarity of fact and the decision of coordinate bench

of tribunal on identical issue and respectfully following the same this

ground of appeal is allowed. No contrary fact or law is brought to our

notice to take other view.

under section 36(1)(iii).The AR of the assessee submits that assessee

incurred expenditure on behalf of its subsidiary from time to time. The total recoverable from the AEs as on 31 March 2011 was ₹

3,85,02,057/-. The AO treated the same as interest free advances and

attributed interest of Rs. 2501460/- and disallowed the same under

section 36(1)(iii) . On objection before the DRP, the action of assessing

officer was confirmed. The learned AR of the assessee submits that on

similar issue the coordinate bench of tribunal in assessee’s own case

for AY 2009-10 and again in AY 2010-11deleted the similar

disallowance by taking view that no loan has been advanced by the

assessee to its AEs and, therefore, there is no question of any

disallowance under section 36(1)(iii) of the Act. The facts for the year

under consideration are identical. Thus, this ground of appeal is also

covered in favour of assessee and against the revenue.

ITA 2068 /Mum/2016 Essel Propack Limited 26. On the contrary the learned DR supported the order of lower

authorities. The ld. DR for the revenue has not controverted the factual

position explained by ld AR for the assessee.

order of lower authorities. We found that the factual matrix of the issue

under consideration is identical to the grounds of appeal raised in

assessee’s own case for AY 2009- 10 in ITA No. 5312/Mumbai/2015

dated 8th January 2018, wherein similar disallowance was deleted by

Tribunal by passing the following order -

“8. With regard to disallowance of interest explained u/s.36(1)(iii), the CIT(A) has recorded the following findings:- 11.1 CIT(A)'s order for A.Y. 2008-09 vide order dt.22.2.2013, has deleted the addition of the A.O. since A.Y. 2003-04 onwards till A.Y. 2007-08 on identical issue: Such order of CIT(A) has also been accepted by the Department. Therefore, ground of appeal No.4 is allowed. Since the issue is the same for this assessment year. 9. It is clear from the findings recorded by CIT(A) that similar disallowance made by the AO was deleted by CIT(A) since A.Y.2003-04 to 2008-09 on identical issues, however, Department did not file any appeal and accepted assessee’s contention. 10. We have considered rival contentions and found from record that the assesse’s has incurred expenses on behalf of certain foreign subsidiaries and Indian subsidiary and shown them under the head Advances Recoverable. The assessee has not made any non business advance to the these companies, but these amount represents various debits in the nature of sale of spares, royalty receivable, service charges and the expenses incurred on their behalf such as traveling expenses, establishment expenses, financial guarantees, communications expenses, etc. The assessee does not have system of charging interest on such debits of expenses incurred on their behalf. Such advances did not attract any adjustment in Transfer Pricing order also. However, the Ld. AO considered these debit balances as advances without interest

ITA 2068 /Mum/2016 Essel Propack Limited and disallowed Rs. 1,07,54,398/- out of interest u/s 36(1)(iii). We do not find any merit for the disallowance so made by the AO.” 28. We have further noted that the coordinate bench by following the order

for AY 2009-10, allowed similar relief in ITA No. 642/Mum/2016 dated

12.04.2018. As the learned DR for the revenue has not disputed the

factual matrix related to this ground of appeal, therefore respectfully

following the decision of tribunal for earlier years on identical set of

facts, this ground of appeal is also allowed. No contrary fact or law is

brought to our notice to take other view.

against market to market gain. The learned AR of the assessee submits

that assessing officer in AY 2008-09 and in AY 201-110 treated market

to market loss as is speculative loss. Aggrieved by the action of

assessing officer the assessee filed appeal before Tribunal, wherein

market to market loss of earlier years was treated as business loss in AY

2008-09 and AY 2009-10 in ITA No.5312/Mum/2015 and

581/Mum/2016 respectively, in the circumstances the present grounds

of appeal have become infructuous. Considering the fact that the learned

AR of the assessee has fairly conceded that this ground of appeal has

become infructuous, therefore, this ground of appeal is dismissed being

infructuous.

ITA 2068 /Mum/2016 Essel Propack Limited 30. In the result appeal of the assessee is partly allowed

Order pronounced in the open court on 27-05-2020.

Sd/- Sd/- (Shamim Yahya) (Pawan Singh) ACCOUNTANT MEMBER JUDICIALMEMBER Mumbai, Dt : 27 May 2020 sk/- Copy to : 1. Appellant 2. Respondent 3. CIT(A) 4. CIT 5. DR /True copy/ By order

Asstt. Registrar, ITAT, Mumbai