DCIT, NEW DELHI vs. M/S JSL LTD.,, HISAR

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ―I-I‖ NEW DELHI BEFORE SMT DIVA SINGH, JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER ITA No. 4249/Del/2013 (Assessment Year: 2007-08) ITA number 6337/Del/2012 (A.Y. 2008 – 09) JSL Limited, ACIT, Vs. (Now known as Jindal Stainless Ltd, OP Central Circle-9, Jindal Marg, Hissar New Delhi PAN: AABCJ1969M (Appellant) (Respondent)

ITA No. 4110/Del/2013 (Assessment Year: 2007-08) DCIT, JSL Limited, Vs. Central Circle-4(1), (Now known as Jindal Stainless New Delhi Ltd, OP Jindal Marg, Hissar PAN: AABCJ1969M (Appellant) (Respondent)

Assessee by : Shri Ajay Vohra, Sr. Adv Shri Neeraj Jain, Adv Shri Abhishek Agarwal, CA Revenue by: Shri Kumar Parnav, Sr. DR Date of Hearing 21/08/2018 Date of pronouncement 19/11/2018 O R D E R PER PRASHANT MAHARISHI, A. M. 1. These are the three appeals pertaining to the same assessee, i.e. Jindal stainless Ltd, [ in short ‗Assessee‘ or JSL‖], two appeals filed by assessee for two AYs and one by revenue for AY 2007-08 , involving the similar grounds for two assessment years i.e. AY 2007-08 and 2008-09,. At the request of the parties, those are argued together and disposed of by this common order. 2. The assessee company is engaged in the business of manufacturing of premium stainless steel i.e. such as hot rolled, cold rolled stainless steels slabs, plates, coils, blades, blank coils, ferrochrome etc. It is a leading manufacturer of stainless steel in India and has substantial Page | 1

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi expertise, technical know-how, brand equity, and marketing network for manufacture of stainless steel products. 3. In ITA number 4249/Del/2013 for A.Y. 2007 – 08, The assessee, has filed the appeal against the order passed by the learned commissioner of income tax (appeals) – XX , New Delhi (the learned CIT – A) dated 30/4/2013. The assessee has raised the following grounds of appeal:- ―1. That the Commissioner of Income Tax (Appeals) erred on facts and in law in sustaining the transfer pricing adjustment made by the TPO in respect of the international transactions of (i) export of steel products aggregating to Rs. 2,47,83,673 (ii) interest on loan of Rs. 70,95,787 and (iii) commission on corporate guarantee of Rs. Rs. 2,29,74,981 on the basis of the order passed under section 92CA(3) of the Act. 2. That the Commissioner of Income Tax (Appeals) erred on facts and in law in sustaining adjustment of Rs. 2,47,83,673 in respect of the international transaction of export of goods made by the TPO by comparing the price charged from export of identical products to the associated enterprises and to unrelated third parties on the same date or a nearby dates. 2.1 That the Commissioner of Income Tax (Appeals) erred on facts and in law in rejecting the benchmarking of international transaction of export of goods undertaken by the appellant in its transfer pricing study by comparing the monthly average price realized in export to related parties with similar average of price of export to the unrelated parties. 2.2 That the Commissioner of Income Tax (Appeals) erred on facts and in law in not appreciating that prices of goods exported to associated enterprise and unrelated third parties varies within a day itself on account of change in market price of nickel and iron and accordingly, benchmarking undertaken on the basis of day to day comparison does not provide accurate or reliable results. 2.3 That while benchmarking the transaction of export of goods applying CUP method, the Commissioner of Income Tax (Appeals) erred on facts and in law in not allowing comparability adjustment on account of bulk discount of 5% given on sales made to associated enterprise allegedly holding that: a. The invoice raised by the appellant does not speak about any discount.

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi b. Sales made to associated enterprise are only 9% of the total sales and accordingly, unrelated third parties should be getting the bulk discount. 2.4 That while benchmarking the transaction of export of goods applying CUP method, the Commissioner of Income Tax (Appeals) erred on facts and in law in not allowing comparability adjustment on account of basic custom duty allegedly holding that the invoice raised to the associated enterprise and domestic customers does not include custom duty. 2.5 That the Commissioner of Income Tax (Appeals) erred on facts and in law in not appreciating that the price paid on international transaction of export of goods to associated enterprise was within arm's length range of +1-5% of the price charged to unrelated third parties, in terms of the proviso to section 92C(2) of the Act. 3. That the Commissioner of Income Tax (Appeals) erred on facts and in law in sustaining addition of Rs. 70,95,787 on account of the alleged difference in the arm‘s length price of international transactions of interest charged on loan given to the associated enterprise, PT Jindal Indonesia by applying the interest rate of 14%, being labor + 700 basis points, as against the rate of LIBOR +200 bps charged by the appellant. 3.1 That the Commissioner of Income Tax (Appeals) erred on facts and in law in not appreciating that the appellant has availed loan from financial institutions, viz., SBI, at the rate of 3 months LIBOR + 170 basis points and from ICICI at 3 months LIBOR + 140 basis points and accordingly, since the rate of interest charged from the associated enterprise at LIBOR+200 is higher, the international transaction of receipt of interest shall be considered to be at arm's length price. 3.2 That the Commissioner of Income tax (Appeals) erred on facts and in law in disregarding, the internal comparable uncontrolled transactions of the interest paid by the associated enterprise in respect of loan of USD 10 million from Standard Chartered Bank at the same rate of LIBOR+ 200 basis points. 3.3 That the Commissioner of Income-tax (Appeals) erred on facts and in law in rejecting the internal CUP, allegedly holding that the associated enterprise at Indonesia is differently placed and apart from being in a different geographical location, it is also situated differently financially.

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi 3.4 That the Commissioner of Income Tax (Appeals) erred on facts and in law in disregarding the fact that the loan was advanced by the appellant to its associated enterprise in foreign denominated currency and accordingly, loan available in the international market with interest rate computed considering Libor rates shall be applied for benchmarking. 4. That the Commissioner of Income Tax (Appeals) erred on facts and in law in sustaining addition of Rs. 2,29,74,981 allegedly on account of the difference in the rate of the commission charged by the appellant for providing corporate guarantee to consortium of Exim Bank and SBI on behalf of its Associated Enterprise. 4.1 That the Commissioner of Income-tax (Appeals) erred on facts and in law in upholding the action of the assessing officer in determining the arm‘s length price of international transaction of provision of corporate guarantee at 3.5%, allegedly on the basis of assumption that the corporate guarantee, issued by the appellant on behalf of the associated enterprise at Indonesia, was beset with risk and, therefore, a mark-up of 200 basis point were to be charged as against corporate guarantee paid by the appellant @ 1.5%. 4.2 That the Commissioner of Income Tax (Appeals) erred on facts and in law in imputing the commission at the rate of 1.5% plus a markup of 200 basis points, allegedly on the basis of data obtained from various banks u/s 133(6) of the Act. 4.3 That the Commissioner of Income Tax (Appeals) erred on facts and in law in not appreciating that, the appellant has charged a commission of 1.5% from its associated enterprise which is higher than the rate of guarantee charges of 0.95% charged by State Bank of India in uncontrolled transactions. 4.4 Without prejudice, the Commissioner of Income Tax (Appeals) erred on facts and in law in sustaining a markup of 200 bps on the average rate of commission charged by various banks on account of adjustment for lending business risk and single customer risk, without providing cogent reasons and on the basis of conjecture and surmises. 5. That the Commissioner of Income Tax (Appeals) erred on facts and in law in sustaining disallowance of expenses alleging the same to be incurred for earning exempt dividend income of Rs. 11,62,000, invoking provisions of section 14A of the Act read with Rule 8D of the Income Tax Rules 1962.

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi 5.1 That the Commissioner of Income Tax (Appeals) erred on facts and in law in upholding the finding of the assessing officer that the ―appellant was using common infrastructure and personnel and the appellant has not maintained separate books of accounts makes the nexus clear that the appellant was using the same for earning exempt as well as taxable income‖, and accordingly, Rule 8D shall be applied to determine the expense to be disallowed under section 14A. 5.2 That the Commissioner of Income Tax (Appeals) erred on facts and in law in not appreciating that only expenses having direct nexus with earning of exempt income could only be disallowed under section 14A of the Act. 5.3 That the Commissioner of Income Tax (Appeals) erred on facts and in law in sustaining applicability of Rule 8D of the Income Tax Rules 1962 for computing disallowance under section 14A of the Act, not appreciating that the said rule cannot have retrospective operation.‖ 4. For AY 2007-08, The learned Deputy Commissioner of Income Tax, Central Circle 4 (1), New Delhi [ The ld AO ] is also aggrieved by the order of the learned Commissioner Of Income Tax Appeals [ The Ld CIT- A] and therefore has raised the following substantive grounds of appeal in ITA No. 4110/Del/2013:- ―1. Whether in the facts and circumstances of the case, the Ld CIT(A) erred in deleting the addition of Rs. 4,11,57,000/- on account of bad debts written off by ignoring the findings of the A.O. that these debts were not bad in nature ? 2. Whether in the facts and circumstances of the case, the Ld. CIT (A) erred in deleting the disallowance of Rs. 2,31,402/- made on account of excess claim of depreciation on UPS @ 60% as UPS/Computer peripherals are not part of the Computer? 3. Whether in the facts and circumstances of the case, the Ld. CIT(A) erred in deleting the addition of Rs. 21.74 crores by ignoring the findings of the A.O. which were based on the decision of Tuticorin Alkalis Chemical & Fertilizers Ltd. Vs CIT 27 ITR 172 (SC)?.‖ 5. ITA number 6337/Del/2012 is appeal of assessee for A.Y. 2008 – 09. The assessee has filed appeal against the assessment order passed under section 143 (3) read with section 144C of the Income Tax Act, 1961 [ The Act] dated 18/10/2012 passed by the learned Deputy Commissioner of income tax, circle 4 (1), New Delhi,[ The Ld AO ] wherein the income of the assessee is assessed at ₹ 8 70418750/– under the normal provisions and the book profit of Page | 5

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi ₹ 3 744066585/– against the returned income of ₹ 6 96249090 and the book profit of ₹ 3 699258505/–. The assessee has raised the following grounds of appeal. ―1. That the assessing officer erred on facts and in law in completing assessment under section 144C/143(3) of the Income-tax Act, 1961 (‗the Act‘) at an income of Rs. 87,04,18,750 as against the income of Rs. 64,33,16,780 returned by the appellant. 2. That the assessing officer erred on facts and in law in making an adjustment of Rs. 18,20,95,679 to the arm‘s length price of the ‗international transactions‘ on the basis of the order passed under section 92CA(3) of the Act by the TPO. 3. That the assessing officer/ TPO erred on facts and in law in making an adjustment of Rs. 12,78,29,707 on account of difference in arms length price of international transaction of export of steel products to associated enterprises as follows: (i) Making Transfer Pricing adjustment of Rs. 7,64,800 by comparing international transaction of export of steel product with export to unrelated party on 12.09.2007 and 25.01.2008, (ii) Making Transfer Pricing adjustment of Rs. 12,35,70,462 by comparing the prices of international transaction of export with prices in the domestic transaction and (iii) Making Transfer pricing adjustment of Rs. 34,94,445 by comparing prices of international transaction of export with prices of export of steel product to unrelated party after making adjustment for variation in composition of Nickel. 3.1 That the assessing officer / TPO erred on facts and in law in not appreciating that the prices of international transaction of export of steel product when compared with prices of export' to unrelated party after appropriate adjustment being difference in composition of Nickel, etc., no adjustment allegedly on account of difference in the arm‘s length price, was warranted. 3.2 That the assessing officer/TPO erred on facts and in law in disregarding comparable uncontrolled prices of similar steel product in the international market in the form of Chinese market quotations as the most appropriate benchmark of the international transaction of export of steel products.

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi 3.3 That the assessing officer/TPO erred on fats and in law in holding that comparable data for the purposes of benchmarking should be actual transactions and hence, market quotations cannot be used for applying CUP method. 3.4 That the assessing officer erred on facts and in law in benchmarking the international transaction of export of goods to AEs with the prices of sales in domestic market ignoring the differences in domestic market conditions, pricing policies, locational economic difference, etc. 3.5 Without prejudice, the assessing officer/TPO erred on facts and in law in not allowing adjustment on account of bulk discount of 5% given on sales made to AEs as per the accepted practice in the market and ignoring the discount actually extended by the appellant to its customers. 3.6 Without prejudice that the assessing officer/TPO erred on facts and in law in comparing sales made by the appellant to associated enterprises with unrelated enterprises (in domestic market) on the basis of date of contract/date of order acceptance instead of monthly, which evens out daily fluctuation in the prices of metals and hence, provides a better comparison. 3.7 That the assessing officer/TPO erred on facts and in law in comparing the export made by appellant to its associated enterprise in Indonesia on 21.09.2007 at USD 1,525 with sales made in Bangladesh on 12.09.2007 at USD 1,634 instead of transactions of sales made by the appellant on 05.09.2007 to an unrelated party in Indonesia at USD 1,504. 3.8 That the assessing officer/TPO erred on facts and in law in comparing the export made by appellant to its related enterprise on 07.02.2008 at USD 1,750 with sales made on 25.01.2008 at 1,904, instead of transactions of sale made by the appellant on 22.02.2008 to an unrelated party in USD 1,834. 3.9 That the assessing officer/TPO erred on facts and in law in not appreciating that the operating profit margin of the appellant on entity-wide basis at 9.85% being higher than that of comparable companies at 7.71% and therefore, even applying TNMM, no adjustment on account of arms length price of export of steel products is called for. 4. That the assessing officer / TPO erred on facts and in law in making an addition of Rs. 64,03,612 on account of the alleged difference in interest charged on foreign currency loan of USD 25,00,000 extended to the AE by applying the interest rate of Page | 7

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi 13.25% being the PLR of SB1 against the rate of LIBOR+200 bps charged by the appellant. 4.1 That the assessing officer/TPO erred on facts and in law in not appreciating that, the rate of interest charged by the appellant is at arm‘s length applying CUP method on the following grounds: (i) The AE of appellant had also paid interest at the rate of LIBOR + 200 bps on its borrowings. (ii) The appellant has availed loan from financial institutions, viz., State Bank of India, at the rate of 3 months LIBOR + 170 bps and from ICICI at 3 months LIBOR +140 bps. 4.2 That the assessing officer/TPO erred on facts and in law in making an adjustment on account of interest on foreign currency loan on the basis of interest rates charged by Indian banks on foreign currency loan without providing details of interest charged by such banks and heard, hence, violating the principle of natural justice. 4.3 That the assessing officer/TPO erred in law in not confronting the appellant with all information obtained under section 133(6) of the Act prior to using such information for determination of arm‘s length price. 4.4 That the assessing officer/TPO erred on facts and in law in further adding a markup of 3.95% on account of the forward premium and ad-hoc markup of 3.43% on account of adjustment for security and single customer risk, without providing any cogent reasons and on the basis of his surmises and conjecture. 4.5 That the assessing officer/TPO erred on facts and in law in making an addition of Rs. 4,78,62,360, allegedly, on the ground that commission at a lower rate of 1.5% is charged by the appellant for providing corporate guarantee to lenders of its associated enterprise, PT Jindal Stainless. 5.1 That the assessing officer/ TPO erred on facts and in law in imputing the commission at the rate of 2.68% plus a mark-up of 200 bps, allegedly on the basis of data obtained from various banks u/s 133(6) of the Act. 5.2 That the assessing officer/ TPO erred on facts and in law in not appreciating that, the appellant has himself paid commission at the rate of 0.75% on bank guarantee to State Bank of India, which should be considered as CUP, as against the rate of 4.68%.

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi 6. That the assessing officer erred on facts and in law in disallowing expenses amounting to Rs. 4,48,08,080 invoking section 14A of the Act read with rule 8D of the Income-tax Rules, 1962 allegedly holding the same to be attributable to earning the exempt dividend income. 6.1 That the assessing officer erred on facts and in law in not appreciating that only expenditure incurred having direct relation to the earning of exempt income could be disallowed in terms of sections 14A(1) and 14A(2) of the Act. 6.2 Without Prejudice, that the assessing officer erred on facts and in law in not recording any finding/satisfaction for any expenditure being incurred by appellant in relation to earning of exempt dividend income, in terms of sub-section (2) of section 14A of the Act, before computing disallowance as per Rule 8D of the Rules. 7. That the assessing officer erred on facts and in law disallowing the depreciation amounting to Rs. 1,98,212 on written down value of Rs. 13, 22,110 of cars sold to the employees proceeds of which was credited to the block of such assets. 7.1 That the assessing officer erred on facts and in law in not appreciating that the block of assets has not ceased to exist and hence, depreciation is to be allowed on the written down value of the block after crediting the sales consideration of such cars to the block. 8. That the Assessing Officer erred on facts and in law in levying interest under section 234B and Section 234C of the Act‖. Facts for AY 2007-08 6. First, we take up the appeals for A.Y. 2007 – 08, the assessee company filed its return of income [ROI] on 27/10/2007 declaring total income of ₹ 2610690840/- . This return was revised on 20/3/2008 declaring that income of ₹ 2630499040/–. During the year, assessee has entered into four international transactions with its associated enterprise as under:- i. import of stainless steel scrap Rs. 129150028/- ii. export of Cold rolled product ₹ 4 765543264/- iii. corporate guarantee ₹ 1082750,000/- iv. receipt of interest on loan to associated enterprises ₹ 7 989214 7. with respect to export of stainless steel to its associated enterprise of ₹ 4 765543264, it was noted by the learned assessing officer that assessee has a wholly owned 100 % subsidiary in Indonesia, namely PT Jindal stainless (Indonesia) Ltd [The Associated Enterprise or AE] Page | 9

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi and assessee has exported various hot rolled coils of the value of ₹ 4765543264/– to its associated enterprise which has sold it further after processing into cold rolled coils. The assessee has benchmarked this transaction using CUP [Comparable Uncontrolled Prices] method. Assessee has supplied cold rolled stainless steel coils to its associated enterprise of three grades, namely, J4 HRAP, J4 black, and J 1 Black. It was the contention of the assessee that grades J4 HRAP and J1 black has unique cost structure, specially graded, and manufactured by the assessee company only. The contention is that there are no comparable prices available in the market. Therefore, assessee benchmark these international transactions relating to export of J4 and J1 grades using CUP of sales made of the same grades to third- party independent companies. The assessee to benchmark international transactions relating to export of grade J4 stainless steel has aggregated transactions for the entire month and computed the average rate of the same product sold to third parties. Similarly, the assessee has computed average rate for the entire month of the goods sold to the assessee as well as goods sold to the third parties and then made a comparison of month wise rates at which sales have been made by the assessee to associated enterprise and 3rd parties. 8. The learned assessing officer examined the methodology adopted by the assessee and held that on detailed comparison of the benchmarking of the international transactions on the date of contract and the date of order of acceptance. There are certain comparable uncontrolled prices available for sales made to associated enterprise and sales made to third party on the same date. The analysis of the learned assessing officer revealed that there were differences in the rate at which sales have been made to the associated enterprise and the sales made to third party on the same date. Therefore, the assessing officer asked the assessee to explain the benchmarking of grade J4 HRAP and J4 black under CUP. 9. The assessee explained that addition was made in the preceding A.Y. 2006 – 07 based on comparison of the rates of the transactions with the associated enterprise and non-related companies by taking the rates on daily bases. The assessee contended that the comparison of rates on daily bases does not give proper results. The assessee also submitted the comparison on daily bases in respect of various materials and stated that where as rates are higher on certain dates and the rates are lower on other dates. The assessee also stated that the reasons could be manifold including the variation in rates within the day itself. He further stated that the rates might vary due to difference in raw material prices like nickel and due to market conditions. Therefore, assessee contended that it is logical that comparisons should only be made on a periodic basis. The assessee also submitted a chart to indicate that if the rates are compared on a periodic basis they are well within 5%. It was further contended by the Page | 10

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi assessee that the difference between grade J1 and grade J4 is mainly on account of nickel content. It was further stated that the rates of nickel have been very volatile in the year under consideration. Assessee also submitted that the rate of nickel has varied from US dollar 14,800 per metric ton to US dollar 40,355 per metric ton. Therefore, the assessee contended that only average rate should be adopted to even out the wide price fluctuations. 10. The learned, TPO considered the explanation of the assessee and stated that when the assessee has itself used the third-party sales comparable uncontrolled prices and there are variation in prices between sales made to associated enterprise and third-party of identical product sold on the same date. Therefore, he held that explanation of the assessee does not satisfy the difference in prices on the daily bases. The learned Transfer Pricing Officer also noted that assessee has not furnished any evidence to prove that the quality of steel sold to third party is different from that sold to associated enterprise. He also rejected the explanation of the assessee with respect to the nickel content and wide fluctuation in the price of the nickel. It was further stated by him that effect of 5% tolerance band is not applicable in the CUP method when the prices are compiled on the daily bases from transaction to transaction. Therefore, he held that the difference in price of same grade coils sold to third party and associated enterprises is ₹ 24783673/– and therefore he proposed an adjustment of the above sum on account of export of steel to the associated enterprise. 11. On the issue of interest on loans given to associated enterprise, the assessee has received interest of ₹ 7989214 on loan given to its associated enterprise and assessee has charged interest at the LIBOR +200 base points. The assessee has also benchmarked this interest income using CUP method. The assessee contended that it is paying interest at the same rate of interest to other lenders and therefore the transaction is at arm‘s length. The learned TPO rejected the method of the assessee holding that interest received from associated enterprise cannot be benchmarked with the interest that assessee is paying to other lenders. He further held that the loan has been given by the assessee out of funds, which it has taken on loan from various lenders. He also rejected the contention that loan given to associated enterprise cannot be benchmarked with the rate that the assessee would have got by investing in fixed deposits, current deposits and commercial papers. Therefore, assessee was directed to explain the application of CUP interest rates. The assessee gave detailed explanation for the same stating that assessee has paid average interest at the rate of 7.04% to its lenders and therefore it has charged a higher rate of interest from its associated enterprise at about 7.5% approximately. It was further stated that associated enterprise has also raised one loan of US dollar 10 million from Standard Chartered Bank at LIBOR +200 basis point. It was further Page | 11

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi stated by the assessee that there is no justification of charging rate of interest higher than the rate at which the borrower can obtain from the open market. Assessee contended that since internal CUP is available, no other data could be used for benchmarking to arrive at arm‘s length price of interest income. The learned assessing officer rejected the contention of the assessee and concluded that basic interest rate for the credit rating of the associated enterprise should be LIBOR +400 basis points and 300 basis points is the added transaction cost thereof resulting into CUP rate of LIBOR +700 basis points. According to the learned TPO as the currency in which the loan is extended is US dollar he considered 6 months US dollar LIBOR and arrived at interest rate of 5.4% per annum and therefore he computed the CUP interest rate of 12.4%. He further stated that AE has no security offered by the subsidiary company and taxpayer is also not into lending and borrowing of the money, 14% rate of interest would be just. Accordingly, on the total loan amount, he applied interest at the rate of 14% amounting to US$ 350,000 wherein the interest already charged is US dollar 185364.58 and computed the balance interest to be charged of 16463 US$ 5.42. He applied the conversion rate of Rs. to dollar at the rate of 43.10 and proposed an adjustment of ₹ 7095787/-. 12. During the course of proceedings, the learned Transfer Pricing Officer noted that assessee has given a bank guarantee of ₹ 10827.5 lakhs on behalf of its associated enterprise and it has charged ₹ 149.21 lakhs for providing the corporate guarantee to its associated enterprise. The assessee benchmarks the above transaction applying the CUP method. The learned TPO for verification of the applicable rate sought information under section 133 (6) from State Bank of India about the rate of commission charged for providing bank guarantee to corporate during the same financial year. The State Bank vide letter dated 1/9/2010 informed that such rates are 2.75% plus Rs. 100/-. Based on the above information, the learned TPO held that a markup of 200 basis points on the rate charged by the National Bank would be appropriate in the circumstances, and therefore adopted the rate of 3.5% on the bank guarantee and determined the arm‘s-length price of ₹ 37896250/- and proposed an adjustment of ₹ 2,29,74,981/–. 13. Consequently the learned TPO [ The TPO] passed in order under section 92CA (3) of the act on 13/10/2010 proposing adjustment of ₹ 24783673/– on account of CUP data in export segment and ₹ 7095787 on account of interest on loan given to associated enterprises and Rs. 22974981/– on account of bank guarantee totaling in all ₹ 54854441/–. 14. Incorporating the above adjustments on account of arm‘s-length price of the International transaction the learned assessing officer passed an assessment order on 31/1/2011 whereby Page | 12

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi he made the following other corporate tax adjustment. He made the disallowance of ₹ 39214001 on account of earning of exempt income of Rs. 1162000/– under section 14 A of the Income Tax Act. He further made the disallowance of bad debts of Rs. 41157000/- holding that large part of the bad debt is related to the public sector undertaking which by no stretch of imagination according to him can be construed as bad debt. According to him as the assessee has not furnished any reason for writing of various other debtors such as their precarious financial condition, which made them not able to pay the debt. He further made disallowance of depreciation on UPS holding that they are not computers entitled to 60% depreciation but normal rate of 15%. Thereby the disallowance of the excess depreciation claimed of Rs. 231402/– was also made. In addition of Rs. 217439000/– was made on account of the decapitalisation of interest. Accordingly the total income of the assessee was assessed at Rs. 2983394884/–. The learned assessing officer also withdrawn the credit of tax deduction at source amounting to ₹ 1458402/–. For some apparent mistakes in the assessment order ,subsequently, the order under section 154 of the Income Tax Act was also passed on 17/12/ 2012 where the profit on sale of investment which was originally not reduced from the total income was reduced of ₹ 135547000/–. Consequent to that total income originally assessed under section 143 (3) vide order dated 31/1/2011 of Rs. 2983394884/– was reduced by the above amount and assessed at ₹ 28 4784 7884/–. 15. Assessee aggrieved with the order of the learned assessing officer preferred an appeal before the learned Commissioner of Income Tax (Appeals) –XX, New Delhi who disposed off the appeal vide order dated 30/4/2013. 16. With respect to the corporate tax disallowance under section 14 A the learned CIT – A held that the learned AO has correctly applied the provisions of section 14 A, however he directed the learned AO to take the average value of the total asset as defined in rule 8D of the Income Tax Rules, 1962 for the working out the disallowance of the expenditure. Regarding the disallowance of bad debts of ₹ 41 1517 00/– he directed the learned AO to delete the addition for the reason that it is the prerogative of the businessmen to decide the nature of the debt and the since the amount has already been shown as income in the earlier years, and it has been written off in the profit and loss account, there is no requirement of showing that the debt has become bad during the year. With respect to the excess depreciation claimed on uninterrupted power supply equipments he held that issue has been decided by the jurisdiction High Court in CIT vs BSES Yamuna powers Ltd in favour of the assessee and therefore he directed that assessee is entitled for the depreciation at the rate of 60% on these equipments and deleted the disallowance. With respect to the disallowance of capitalization Page | 13

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi of interest of ₹ 21 7430 9000/– he relying upon the decision of the honourable Supreme Court in the case of CIT versus Bokaro steel Ltd held that interest received on borrowed funds exclusively for the purposes of setting up of the unit is not taxable as interest income and therefore he directed the AO to delete the addition of ₹ 21 7430 9000/–. 17. On the issue of the transfer price adjustment with respect to the export of goods, he rejected the monthly average price taken by the assessee under the transfer pricing study for the reason that according to him the nearest date of the transaction if taken for comparison, the variation in prices of the steel product by the appellant does not very as much within a short span of time. He therefore upheld the order of the learned Transfer Pricing Officer in adopting the transaction value of the independent parties on the nearest date and rejected the approach of the assessee of taking the monthly average of prices for determination of the arm‘s-length price. He also rejected the 5% claim of bulk discount to the associated enterprise holding that as the appellant is selling more to the third parties rather than to the related party therefore the third party should be getting the bulk discount. He also stated that the customs duty adjustment is also not applicable in either the sale made to associated enterprise or sales made to local customers. According to him the prices are compiled are CIF prices and the learned TPO is right in not accepting such adjustments holding them illogical and inconsistent with the business practices. Accordingly, he upheld the adjustment proposed by the learned Transfer Pricing Officer to the International transaction on account of sale of finished goods to associated enterprise. On the aspect of interest on loan given to the associated enterprise, he also upheld the order of the learned TPO benchmarking the rate of interest at LIBOR + 700 basis points and further addition on account of risk factor thereby determining the interest rate at the rate of 14%. He held that entity at Indonesia is placed differently apart from being in a different geography location; it is also situated different financially. He also upheld the risk adjustment. Accordingly he upheld the interest adjustment made by the learned TPO on loan given by the assessee of US dollars 25, 00,000 to Indonesian entity and interest income thereon. The 3rd adjustment is on account of the issue of corporate guarantee given by the assessee to the associated enterprise. He upheld the addition proposed by the learned TPO. Reason being that appellant itself has charged the guarantee fee at the rate of 1.5% and the TPO has assumed that corporate guarantee on behalf of entity at Indonesia is beset with risk and therefore 200 basis point were marked upon such guarantee in addition to what the assessee has charged is justified. Therefore, he upheld the 3.5% guarantee charge proposed by the learned Transfer Pricing Officer.

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi 18. Therefore both the parties, assessee and assessing officer aggrieved with the order of the learned Commissioner Of Income Tax Appeals has preferred appeal before us separately. Facts for AY 2008-09 19. For A.Y. 2008 – 09 assessee filed its return of income on 29/9/2008 at ₹ 696249090/- which was subsequently revised on 29/3/2010 at ₹ 643316780/– under the normal provisions and ₹ 3699258505/- under section 115JB of the act. The assessee has entered into certain international transactions therefore the learned Assessing Officer made reference to the learned TPO for determination of the arm‘s-length price of those international transactions under section 92CA (3) of the act. During the year the assessee has entered into following international transactions which were benchmarked by the assessee as well as the adjustment proposed by the learned TPO as follows:- serial Nature of Value of Most Arm‘s-length Adjustment number transactions transactions appropriate price proposed (in Rs.) method determined adopted by by the the assessee learned TPO Export of 4736804511 CUP 4864 634 218 127829707 1 finished goods Import of 16 4115 212 CUP No 2 stainless steel adjustment scrap proposed Commission 9701640 CUP 5 7564000 47862360 3 received on corporate guarantee Commission paid 10 5693 173 CUP No 4 on sales adjustment proposed Interest on 6892 462 CUP 17335147 10442685/- 5 subordinate that is Share application 20 000000 CUP No 6 money adjustment

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi proposed Reimbursement 4844359 CUP No 7 of expenses (net) adjustment proposed

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi grade of steel four sale transactions were noted, nearest date of export to the third- party export was found, difference between the two prices in US dollar was determined and thereto exchange rate was applied. The learned TPO found that that adjustment on that account is ₹ 764800/-. b. With respect to the comparison of the export made by the assessee to the associated enterprises with the Chinese market quotation, the learned TPO compared it with the domestic sales rates by the assessee and allowed adjustments with respect to advance license and duty entitlement passbook scheme benefits, basic customs duty, freight, trimming cost and arrived at net rate in INR. Then he compared with net rate of sales of the domestic parties with the export made to associated enterprises and determined the adjustment of ₹ 123570462/–. c. With respect to the exports where assessee compared it with the nickel adjusted price data which is derived from export price in the past and adjusted for fall in nickel prices to the date of the transaction, the learned transfer arising officer adopted actual third-party export price base and then granted adjustment and derived at the difference in arm‘s-length price of ₹ 3494445/– 22. With respect to the International transaction of interest received on loan given by the assessee to its associated enterprise of ₹ 6892462/–, the learned TPO rejected the benchmarking of the assessee that interest has been charged at the rate of monthly LIBOR + 200 basis points using the CUP method stating that assessee is paying interest on the same rate of interest to other lenders. The method adopted by the assessee was not disputed by the learned Transfer Pricing Officer however; the manner in which the CUP method was used was rejected by him. He stated that the interest received from associated enterprise cannot be benchmarked with the interest that assessee is paying to other lenders. Further, the loan given to an associated enterprise cannot be benchmarked with the rate that the assessee would have got if invested in fixed deposits, current deposits, or commercial papers when assessee has already borrowed loan from the banks. Therefore, he proceeded to determine the CUP rates. After detailed analysis and dealing with the objection raised by the assessee and quotes called for under section 133 (6) of the act, he held that that the basic interest rate for the credit rating of the associated enterprise shall be 9.88% and transaction cost thereto should be added of 395 basis points resulting into the CUP rate of 13.83%. He further made a risk adjustment for single customer to that rate as no securities offered by the subsidiary company. Further the assessee is also not engaged in the business of lending and borrowing of the money and it is a lending to a single customer, he held that interest should be chargeable at the rate of Page | 17

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi 17.26% which is fair and reasonable. Therefore he held that interest has been charged by the assessee resulting into the shortfall of interest charged, he proposed an adjustment of ₹ 10442685/–. 23. With respect to the corporate guarantee which the assessee has given of US dollar 30 million to the lenders of Indonesian company and charged corporate guarantee commission of ₹ 9701640 computed at the rate of 1.5% on the amount of loan availed by the associated enterprise, which is benchmarked by the assessee using CUP method, The learned Transfer Pricing Officer accepted the CUP method but rejected the manner in which it is determined by the assessee. He obtained the quotation from various banks under section 133 (6) of the Income Tax Act and determine the arithmetic mean of all the quotation at 2.68%. The assessee objected before him that the corporate guarantee is not an international transaction, which was rejected by the learned Transfer Pricing Officer holding that assessee himself has charged guarantee commission and earned the revenue and therefore now it cannot be said that corporate guarantee is not an international transaction. He further held that as the assessee has given guarantee without taking any margin from the associated enterprise or without any security being offered by the associated enterprise. He therefore stated that it is much more risky than the bank because banks issue guarantee only after taking margin from the clients. He therefore presumed that there should have been a margin of 25% and the assessee would have earned higher income on the amount of guarantee. However he took a conservative estimate and proposed the markup of 200 basis point on account of the risk that assessee is bearing and based on that he adopted the rate of 4.68% (2.68% is the arithmetic mean of the various contentions obtained by the assessee from various banks +200 basis point) on the value of the bank guarantee of US dollar 30 million computed the guarantee commission that should have been received by the assessee amounting to US dollar 1.404 million and applied the conversion rate of ₹ 41/- per US dollar determined that assessee should have shown a revenue of ₹ 57564000 and proposed an adjustment of Rs. 47862360/-. 24. Further on aspect of the corporate tax adjustment the learned AO disallowed Rs. 44808080/– on account of disallowance under section 14 A of the Income Tax Act read with rule 8D of the income tax rules 1962. He further disallowed depreciation on the computer peripherals holding that they are not entitled to the depreciation at the rate of 60% but that at the rate of normal depreciation rate applicable to a plant and machinery. Therefore the adjustment on account of excess depreciation claimed by the assessee was disallowed to the extent of ₹ 192197/–. The learned assessing officer further disallowed a sum of ₹ 125330/– being the depreciation on cars under section 32 of the act. Certain other adjustments were also made. Page | 18

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi Consequently the draft assessment order under section 144C (1) of the Income Tax Act 1961 was passed by the learned assessing officer and forwarded to the assessee on 28/12/2011. 25. Assessee aggrieved with the above order preferred objection before the Dispute Resolution Panel – 1, New Delhi who passed the direction under section 144C (5) of the Income Tax Act 1961 on 3/9/2012. The learned Dispute Resolution Panel with respect to the objection on account of international transaction on export of goods of ₹ 1 27829707 on account of export of steel products to the associated Enterprises upheld the adjustment proposed by the learned TPO . Before the learned Dispute Resolution Panel, the assessee also raised an objection that that the learned TPO has compared the third-party sales made in Indonesia with Bangladesh and the learned TPO has not appreciated that the operating profit margin of the assessee is any way higher than the comparables. The learned DRP also rejected the objection of the assessee holding that benchmarking analysis has to be undertaken on a transaction-to- transaction basis with respect to the comparison of sales made in Bangladesh. The learned Dispute Resolution Panel held that it has been adopted by the learned TPO due to closer comparability of dates, which is also appropriate. On the 2nd aspect of the adjustment on the interest received from the associated enterprise on loan granted by the assessee which has been benchmarked by the learned TPO adopting the rate of 17.26%, the learned Dispute Resolution Panel directed the learned TPO to adopt the interest at the PLR of the RBI in the financial year 2007 – 08. Otherwise, the computation made by the learned Transfer Pricing Officer was upheld. The learned TPO obtained during the course of transfer pricing assessment the information under section 133 (6) of the act from the various bank which was objected by the assessee before the learned Dispute Resolution Panel. The learned Dispute Resolution Panel rejected the same as the information obtained by the assessee was confronted to the assessee and assessee was given complete opportunity of rebutting that information. With respect to the corporate guarantee computed at 4.68% by the learned Transfer Pricing Officer it upheld the same. 26. With respect to the corporate tax issues the learned Dispute Resolution Panel upheld the disallowance under section 14 A of the Income Tax Act disallowing a sum of Rs. 44808080/–. The learned Dispute Resolution Panel further noted that assessee has earned the dividend income of Rs. 237000 and has offered the disallowance of ₹ 1 lakh on account of expenditure incurred. With respect to the depreciation restricted by the learned assessing officer at the rate of 15% on the computer peripherals, which were claimed by the assessee at the rate of 60%, the learned Dispute Resolution Panel accepted the argument of the assessee and directed the learned assessing officer to allow depreciation at the rate of 60% on Page | 19

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi computer peripherals relying on the decision of the jurisdictional High Court of BSES Yamuna powers Ltd. With respect to the disallowance of depreciation of ₹ 1 25330 with respect to the purchase of 3 ready built flats purchased by the assessee where the learned assessing officer disallowed this the appreciation is holding that 5% of the total cost of Rs. 25066109/– is related to the land the learned Dispute Resolution Panel directed the learned AO to delete the disallowance of depreciation of ₹ 1 25330/–. With respect to the depreciation disallowed on cars sold to the employees, the learned Dispute Resolution Panel agreed with the opinion of the learned assessing officer and rejected the argument of the assessee. The learned Dispute Resolution Panel was of the opinion that assessee has devised a scheme to claim more depreciation than what is justifiably entitled to where purchase cost of ₹ 3 527637/– and written down value is Rs. 2206227 which has been sold at a ridiculously low price of Rs. hundred each totaling to ₹ 700 since the sale of cars to its employees is made under the colorable device, the assessee cannot be allowed to take undue benefit in the claim of depreciation in respect of written down value of these cars. With respect to the unrealized exchange fluctuation gain credited to the profit and loss account the learned Dispute Resolution Panel directed the assessing officer not to make the adjustment on account of exchange fluctuation as it is covered by the decision of honourable Supreme Court in case of oil and natural Gas Corporation Ltd 322 ITR 180 where the honourable Supreme Court has observed that it is permissible to adjust the actual cost of imported assets acquired in foreign currency on account of fluctuation in the rate of foreign exchange at each balance sheet date pending actual payment of the liability. With respect to the disallowance of the credit of tax deduction at source claimed by the assessee of Rs. 3326422/– the learned Dispute Resolution Panel rejected the contention of the assessee where it was submitted that the disallowance of credit of tax deduction at source claimed by the assessee is not sustainable because the assessee has not claimed the credit of the aforementioned tax in earlier years when they were actually deducted. The learned Dispute Resolution Panel stated that since the income in question in relation to which the tax deduction at source has been made is not assessable for the A.Y. under consideration, the learned assessing officer is justified in denying the credit of Rs. 3326422/–. The learned Dispute Resolution Panel also rejected the alternative argument of the assessee to allow the credit in earlier years by direction to the assessing officer where the respective income has been assessed, the learned Dispute Resolution Panel held that no such direction can be given by the Dispute Resolution Panel as jurisdiction of the Dispute Resolution Panel is restricted to the variation made by the assessing officer in the A.Y. under consideration. With respect to the adjustment to the book Page | 20

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi profit made by the learned assessing officer on account of transfer pricing adjustment, depreciation disallowance on computer peripherals, depreciation on cars and depreciation on buildings, the learned Dispute Resolution Panel directed the learned assessing officer to not to make such adjustment as it is not warranted according to the provisions of section 115 JB of the Income Tax Act. 27. Consequent to the direction of the learned Dispute Resolution Panel the learned Assessing Officer passed an assessment order under section 143 (3) read with section 144C of the Income Tax Act, 1961 on 18/10/2012 and determined the total income of the assessee at ₹ 8 70418751. 28. The assessee aggrieved with the order of the learned Assessing Officer passed under section 143 (3) read with section 144C of the act has preferred an appeal before us. 29. Therefore, now it is apparent that following issues are under dispute in these two appeals filed by the assessee and one appeal filed by the revenue for two assessment years. i. Transfer pricing adjustment made by the learned assessing officer with respect to the arm‘s-length price of export of goods made by the assessee to its associated enterprise of stainless steel [ Ground no 3 for AY 2008-09 and Ground No 2 for AY 2007-08 in appeal of assessee] ii. Transfer pricing adjustment made by the learned TPO with respect to the computation of interest received by the assessee on loan given by the assessee to its associated enterprise[ Ground no 4 for AY 2008-09 and Ground no 3 for Ay 2007-08 in appeal of assessee] iii. Transfer pricing adjustment made by the learned TPO with respect to the International transaction of the corporate guarantee given by the assessee to its associated enterprise. [ Ground no 4 for AY 2007-08 and Ground no 5 for AY 2008-09 in appeal of the assessee] iv. Disallowance under section 14 A of the Income Tax Act [ Ground no 5 for AY 2007-08 and Ground no 6 for Ay 2008-09 in appeal of assessee] v. Disallowance of depreciation on written down value of cars sold to the employees [ Ground no 7 for Ay 2008-09 in appeal of assessee] vi. Disallowance of depreciation on computer peripherals considering them as computers [ Ground no 2 in appeal of AO for Ay 2007-08] vii. Disallowance of bad debts written off [ Ground no 1 of appeal of AO for AY 2007-08]

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi viii. Disallowance of interest decapitalisation [ Ground no 3 of appeal of AO for Ay 2007-08]

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi J1 Grade JSJ Tube 733.000 56,244 40,494,111 54,672 40,074,576 Grade J4 HRAP 543,110 70,492 38,284,910 71,263 35,703,648 Store Items 1,277,500 1,277,500 68477.860 4,765,543,264 4,723,815,542

During the course of assessment proceedings, the TPO required the appellant to provide comparison of price of goods sold to its associated enterprise vis-à-vis sale made to unrelated third parties on daily basis. Accordingly, the appellant vide reply dated 30.09.2010 submitted comparison of price on daily basis (nearest available date of sale to unrelated third parties) for Grade J4 HRAP, J4 Black Coil and J1 (JSL AUS) coils. The ld TPO, rejected the contention of the assessee that (i) the price of goods is volatile even on daily basis, (ii) the appellant has charged higher price in most cases and (ii) the price charged by the appellant is within the range of +/- 5% of the price charged from unrelated third parties and without allowing comparability adjustment on account of (i) discounts and (ii) basic custom duty, made transfer pricing adjustment of Rs. 2,47,83,673 in respect of the transactions shown at pages 3-6 of the transfer pricing order, wherein allegedly, the price charged by the appellant from its associated enterprise was lower than the price charged from unrelated parties. 34. For AY 2008-09 appellant has exported various grades of stainless steel products to the associated enterprise, viz., PT Jindal Stainless, Indonesia, aggregated to Rs.4,73,68,04,611, as under: Products Quantity exported Average rate Value INR MT Rs. Rs. HR SS Coils Grade 204CU 331.115 74,263 2,45,89,627 HRAP HR SS Coils Grade 204CU 1,512.335 74,542 11,27,32,964 Black HR SS Coils Grade 304 HRAP 444.740 1,51,735 6,74,82,617 HR SS Coils Grade 304 Black 2,646.335 1,51,695 40,14,36,716 HR SS Coils Grade 430 Black 436.020 46,999 2,04,92,346 HR SS Coils Grade J4 HRAP 2,202.630 66,605 14,67,07,249 HR SS Plate Grade J4 382.805 68,362 2,61,69,462

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi HR SS Coils Grade J4 Black 45,205.790 62,446 2,82,29,29,453 HR SS Coils Grade JSL AUS 803.585 1,16,381 9,35,21,792 HRAP HR SS Coils Grade JSL AUS 5,581.245 1,11,765 62,37,87,101 Black HR SS Coils JSL Tube HRAP 734.765 56,902 4,18,09,522 HR SS Coils JSL Tube Black 6,612.860 52,515 34,72,75,662 Store Items 78,70,000 Total 66,894.225 4,73,68,04,511

The appellant has also made export of following grades of Stainless Steel products to unrelated parties during the same period:

Quantity Average Products Value INR exported rate MT Rs. Rs. HR SS Coils Grade 304 HRAP 444.740 1,51,735 6,74,82,617 HR SS Coils Grade J4 HRAP 2,202.630 66,605 14,67,07,249 HR SS Plate Grade J4 382.805 68,362 2,61,69,462 HR SS Coils JSL Tube HRAP 734.765 56,902 4,18,09,522

The remaining grades of Stainless Steel products were not exported to unrelated parties during the same month in all transactions. Wherever such comparable uncontrolled transactions of export to unrelated parties in the same month was not available, comparison was made with reference to prices of export during the same month by unrelated party manufacturers of Stainless Steel products in China, viz., LISCO and BAO Steel. For the purpose of comparison of prices of international transactions of export of Stainless Steel products to the associated enterprise, viz., Pt Jindal Stainless, Indonesia, the following adjustments were made:

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi (i) Comparison of prices of international transactions of export has been made with reference to the date of order accepted with the price of export to unrelated parties on the nearest possible uncontrolled transactions of export during the same month. (ii) Comparison in prices has been made for export on CIF basis and in US Dollars. (iii) Adjustment has been made to the prices of export to unrelated parties on account of payment of export commission. (iv) While comparing unrelated party prices in China, comparability adjustment is made on account of levy of VAT @ 17%. Comparable uncontrolled transactions of sale of stainless steel products by uncontrolled enterprises in China were available only for J4 HRAP and 304 HRAP grades of coils. Accordingly, for comparing such uncontrolled prices with other grades of stainless steel products, adjustment was made because of difference in Nickel content and conversion cost of Black Coil (HR) to Pickled Coils HRAP Annealed, as follows:

Adjustment for Adjustment for Nickel conversion from Black Grades contents to HRAP HRAP 204 CU HRAP coil 0.50% 204 CU HRAP coil 0.50% (second) 204 CU Black coil 0.50% USD 60 304 Black coil - USD 60 JSL AUS HRAP coil 3% JSL AUS Black Coil 3% USD 60 JSL Tube Black coil 0.70% USD 60

Adjustment because of difference in Nickel content has been made with reference to prices prevailing in London Metal Exchange (LME) on the respective dates. Accordingly, prices of international transactions of export of various grades of Stainless Steel products were compared with prices of comparable uncontrolled transactions of export to unrelated parties by JSL or uncontrolled transactions of export by uncontrolled enterprises in China. The prices of international transactions of export of the various grades of Stainless Steel products to associated enterprise was found to be comparable / higher than the prices charged by JSL Page | 25

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi from export of similar products to unrelated parties or by uncontrolled enterprise in China. Such international transactions of export of finished goods were, therefore, considered at arm‘s length applying CUP method. Alternatively, the appellant vide reply dated 29.09.2011 had also undertook benchmarking analysis applying Transactional Net Margin Method (―TNMM‖) with operating profit to operating income (OP/OI) as PLI. After considering various selection criteria, one comparable company viz. Salem Steel Plant of Steel Authority of India was identified as functionally comparable to the operations of JSL. The results of the Transfer Pricing analysis applying TNMM are summarized herein below:

Company Name Financial year Sales OP/OI (%) Steel Authority of India (Salem Steel 200803 1397.13 7.71% Plant) Jindal Stainless Ltd. 200803 5707.06 9.85%

Since the operating profit ratio (OP/OI %) of JSL @ 9.85% is higher than the operating profit margin (OP/OI %) of 7.71% of Salem Steel Plant of Steel Authority of India, the comparable enterprise, the international transactions entered into by JSL were considered as having been entered at arm‘s length price, applying TNMM on an entity-vide basis.

The TPO, however, during the assessment proceedings has disregarded the benchmarking analysis undertaken by the appellant for comparing the export of goods made to associated enterprises with Chinese market quotations on the following grounds, as under:

i. Price charged in Chinese market quotations are not comparable to price charged by the appellant due to different in geography, product, quality etc. ii. As per rule 10B(1)(a), only actually transacted data can be used as comparable price. iii. The quality of goods manufactured by the appellant are different from goods sold by Chinese manufacturers and therefore, cannot be compared applying CUP.

Accordingly, during the course of assessment proceedings, the TPO required the appellant to compare export of goods to related parties with domestic sales and any other comparable prices. In reply to the requirements of the TPO, the appellant vide reply dated 29.09.2011 submitted the comparison of prices of export of steel products to related parties with Page | 26

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi domestic sales and also with export sales made to unrelated parties after adjusting for nickel content in the exported goods. The TPO while comparing export of goods made to related parties with domestic sales, rejected the adjustment claimed by the appellant on account of bulk discount of 5% to associated enterprises for purchases made in huge quantum by them holding that the appellant has not been able to produce any analysis or documentary evidence for providing 5% discount on bulk purchases. Further, the TPO while comparing export of goods made to related parties with export of goods to unrelated parties has also made following observations in two cases, as under: (i) For benchmarking of international transactions of export of J-4 HR Plate SS to associated enterprise in Indonesia on 21-09-2007, the appellant considered price of export of same grade of steel made to unrelated party in Indonesia on 05-09-2007. The TPO however, has compared the price of export of J-4 HR Plate SS to unrelated party in Bangladesh on 12-09-2007 as comparable uncontrolled price.

(ii) With respect to the international transaction of J-4 HR Plate SS made on 07-02- 2008, the appellant had considered comparable uncontrolled transactions of export of similar product undertaken on 22-02-2008 as the benchmark. The TPO, however, considered the price of export of similar product made on 28-01-2008 to unrelated party as comparable uncontrolled price.

Accordingly, the TPO has made following adjustments in the arm‘s length price of various grades of steel products exported to AE as under:

Category Variance determined International Transaction CUP by TPO I J4 Plate Exports made to 7,64,800 third party Total 7,64,800 II Other grades Adjusted 5,07,141 domestic prices 304 Black coil 43,96,216 (excluding adjustment of 430 Black Coil 15,288 bulk discount) J4 Black Coil 9,71,47,635

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi JSLAUS HRAP Coil 19,663 JSLAUS Black Coil 1,52,37,778 JSL Tube Black Coil 49,14,453 204 CU HRAP Coil (Second) 5,62,211 J4 HRAP Coil (Second) 6,70,884 JSLAUS HRAP Coil 99,194 (Second) Total (INR) 12,35,70,462 III 304 HRAP Coil Nickel price 31,818 adjusted export 304 Black Coil 2,850 Prices JSL Tube Black coil 50,562 Total (INR) 34,94,445 Total 12,78,29,707

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi following methods, being the most appropriate method, in the following manner, namely:-

―(a) comparable uncontrolled price method, by which,

(i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified;

(ii) such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market;

(iii) the adjusted price arrived at under sub-clause (ii) is taken to be an arm's length price in respect of the property transferred or services provided in the international transaction;‖(emphasis supplied)

For the purpose of application of CUP method, prices charged in an international transaction are required to be compared with the prices charged for comparable uncontrolled transactions. For the purpose of the aforesaid comparison of prices of international transactions applying CUP method, Rule 10B(1) of the Rules provides for making adjustment to account for differences, if any, between the international transactions and the comparable uncontrolled transactions, which could merely effect the price in the open market. Further, Rule 10D of the Income-tax Rules provides for information and documents which are required to be kept and maintained by the appellant in terms of the requirements of section 92D of the Income-tax Act in order to support the prices of international transactions as at arm‘s length. Sub-rule (1) of Rule 10D, inter alia, requires the appellant to keep and maintain as part of the documentation description of methods considered for determining the arm‘s length price in respect of each of the international transactions. Sub rule (3) of Rule 10D further produces that the information specified in sub-rule (1) shall be supported by authentic documents which may include, inter alia, price publication including stock exchange and commodity market quotation. The relevant portion of sub-rule (3) of rule 10D reads as follows:

―10D. Information and documents to be kept and maintained under section 92D.

(1) …………………………

(2) …………………………

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi (3) The information specified in sub-rule (1) shall be supported by authentic documents, which may include the following:

(a) official publications, reports, studies, and data bases from the Government of the country of residence of the associated enterprise, or of any other country;

(b) reports of market research studies carried out and technical publications brought out by institutions of national or international repute;

(c) price publications including stock exchange and commodity market quotations;‖

The appellant for the purpose of applying CUP method compared the prices of international transactions of export of the various grades of stainless steel products with prices of export of the same grades of stainless steel products to unrelated party on the same or the nearest possible date. Wherever such comparison was not available, market quotation of Chinese manufactures, i.e., BAO Steel and LISCO, was considered as the benchmark for applying CUP method. It is further respectfully submitted that stainless steel is a metal compound and is required to be made as per the specified composition / specifications. There would not be any difference in stainless steel products of a particular grade manufactured by different manufacturers. Further, market price quotation of Chinese manufacturers represents the price at which similar stainless steel products are available in the international market. Such market price quotation of the Chinese manufacturers, i.e., BAO Steel and LISCO, of stainless steel products, it is respectfully submitted, are available in public domain and represents prices at which actual transactions have taken place in the international market and, therefore, in our respectful submission, represent comparable uncontrolled transactions. Further, it is respectfully submitted that CUP method evaluates whether the amount charged in a controlled transaction is at arm's length with reference to the amount charged in a comparable uncontrolled transaction. The CUP seeks to provide a direct estimate of the price the parties would have agreed to, had they resorted directly to an open market alternative to the controlled transaction. The results derived from applying CUP method generally will be the most direct and reliable measure of an arm's length result for the controlled transaction. The OECD guidelines also provide in paragraph 2.7 that- ―…….Where it is possible to locate comparable uncontrolled transactions, the CUP method is the most direct and reliable way to apply the arm‘s length principle. Consequently, in such cases the CUP Method is preferable over all other methods.‖

In paragraph 2.13, the OECD guidelines further illustrate application of CUP method in case where an enterprise sells some products to an associated enterprise and also to an independent enterprise, as follows: ―2.13 As another example, assume a taxpayer sells 1,000 tons of a product for $80 per ton to an associated enterprise in its MNE group, and at the same Page | 30

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi time sells 500 tons of the same product for $100 per ton to an independent enterprise. This case requires an evaluation of whether the different volumes should result in an adjustment of the transfer price. The relevant market should be researched by analyzing transactions in similar products to determine typical volume discounts.‖

Attention in this regard is invited to the relevant portion of the order of Special Bench of Tribunal in the case of Aztec Software and Technology Ltd. v. ACIT: 107 ITD 141, where the Tribunal while discussing the applicability of various methods of determining arm‘s length price, provided under the Act, duly considered that the public data available at exchanges, quotation media etc., on the basis of which actual transaction take place in the market, even amongst unrelated parties can be used/ relied upon, while applying CUP method. The relevant observations of the Tribunal are as under: ―119. .……..XX……….. XX……… XX……… However, where CUP method is to be applied on the basis of public data, it is provided in Regulation 1.482-3(b)(5) that following requirements must be met:

- The data is widely and routinely used in ordinary course of business in the industry to negotiate prices for uncontrolled sales.

- The data is used to set prices in the controlled transaction in the same way that it is used by uncontrolled taxpayers in the industry; and

- The amount charged in the controlled transaction is adjusted to reflect product and service variations.

The US regulations further warn that data from public exchanges, quotation media should not be used in extraordinary situations such as war period, economic depression, natural calamities period. We are of the considered view that above principles are of universal application and there is no good reason why they should not be applied in transfer pricing determination in India.

………XX…..XX……XX…...‖ (emphasis supplied)

Reliance is also placed on the decision of the Hon‘ble Pune Bench of the Tribunal in the case of ACIT vs. MSS India (P) Ltd.: 123 TTJ 657, wherein, the appellant had determined the arm‘s length price of the international transactions with associated enterprise applying CUP/ Cost Plus method. In that case, the appellant had in respect of the international transaction of import of raw materials, applied CUP method by comparing the prices of import on the basis of London Metal Exchange Price plus Page | 31

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi certain markup. The markup of 2 to 6% towards cost of significant services in procuring raw material and freight, insurance etc., incurred by the associated enterprise. The TPO, however, rejecting the application of CUP/ Cost Plus method by the appellant, made adjustment-applying TNMM. The Hon‘ble Tribunal, while holding that the TPO was not justified in rejecting the CUP/ Cost Plus method, which was transactional based method, and instead making adjustment applying TNMM even if the appellant has suffered loss in those transactions with its associated enterprise, observed as under. However, whenever necessary inputs for applying one of these methods are available and there is no dispute about comparability of those inputs, there is no good reason to resort to transactional profit methods. It would thus follow that in a situation in which the appellant has followed one of the standard methods of determining ALP, such a method cannot be discarded in preference over transactional profit methods unless the revenue authorities are able to demonstrate the fallacies in application of standard methods. In any event, any preference of one method over the other method must be justified by the Transfer Pricing Officer on the basis of cogent material and sound reasoning. Let us, in the light of this factual position, revert to the facts of this case.

xxx xxx xxx xxx xxx

The external CUP, by way of London Metal Exchange prices, is the basis of determination of transaction prices and all that the Transfer Pricing Officer is to see is whether the variation in such prices vis-a-vis the prices at which the appellant has entered into transactions with the AE is reasonably explained. As a matter of fact, Rule 10B(1)(a)(ii) categorically provides that price charged for the property transferred in comparable uncontrolled transaction, which London Metal Exchange price inherently is, to be 'adjusted on account of differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market". What is translates into, on the facts of the present case, is that the adjustment on account of services rendered by the AE and the insurance and freight costs are required to be made to the LME prices. An adjustment of 2% to 6%, for such factors, cannot be said to be unjustified……..

xxx xxx xxx xxx xxx

The test in selecting the most appropriate method of ALP determination does not have ‗complexity of the method‘ as one of the factors. All that is to be taken into account for the said purpose is the nature and class of international transaction, the class or classes of associated enterprises entering into transactions and their FAR, the availability, coverage and reliability of data necessary for application of the method, the degree of comparability existing between the international transaction and the uncontrolled transaction and between the enterprises entering into such transactions, the extent to which reliable and accurate adjustments can be made to account for differences, if Page | 32

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi any, between the international transaction and the comparable uncontrolled transaction or between the enterprises entering into such transactions; and the nature, extent and reliability of assumptions required to be made for application of the method. ―

In the aforesaid decision of Hon‘ble Pune Bench of the Tribunal, application of CUP method has been upheld by treating the prices of metal quoted in London Metal Exchange treating as the comparable uncontrolled price.

Reliance in this regard is placed on the decision of the Hon‘ble Gujarat High Court in the case of CIT vs. Adani Wilmar Ltd (ITA No 240/2014) wherein the Hon‘ble High Court upheld the use of quotations as a valid CUP. The relevant finding of the Hon‘ble High Court are as under: ―7. In terms of clause (c) of subsection (3) of Rule 10D of the Rules, these price publications as long as the same were authentic and reliable, would be relevant materials. In this background, mere base of the organization would be of no consequence. Further, though the price quotationsof the MPOB would be entit led to its due and fullweightage and respect, would not necessarily mean that the other quotations would lose their significance, unless, of course, it is pointed out that such quotations lack basis.‖

Following the decision of Hon‘ble Gujarat High Court in the case of Adani Wilmar (supra), Hon‘ble Pune Bench of Tribunal in the case of Cargil foods India Limited vs. DCIT [ITA No. 1460/Pn/2010], too, accepted the price of commodities listed on Chicago Board of Trade (CBOT) and Oil world as appropriate comparable uncontrolled transaction: 18. Ostensibly, the rules pertaining to the transfer pricing assessment refer to information, being price publications including stock exchange and commodity market quotations. It is a common knowledge that for the products, which are listed on the stock and commodity exchanges, the transactions of buying and selling are carried out by parties based on the prices prevailing/quoted on the respective stock or commodity exchanges. Therefore, such published data available from stock or commodity exchanges is available to set prices in the uncontrolled and controlled transactions both. At this stage, we may also refer to the judgment of Hon‘ble High Court of Gujarat in Tax Appeal No.240 of 2014 in the case of CIT Vs. Adani Wilmar Limited, dated 07.04.2014 which was relied upon by the appellant before us. In the case before the Hon‘ble High Court of Gujarat, the TPO adopted CUP method to benchmark an international transaction. The appellant presented two sets of prices claiming them to be comparable to his transactions with the associated enterprises. One set of prices relied upon by the appellant was supplied by the Malaysian Palm Oil Board and the second set of prices was the quotations published by Oil World, an independent organization. The TPO took into account the rates mentioned by Malaysian Palm Oil Board and disregarded the rates published by Oil World. According to the TPO, the Malaysia Palm Oil Board was a statutory body of Malaysia whereas the quotations published by Oil World did not have any statutory authority. The aforesaid objection of the TPO was negated by the CIT(A) as well as the Tribunal, and such stand of the TPO Page | 33

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi also did not find favour with the Hon‘ble High Court of Gujarat. Following discussion in the order of the Hon‘ble High Court of Gujarat is relevant in this regard:- ―7. ……………………………………………..

The aforesaid decision of the Hon‘ble Pune Tribunal was upheld by the jurisdictional High Court in ITA No. 157/2016, wherein, Hon‘ble Delhi High Court has held: 4. However, as noted by the ITAT, Rule 10 D (3) (c) of the Income Tax Rules, 1962 envisages that the TPO should take into consideration price publications including stock exchange and commodity market quotations. Therefore, such published data available from stock or commodity exchanges could form the basis of the prices in both uncontrolled and controlled transactions.

Reliance in this regard is also placed on the recent decision of Mumbai Bench of Tribunal in the case of Reliance Industries Limited vs. ACIT (ITA No. 3082/Mum/2006), wherein the Hon‘ble Tribunal for the purpose of benchmarking international transaction applying CUP method has directed the assessing officer to consider data available in public domain in the form of publication of shipping Intelligence weekly and Drewry Monthly, as under: ―12.10 Both the parties agreed before us that the "CUP" method should be followed. As there is no comparable transactions, in view of the fact that "Reichem Isha", is a Unique Vessel, with no comparable ship available, as suggested by both the parties, we set aside the issue to the file of the Assessing Officer for the limited purpose of re- computing the arm‘s length price by taking the date available in the public domain in the form of publication of Shipping Intelligence Weekly and Drewry Monthly as a "comparable price", and thereafter to make various adjustments towards weight, capital Page | 34

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi cost, risk, etc., and then arrive at the arm‘s length price. The appellant has furnished its calculation. The Assessing Officer shall examine this calculation of arm‘s length price given by the appellant wherein various adjustments are claimed on account of variation and arrive at the arm‘s length price. Needless to say, opportunity of being heard should be given to the appellant.

Reliance in this regard is also placed on recent decision of Delhi Bench of Tribunal in the case of Tilda Riceland Pvt. Ltd. vs. ACIT (ITA No. 6279/Del/2012), wherein the facts of the case were found to be identical to the facts of the case of appellant.

Relying upon the decision of the Hon‘ble High Court, the Hon‘ble Delhi Tribunal in the case of Noble Resources and Trading India Pvt Ltd vs DCIT (ITA No 3132/Del/2013) upheld the use of quotations as a valid CUP. The Hon‘ble Tribunal held as under: ―14…... However, ld AR has relied on the decision of Hon'ble Gujarat High Court in case of CIT Vs. Adani Wilmar Ltd. wherein the Hon'ble High Court has held that the price publication as long as same are authentic and reliable would be relevant material for the purpose of Rule 10D(3)(c). The Hon'ble High Court considered the quotations of Malaysian Palm Oil Board prices and quotation by One Oil World for comparability analysis Before us the ld DR has stated that that these data are not authentic. However, we do not find a whisper in the order of ld. Transfer Pricing Officer that the internal and external comparable data have been examined at all with respect to their authenticity. They have been simply rejected relying on Rule 10D(3) of the Income Tax Rules. On the issue before the Hon'ble Gujarat High Court in case of CIT Vs. Adani Wilmar Ltd. was not on unacceptability of quotations but TPO only objected with respect to the geographical location of the transactions and the quotations. Therefore, even before the Hon‘ble Gujarat High court the quotations were accepted as external CUPs. The Hon‘ble Gujarat High Court has held as under: XXX

Therefore respectfully following the decision of Hon‟ble Gujarat High Court and drawing support from OECD BEPS Action Plan , we are of the view that even the „quoted prices‟ which is authentic may be acceptable as per Rule 10D(3) of the Income Tax Rules for comparability analysis‖ Page | 35

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi

It is also submitted that the appellant is selling its steel products in global market and the Chinese manufactures, with whom the comparison has been made by the appellant sells its products globally. Since, the market for both appellant and Chinese manufacturers are same, the market quotation provided by the Chinese manufacturers provides better comparable uncontrolled transactions. Reliance in this regard is placed on the decision of M/s Clear Plus India Pvt Ltd vs. DCIT (ITA No.3944/D/2010), wherein the Hon‘ble Tribunal held that: ―7. We have examined the ratio of these cases in the context of the facts of the case. At the cost of repetition, it may be mentioned that goods were sold by the Chinese manufacturers in the USA market. The appellant has also sold the goods in U.S.A. market. Therefore, market conditions in the territory of sale are the same. In view thereof, we are in agreement with the learned counsel that the buyer in the USA market will be more concerned with quality and price rather than economic conditions prevailing in China and India…..

………In the case of Serdia Pharmaceuticals India (P) Limited, it has been held that CUP method is a preferred method and it leads to more reliable results visa- vis the results obtained by applying transaction profit method. In the case of SNF (Australia) Pty. Limited, it has been held that the focus is on the market in which products are acquired. The ratio of this case is applicable mutatis-mutandis to the facts of the case as the focus is on the market in which products are sold.‖

In view of the aforesaid, it is respectfully submitted that the appellant has appropriately considered market quotations of the Chinese manufacturers as a benchmark for applying CUP method in respect of international transactions of export of stainless steel products. It is further submitted that the TPO has sought to make comparison of price charged by the appellant in sales made to associated enterprise with domestic sales made to unrelated third parties. In this regard it is submitted that the price charged for sale of such products in domestic market, on the other hand, is subject to the demand and supply situation, Government policy and duty structure, etc. in domestic market. More specifically, the following factors may influence the prices of stainless steel in the domestic market:

i) The prices being offered by the competitors in the market.

ii) The duties and taxes on imports in to the country and the resultant delivered cost to the customer.

iii) International demand-supply situation.

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi iv) Domestic capacity and domestic prices of local manufacturers in respective countries.

Additionally it is submitted that prices of export of finished goods in one country cannot be benchmarked with reference to prices prevailing in another country by applying CUP method, on account of, inter alia, (i) variation on account of the strength of the currency, (ii) geographical differences from country to country owing to economic scenario/ purchasing power, level of competition, (iii) market condition, (iv) time of export and (v) size of the order, etc.

In fact, in the year under consideration, the price charged by Chinese manufacturers in the open market were lower than the price charged by the appellant from its associated enterprises, due to huge production of steel in their country. Despite slowdown in the steel industry, China has produced 36% more steel than the preceding year which is much higher than the growth in production reported by entire Asia region at 6.3% (refer page 35 of the paper book). Therefore, considering the economic scenario prevalent in the international market, the price charged by the appellant in sales made to associated enterprise cannot be compared with domestic sales and the right comparable ought to be the price at which goods were available to the associated enterprise in the open market, i.e. price charged by Chinese Manufacturers.

It is respectfully submitted that comparison of prices of international transactions of export of various grades of stainless steel products with the prices in domestic market would not satisfy the test of comparability, in as much as, the two transactions have been undertaken in different economic and geographical scenario. Such comparison, it is submitted with entire emphasize, does not satisfy the cardinal principle of comparability under the Transfer Pricing regulations and would lead to fallacious and misleading results.

It would be appreciated that in the case of the appellant, the tests for application of CUP method, as the most appropriate method, as provided in sub-rule (2) of Rule 10C of the Rules are satisfied only be comparing the price charged by the appellant in export of stainless steel products made to associated enterprise with that of transactions of sale of stainless steel products in the international market, i.e. quotation issued by Chinese manufacturers in international market.

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi appreciated that, if significant differences, CUP method will not produce a reliable measure of an arm's length result.

It would be noted that in order to apply the CUP method, the comparable uncontrolled transaction have to satisfy the strict comparability criteria. Hon‘ble ITAT in the case of UCB India (P) Ltd. vs. ACIT [2009] 30 SOT 95 [MUM] examining the test of comparability on application of CUP method held as under: ―80. ………………………….circumstances and conditions have to be evaluated………………. For pricing of a product is a very subjective exercise and is true value, as received by the receiver, can differ from that received by others in the market place. Thus, CUP method requires a high degree of comparability along the following dimensions:

(i) Quality of the product or service; (ii) Contractual terms (example, scope and terms of warranties provided, sale or purchase volumes, credit terms, transportation terms, etc) (iii) Level of market i.e. wholesale, retail, etc. (iv) Geographical market in which the transaction takes place. (v) Date of transaction (vi) Intangible property associated with the sale (vii) Foreign currency receipt (viii) Alternatives realistically available with the buyer and the seller.

"2.8 It may be difficult to find a transaction between independent enterprises that is similar enough to a controlled transacting such that no differences have a material effect on price. For example, a minor difference in the property transferred in the controlled and uncontrolled transactions could materially affect the price even though the nature of the business activities undertaken may be sufficiently similar to generate the same overall profit margin. When this is the case, some adjustments will be appropriate. As discussed below in paragraph 2.9, the extent and reliability of such adjustments will affect the relative reliability of the analysis under the CUP method.

2.9 In considering whether controlled and uncontrolled transactions are comparable, regard should be had to the effect on price of broader business functions other than just product comparability (i.e. factors relevant to determining comparability under chapter 1). Where differences exist between the enterprises undertaking those transactions, it may be difficult to determine reasonably accurate adjustments to eliminate the effect on price. The difficulties that arise in attempting to make reasonably accurate adjustments should not routinely preclude the possible application of the CUP method. Practical considerations dictate a more flexible approach to enable the CUP method to be used Page | 38

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi and to be supplemented as necessary by other appropriate methods, all of which should be evaluated according to their relative accuracy. Every effort should be made to adjust the data so that it may be used appropriately in a CUP method. As for any method, the relative reliability of the CUP method is affected by the degree of accuracy with which adjustments can be made to achieve comparability."

Reliance is placed in this regards on the following decisions where in it is held that application of CUP method requires strict comparability and comparability adjustment is required to be made for the differences if any: - UCB India Pvt. Ltd. vs ACIT (2009) 30 SOT 95(Mum) - ACIT vs. MSS India Pvt.Ltd.:123 TTJ 653 (Pune) - Gharda Chemicals vs DCIT (2009) 35 SOT 406 (Mum) - Intervet India Pvt .Ltd.ACIT :130 TTJ 301(Mum) - ACIT vs Dufon Laboratories: (2010) 39 SOT 59 (Mum)

Further, the cardinal principle of the transfer pricing regulations is to compare like with like and to eliminate differences, if any, by suitable adjustment. Rule 10B(3) also provides for appropriate comparability adjustments to made in the PLI of the tested party and comparable companies while computing the arm‘s length price. Rule 10B(3) of the rules provides that:

―An uncontrolled transaction shall be comparable to an international transaction if—

(i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or

(ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences.‖

The said regulations clearly provide for adjustments in margins of the enterprise entering into international transactions for any differences between such international transactions and the transaction of the comparables or between the enterprise entering into international transactions and comparable companies.

Reliance is also placed on the following decisions, wherein undertaking economic adjustment for improved comparability of the entities being compared for benchmarking experience has been emphasized. - Sony Ericsson Mobile Communications India Pvt. Ltd. vs CIT III (374 ITR 118) - Transwitch India Pvt Ltd vs DCIT (ITA No 6083/Del/2010) - Hon‘ble Delhi High Court, in the appeal preferred by the revenue, vide order dated 17.07.2013 upheld the adjustment claimed by the appellant on account of capacity utilization. - Mentor Graphics (Noida) : Private Limited : 109 ITD 101 (Del), Page | 39

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi - Sony India (P) Limited : 106 ITD 175 (Del). - Skoda Auto India (P) Ltd. vs. ACIT : 122 TTJ 699 (Pune) - Schefenacker Motherson Ltd. vs. ITO (in ITA Nos. 4459 & 4469/Del/07), - Honeywell Automation India Pvt. Ltd. vs. DCIT (ITA No. 4/PN/08), - Egain Communication Pvt. Ltd. vs. ITO : 118 ITD 243 (Pune) - Brintons Carpets Asia Pvt. Ltd. vs. ACIT (ITA No. 1296/PN/10) - CRM Services India P. Ltd. vs. DCIT (ITA No. 4068/Del/2009) - The aforesaid decisions of the Tribunal have been affirmed by the Hon‘ble High Court in ITA No. 618/2012 and 619/2012 - Genisys Integrating Systems (India) Pvt Ltd vs DCIT (ITA No 1231/Bang/2010) - Radhashir Jewellery Co. Pvt. Ltd. vs. ACIT (ITA No. 7066/Mum/2013) - Calsonic Kansel Motherson Products Ltd vs. DCIT (ITA No. 667/Del/2015) - ACIT vs. Fiat India Pvt Ltd (ITA no 1848/Mum/2009) - E.I. Dupont India Pvt Ltd vs. DCIT (ITA No 5336/D/2010) - DCIT vs. Panasonic AVC Networks India Co. Ltd. (ITA No. 4620/Del/2011) - HCL Technologies BPO Services Ltd. vs. ACIT in ITA No. 3547/Del/2010

In the case of the appellant, while undertaking the benchmarking analysis applying CUP, in order to make comparison of like to like, comparability adjustments of bulk discount are required to be made. It is a common market practice that the bulk purchasers are generally given some discount. In the case of the appellant, the A.Es have been given sale-price discount of 5% due to the high quantity of purchases. The fact that the quantity discount were given to associated enterprises can also be corroborated from the fact that during the year, the total sale made to related party per invoice was much higher than the sales made to unrelated third parties:

Grade Sales made Sales made to associated enterprise to unrelated third parties No. of Quantity Sales No. of Quantity Sales Invoices (MT) quantity Invoices (MT) quantity per per invoice invoice 204 CU Black Coil 22 1,512.335 69 3 30.350 10 204CU HRAP Coil 10 331.115 33 11 106.221 10

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi 304 Black Coil 23 2,646.335 115 432 6,367.050 15 304 HRAP Coil 4 444.740 111 401 3,666.023 9 430 Black Coil 8 436.020 55 2 1.240 1 J4 Black Coil 296 45,205.790 153 174 2,243.400 13 J4 HRAP Coil 32 2,202.630 69 69 605.482 9

J4 Plate 14 382.805 27 104 858.935 8 JSL AUS Black Coil 46 5,581.245 121 23 330.510 14 JSL AUS HRAP Coil 18 803.585 45 53 441.518 8 JSL Tube Black Coil 68 6,612.860 97 285 5,233.315 18 JSL Tube HRAP 5 Coil 734.765 147 368 2,414.421 7

In fact in the case of J4 Black coil, it would be noted that the appellant has sold 45205.790 MT to the associated enterprise, whereas, the total quantity of J4 Black Coil sold to unrelated third parties is merely 2234.400 MT, constituting only 4.7% of the total sales. Accordingly, in a situation where the manufacturing facility of the appellant established for J4 Black Coil is substantially dependent on the purchase orders received from associated enterprise, it is natural commerce that the price ought to be comparatively discounted from the price charged in sales made to unrelated third parties.

Accordingly, while undertaking the benchmarking analysis with unrelated third parties, applying CUP, in order to make comparison of like to like, the appellant has made adjustment of bulk discount of 5% given on export sales made to related party customers. Page | 41

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi Reliance in this regard is also placed on the decision of Ahmadabad bench of the Tribunal in the case of Atul Limited vs. ACIT (ITA No. 3118/Ahd/2010), wherein, the Hon‘ble Tribunal, in the similar situation, has allowed adjustment of bulk discount in CUP prices, as under: ―regarding the adjustment on the basis of ‗quantity discount‘ as claimed by the appellant, there were few products, the sales of which to the AE were higher. It was a common market practice for bulk purchasers to be given some discount.‖

The Hon‘ble Mumbai Bench of Tribunal in the case of Clariant Chemicals (India) Ltd. vs. JCIT (ITA No. 2393/Mum/2011), too, allowed comparability adjustment on account of trade discount, holding as under: 6. We have heard both the parties on this issue and their contentions have carefully been considered. We have also carefully gone through the case law and documents relied upon by both the parties. The main contention of the appellant in this regard is grant of 20% discount on volume difference.. This contention of the appellant is supported by the arguments that in immediate preceding assessment year TPO had accepted such volume discount and reference in this regard has been made to the order of TPO rendered in respect of assessment year 2002-03, the relevant portion of which has been reproduced in the above part of this order. The relevant portion of impugned TPO‘s order has also been reproduced in the above part of this order. So as it relates to chemical HOSTAPERM the turnover for this year to the related parties is 29,400 Kgs. @ 302.38 per Kg as against similar sales made to AE‘s in A.Y 2002-03 to the tune of 23,500 Kgs. at the average the price of Rs.310.83 per Kg. The uncontrolled party sales for the year under consideration for the same chemical is 700 kgs. as against the similar sales to unrelated parties of 125Kgs. Therefore, it cannot be said that there is any material difference in the facts of the two years i.e. A.Y 2002-03 and 2003-04. When the facts are same the question will be that whether on the same facts Department can take a different stand for the year under consideration which is against the rule of consistency. When there is no difference in the facts of preceding year where the case of appellant has been accepted by the TPO expressly, then in our considered view TPO cannot take a different stand during the year under consideration as the appellant will be entitled to get benefit of the stand taken by the revenue in immediate preceding year. There is insignificant difference in the rates of the commodity and the volume of transactions. The difference, if any, favours the appellant as the volume of related party transaction is much more this year as it has gone upto 29,400 kgs against last years sales of 23,500 kgs.

The TPO, while comparing the international transaction of exports of goods with domestic sales has disregarded the claim of quantity discount holding it to be a contagious issue. Page | 42

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi

It is pertinent to note that the fact that average sales made to associated enterprises per invoice is invariably higher than the average sales made to unrelated third parties, is in itself an evidence to corroborate that the associated enterprises were offered discounted price on account of bulk purchases, for which comparability adjustment ought to be made in the price of goods sold to unrelated third parties.

It shall also be noted that had the appellant charged a price higher than the international market price to the associated enterprise, it would have purchased similar goods from other unrelated third parties and consequently, the appellant would had to incur higher cost on account of unsold stock/ utilization of production capacity, resulting into lower profitability.

In fact, in the year under consideration, the price charged by Chinese manufacturers in the open market were lower than the price charged by the appellant from its associated enterprises, due to huge production of steel in their country. Despite slowdown in the steel industry, China has produced 36% more steel than the preceding year which was much higher than the growth in production reported by entire Asia region at 6.3% (refer page 35 of the paper book). Therefore, it could be concluded that the associated enterprises has only accommodated the appellant by purchasing its goods at a price higher than the market price, in order to protect it from anticipated capital loss due to unsold stock/ unutilized capacity.

Accordingly, in view of the aforesaid provision of the Act and various decisions given by the Hon‘ble Tribunal regarding comparability adjustment on account of difference in geographies, market conditions, terms and conditions of sales, etc., it is respectfully submitted that while comparing the international transaction of export of goods with domestic sales, the price ought to be determined by making adjustment on account of bulk discount of 5% given the assess to its associated enterprises.

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi It would be appreciated that prices of international transactions of export to associated enterprise, after considering adjustment on account of bulk discount of 5%, is higher/ within the range of +/-5% than the comparable uncontrolled prices in all grades of stainless steel products. In view of the aforesaid, too, the international transactions of export of stainless steel products is to be regarded as having been undertaken as at arm‘s length applying CUP method.

In the present case, it is submitted that the goods exported by the appellant, namely, hot rolled and cold rolled stainless steel coils contains metal components such as nickel and iron and the prices of the goods sold by the appellant is determined considering the prices prevailing in London Metal Exchange (LME) on the respective dates of such metal components. In view of the aforesaid, the price of goods sold on one specific date cannot be compared with the prices of goods sold on any preceding or subsequent date.

Accordingly, in view of the volatility in the prices of metal components on day to day basis and consequential change in the final products sold by the appellant, it is submitted that the benchmarking of price ought to be made on the basis of average price charged in uncontrolled transactions for the same period, for each of the grade of stainless steel products.

It shall further be appreciated that the export of goods made by the appellant to its associated enterprise on several dates are one class of transaction, i.e. export of goods, the same can be benchmarked together applying CUP method. Rule 10A(d) provides that closely linked transaction can be considered together. Further, para 3.9 of the revised OECD guidelines on transfer pricing states that: "3.9 Ideally, in order to arrive at the most precise approximation of fair market value, the arm's length principle should be applied on a transaction by- transaction basis. However, there are often situations where separate transactions are so closely linked or continuous that they cannot be evaluated adequately on a separate basis. Examples may include 1. Some long-term contracts for the supply of commodities or services, Page | 44

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi 2. rights to use intangible property, and 3. pricing a range of closely linked products (e.g. in a product line) when it is impractical to determine pricing for each individual product or transaction. Another example would be the licensing of manufacturing know-how and the supply of vital components to an associated manufacturer; it may be more reasonable to assess the arm's length terms for the two items together rather than individually. Such transactions should be evaluated together using the most appropriate arm's length method or methods. A further example would be the routing of a transaction through another associated enterprise; it may be more appropriate to consider the transaction of which the routing is a part in its entirety, rather than consider the individual transactions on a separate basis.‖

Hon‘ble Delhi High Court in the case of Sony Ericsson Mobile Communications India Pvt Ltd. vs. CIT (374 ITR 118), on the issue of set off of transaction in the case of segregation of bundled transaction, held as under:

―136. This leads us to the question of set off when bundled transactions are segregated. Conceptually, this is justified and equitable, as tax is payable on the total income after transfer pricing computation in respect of international transactions (See Section 92(4) of the Act). 137. The question of aggregation and disaggregation of transactions when the TNM Method or even in other methods is sought to be applied, must have reference to the strength and weaknesses of the TNM Method or the applicable method. Aggregation of transactions is desirable and not merely permissible, if the nature of transaction(s) taken as a whole is so inter-related that it will be more reliable means of determining the arm‗s length consideration for the controlled transactions. There are often situations where separate transactions are intertwined and linked or are continuous that they cannot be evaluated adequately on separate basis. Secondly, the controlled transaction should ordinarily be based on the transaction actually undertaken by the AEs as has been struck by them. We should not be considered as advocating a broad-brush approach but, a detailed scrutinized ascertainment and determination whether or not the aggregation or segregation of transactions would be appropriate and proper while applying the particular Method, is necessary.

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi (3) The provisions of this section shall not apply in a case where the computation of income under sub-section (1) or sub-section (2A) or the determination of the allowance for any expense or interest under sub-section (1) or sub-section (2A), or the determination of any cost or expense allocated or apportioned, or, as the case may be, contributed under sub-section (2) or sub-section (2A), has the effect of reducing the income chargeable to tax or increasing the loss, as the case may be, computed on the basis of entries made in the books of account in respect of the previous year in which the international transaction or specified domestic transaction was entered into. 140. Sub-section (3), we do not think incorporates a bar or prohibits set offs or adjustments. It states that Section 92, which refers to computation of income from international transaction with reference to arm‗s length price under sub- section (2) or (2A), would not have the effect of reducing income chargeable to tax or increase the loss, as the as may be, computed by the appellant on the basis of entries in the books of account. Income chargeable to tax or loss as computed in the books is with reference to the previous year. The effect of sub-section is that the profit or loss declared, i.e. computed by the appellant on the basis of entries in the books of account shall not be enhanced or reduced because of transfer pricing adjustments under sub-section (2) or (2A) to Section 92. It states the obvious and apparent. In case the assessed has declared better and more favourable results as per the entries in the books of account, then the income chargeable to tax or loss shall not be decreased or increased by reason of Transfer Pricing computation. Thus, transfer pricing adjustments do not enure to the benefit or advantage the assessed, thereby reducing the income declared or enhancing the declared loss. Pertinently, the Sub-Section makes reference to the income chargeable to tax or increase in the loss on the basis of the entries in the books of account. The concept of set off or adjustments was/is well recognized and accepted internationally and by the tax experts/ commentators. In case the legislative intent behind sub-section (3) to Section 92 was to deny set off, the same would have been spoken about and asserted different and categorical words. Legislative intent to the contrary should not be assumed.

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi OECD Transfer Pricing Guidelines or the U.N. Transfer Pricing Manual can be supplement and constitute a valuable and convenient commentary on the subject. They are not binding but surely their rational and articulacy requires cogitation, if not acceptance, when warranted.

Reliance is also placed in this regard on the decision of the Hon‘ble Pune Bench of the Tribunal in the case of Demag Cranes & Components (India) Pvt. Ltd. vs. DCIT (ITA No. 1683/Pn/2011), wherein, the Hon‘ble Tribunal while upholding the principal of aggregation held as under:

―30. We have carefully considered the rival submissions. Section 92B of the Act provides the meaning of expression ―international transaction‖ as a transaction between two or more associated enterprises. Rule 10A(d) of the Rules explains the meaning of the expression ―transaction‖ for the purposes of computation of ALP as to include a number of closely linked transactions. Rule 10B of the Rules prescribes the manner in which the ALP in relation to an international transaction is to be determined by Page | 47

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi following any of the methods prescribed. Shorn of other details, it would suffice to observe that on a combined reading of Rule 10A(d) and 10B of the Rules, a number of transactions can be aggregated and construed as a single ‗transaction‘ for the purposes of determining the ALP, provided of course that such transactions are ‗closely linked‘. Ostensibly the rationale of aggregating ‗closely linked‘ transactions to facilitate determination of ALP envisaged a situation where it would be inappropriate to analyse the transactions individually. The proposition that a number of individual transactions can be aggregated and construed as a composite transaction in order to compute ALP also finds an echo in the OECD guidelines under Chapter III........................

XX XX

Your Honour‘s attention is invited to recent decision of the Hon‘ble Pune Bench of the Tribunal in the case of Cummins India Ltd vs Addl CIT (ITA No 1616/PN/2011), wherein, interpreting Rule 10A(d) of the Rules, it was held as under: ―26. In view of the ratio laid down by Pune Bench of the Tribunal in Demag Cranes & Components (India) Pvt. Ltd. Vs. DCIT (supra), it is held that where number of transactions are closely linked transactions, then the same can be Page | 48

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi aggregated and construed as a single transaction for the purpose of determining the arm's length price. In case, there is close link exists between the different transactions, the same should be treated as composite transaction and appropriate method should be applied to work out the transfer pricing analysis. Where two or more transactions emanate from common source being an order or contract or an agreement or an arrangement, then such transactions could be said to be closely linked as the nature, characteristic and terms of such transaction substantially flow from the said common source.‖

Reliance is also placed in this regard on the decision of the Canadian International Trade Tribunal in the case of Skechers USA Canada Inc (Appeal No AP -2012-073) wherein the Tribunal held that in cases where the Research and Development activity is necessary for creation of successful models of goods, costs relatable to such R&D activity when separately allocated by the manufacture of goods to the distributor of goods, is required to be taken into consideration while determining the arm‘s length price of sale of goods by the manufacturer to the distributor. The relevant findings of the Tribunal are as under:

―82. Not only does the Tribunal consider the R&D payments to be necessary for the creation of the footwear, it also considers that a sufficient link can be established between the R&D payments and the goods in issue by examining the way in which the owed amounts are determined. To paraphrase previous Tribunal jurisprudence on the scope of ―in respect of‖ the evidence shows that the R&D payments are not general payments unaffected by the imported goods. XXX

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi entirety. Skechers Canada‘s position throughout was that the transaction value of the goods method could and must be applied, all conditions being met.‖

Various benches of Tribunal in the following cases also upheld the benchmarking of closely linked transaction on aggregate basis: (i) McCann Erickson India Pvt Ltd vs Addl CIT (ITA No 5871/Del/2011) (ii) Atul Ltd vs ACIT (ITA No 3118/Ahd/2010) (iii) Toyota Kirloskar Motor (P) Ltd. vs. ACIT (ITA No. 1315/Bang/2011) (iv) Panasonic India Pvt Ltd vs Income Tax Officer (ITA No.1417/Del/2008) (v) Hindustan Unilever Ltd. vs. ACIT (ITA No.7868/Mum/2010) (vi) Amphenol Interconnect India Pvt. Ltd. vs. DCIT (ITA No.1486/PN/2010) (vii) Lumax Industries Ltd. vs. ACIT (ITA No. 4456/Del/2012) (viii) DCIT vs. CLSA India Limited – (ITA No. 2362/Mum/2011) (ix) Cadbury India Limited vs. ACIT – (ITA No. 7408/Mum/2010) (x) Thyssen Krupp Industries India Pvt Ltd vs ACIT (ITA No 7032/Mum/2011) (xi) DCIT vs. SAS Research and Development (India) P. Ltd. (ITA No. 810/Pn/2013)

In an identical situation of export of hot rolled coils to the associated enterprise, the Hon‘ble Mumbai Bench of Tribunal in the case of ACIT vs. Essar Steel Limited (ITA No. 3727/Mum/2011) upheld the benchmarking analysis undertaken by the appellant, wherein, the appellant has compared the average price of eight transactions of export of goods made to associated enterprise, applying CUP method, holding as under:

―10. We have considered rival contentions and gone through the orders of the authorities below. A clear finding has been recorded by the CIT(A) to the effect that appellant has already considered all the 8 transactions with its AE in totality by aggregating the same whereas the TPO picked up two transactions where the price charge was less than the average market price. Rule 10(A)(a) defines a transaction to include a number of closely linked transaction. In case they are closely linked then they can be aggregated for determining the ALP. We found that appellant has exported hot rolled coils to its AE between 30-6- 2005 to 10-3-2006, the price has been determined from the website whose data is not subject to challenge. The product remains the same and the source from which the average price has been taken remains the same. Accordingly, it is a fit case for aggregation. We found that if the average price is adopted for all the 8 transactions, then the average comes exactly to 420.71 which is what the price charged by the appellant to its AE. Furthermore, the detailed finding recorded by the CIT (A) at para 3.4 to 3.8 has not been controverted by learned DR by bringing any cogent material on record. Accordingly, we do not find any reason

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi to interfere in the order of CIT(A) for deleting the addition in respect of adjustment made of Rs.5,82,41,193.‖

In view of the above, it would be appreciated that the benchmarking ought to be undertaken on the basis of average price charged by the appellant from sales made to associated enterprise vis-à-vis average price charged from sales made to unrelated third parties in the same period, for each grade of stainless steel products.

Without prejudice, it is submitted that even after considering the average sales price in domestic sales made to unrelated third parties and without allowing adjustment on account of bulk discount, i.e. after considering the average of daily price considered by the TPO for the purpose of applying CUP method, the adjustment made by the TPO works out to Rs. 99,04,929 as against original adjustment of Rs. 12,78,29,707 made by the TPO. The detailed working of the average prices is enclosed as Annexure 4.

(i) J-4 Black Coil: The appellant has also compared the prices of international transactions of export of J-4 Black Coil grade of stainless steel products with prices of export of the same grade of stainless steel products to unrelated party in earlier months after adjustment on account of variation in nickel prices on the basis of day-to-day variation in prices of nickel as per price quoted in London Metal Exchange (LME). It may be noted that variation in stainless steel prices had happened primarily on account Page | 51

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi of variation in nickel prices in open market. In any case, the aforesaid comparison made by the appellant on the conservative basis, since the prices of stainless steel products were higher in earlier month and have gradually declined in the later month during the relevant financial year. The aforesaid comparison would clearly establish that the prices of international transactions of export of J-4 Black Coil grade of stainless steel product are at arm‘s length applying CUP method.

(ii) 304 Black Coil: In respect of international transactions of export of 304 Black Coil made in the month of April, 2007 (OA date 28-02-2007) was compared with prices of export of similar grade of stainless steel products, viz., 304 HRAP Coil with the minor adjustment on account of difference in conversion of black stainless steel coil to annealed and pickled (AP) coil by USD 60 per metric ton. For international transactions undertaken in the subsequent month, comparison has been made with reference to the comparable uncontrolled prices arrived at, as aforesaid, after making adjustment on account of variation in prices of nickel on day to day variation in prices of nickel as per price quoted in London Metal Exchange (LME). It may be noted that variation in stainless steel prices had happened primarily on account of variation in nickel prices in open market. In any case, the aforesaid comparison made by the appellant on the conservative basis, since the prices of stainless steel products were higher in earlier month and have gradually declined in the later month during the relevant financial year. The aforesaid comparison would clearly establish that the prices of international transactions of export of 304 Black Coil grade of stainless steel product are at arm‘s length applying CUP method.

(iii) JSL AUS HRAP Coil: CUP method was applied in respect of international transactions of export of JSL AUS HRAP Coil grades of stainless steel products with reference to the unrelated party price of market quotation of the above manufacturers of stainless steel products in China. The appellant has also compared the prices of such international transactions of export of JSL AUS HRAP Coil grades of stainless steel products with the prices of export of highest rate of J-4 Stainless Steel coil with appropriate adjustment of difference in composition on account of nickel content.

(iv) JSL AUS Black Coil: CUP method was applied in respect of international transactions of export of JSL AUS Black Coil grades of stainless steel products with reference to the unrelated party price of market quotation of the above manufacturers of Page | 52

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi stainless steel products in China. The appellant has also compared the prices of such international transactions of export of JSL AUS Black Coil grades of stainless steel products with the prices of export of highest rate of J-4 Stainless Steel coil with appropriate adjustment of difference in composition on account of nickel content.

(v) JSL Tube Black Coil: CUP method was applied in respect of international transactions of export of JSL Tube Black Coil grades of stainless steel products with reference to the unrelated party price of market quotation of the above manufacturers of stainless steel products in China. The appellant has also compared the prices of such international transactions of export of JSL Tube Black Coil grades of stainless steel products with the prices of export of highest rate of J-4 Stainless Steel coil with appropriate adjustment of difference in composition on account of nickel content.

(vi) 204CU HRAP Coil: CUP method was applied in respect of international transactions of export of 204CU HRAP Coil grades of stainless steel products with reference to the unrelated party price of market quotation of the above manufacturers of stainless steel products in China. The appellant has also compared the prices of such international transactions of export of 204CU HRAP Coil grades of stainless steel products with the prices of export of highest rate of J-4 Stainless Steel coil with appropriate adjustment of difference in composition on account of nickel content.

(vii) 204CU Black Coil: CUP method was applied in respect of international transactions of export of 204CU Black Coil grades of stainless steel products with reference to the unrelated party price of market quotation of the above manufacturers of stainless steel products in China. The appellant has also compared the prices of such international transactions of export of 204CU Black Coil grades of stainless steel products with the prices of export of highest rate of J-4 Stainless Steel coil with appropriate adjustment of difference in composition on account of nickel content.

The workings of the aforesaid comparison of international transactions of export of various grades of stainless steel products (for which the appellant has earlier applied CUP method with reference to the price of market quotations of stainless steel manufacturers in China) with prices of export to unrelated party made on a rational and

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi scientific basis, was filed before the TPO vide reply dated 29.09.2012 (enclosed at pages 271-323 of the paper book).

Under this analysis also, it would be appreciated that prices of international transactions of export to associated enterprise is higher than the comparable uncontrolled prices in all grades of stainless steel products. In view of the aforesaid, too, the international transactions of export of stainless steel products is to be regarded as having been undertaken as at arm‘s length applying CUP method.

It would be appreciated that economic scenario, geographical market comparability, contractual term influencing comparability are important factors which are required to be compared while applying CUP method. In case of difference, necessary comparability adjustments are required to be made to eliminate differences between controlled and uncontrolled transactions. Accordingly, under the circumstances, a profit based method, i.e. TNMM can only be applied for the purpose of benchmarking analysis.

The Transfer Pricing Regulations in India provide no priority of methods. Rather, the selection of the pricing method to be used to test the arm's length character of a controlled transaction must be made under the 'Most Appropriate Rule', which under the facts and circumstances of the transaction under review, provides the most reliable measure of an arm's length result.

Rule 10C of the Rules inter-alia, provides for the factors which are to be considered in selecting the most appropriate method. The major considerations in this regard have been specified to be (i) availability, coverage, and reliability of data necessary for application of the method; (ii) the degree of comparability existing between the international transaction and the uncontrolled transaction and extent to which reliable

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi and accurate adjustment can be made on account of differences, if any, and the assumptions required to be made for application of a method.

It is submitted that since CUP cannot be applied in the case of the appellant due to reasons submitted infra, it is respectfully submitted that the international transactions undertaken by the appellant ought to be benchmarked applying TNMM.

The TNMM examines the net profit margin relative to an appropriate base (e.g. cost, sales, assets) that a taxpayer realizes from a controlled transaction (or transactions that are appropriate to aggregate under the transfer pricing principles). TNMM determines an arm‘s length price for the transfer of tangible property by reference to an objective measure of profitability of an uncontrolled party, or comparable, that engages in similar transactions or operates under similar circumstances. The method compares the profitability of either the controlled party buyer or seller to the profitability of the comparable.

Reliance is placed on the decision of the Mumbai Bench of the Tribunal in the case of ACIT vs. Tara Ultimo Pvt. Ltd. (ITA No. 5098/Mum/2010), wherein the Hon‘ble Tribunal held that, ―when ALP cannot be reasonably determined by CUP or any other direct method (i.e., cost plus method and resale price method) in respect of even one of these areas, the application of TNMM or other indirect method (i.e. profit split method) is inevitable and it cannot be rejected.

Reliance is also placed on the following decisions wherein it has been held that when CUP cannot be applied due to non-availability of data, TNMM can be applied for the purpose of benchmarking analysis:

- Toyota Kirloskar Auto Parts vs ACIT (ITA No 1642/Bang/2012) - ACIT vs Super Diamonds (6399/Mum/2007 - AWB India Pvt Ltd vs DCIT (ITA No 6480/Del/2012) - M/s Garware Polyster Ltd vs. DCIT (ITA 6169/Mum/2011

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi In the present case, the appellant had also undertaken benchmarking analysis applying Transactional Net Margin Method (―TNMM‖) with operating profit to operating income (OP/OI) as the PLI. After considering various selection criteria, one comparable company vis. Salem Steel Plant of Steel Authority of India was identified as functionally comparable to the operations of JSL (refer reply dated 29.09.2007 placed at pages 271-323 of the paper book for complete search process). The results of the Transfer Pricing analysis applying TNMM are summarized herein below:

Company Name Finance Sales OP/OI(%) year Salem Steel Plant 200803 1397.13 7.71% Jindal Stainless Ltd. 200803 5707.06 9.85%

Since the operating profit ratio (OP/OI %) of JSL @ 9.85% is higher than the operating profit margin (OP/OI %) of 7.71% of Salem Steel Plant of Steel Authority of India, the comparable enterprise, the international transactions entered into by JSL were considered as having been entered at arm‘s length price, applying TNMM on an entity- wide basis.

It is respectfully submitted that, in most of the cases, the difference in the arm‘s length price of goods exported by the appellant to its associated enterprise fall within the range of +/-5% of the transacted price, as provided under second proviso to Section 92C(2) of the Act.

Reliance in this regard is made to the decision of Mumbai Bench of Tribunal in the case of DDIT vs. Development Bank of Singapore, reported at 155 TTJ 265, wherein the Hon‘ble Tribunal held that the benefit of range of +/-5% is available not only to a situation where more than one price is determined as ALP by the most appropriate method but also where only one price is determined as ALP, as under:

―8. We have heard the rival submissions and perused the relevant material on record. Section 92C deals with computation of arm's length price (ALP). Sub-section (1) of this provision provides that the ALP in relation to an international transaction shall be determined by any of the prescribed methods, being the most appropriate method Page | 56

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi having regard to the nature of transaction or class of transaction or class of associated persons etc. Five specific methods starting with (a) comparable uncontrolled price method, are set out in this provision with the sixth residual method under clause (f) as : "such other method as may be prescribed by the Board". Sub- section (2) provides that the most appropriate method referred to in sub-section (1) shall be applied for determination of arm's length price in the manner as may be prescribed, which has been prescribed in rule 10B(1). Proviso to section 92C(2), which is the core of controversy, at the relevant time provided as under :- "Provided that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices, or, at the option of the assessee, a price which may vary from the arithmetical mean by an amount not exceeding five per cent of such arithmetical mean."

"(a) comparable uncontrolled price method, by which,—

(i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified ;

(ii) such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market ;

(iii) the adjusted price arrived at under sub-clause (ii) is taken to be an arm's length price in respect of the property transferred or services provided in the international transaction ;"

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi the arithmetical mean of such prices. Thus under the CUP method, if there are more than one comparable uncontrolled price, then the ALP shall be taken to be the arithmetical mean of such prices. Second part of the proviso grants an option to the assessee by providing that the ALP may be a price varying from the arithmetical mean by an amount not exceeding five per cent of such arithmetical mean. It means that if the difference between the arithmetical mean of such prices and the price actually charged or paid does not exceed 5%, then the price so charged or paid may be taken as ALP, not calling for any adjustment. In order to be eligible for exercising option of having ALP as a price varying by +-5% of the price worked out as per rule 10B, it is necessary that there should be more than one price determined by the most appropriate method as per rule 10B which should be then averaged. To put it simply, if there is more than one price determined by the most appropriate method, the ALP shall be considered by taking the cushion of plus minus five percent of the arithmetical mean of such prices. If, however, there is only one price determined by the most appropriate method, then this option of plus minus 5% is not available for determination of the ALP.

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi

Accordingly, since the transaction of export of goods undertaken by the assessee with its associated enterprise is within the range of +/-5% of the arm‘s length price, in certain cases, in terms of second proviso to section 92C(2), such transactions undertaken by the appellant ought to be considered to be at arm‘s length price.

Further, the TPO in his order noted certain errors in the comparison made by the appellant from prices of international transactions of export of stainless steel products to associated enterprise and price of export to unrelated party. It is respectfully submitted in this regard as follows:

(i) For benchmarking of international transactions of export of J-4 HR Plate SS to associated enterprise in Indonesia on 21-09-2007, the appellant has considered price of export of same grade of steel made to unrelated party in Indonesia on 05-09-2007. The TPO however, has compared the price of export of J-4 HR Plate SS to unrelated party in Bangladesh on 12-09-2007 as comparable uncontrolled price or applying CUP method instead of comparable uncontrolled price of export to the unrelated party in the same country, i.e., Indonesia on 05-09-2007.

Accordingly, since the price charged by appellant on sales made to AE at USD 1525 PMT is higher than the price charged from sales made to unrelated third party in Indonesia at USD 1504 PMT, the adjustment of Rs. 83,528 made by the TPO will be deleted.

(ii) With respect to the international transaction of J-4 HR Plate SS made on 07- 02-2008, the appellant had considered comparable uncontrolled transactions of export of similar product undertaken on 22-02-2008 as the benchmark. The TPO, however, considered the price of export of similar product made on 28-01-2008 to unrelated party as comparable uncontrolled price.

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi Accordingly, the price charged by appellant on sales made to AE at USD 1750 PMT is within the range of +/-5% of the price charged from sales made to unrelated third party in Indonesia at USD 1834 PMT, the adjustment of Rs. 5,23,160 made by the TPO will be deleted.

Even otherwise, after considering the average of uncontrolled price at USD 1869 PMT [(1834+1904)/2], the adjustment will reduce to Rs. 10,216.

It would be appreciated that the aforesaid errors noted in the comparison of price for applying CUP method in respect of international transaction of export of stainless steel product are not sustainable and, therefore, liable to be deleted.‖

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi comparable transactions are to be compared between the associated property and the Non associate enterprise, the transaction date, the product, quality, and quantity needs to be same. If exact replication is not possible, then it is preferred that in almost replication is achieved. Therefore, he stated that this implies that if the same or similar products are not transacted on the same date, then, the nearest date on which the similar products are transacted should be the date for comparison. He submitted that in the transfer pricing study, the assessee has used monthly average rates. However, it is clear from the transfer pricing study that similar transactions have happened either on the same day or in the same week with similar products with both the associated enterprises and non-associated enterprises. He therefore submitted that hence the approach of the assessee is flawed since it is not judicious to utilize average monthly price while applying CUP method, as the prices through the wall month are likely to fluctuate much more (which is also evident from the case in hand). Therefore, it stated that this might call for suitable adjustments, which are not possible to be quantified accurately. This difficulty can easily be overcome if the same day transactions or nearby the transaction are used instead. This is precisely what is done by the learned Transfer Pricing Officer in the present instance and hence is the correct method for applying the CUP. b. He further stated that for the benchmarking of the transactions were no actual CUP was present since the product developed by the assessee is of high grade and renowned, for benchmarking purposes, the assessee has used the Chinese market quotations. The approach adopted by the assessee is not correct, as the product manufactured by the company is indigenous and driven by Indian market forces, and as already pointed out; the grade of the material is also very superior. Thus to apply the CUP method the first requirement is that the quality of the product needs to be matched. If the approach of the assessee had to be followed, then the basic requirement of the CUP method fails as the quality of the product whose quotation it has used is not comparable to that of the products manufactured by the assessee. Further, the prices shown from the Chinese market cannot be checked for its authenticity and reliability also. Furthermore the rule 10 B (1) (a) of the income tax rules dictate that the price charged or paid should be used instead of some quoted rates as used by the assessee. In comparison to the assessee‘s approach, the approach adopted by the learned Transfer Pricing Officer is more suitable as per the requirement of CUP method. For this purpose, the Transfer Pricing Officer adopted Page | 61

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi price for the same quality products sold in the Indian market by the assessee. Further in order to remove any effect of difference in the transactions of the products sold to the associated enterprise with nonassociated enterprises, the learned TPO allowed for material adjustments, which is as per the provisions of rule 10 B (1) (a) of the income tax rules. He therefore submitted that the Transfer Pricing Officer allowed adjustment to the amount of products sold on the same date or nearby date in the domestic market. c. He contended that the contention of the assessee that the learned Transfer Pricing Officer has added in not using the Chinese quotation is the most appropriate benchmark for the international transaction of export of steel products; he submitted that the issue that needs to be addressed is whether a contention is an acceptable document for the application of CUP method. He stated that quotation precedes an actual transaction and is not a transaction per se. According to him, quotation is merely intent to enter into transaction but it is certainly not a transaction. Those being the case, the amount quoted in a quotation can be by no stretch of imagination takes the same of price charged or actually paid under any circumstances. He further stated that for the benchmarking of the transactions were no actual CUP was present since the product developed by the assessee is of high grade and renowned, for benchmarking purposes, the assessee has used the Chinese market quotations. The approach adopted by the assessee is not correct as the product manufactured by the company is in the genius and driven by Indian market forces, plus as already pointed out, the grade of the material is very superior. Thus, to apply up method the first requirement is that the quality of the product needs to be matched. If the approach of the assessee had to be followed, then the basic requirement of CUP method fails as the quality of the product whose quotation it has used is not comparable to that of the products manufactured by the assessee. Further, the prices shown from the Chinese market cannot be checked for its authenticity and reliability also. He stated that in comparison to the assessee‘s approach, the approach adopted by the learned Transfer Pricing Officer is more suitable as per the requirement of CUP method. For this purpose, the learned Transfer Pricing Officer adopted price for the same quality products sold in the Indian market by the assessee. Further, in order to remove any effect of differences in the transaction of the products sold to the associated enterprises versus known associated enterprises, the learned TPO allowed for material adjustments which are as per the rule 10 B (1) (A). He therefore stated that Page | 62

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi the learned Transfer Pricing Officer allowed adjustment to the amount of products sold on the same date or nearby date in the domestic market. He further submitted that the Chinese quotation adopted by the assessee is neither authentic, and reliable nor related to a comparable product. Therefore, it cannot be used as comparable prices. He further stated that it is also not known that whether the transaction has happened at that price or not. He further stated that the quotations used by the assessee are not a stock exchange quotation at least and are not authentic. d. With related to the 3rd category of the transactions that is comparison of export to associated enterprises with export to unrelated parties after adjusting for variation in composition of nickel, the learned TPO use the domestic data and adjusted it to the nickel adjusted price that are similar to the adjustment done by the assessee on Chinese market quotation price. Therefore he stated that the rates used from the assessee‘s own domestic sale hold more ground as they are in line with the definition of the CUP as per rule 10 B (1) (a) of the income tax rules 1962. e. He further submitted that the assessee has raised the contention that the prices of the goods exported to associated enterprises and on related party are compiled for the purposes of benchmarking and no adjustment on the ground of difference in compose it of nickel is provided. He submitted that the contention of the assessee is without any basis as on the contrary the learned Transfer Pricing Officer has the divided the transaction into three categories and for the third he has provided appropriate adjustment to nickel prices similar to the adjustment done by the assessee. He further referred to the order of the learned Dispute Resolution Panel in assessee‘s own case for assessment year 2008 – 09 where the adjustment in the price of fabricated stainless steel is not dependent on the fluctuating price of the nickel alone. It also depends on various other constituent components of stainless steel. Additionally the learned Transfer Pricing Officer has pointed out that demand and supply gap, seasonal variation; global economic situations also play a vital role. He therefore submitted that any alternate analyses using only one variable would not give the desired results. He therefore supported the order of the learned Transfer Pricing Officer on this count. f. With respect to the contention of the assessee that the learned Transfer Pricing Officer has erred in benchmarking the transaction of export of goods to associated enterprises with the price of goods sold in domestic market ignoring the difference in domestic marketing conditions, pricing policies, locational economic differences et Page | 63

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi cetera. He therefore submitted that it is important to underline the basic principles of transfer pricing, which is that a controlled transaction should be compared to an uncontrolled transaction. For this purpose in the present scenario, the assessee is an Indian entity selling products to its associated enterprise in domestic parties. The part where it says the product to the domestic parties is the uncontrolled transaction. Any independent entity would want to replicate the margin on in the uncontrolled transactions. The same process was done by the learned Transfer Pricing Officer also. On the contrary, the assessee has used some random, unverifiable, and unsubstantiated Chinese market quotation rates that are not even the actual transaction rates. Further the assessee applied some adjustment to these Chinese market quotation rates and the same with some exceptions, was also replicated by the learned Transfer Pricing Officer. The learned Transfer Pricing Officer has already allowed the adjustment on the ground of advance license and duty entitlement passbook scheme benefits, basic customs duty, freight, trimming cost et cetera. He therefore stated that the approach of the learned Transfer Pricing Officer is the most reasonable approach and should be upheld. g. He further referred to the claim of the assessee that it has given a bulk discount at the rate of 5% per metric ton to its associated enterprises. He stated that the invoices provided by the assessee do not show any such discount offered, this claim of the assessee further weakens its own case, as the main exercise conducted in the transfer pricing is to determine whether any profit has been shifted outside India in terms of any undue favour. This bulk discount, as per the assessee, is being forwarded to the associated enterprise only and not to the unrelated parties. The sunroof ever made towards the associated enterprise resulted in tax base erosion in India. That question that needed to be answered here that if we consider an independent third party instead of the associated enterprises of the assessee, would the same assessee give above the discount to an entity, which is giving it merely 10 – 15% of its business. The answer will be simple no. Thus, when the assessee is easily able to sell a much higher amount of its total sales to an Indian domestic market without any bulk discount, why would it give a bulk discount to an entity with which it has only 10 to 15% of the businesses? He further stated that it is pertinent to mention here as stated by the learned CIT appeal that out of the total sales only 10 – 15% of the sale is towards the associated enterprises. Therefore in uncontrolled conditions the transactions involving

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi 85 – 90 percentage of the transaction would include the bulk discount and not in the other way around. h. He further referred to the contention of the assessee that the learned Transfer Pricing Officer has erred in comparing the sales based on the date of contract/date of order acceptance instead of monthly, which evens out a daily fluctuation in the price of metals as per the assessee. He submitted that the contention of the assessee is entirely unsustainable as it fails to satisfy the basic requirement of CUP method as laid down in the act, rules as well as the international guidelines such as you and TP manual and OECD guidelines et cetera. He submitted that in the present scenario, as far as possible, if the comparable transactions are to be compared between the associated enterprise and the known associated enterprises, the transaction date, the products, the quality, and quantity needs to be the same. If exact replication is not possible, then it is preferred that in almost replication is achieved. This implies that if same or similar products are not transacted on the same date, then, the nearest date on which the similar products are transacted should be the date for comparison. He submitted that in the transfer pricing study report, the assessee has used monthly average rates. However, it is clear from the transfer pricing study that similar transactions have happened at around the same day or in the same week with similar products with both associated enterprise and known associated enterprises. Hence, the approach of the assessee is flawed since it is not judicious to utilize average monthly price while applying CUP method, as the prices through the wall month are likely to fluctuate much more. This may call for suitable adjustment, which are not possible to be quantified accurately. This difficulty can easily be overcome if the same day transaction on the nearby the transactions are used instead. This is precisely what has been done by the learned Transfer Pricing Officer in the present instance and hence the correct method is applied by the learned Transfer Pricing Officer applying the CUP method. i. He further stated that the contention of the assessee is that the learned TPO has erred by comparing sales to associated enterprise on 21/9/2007 to sales made to third-party in Bangladesh on 12/9/2007 instead of transactions made it to third party based in Indonesia on 5/9/2007 and further by comparing sales to an associated enterprise on 7/2/2008 with the sales made to third party on 25/1/2008 instead of sales made to third-party on 22/2/2008, he submitted that under the CUP method it is most improper 8 and beneficial to use that from a nearby date and therefore there is no error in the Page | 65

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi approach of the learned TPO . He further submitted that of the assessee has not shown any reason that whether the comparison is not proper except the difference of jurisdiction. He stated that the assessee has also not sure that because of the difference in jurisdiction what impact it has made on the price. He therefore stated that the contention of the assessee is unsubstantiated. j. With respect to the contention of the assessee that the learned TPO has added in not applying the transactional net margin method (TNMM) where assessee has a margin of 9.85% where the comparable companies have a margin of 7.71%, he submitted that in essence, what is being argued by the taxpayer is that cases where profit higher than those of the comparable is are demonstrated at net level, when international transaction is benchmarked using TNMM method, in such cases the ALP should be determined by aggregating the international transactions, where they pertain to purchase, sale, transactions of royalty, warranty charges, intragroup services and AMP expenses. He submitted that the taxpayer is argued that since the ratio of operating margin to operating revenue of the taxpayer is above that of the two comparable companies, the same should be treated to have benchmarked all other international transaction also at arm‘s length. He submitted that that the net margin of an entity is in operation of various factors. The task of the Transfer Pricing Officer is not so much to determine the profit of the entity but to determine the arm‘s-length price of international transactions. In the taxpayer‘s case, the higher operating profit margin that the taxpayer is demonstrating is due to a higher unit price as the product manufactured by the assessee is of a superior grade and a renowned brand that it is able to charge from customers. He therefore stated that that the argument of the assessee is inconsistent with the CUP method. He otherwise stated that in the previous years, also the assessee has itself adopted the CUP method and now it is arguing for acceptance of TNMM method only because adjustment has been made by the learned Transfer Pricing Officer as assessee is not selling goods to its associated enterprise at arm‘s-length price. 38. In view of the above facts, he vehemently submitted that the adjustment proposed by the learned Transfer Pricing Officer, confirmed by the learned Commissioner Appeals for assessment year 2007 – 08, and approved by the learned Dispute Resolution Panel for assessment year 2008 – 09 deserves to be upheld.

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi 39. We have carefully considered the rival contentions. There are seven different types of arguments of the assessee against the transfer pricing adjustment made by the learned Transfer Pricing Officer. We deal each of them. The 1st grievances is the rejection of the Chinese market quotation adopted by the assessee 40. applying CUP method for comparability analysis of the export made to the foreign associated Enterprises. The claim of the assessee is that according to rule 10 B of The Income Tax Rules , prices are required to be adjusted to account for the differences if any between the international transaction and the comparable uncontrolled transactions, which could materially affect the pricing in open market. His further reliance is on rule 10 B of the income tax rules wherein it is stated that price publications including stock exchange and, to market quotations stating that the international transaction is further required to be supported by authentic document of such a nature. The assessee has also stated that whenever the comparison is not available to the assessee, market quotation of the Chinese manufacturers was considered for applying CUP method. Before us, the claim is that the market price quotation of the Chinese manufacturers represents the price at which similar stainless steel products are available in the international market. The claim of the assessee is that market price quotations are also available in public domain and represents the price at which actual transactions have taken place in the international market. Hence, it is a comparable uncontrolled transaction. Various judicial precedents and OECD guidelines were quoted by the assessee. The objection of the learned Transfer Pricing Officer is that that the data to be used is transacted data and the quotations are not the transacted data. The identical issue arose in case of a decision by the honourable Gujarat High Court in case of CIT versus Adani Wilmar Ltd [tax appeal number 240 2014 dated 7/4/2014] where the issue was whether the quotation of Malaysian oil price from oil word which is an independent agency of Germany engaged in providing forecasting services for the purpose of deciding the arm‘s-length price of valuation palm oil is right. The honourable High Court while dealing with the issue noted that firstly the learned assessing officer did not object before the lower authorities that oil word is a forecasting agency and such rates were not based on actual transactions. Thereafter the honourable High Court held that the price publications as long as they are authentic and reliable would be relevant materials. Merely the basis of organization would be of no consequence. Such quotations also would be entitled to its due and full weightage unless it lacks basis. The issue before the honourable High Court was the consideration of the quotations of the oil world that was not based in Malaysia but it was an independent organization established in 1958 in Germany, which provided the independent forecasting Page | 67

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi services for oilseeds, oils and providing primary information and professional analysis. It also compiled information of various countries in the oil sector. It publishes the daily monthly and yearly journals in oil sector compiling information of various countries and has a broad base database. In the quotation adopted by the assessee from oil word was for Malaysia and not for Germany. Therefore, it was held that it is an authentic independent trade quotation. Further honourable Delhi High Court has on occasion to consider in CIT versus Cargill food India Ltd in [ITA number 157/2016 dated 19/2/2016] where the basis of a broker quote adopted in CUP method was accepted as it was based on the prices prevailing in the market. The honourable High Court held that published data are available from stock or commodity exchanges could form the basis of the price in both controlled and uncontrolled transactions. In that particular case the price quote given by the broker was based on the prices prevalent in the commodity exchanges and other market including Chicago Board of trade. Further in the case of the ACIT versus MSS India private limited (2009) 32 SOT 132 (Pune) the rates adopted were based on rates prevailing at London metal exchange with respect to the raw material mainly consisting of copper and lead. Therefore, it is apparent that if the quotations are authentic and reliable then only they can be used as comparable in CUP method. In this background, we examine the quotations taken by the assessee as comparable prices. In the transfer pricing study report the assessee has stated that where similar grades of stainless steel products was not exported to an unrelated party, comparison was made with reference to comparable uncontrolled prices being market quotations available in public domain of sale of such products by a manufacturer of stainless steel products in China i.e. . BAO steel and LISCO. In fact, it is an established fact that these are the companies, which are one of the largest manufacturers of the steel, however the assessee neither established product comparability with the product sold by the assessee. As assessee itself is selling number of different quality of steel it was not known that how the products of those of Chinese companies are comparable with the assessee. At page number 8 of the order of the learned Transfer Pricing Officer this was the one of main reason for rejecting the Chinese quotations. For the CUP method to be reliably applied to commodity transactions, the economically relevant characteristics of the controlled transactions and the uncontrolled transactions or the uncontrolled arrangements represented by the quoted price need to be comparable. For the products manufactured by the assessee the economically relevant characteristics include among others, the physical features and the quality of the steel, the contractual terms of the controlled transactions, such as volumes traded of the arrangements, the timing and terms of delivery, transportation, insurance and foreign Page | 68

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi currency terms are very important. Further relevant factor in determining the appropriateness of using the quoted price for a specific commodity is the extent to which the quoted price is widely and routinely used in the ordinary course of business in the industry to negotiate prices for uncontrolled transactions comparable to the controlled transactions. Further, the prices mentioned in the quotation are also not substantiated by any authentic and reliable material. If such quotations are accepted, which are devoid of any comparability analysis with the product and how they are authentic and reliable is not proved, then the whole purpose of finding the uncontrolled comparable prices would be defeated. In all the decisions which are pushed forward before us were speaking about authentic and reliable price quote. In almost all the decisions, the prices are backed by some exchanges or some reputable agencies, which are in the business of providing price-based data. No such evidences were led by the assessee in case of these Chinese quotations, which are downloaded from the Internet without any Comparability analysis, cannot be accepted. Before the learned Transfer Pricing Officer the assessee also did not substantiate that how the Chinese market quotations support the rule 10 B and D of the income tax rules. Further according to the OECD Transfer Pricing Guidelines For Multinational Enterprises And Tax Administration (July 2017) in Para number 2.18 has stated that the term quoted price refers to the price of the commodity in the relevant period obtained in an international or domestic commodity exchange market. The quoted price also include prices obtained from recognized and transparent price reporting or statistical agencies or from governmental price setting agencies where such indexes are used as a reference by unrelated parties to determine prices in transactions between them. Therefore, we fully agree with the order of the learned Transfer Pricing Officer and the learned Dispute Resolution Panel in holding that the Chinese market quotations downloaded from Internet by the assessee of BAO steel and LIiSCO cannot be used for comparability analysis in CUP method. 41. The second grievance of the assessee is the rejection of bulk discount of 5% relevant for adjustment made in J 4 black coil exported to its associated enterprise. The main claim of the assessee is that assessee has made total sales of 43898 metric ton to its associated enterprise against 309 MT sold to an unrelated 3rd parties. Therefore, the price charged by the assessee to its associated enterprise should be adjusted for quantity discount of 5% for the reason of the large volume purchased from the assessee. For the claim assessee has relied on the decision of the coordinate bench in case of ATUL Ltd versus ACIT [ITA number 3118/HD/2010] and the decision of the Mumbai bench of tribunal in case of Clariant chemicals India Ltd versus JCIT [ITA number 2393/IBM/2011]. Therefore, it is stated that if Page | 69

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi the above discount were factored into the prices then the transactions with the associated enterprise would be in the range of +- 5%. The learned TPO has rejected the discount as has been stated by the learned the TPO that onus is on the assessee to substantiate it claim for quantity discount. The assessee has not been able to submit any analysis or produce any documentary evidences that the assessee is giving 5% discount on bulk purchases since this claim is not substantiated by any evidence, hence rejected. We have carefully considered the decision of the coordinate bench in case of ATUL limited versus ACIT wherein para number 5.19.2 the coordinate bench has held that ― as far as the merit of this adjustment is concerned we are of the view that it is a common market practice that the bulk purchases are generally given some discount. If the associated enterprise have been given sale price discount due to the high quantity of purchases then the assessee is required to place on record the commercial policy of the assessee company, whether based upon some agreement or resolution. The assessee is also expected to demonstrate with supporting evidence the basis of applying 2% adjustment and in some cases it was found to be 5% adjustment. In natural question has also come up that whether such discount in sale price had also been granted by the assessee to non-associated enterprise on bulk purchases. However, we are of the view that the TPO was not justified in rejecting that claim which is otherwise prevalent in the market and can be said to be a common market practice. However, before claiming this adjustment the assessee must be fair in not claiming this adjustment on such sale transactions to associated enterprise, which are apparently lower than the sales to non-associated enterprise. Rather bulk purchases by the AES are only required to be taken into account for this adjustment‖ Further, we have also perused the decision of the Mumbai ITAT in case of Clariant chemicals Ltd (supra) in that particular decision the 20% volume discount was given to the assessee only because of the reason that in the earlier years the same was given by the learned Transfer Pricing Officer. In the OECD transfer pricing guidelines for MNE and tax administration (July 2017) in para number 2.26 and example is given where the quantitative discount can be allowed. It is stated that in that assume a taxpayer sales 1000 tons of a product for $ 80 per tonne to an associated enterprise in its MNE group, and at the same ties time sales 500 tons of the same product $ 400 per tonne to an independent enterprise. This case requires an evaluation of whether the different volumes should result in an adjustment of the transfer price. The relevant market should be researched by analyzing transaction in similar products to determine typical volume discounts. No such market research or any other Page | 70

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi market policy of the assessee was produced before us or authorities below, therefore, the facts of the case before us are not such. Even otherwise, the assessee has not shown that there was any pricing policy with the associated enterprise of giving a bulk discount. It was also not shown that what is the bulk quantity purchased on which discount is eligible. In all the circumstances, the claim of the assessee is merely an ad hoc claim without any supporting evidences. No documents was also placed before the lower authorities or before us that giving the volume discount is a market trend or commercial practice in steel business when assessee is a premium steel manufacturer of the country. In view of this we do not find any infirmity in the order of the lower authorities in rejecting 5% bulk discount to the assessee. Therefore, this contention is rejected.

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi apparent that if the transactions are the interlinked transactions then the ALP should be considered of export of goods on aggregate basis. It can be established in many ways that transactions are interlinked, one of the illustrative way is supply of goods billed separately but the purchase order is common and the rates are also predetermined with adjustments on account of material prices. Before us, no such data is available or any other information by which we can say that the transactions of export to associated enterprise are interlinked transactions. It is also clear that merely because they are the export of the same goods over a period to the Associated Enterprises, they do not become interlinked. There has to be a binding element behind all the transactions to make them one and connected. Such data was also not available before the learned Transfer Pricing Officer or learned Dispute Resolution Panel. If this fact is established by the assessee then the issue is squarely covered in favour of the assessee on this point by the decision of the coordinate bench. Therefore, respectfully following the decision of the coordinate bench, we also direct the AO to compute the ALP considering the transactions of export to associated enterprise on aggregate basis after assessee establishes before him that all these export transactions of the associated enterprise are interlinked. To this extent, this issue is sent back to the file of the learned AO/TPO with a direction to the assessee to substantiate the argument that the transactions of export of goods to associated enterprise are interlinked. 43. The fourth contention of the assessee before us is that it has made an analysis based upon the nickel price adjusted export data. According to this the comparison of the prices of international transactions of export of those grade of stainless steel product has been compared with the prices of export of the same grade of stainless steel products to unrelated party in the earlier months was determined. There from the adjustment on account of variation in the nickel prices on day-to-day basis as per the prices quoted in London metal exchange was made. After this analysis, the assessee stated that the variation in steel prices has happened primarily because of variation of nickel prices in open market. Further, undisputedly this analysis has been done by the assessee on conservative basis. Learned Transfer Pricing Officer stated that this does not meet the intent of rule 10 B (1) (a) of the IT rules 1962 and it is a simplistic view of the price change happening over a period. He also stated that the price of stainless steel product is not only dependent upon the in nickel prices, it has other material also such as steel, chromium et cetera. The learned Transfer Pricing Officer in the end, stated that there are also some dates and some transactions for which neither the third-party export data is available nor the domestic sale data is available, and in such cases there is no option but to adopt this data and use it as a fill gap Type of Page | 72

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi arrangement where no other option is available. We fully appreciate the contention of the assessee that if nickel prices are adjusted between the export of similar products on two different dates to AE and non-AE for comparability analysis provided there is no other recourse available and further there is no similar fluctuation in the price of other material component. The learned Transfer Pricing Officer has also agreed that in the rare cases where the export data is not available to the third party on the date of export made to the associated Enterprises and further the domestic sales of the similar product on that date is also absent, there is no option available but to accept such adjustments. Cautiously, we also say that, if the assessee is embarking upon benchmarking the transaction in such a rare situation then the onus is on the assessee to establish the nickel content in the stainless steel product, the relevant prices of the nickel from London metal exchange, any further variation in the other materials prices over that period are also required to be adjusted in the similar fashion, if material. Neither before the learned Transfer Pricing Officer, before the learned Dispute Resolution Panel , or before us this data is made available. Even the composition of the each product with respect to the nickel content, steel content, chromium content et cetera has not been established. Therefore, we do not have any alternative to give such kind of adjustment to the assessee at this stage. Therefore we set aside this issue to the file of the learned assessing officer with a direction to the assessee to substantiate its claim accordingly with respect to the nickel content in the product, nickel price variations over the period, variation in other commodity prices et cetera. The AO may examine the detail and then decide the issue afresh with respect to the alternative claim of the assessee. 44. Alternatively the assessee has also stated that if the CUP method cannot be applied in the case of the appellant due to the reasons stated above, the alternative claim of the assessee is that international transactions undertaken by the assessee to be benchmarked applying the Transaction Net Margin Method. For assessment year 2007 – 08 The assessee has also submitted that comparable namely Salem Steel Plant and assessee has operating profit ratio of at the rate of 9.85% which is higher than the operating profit margin of 7.71% of the comparable. Undisputedly both the assesses as well as the learned Transfer Pricing Officer are on the same page that most appropriate method applicable in this case is CUP. It is also not the case of the assessee that the appropriate data is not available, as such statement has never been made before the lower authorities or before us. In such circumstances, considering the altogether different method at this stage is inappropriate. Further even assuming while denying, the assessee has stated that there is only one comparable. Therefore, undisputedly the data availability in both the methods is scarce. Further, the decisions relied Page | 73

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi on Mumbai bench of the tribunal in case of ACIT vs Tara ultimate private limited in ITA number 5098/UM/2010, the finding was that where arm‘s-length price cannot be reasonably determined by CUP method or any other direct method in respect of even one of the areas, the application of TNMM or other direct method is inevitable and it cannot be rejected. Here the assessee has given multiple data to justify the benchmarking methodology with respect to sale of export of steel material to its Associated Enterprises; therefore, such are not the facts before us as are decided by the coordinate bench. Further the other decisions relied upon are also related to the non-availability of the data. Therefore, unless the assessee says that there are no data available for benchmarking under the CUP method, the TNMM should be the alternative method could not be accepted. Therefore, this argument of the learned authorised representative is rejected. 45. The sixth argument of the assessee is with respect to, without prejudice, that the difference in the arm‘s-length price of goods exported by the appellant to its associated enterprise fall within the range of 5% of the transacted price as provided under the second proviso to section 92C (2) of the act. The assessee has relied on the decision of the coordinate bench in the case of DDIT vs Development Bank Of Singapore [155 TTJ 265] wherein the tribunal held that the benefit of range of 5% is available not only to a situation where more than one price is determined as arm‘s-length price by the most appropriate method but also where only one price is determined as arm‘s-length price. The identical issue has been considered by the coordinate bench in appellant‘s own case for assessment year 2006 – 07 in ITA number 4111 and 4248/del/2013 wherein para number 23 – 30 this issue has been considered. In para number 30 the coordinate bench has held that:- ―30. The fine from the submissions that the details are not coming out clearly which requires a revisit to the file of the TPO for proper appreciation of the facts. We therefore in the interest of justice, deem it proper to restore the ground raised by the assessee relating to TP adjustment to the file of the TPO for fresh adjudication of the issue in the light of the submission details filed by the assessee in the paper book…. ― Therefore, respectfully following the decision of the coordinate bench in the assessee‘s own case, we set aside this argument of the assessee to the file of the learned assessing officer/Transfer Pricing Officer, with a direction that if there are more than one prices the learned Transfer Pricing Officer is directed to consider the ± 5 percent as in the case for assessment year 2006 – 07. Accordingly, this argument of the assessee is accepted.

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi 46. The seventh argument of the assessee is with respect to certain errors in the comparison made by the Transfer Pricing Officer in his order. The errors pointed out by the assessee with respect to assessment year 2008 – 09 deserve consideration by the learned Transfer Pricing Officer. The assessee is directed to show the error to the learned TPO/assessing officer and the learned AO and TPO are directed to verify the error and if found correct it may be rectified. Therefore, this argument of the assessee is accepted. 47. The Eighth argument of the assessee is that there should be an adjustment of basic customs duty when the price of the product of export is compared with the domestic market prices. The contention of the assessee is that domestic market price would be higher at least to the extent of the customs duty imposed on import by the government. Therefore, according to assessee the prices determined in the domestic market for the comparability by the learned Transfer Pricing Officer would be required to be adjusted to the extent of the rate of the customs duty imposed by the government of India for comparing the price in the international market. Accordingly, the assessee stated that for the purpose of the comparison of the price of international transaction of export of various grades of stainless steel products with the price of domestic market an adjustment for basic rate of customs duty to the extent of 5% of the basic price is required to be made. The main claim of the assessee is with respect to the export of J1 black coil for assessment year 2008-09. On careful analysis of page number 168 of the order of the learned Transfer Pricing Officer in category II of the benchmarking, the basic customs duty has been considered by the learned Transfer Pricing Officer therefore this argument has already been addressed by the learned Transfer Pricing Officer by granting appropriate adjustment. It is also clear on reading page number 10 of the order of the Transfer Pricing Officer at para number five. Therefore, now this grievance of the assessee is resolved. 48. Accordingly ground number two for assessment year 2007 -08 and ground number three for assessment year 2008 -09 are decided accordingly. These grounds of the appeal of the assessee are partly allowed.

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi 1,85,364.58 on loan granted to PT Jindal Stainless, Indonesia. In case of JSL, comparable transaction is available where JSL has availed loan from financial institutions, viz., State Bank of India, at the rate of 3 months LIBOR + 170 basis point and from ICICI at 3 months LIBOR + 140 basis point. JSL had provided the loan to PT Jindal Stainless, Indonesia at higher rate, i.e., 3 months LIBOR + 200 basis points. In addition, the associated enterprise, viz., PT Jindal Stainless, Indonesia has obtained external commercial borrowings from unrelated parties for meeting its working capital requirements at LIBOR + 200 basis point. Considering that, the international transaction of receipt of interest by JSL at LIBOR + 200 basis points was higher or comparable to comparable uncontrolled prices for similar uncontrolled transactions, the ‗international transaction of interest received is considered as being at arm‘s length applying Comparable Uncontrolled Price method. The TPO, however, in the impugned order has disregarded the benchmarking analysis undertaken by the appellant for determining the arm‘s length price of interest on loan applying CUP method. He instead imputed a rate of interest of 14% on the basis of interest charged at LIBOR + 4% by Indian Banks on foreign currency loans from ‗bb‘ rated companies plus a markup of 3% as transaction cost and 1.6% on account of security risk. For AY 2008-09 the appellant has charged interest at the rate of LIBOR plus 200 basis point on loan amounting to USD 25,00,000 issued to PT Jindal Stainless, Indonesia. In case of JSL, comparable transaction is available where JSL has availed loan from financial institutions, viz., State Bank of India, at the rate of 3 months LIBOR + 170 basis point. Considering that, the international transaction of receipt of interest by JSL at LIBOR + 200 basis points was higher or comparable to comparable uncontrolled prices for similar uncontrolled transactions, the ‗international transaction of interest received is considered as being at arm‘s length applying Comparable Uncontrolled Price method. The TPO, however, has disregarded the benchmarking analysis undertaken by the appellant for determining the arm‘s length price of interest on loan applying CUP method and instead imputed a rate of interest of 17.26% on the basis of information sought under section 133(6) of the Act. The TPO further added a markup of 3.95% because of forward premium and ad-hoc markup of 3.43% on account of adjustment for security and single customer risk, on the rate of interest charged by various banks in India, without providing any cogent reasons and on the basis of his surmises and conjecture. Accordingly, the TPO made an addition of Rs. 1,04,42,685 in the arm‘s length price of interest of loan. 50. The Ld AR submitted as under :-

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi 1. Benchmarking of international transaction undertaken for receipt of interest using internal CUP: In the Transfer pricing document the transaction of loan advanced to the associated enterprise is benchmarked applying CUP method wherein the loan availed by the appellant from State Bank of India, at the rate of 3 months LIBOR + 170 basis point and from ICICI at 3 months LIBOR + 140 basis point, as the appropriate internal uncontrolled transaction. It was also submitted that the associated enterprise, viz., PT Jindal Stainless, Indonesia has obtained external commercial borrowings from unrelated parties for meeting its working capital requirements at LIBOR + 200 basis point.

Clause (a) of Rule 10B(1) of the Income-tax Rules (―the Rules‖) provides for application of CUP method. In terms of the provisions of the said clause, Comparable Uncontrolled Price ("CUP") Method compares the price charged for property or services transferred in a controlled transaction to the price charged for property or services transferred in a comparable uncontrolled transaction in comparable circumstances, as under: ―10(1) (a) comparable uncontrolled price method, by which,— (i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified; (ii) such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market; (iii)the adjusted price arrived at under sub-clause (ii) is taken to be an arm's length price in respect of the property transferred or services provided in the international transaction;‖ In practice, there are two types of comparable uncontrolled transactions. The first, known as an "Internal Comparable", is a transaction between one of the parties to the controlled transaction and an unrelated third party. The second, known as an "External Comparable", is a transaction between two unrelated third parties.

Generally, specific details regarding internal comparables are more readily available to the parties engaged in the controlled transaction than details regarding external comparables. In light of above, External CUP should be used with utmost caution, and if internal CUP is available, it is preferred over external CUP.

In fact, internal comparables available in case of an appellant are to be preferred for the purpose of benchmarking of international transactions even in the case where any of the Page | 77

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi prescribed method is applied, instead of relying on external comparables, as provided in Paragraph 3.26 of the OECD Guidelines, 2009.

It is respectfully submitted that the OECD Guidelines on Transfer Pricing recognizes the fact that internal comparables, if available, are to be adopted in the first instance, as the preferred benchmark. Only where such internal comparables are not available, resort can be had to external comparables, which may even otherwise be difficult to obtain and information in respect of which may be incomplete and difficult to interpret.

The revised OECD Transfer Pricing Guidelines issued on 22 July 2010, too, recommended the use of internal comparable data for benchmarking analysis.

Further, it is a settled law that internal comparables available in case of a taxpayer ought to be preferred over external comparables for the purpose of benchmarking of international transactions. Reliance in this regard is placed on the recent decision of Hon‘ble Delhi High Court in the case of Sony Ericsson Mobile Communications India Pvt. Ltd. vs. CIT (374 ITR 118) wherein the Hon‘ble court held that preference shall be given to internal comparables while applying TNMM over external TNMM. The observations of Hon‘ble Court are as under: ―The TNM Method is a preferred transfer pricing arm‗s length principle for its proficiency, convenience and reliability. Ideally, in TNM Method preference should be given to internal or in-house comparables. In absence of internal comparables, the taxpayer can and would need to rely upon external comparables, i.e. comparable transactions by independent enterprises.‖ Reference is also made to the decision of Hon‘ble Delhi High Court in the case of ACIT vs. Birlasoft Limited in ITA No. 44/2015, Wherein, while dismissing the appeal of the revenue filed against the decision of Hon‘ble Tribunal for application of internal TNMM, Hon‘ble High Court held ―the court sees no reason to interfere firstly because the ITAT‘s order has become final. Furthermore, the ITAT‘s reasoning is in accord with Rule 10B(1)(e)(ii) of the Income Tax Rules.‖

Further, the Benches of the Tribunal has consistently held that while undertaking benchmarking analysis, internal comparable uncontrolled transactions is to be preferred over the external comparable uncontrolled transactions. Reference, in this regard, is made to the following decisions: (i) Inslico Ltd vs. DCIT (ITA No. 4880/Del/2013) Page | 78

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi (ii) M/s e4e Business Solutions India Pvt. Ltd. vs. DCIT (ITA No. 324/Bang/2015) (iii) M/s. Agila Specialties Pvt. Ltd. vs. DCIT (ITA No. 214/Bang/2015) (iv) Valtech India Systems P. Ltd. vs. DCIT (ITA No. 22/Bang/2014) (v) UCB India (P) Ltd. v ACIT 30 SOT 95 (vi) Easton Fluid Power Limited vs. ACIT (ITA No. 1623/PN/2011) (vii) Cybertech Systems & Software Ltd. vs. ACIT (ITA No. 7307/Mum/2012) (viii) Gharda Chemicals Limited Vs DCIT, 130 TTJ 556 (ix) Destination of the World vs. DCIT [ITA No 5534/Del/2010] (x) Interra Information Technologies India (P) Ltd. Vs. DCIT (ITA No. 5568&5680/Del/2011) (xi) Honeywell Electrical Devices & Systems India Pvt. Ltd. vs. ACIT (ITA No. 2152/Mds/2011) (xii) Lummus Technology Heat Transfer BV vs. DCIT (ITA No. 6227/Del/2012) Reliance in this regard is also placed on the decision of Chennai Bench of Tribunal in the case of VVF LTD Vs DCIT [ITA No. 673/Mum/06], wherein, in a similar case involving transaction of loan advanced to the associated enterprise, the Hon‘ble Tribunal held as under: ―We have noted that as was also noted by the Transfer Pricing Officer himself at page 3 of his order the appellant has borrowed foreign currency loans in US Dollars and for the purposes of investing in subsidiaries abroad, from ICICI Bank at the rate of LIBOR + 3% The appellant has also filed a letter from Bank of India stating that "during March 2002, we had been charging spreads of 150 bps to 300 bps over LIBOR in respect of foreign currency loans based on financial position and credit rating of the borrower". As for the LIBOR rate, as per the information provided by appellant, it ranged from 1.85000 (2 weeks) to 3.00250 (1 year). On the given facts, in our considered view, it would be appropriate to accept internal CUP, i.e. the rate at which the appellant has resorted to foreign exchange borrowings from the ICICI, as arms length price under CUP method. The fact, as painstaking brought on record by the authorities below that this loan from ICICI bank was not used for the purposes of remittance to subsidiaries as interest free loans has no bearing for the purposes of computing ALP of interest free loan. The financial position and credit rating of the subsidiaries will be broadly the same as the holding company, and, therefore, the precise rate at which the ICICI Bank has advanced the foreign currency loans to the appellant company can be adopted at arm‘s length price of interest free loans advanced by the appellant company to its foreign subsidiaries.‖ The Hon‘ble Tribunal in the case of Bharti Airtel Ltd. (ITA No. 5636/Del/2011), too, following the principles laid down in the case of VVF Ltd. (supra), upheld the contention of the appellant that internal benchmark available in the form of interest paid on borrowings in same or similar currency, ought to be taken into consideration for undertaking benchmarking of international transactions of loan extended to the AE in foreign currency.

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi Reliance is also placed in this regard on the decision of the Hon‘ble Pune Bench of the Tribunal in the case of Varroc Engineering Pvt Ltd vs ACIT (ITA No 2482/PN/2012), wherein, the Hon‘ble Tribunal held as under: ―In the totality of the facts and circumstances where the appellant has the internal CUP of operating at international rates available and since the said loan raised by the appellant at international rates was advanced to its associated enterprises, we find no merit in the order of the TPO in applying the domestic loan rates i.e. BPLR rates for benchmarking transaction of charging of interest on the loans advanced to the associated enterprises by the appellant.‖ In view of the aforesaid, it is respectfully submitted that since the appellant has charged interest on the loan @ monthly LIBOR plus 200 basis point from JSL Indonesia, being higher than the internal CUP where JSL has availed loan from financial institutions, viz., State Bank of India, at the rate of 3 months LIBOR + 170 basis point and from ICICI at 3 months LIBOR + 140 basis point. JSL had also provided the loan to PT Jindal Stainless, Indonesia at higher rate, i.e., 3 months LIBOR + 200 basis points, the ‗international transaction of interest received is considered as being at arm‘s length applying Comparable Uncontrolled Price method.

Reliance in this regard is also placed on the recent decision of Chennai Bench of Tribunal in the case of V.V.F. LTD Vs DCIT [ITA No. 673/Mum/06], wherein, the Hon‘ble Tribunal held that: ―The financial position and credit rating of the subsidiaries will be broadly the same as the holding company, and, therefore, the precise rate at which the ICICI Bank has advanced the foreign currency loans to the appellant company can be adopted at arm‘s length price of interest free loans advanced by the appellant company to its foreign subsidiaries.‖ In view of the aforesaid, the arm‘s length rate of interest to be charged from the associated enterprise should be equivalent to the rate of interest chargeable on category AA companies and therefore, without prejudice, the adjustment made by the TPO ought to be restricted to the rate of interest charged on category AA company. Page | 80

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi 3. Ad-hoc adjustment of transaction cost, security and single customer risk upon interest rate: The TPO, on the arm‘s length rate of interest determined at Libor + 4%, has allegedly added transaction cost of 3% considering the premium charged by banks on forward contract of 3-months tenure. It is submitted that the TPO himself has considered the highest rate of interest charged by banks on foreign currency loans, and therefore, a separate mark-up of transaction cost is unwarranted. Further, there is no justification in considering premium on forward contracts as transaction cost when the banks provides for specific processing charges on loans.

Further, with regard to risk adjustments, it is submitted that the TPO has grossly misunderstood the underlying facts of the case with regard to risk. A bank, it is submitted, cannot have control over the operations of the borrower and accordingly always carry credit risk. However, in the case of the appellant, the associated enterprise, is its wholly owned subsidiary company and accordingly, question of any margin money/security does not arise.

Reference in this regard is also made to the recent decision of Delhi Bench of the Tribunal in the case of Bharti Airtel Limited vs. ACIT (ITA No. 5816/Del/2012), wherein, the Hon‘ble Tribunal upheld the aforesaid proposition of the appellant, as under: ―66. We see no substance in this adjustment either. The TPO has taken the lender as the tested party, and yet made adjustments for higher risks on account of assumed lack of security and increased risk of single party dealing. This approach overlooks the fact that the appellant has advanced monies to its subsidiaries which are under its management and control – a factor which substantially reduces the risk rather than increasing it. On these facts, it is difficult to understand, much less approve, any rationale for adjustment on account of higher risks. On this point also, we see no merits in the stand of the TPO.‖ In view of the aforesaid, it is respectfully submitted that the addition made by the TPO on account of interest charged on foreign currency loan extended to the associated enterprise is bad in law and liable to be deleted

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi assessee, as assessee itself has obtained loan from banking institutions at the rate of 3 months LIBOR + 170 bps and 140 bps, he submitted that the purpose of benchmarking the interest on loan, the credit rating in the necessary to reduce the interest rates. He submitted that the assessee has failed to submit the credit rating of the associated enterprise is the Transfer Pricing Officer was left with no other option but to consider the rating at a minimal. He submitted that assessee has provided the internal CUP data in form of loans, which were acquired by the assessee itself from banking institutions in India. Here the internal CUP applied by the assessee does not hold good as the geographical conditions, economic conditions, market forces of the countries involved are different. Therefore, the assessee has wrongly applied the internal CUP, which is not appropriate. He further submitted that the risk factor being adjusted by comparing the bonds as per any rating agency was the only option left before the learned Transfer Pricing Officer to benchmark the international transactions of receipt of interest on loan. The learned Transfer Pricing Officer has followed the international best practices in determining arm‘s-length interest in situation like this by taking financial, credit, business, and structural risk into account. Therefore, the interest rate applied by the learned Transfer Pricing Officer is justified. 52. He further submitted that though assessee has contended that internal CUP of interest paid by the associated enterprise at the LIBOR + 200 bps should be used, he submitted that it is the Indian associated enterprise which needs to be taken as the tested party since the loan is extended by a to its associated enterprises. Further from a, shall point of view, as pointed out by the TPO in his order dated 24th/10/ 2011 that if the associated enterprise was able to acquire a loan at a cheaper rate than what enticed the associated enterprise to obtain a loan from other entities at a higher rate. The logic behind it is that the associated enterprise had exhausted its borrowing limit with the local banks and then it had to take a loan from Indian associated enterprise. He further stated that the contention of the assessee that loan was advanced by the assessee to the associated enterprise in foreign denominated currency therefore should be benchmarked accordingly using LIBOR rates prevalent in the international market is also devoid of any merit. He stated that the company that lent in foreign currency has to bad and additional transaction cost, which for the year under consideration works out to the tune of 3%. Further the learned TPO has examined in detail how he has applied LIBOR + appropriate basis points after accounting for transaction cost, adjustment between the bank and non-bank and adjustment of security. He further submitted that the argument of the assessee that the learned TPO has used information acquired under section 133 (6) without confronting the same to the assessee, he submitted that assessee has Page | 82

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi been confronted with the result of this exercise so there is no secrecy hence the tenets of natural justice have been followed and no further opportunity in the view of Dispute Resolution Panel is required to be provided to the assessee. He therefore submitted that this argument of the assessee requires to be rejected at the threshold. He further submitted that even at this stage the assessee could not show that how assessee is aggrieved by the action of the learned TPO in obtaining information under that section when the assessee has not provided adequate information to the learned TPO for benchmarking the interest income. He submitted that it is not the case of the assessee that it has provided the complete information on the learned TPO has rejected it and obtain information under section 133 (6) of the act and assessee has not been confronted. He further submitted that the contention of the assessee that the learned TPO has erroneously charged markup of 3.95% on account of the forward premium and ad hoc markup of 3.43% on account of adjustment for security and single customer risk without giving any cogent reason. He submitted that while deciding the markup the learned TPO has considered the transaction cost which the assessee has to bear on account of the associated enterprise as explained in detail on page number 32 of the transfer pricing order dated 24/10/2011. He further stated that further adjustments were made by the learned TPO because of adjustment between a banker and non-bank and further men adjustment on account of security and single customer risk. These risk factors do affect compatibility and hence the TPO has followed the international best practices in determining arm‘s-length interest in situation like this by taking into account suitable adjustments for all the risks. He therefore submitted that the interest rate applied by the Transfer Pricing Officer is justified. 53. We have carefully considered the rival contentions and perused the orders of the lower authorities. We also considered the various decisions cited by both the parties before us on the issue. 54. The first contention of the assessee is that benchmarking of international transaction based on interest rates for receipt of interest using internal CUP by the assessee should be accepted. The assessee has adopted the internal CUP of the interest rates on which the assessee has borrowed the money. These are two different transactions the assessee is trying to benchmark the transaction of receipt of interest with the transaction of payment of interest. Therefore, according to us this is not a proper internal comparable, hence, this argument of the assessee is rejected. 55. Second contention is that benchmarking should be done based on the borrowing rates on Thailand Company as internal CUP. Here the tested party is the assessee therefore the Page | 83

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi transaction is required to be benchmarked what an independent person in India would have charged on the interest on loan to the foreign AE. Therefore, internal CUP with respect to the borrowing made by the Thailand Company is also correctly rejected by the learned Transfer Pricing Officer. 56. For assessment year 2007 – 08 the learned commissioner of income tax appeal has upheld the action of the learned Transfer Pricing Officer in benchmarking the rate of interest at Libor +700 basis points and addition on account of the risk factor as a result of that the interest to be charged is determined at the rate of 14%.. Coming to the order of the learned Dispute Resolution Panel for assessment year 2008 – 09, wherein they have directed the learned Transfer Pricing Officer to consider the rate of interest at the prime lending rate of the reserve Bank of India as prevalent in the financial year 2007 – 08. Therefore, there is a dichotomy in the approach of the revenue in taking in the first year based LIBOR +700 basis points and in the second year to consider the prime lending rate of the reserve Bank of India. Therefore, both the benchmarking for both the years by the LD TPO confirmed by LD CIT A and Ld DRP deserves to be rejected. 57. Further the Honorable Delhi High court in case of CIT V Cotton Naturals ITA 233 of 2014 dated 27/3/2015 [2015] 55 taxmann.com 523 (Delhi) [2015-TII-09-HC-DEL-TP ] and held as under :- 15. The case of the appellant-Revenue finds lucid exposition in the following table quoted by the Transfer Pricing Officer, pointing out the difference between lending and borrowing: "The difference between lending and borrowing when dealing at arm's length is given in the below table (Assuming X is in India and Y is outside India). Sl. Aspect Lending money Borrowing No. b X to Y Money b X from Y

1 Primary The primary The primary Consideration consideration consideration for X is to for X is to maximize its minimize its return in terms rate of interest of interest keeping in keeping in view view the risk the risk involved. involved.

2 Interest Rate Interest rate Interest rate

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi depends on the depends on the tenure, credit tenure, credit rating of Y, and rating of X, security and security offered. offered.

3 Benchmarking X would see X would see what the what the maximum minimum return he gets interest rate it in India and can borrow spread required from Y as for taking the interest rates risk of losing in India are money higher when (depends on the compared to credit rating of the interest Y) as well as rates charged security being in ECB loans. offered by Y. Thus the bench Independent marking is party would not based on lend outside LIBOR + some India if it can basis points get higher depending on return in India. the credit Thus the rating of X. benchmarking would be based on the interest rate receivable in India for giving loans to parties with similar credit rating as that of Y (like corporate bonds) and also the level of security offered by Y.

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi Indian companies go for External Commercial Borrowings as the interest rates on ECB loans are generally cheaper than the prevailing interest rates in the domestic market. Thus as can be seen from above, while borrowing money by X (in India) from Y (outside India), the interest rates are benchmarked with LIBOR and the interest rate above LIBOR is decided by the stand alone credit rating of X. On the contrary, no company in India would like to investment in the form of loan outside India and that also without security as the interest returns in India would be higher than those prevailing in developed markets. Thus while lending money by X (in India) to Y (outside India), the interest rates would be bench marked against those prevailing in India for investing in corporate bonds (which are without security)." 16. We would first like to deal with the aforesaid table and the reasoning given in the case of Logic Micro Systems Ltd. (supra) before we advert to other facets of the issue. 17. In our opinion, the reasoning recorded therein suffers from a basic and fundamental fallacy. Transfer pricing determination is not primarily undertaken to re-write the character and nature of the transaction, though this is permissible under two exceptions. Chapter X and Transfer Pricing rules do not permit the Revenue authorities to step into the shoes of the assessee and decide whether or not a transaction should have been entered. It is for the assessed to take commercial decisions and decide how to conduct and carry on its business. Actual business transactions that are legitimate cannot be restructured. It is not uncommon for manufacturers cum exporters to enter into distribution and marketing agreements with third parties or incorporate subsidiaries in different countries for undertaking marketing and distribution of the products. The Delhi High Court in Commissioner of Income Tax versus EKL Appliances Limited, (2012) 345 ITR 241 (Delhi) = 2012-TII-01-HC-DEL-TP referred to the Paragraphs 1.36 to 1.38 of the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, 2010 published by the Organization for Economic Cooperation and Development (OECD, for short) and held as under:- "17. The significance of the aforesaid guidelines lies in the fact that they recognise that barring exceptional cases, the tax administration should not disregard the actual transaction or substitute other transactions for them and the examination of a controlled transaction should ordinarily be based on the transaction as it has been actually undertaken and structured by the associated enterprises. It is of further significance that the guidelines discourage re-structuring of legitimate business transactions. The reason for characterisation of such re-structuring as an arbitrary exercise, as given in the guidelines, is that it has the potential to create double taxation if the other tax administration does not share the same view as to how the transaction should be structured. 18. Two exceptions have been allowed to the aforesaid principle and they are (i) where the economic substance of a transaction differs from its form and (ii) where the form and substance of the transaction are the same but arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner." 18. This judgment was referred to by us in ITA No. 16/2014, Sony Ericsson Mobile Communications India Private Limited (Now known as Sony India Limited) versus Commissioner of Income Tax-III and other connected cases decided on 16th March, 2015 = 2015-TII-06-HC-DEL-TP and it was held as under:- "147. Tax authorities examine a related and associated parties‗ transaction as actually undertaken and structured by the parties. Normally, tax authorities cannot Page | 86

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi disregard the actual transaction or substitute the same for another transaction as per their perception. Restructuring of legitimate business transaction would be an arbitrary exercise. This legal position stands affirmed in EKL Appliances Ltd. (supra). The decision accepts two exceptions to the said rule. The first being where the economic substance of the transaction differs from its form. In such cases, the tax authorities may disregard the parties' characterisation of the transaction and re- characterise the same in accordance with its substance. The Tribunal has not invoked the said exception, but the second exception, i.e. when the form and substance of the transaction are the same, but the arrangements made in relation to the transaction, when viewed in their totality, differ from those which would have been adopted by the independent enterprise behaving in a commercially rational manner. The second exception also mandates that actual structure should practically impede the tax authorities from determining an appropriate transfer price. The majority judgment does not record the second condition and holds that in their considered opinion, the second exception governs the instant situation as per which, the form and substance of the transaction were the same but the arrangements made in relation to a transaction, when viewed in their totality, differ from those which would have been adopted by an independent enterprise behaving in a commercially rational manner. The aforesaid observations were recorded in the light of the fact in the case of L.G. Electronics (supra). Commenting on the factual matrix of L.G. Electronics case (supra) would be beyond our domain; however, we do not find any factual finding to this effect by the TPO or the Tribunal in any of the present cases. However, in L.G. Electronics decision (supra), it is observed that if the AMP expenses and when such expenses are beyond the bright line, the transaction viewed in their totality would differ from one which would have been adopted by an independent enterprise behaving in a commercially rational manner. No reason or ground for holding or the ratio, is indicated or stated. There is no material or justification to hold that no independent party would incur the AMP expenses beyond the bright line AMP expenses. Free market conditions would indicate and suggest that an independent third party would be willing to incur heavy and substantial AMP expenses, if he presumes this is beneficial, and he is adequately compensated. The compensation or the rate of return would depend upon whether it is a case of long-term or short-term association and market conditions, turnover and ironically international or worldwide brand value of the intangibles by the third party." 19. It would also be appropriate at this stage to reproduce the following portion from the UN Model Double Taxation Convention Between Developed and Developing Countries, wherein reference was made to the OECD Model Convention Commentary on Paragraph 6 of Article 11, in the following words: "22. This paragraph reproduces Article 11, paragraph 6, of the OECD Model Convention, the Commentary on which reads as follows: 32. The purpose of this paragraph is to restrict the operation of the provisions concerning the taxation of interest in cases where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the interest paid exceeds the amount which would have been agreed upon by the payer and the beneficial owner had they stipulated at arm's length. It provides that in such a case the provisions of the Article apply only to that last-mentioned amount and that the excess part of the interest shall remain taxable according to the laws of the two Contracting States, due regard being had to the other provisions of the Convention. Page | 87

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi 33. It is clear from the text that for this clause to apply the interest held excessive must be due to a special relationship between the payer and the beneficial owner or between both of them and some other person. There may be cited as examples cases where interest is paid to an individual or legal person who directly or indirectly controls the payer, or who is directly or indirectly controlled by him or is subordinate to a group having common interest with him. These examples, moreover, are similar or analogous to the cases contemplated by Article 9. 34. On the other hand, the concept of special relationship also covers relationship by blood or marriage and, in general, any community of interests as distinct from the legal relationship giving rise to the payment of the interest. 35. With regard to the taxation treatment to be applied to the excess part of the interest, the exact nature of such excess will need to be ascertained according to the circumstances of each case, in order to determine the category of income in which it should be classified for the purposes of applying the provisions of the tax laws of the States concerned and the provisions of the Convention. This paragraph permits only the adjustment of the rate at which interest is charged and not the reclassification of the loan in such a way as to give it the character of a contribution to equity capital. For such an adjustment to be possible under paragraph 6 of Article 11 it would be necessary to as a minimum to remove the limiting phrase"having regard to the debt-claim for which it is paid". If greater clarity of intent is felt appropriate, a phrase such as"for whatever reason" might be added after"exceeds". Either of these alternative versions would apply where some or all of an interest payment is excessive because the amount of the loan or the terms relating to it (including the rate of interest) are not what would have been agreed upon in the absence of the special relationship. Nevertheless, this paragraph can affect not only the recipient but also the payer of excessive interest and if the law of the State of source permits, the excess amount can be disallowed as a deduction, due regard being had to other applicable provisions of the Convention. If two Contracting States should have difficulty in determining the other provisions of the Convention applicable, as cases require, to the excess part of the interest, there would be nothing to prevent them from introducing additional clarifications in the last sentence of paragraph 6, as long as they do not alter its general purport. 36. Should the principles and rules of their respective laws oblige the two Contracting States to apply different Articles of the Convention for the purpose of taxing the excess, it will be necessary to resort to the mutual agreement procedure provided by the Convention in order to resolve the difficulty. 23. When this issue was last considered, some members of the former Group of Experts pointed out that there are many artificial devices entered into by persons to take advantage of the provisions of Article 11 through, inter alia, creation or assignment of debt claims in respect of which interest is charged. While substance over form rules, abuse of rights principle or any similar doctrine could be used to counter such arrangements, Contracting States which may want to specifically address the issue may include a clause on the following lines in their bilateral tax treaties during negotiations, namely: The provisions of this Article shall not apply if it was the main purpose or one of the main purposes of any person concerned with the creation or assignment of the debt claim in respect of which the interest is paid to take advantage of this Article by means of that creation or assignment." Page | 88

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi 20. Reverting to the reasoning given, we record that the respondent-assessee had incorporated a subsidiary in United States for undertaking distribution and marketing activities for the products manufactured by them. It is obvious that this was done with the intention to expand and promote exports in the said country and was a legitimate business decision. The transaction of lending of money by the respondent-assessee to the subsidiary should not be seen in isolation, but also for the purpose of maximising returns, propelling growth and expanding market presence. The reasoning ignores the said objective facet. Transfer pricing rules treat the domestic AE and the foreign AE as two separate entities and profit centres, and the test applied is whether the compensation paid for the products and services is at arm's length, but it does not ignore that the two entities have a business and a commercial relationship. The terms and conditions of the commercial business relationship as agreed and undertaken are not to be rewritten or obliterated. Transfer pricing is a mechanism to undo an attempt to shift profits and correct any under or over payment in a controlled transaction by ascertaining the fair market price. This is done by computing the arm's length price. The purpose is to ascertain whether the transfer price is the same price which would have been agreed and paid for by unrelated enterprises transacting with each other, if the price is determined by market forces. The first step in this exercise is to ascertain the international transaction, which in the present case is payment of interest on the money lent. The next step is to ascertain the functions performed under the international transaction by the respective AEs. Thereafter, the comparables have to be selected by undertaking a comparability analysis. The comparability analysis should ensure that the functions performed by the comparables match with the functions being performed by the AE to whom payment is made for the services rendered. These aspects have been elucidated in detail in Sony India Ltd. (supra) by referring to the OECD Guidelines as well as United Nations Practical Manual of Transfer Pricing for Developing Countries. 21. Appropriate in this regard would be reference also to Rules 10B and 10C of the Income Tax Rules, 1962. Rule 10B (2) reads:- "10B. xxx (2) For the purposes of sub-rule (1), the comparability of an international transaction or a specified domestic transaction with an uncontrolled transaction shall be judged with reference to the following, namely:- (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail." Equally important is sub-rule (3) to Rule 10B, which reads:- "10B. (3) An uncontrolled transaction shall be comparable to an international transaction or a specified domestic transaction if-

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences." Similarly, Rule 10C (1) reads:- "10C. (1) For the purposes of sub-section (1) of section 92C, the most appropriate method shall be the method which is best suited to the facts and circumstances of each particular international transaction or specified domestic transaction, and which provides the most reliable measure of an arm's length price in relation to the international transaction or the specified domestic transaction, as the case may be. (2) In selecting the most appropriate method as specified in sub-rule (1), the following factors shall be taken into account, namely:- (a) the nature and class of the international transaction or the specified domestic transaction; (b) the class or classes of associated enterprises entering into the transaction and the functions performed by them taking into account assets employed or to be employed and risks assumed by such enterprises; (c) the availability, coverage and reliability of data necessary for application of the method; (d) the degree of comparability existing between the international transaction or the specified domestic transaction and the uncontrolled transaction and between the enterprises entering into such transactions; (e) the extent to which reliable and accurate adjustments can be made to account for differences, if any, between the international transaction or the specified domestic transaction and the comparable uncontrolled transaction or between the enterprises entering into such transactions; (f) the nature, extent and reliability of assumptions required to be made in application of a method." 22. The aforesaid Rules indicate factors that ought to be taken into account for selection of the comparables, which necessarily include the contractual terms of the transaction and how the risks, benefits and responsibilities are to be divided. The conditions prevailing in the market in which the respective parties to the transactions operate, including the geographical location and the size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition, are all material and relevant aspects. If we keep the aforesaid aspects in mind, it would be delusive not to accept and agree that as per the prevalent practice, subsidiary AEs are often incorporated to carry on distribution and marking function. This is not an unusual but common. Once this is accepted, then we cannot accept the reasoning given by the TPO that the transfer pricing adjustment could restructure the transaction to reflect maximum return that a party could have earned and this would be the yardstick or the benchmark for determining the interest payable by the subsidiary AE. This is not what Chapter X of the Act and Rules mandate and stipulate. The aforesaid provisions neither curtail the commercial freedom, nor do they bar or prohibit a legitimate transaction. They permit transfer pricing adjustment so as to bring to tax what would have been paid for the transaction in the same or similar comparable circumstances by an independent third party. Page | 90

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi 23. This ratio and rationale, when applied to the facts of the present case, would mean that the transfer pricing determination would decide what an independent distributor and marketer, on the same contractual terms and having the same relationship, would have earned/paid as interest on the loan in question. What an independent party would have paid under the same or identical circumstances would be the arm's length price or rate of interest. What the assessed would have earned in case he would have entered into or gone ahead with a different transaction, say with a party in India, is not the criteria. What is permitted and made subject matter of the arm's length determination is the question of rate of interest and not re-classification or substitution of the transaction. The position would have been different, if the two exceptions carved out in the case of EKL Appliances (supra) were applicable. 24. This is clear and lucid when we examine the methodology prescribed in Rule 10B (1) (a), which prescribes the manner of computing arm's length price under CUP method. Rule 10B (1) (a) reads:- "10B. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction 55a[or a specified domestic transaction] shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely:- (a) comparable uncontrolled price method, by which,- (i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified; (ii) such price is adjusted to account for differences, if any, between the international transaction or the specified domestic transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market; (iii) the adjusted price arrived at under sub-clause (ii) is taken to be an arm's length price in respect of the property transferred or services provided in the international transaction or the specified domestic transaction xxx " 25. The comparison, therefore, has to be with comparables and not with what options or choices which were available to the assessed for earning income or maximizing returns. Importantly, the TPO, DRP and the Assessing Officer have all accepted that the respondent assessee had adopted and applied CUP Method for computing arm's length interest payable by the subsidiary AE. To this extent, there is no lis or dispute. 26. The TPO has noticed the contractual terms and referred to the following facets: The advance given by the parent company i.e. the assessed to M/s JPC Equestrian Inc. was to meet the working capital requirements of the subsidiary AE. He noted that when independent enterprises transact with each other, their business relations are determined by the market forces operating, i.e. what is the amount of interest that would have been earned had such an advance been given to an unrelated party placed in a similar position as that of the subsidiary AE. The TPO had asked for the audited financial accounts of the subsidiary. Credit rating would be relevant. He accepted that there was a sense of commercial expediency and related benefits in the loan transaction but the assessed had not been able to demonstrate that the interest charged satisfied the arm's length standard. He observed that business prudence or necessity of advancing loan to the subsidiary was not relevant for computing arm's length price (i.e. rate of interest in this case) in unrelated party

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi transactions. This aspect, he held, would not take precedence over the arm's length nature of interest. 27. Several aspects enunciated above, reflect the correct legal position. We, however, express our inability to accept that commercial expediency and related benefits have no connection or relationship with the rate of interest. In terms of Clause (c) and (d) to Rule 10B (2), contractual relations or terms, and other material facts should be recognized. Having said so, we do accept the force of the alternative argument advanced that this fact could be of marginal significance and effect. It would be for the assessed to show and prove that a transaction separately benchmarked, included consideration for the lower interest rate being paid. 28. We do not agree with the finding recorded in paragraph 5 of the TPO's order that the comparable test to be applied is to ascertain what interest would have been earned by the assessed by advancing a loan to an unrelated party in India with a similar financial health as the taxpayer's subsidiary. The aforesaid reasoning is unacceptable and illogical as the loan to the subsidiary AE in the instant case is not granted in India and is not to be repaid in Indian Rupee. It is not a comparable transaction. The finding of the TPO that for this reason the interest rate should be computed at 14% per annum i.e. the average yield on unrated bonds for Financial Years (FY, for short) 2006-07, has to be rejected. 29. The TPO has referred to the decision of the Tribunal in the case of Perot Systems TSI (India) Limited versus DCIT and VVF Limited versus DCIT, 2010-TIOL-55-ITAT- MUM wherein LIBOR plus 1.64% i.e. 4.03% and LIBOR plus 3% respectively, were accepted as the arm's length rate of interest. But these decisions, he held, were unacceptable for the reasons set out in paragraph 6.1 of the TPO's order (the table has been quoted above). We have rejected the reasoning given in the table. 30. However, the TPO was right in rejecting computation of arm's length interest on the basis of Reserve Bank of India Master Circular dated 1st July, 2006 and 2nd July, 2007, fixing a ceiling on the interest rate on export credit at LIBOR plus 100 basis points etc. The reasoning given is correct and befitting. These were special schemes floated by the Reserve Bank of India for encouraging and facilitating exports with the said object and purpose. Export credit interest was available only for limited number of days and for specific purposes. The rates fixed did not reflect comparable market rates. 31. On the question of adjustment, the TPO referred to the FCNR loan advanced by the Power Finance Corporation to the Indian company i.e. Jindal Thermal Power Company Ltd. of US$ 44.50 million. Interest charged in the said case was US LIBOR plus 350 basis points for a company which had been given BB+ credit rating. However, full facts like the nature of transaction; risk factors etc. are not elucidated. He has also referred to the Bank of Baroda website that the rate of interest on FCNR loan were between 350-650 basis points over LIBOR for the FY 2006-07. TPO held that in view of the financial health of the subsidiary AE, interest rate could be taken as the average of six months LIBOR plus 400 basis points. On the question of transaction cost, it was stated that it was mandatory for the bank to insist that the borrower must book forward contracts to hedge their position. The TPO referred to the premium payable for undertaking the said hedging transactions and added a cost of 3% per annum as premium, which should have been paid. At the same time, the TPO acknowledged that the taxpayer was not in the business of lending or borrowing money and observed that the taxpayer's risk was higher in advancing loan to a single customer, vis a bank which spreads its risk among various customers. Banks spread their risk when loans are/were advanced to various consumers, but this does not happen when a loan is given to a single customer.

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi 32. On the question of adjustment made on account of the transaction cost, we do not appreciate the reasoning given by the TPO and find it difficult to accept. The transaction or hedging cost is borne and paid by the borrower. These are undertaken when they take loans in US Dollars or other foreign currencies because the borrower wants to cover any loss on account of the depreciation of the Indian Rupee vis- a- vis the foreign currency. The assessee in the present case is not the borrower, but the lender. Transaction cost is not, therefore, applicable in the case in question, as the loan had to be repaid in US Dollars. Mark up towards the transaction cost is exorbitant and even comparison with banks is unsound and unintelligible. Risk factor adjustment is also stretched, for it ignores the close relationship between the two AEs and the funds were the shareholder funds, and not borrowed money. 33. The DRP accepted the addition of 700 basis points on account of credit rating and transaction costs, but the suggested third adjustment of 1.776 basis points was not accepted as loan was given out of the shareholder funds, which flowed from one set of shareholders to another set of shareholders. The security aspect it was held was embedded by default in the transaction. Thus, there was no requirement to make further addition on account of security. 34. In the present case, the loan was granted in the year 2002-2003 and not during the period relevant to the assessment year in question. The agreements in respect of loan was entered into on 13th April, 2002, 7th May, 2003 and then on 8th September, 2003. The agreements fixed the rate of interest at 4% per annum on the principal sum. The said rate has been accepted in the earlier assessment years and, as noticed above, even in the subsequent assessment year 2008-09. 35. The LIBOR rate plus markup or the interest rate prevailing in the United States at that time, i.e. 2003 have not been examined and are not the basis on which the TPO made the adjustment and compute the interest rate for the transaction under consideration. It claimed that the LIBOR rates in the year 2002 varied between 1.447 % to 3.006 % and in the year 2003 between 1.201% to 1.487%. Rates in the year 2004 were again marginal, with the highest at 3.100% and the lowest at 1.340%. The LIBOR rate of 5.224% quoted in the TPO's order, it is pointed out, was the rate received on the investment made during the assessment year in question by the assessed. Thus, it was argued that the present case is of a long-term loan granted to the AE and the rate of interest charged was much higher than the then prevailing LIBOR interest rate. There is no finding of the TPO, the DRP or the Assessing Officer questioning the long-term transaction as such. 36. Under sub-rule (4) to Rule 10B, the data used for comparability of the uncontrolled transaction should be the data relating to the financial year in which the international transaction has been entered into. The proviso permits consideration of data, not more than two years prior to the financial year, if such data reveals facts which would have influenced determination of transfer price in relation to the transaction being compared. The transaction in question was entered into in the year 2002-03 when the loans were granted to the AE. This was the financial year of the international transaction. Payment of interest is also an international transaction but would have reference to the year in which the loan was granted in case of a long term loan. However, in such situations, question may arise whether the case would fall under the second exception mentioned in the case of E.K.L. Appliances (supra), when an AE has the right to recall and ask for repayment of loan. These aspects have not been considered and applied by the TPO, DRP and the Assessing Officer. Neither has this ground been argued before us on behalf the Revenue. We, therefore, would not proceed to examine the said aspect and leave the question open.

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi Similarly, we have not expressed any opinion on the issue or question of"thin capitalization" which does not arise for consideration in the present case. 37. We observe that whatever the Revenue argues and submits in the case of outbound loans or for that matter what we have observed would be equally applicable to inbound loans given to Indian subsidiaries of foreign AEs. The parameters cannot be different for outbound and inbound loans. A similar reasoning applies to both inbound and outbound loans. Revenue has erroneously argued that different parameters would apply for inbound and outbound loans, which is not acceptable . 38. The DRP referred to the PLR rates fixed in India. It is evident that the PLR rates were not the basis for fixing the arm's length price. Both TPO and the DRP have referred to the PLR rates only by way of analogy so as to state the prevailing interest rates in India, but while applying CUP method for comparability, they had applied LIBOR rates prevailing and had applied a mark-up of 700 points on account of low credit rating of the subsidiary AE and the cost of transaction. 39. The question whether the interest rate prevailing in India should be applied, for the lender was an Indian company/assessee, or the lending rate prevalent in the United States should be applied, for the borrower was a resident and an assessee of the said country, in our considered opinion, must be answered by adopting and applying a commonsensical and pragmatic reasoning. We have no hesitation in holding that the interest rate should be the market determined interest rate applicable to the currency concerned in which the loan has to be repaid. Interest rates should not be computed on the basis of interest payable on the currency or legal tender of the place or the country of residence of either party. Interest rates applicable to loans and deposits in the national currency of the borrower or the lender would vary and are dependent upon the fiscal policy of the Central bank, mandate of the Government and several other parameters. Interest rates payable on currency specific loans/ deposits are significantly universal and globally applicable. The currency in which the loan is to be re-paid normally determines the rate of return on the money lent, i.e. the rate of interest. Klaus Vogel on Double Taxation Conventions (Third Edition) under Article 11 in paragraph 115 states as under:- "The existing differences in the levels of interest rates do not depend on any place but rather on the currency concerned. The rate of interest on a US $ loan is the same in New York as in Frankfurt-at least within the framework of free capital markets (subject to the arbitrage). In regard to the question as to whether the level of interest rates in the lender's State or that in the borrower's is decisive, therefore, primarily depends on the currency agreed upon (BFH BSt.B1. II 725 (1994), re. 1 § AStG). A differentiation between debt- claims or debts in national currency and those in foreign currency is normally no use, because, for instance, a US $ loan advanced by a US lender is to him a debt-claim in national currency whereas to a German borrower it is a foreign currency debt (the situation being different, however, when an agreement in a third currency is involved). Moreover, a difference in interest levels frequently reflects no more than different expectations in regard to rates of exchange, rates of inflation and other aspects. Hence, the choice of one particular currency can be just as reasonable as that of another, despite different levels of interest rates. An economic criterion for one party may be that it wants, if possible, to avoid exchange risks (for example, by matching the currency of the loan with that of the funds anticipated to be available for debt service), such as taking out a US $ loan if the proceeds in US $ are expected to become available (say from exports). If an exchange risk were to prove incapable of being avoided (say, by forward rate fixing), the appropriate course would be to attribute it to the economically more powerful party. But, exactly where there is no ‗special relationship', this will frequently not be possible in Page | 94

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi dealings with such party. Consequently, it will normally not be possible to review and adjust the interest rate to the extent that such rate depends on the currency involved. Moreover, it is questionable whether such an adjustment could be based on Art. 11 (6). For Art. 11(6), at least its wording, allows the authorities to ‗eliminate hypothetically' the special relationships only in regard to the level of interest rates and not in regard to other circumstances, such as the choice of currency. If such other circumstances were to be included in the review, there would be doubts as to where the line should be drawn, i.e., whether an examination should be allowed of the question of whether in the absence of a special relationship (i.e., financial power, strong position in the market, etc., of the foreign corporate group member) the borrowing company might not have completely refrained from making investment for which it borrowed the money." 40. The aforesaid methodology recommended by Klaus Vogel appeals to us and appears to be the reasonable and proper parameter to decide upon the question of applicability of interest rate. The loan in question was given in foreign currency i.e. US $ and was also to be repaid in the same currency i.e. US $. Interest rate applicable to loans granted and to be returned in Indian Rupees would not be the relevant comparable. Even in India, interest rates on FCNR accounts maintained in foreign currency are different and dependent upon the currency in question. They are not dependent upon the PLR rate, which is applicable to loans in Indian Rupee. The PLR rate, therefore, would not be applicable and should not be applied for determining the interest rate in the extant case. PLR rates are not applicable to loans to be re-paid in foreign currency. The interest rates vary and are thus dependent on the foreign currency in which the repayment is to be made. The same principle should apply. 41. Counsel for the Revenue had made reference to Chapter 10 of the U.N. Transfer Pricing Manual, relevant portion of which reads:- "10.4.10. Financial Transactions 10.4.10.1. Intercompany loans and guarantees are becoming common international transactions between related parties due to the management of cross-border funding within group entities of an MNE group. Transfer pricing of inter-company loans and guarantees are increasingly being considered some of the most complex transfer pricing issues in India. The Indian transfer pricing administration has followed a quite sophisticated methodology for pricing inter-company loans which revolves around: - Examination of the loan agreement; - A comparison of terms and conditions of loan agreements; - The determination of credit ratings of lender and borrower; - The identification of comparable third party loan agreements: and - Suitable adjustments to enhance comparability. 10.4.10.2. The Indian transfer pricing administration has come across cases of outbound loan transactions where the Indian parent has advanced to its associated entities (AE) in a foreign jurisdiction either interest free loans or loans at LIBOR (London Interbank Offered Rate) or EURIBOR (Euro Interbank Offered Rate). The main issue before the transfer pricing administration is benchmarking of these loan transactions to arrive at the ALP of the rates of interest applicable on these loans. The Indian transfer pricing administration has determined that since the loans are advanced from India and Indian currency has been subsequently converted into the currency of the geographic location of the AE, the Prime Lending Rate (PLR) of the Indian banks should be applied as the external CUP and not the LIBOR or EURIBOR rate. Page | 95

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi 10.4.10.3. A further issue in financial transactions is credit guarantee fees. With the increase in outbound investments, the Indian transfer pricing administration has come across cases of corporate guarantees extended by Indian parents to its associated entities abroad, where the Indian parent as guarantor agrees to pay the entire amount due on a loan instrument on default by the borrower. The guarantee helps an associated entity of the Indian parent to secure a loan from the bank. The Indian transfer pricing administration generally determines the ALP of such guarantee under the Comparable Uncontrolled Price Method. In most cases, interest rates quotes and guarantee rate quotes available from banking companies are taken as the benchmark rate to arrive at the ALP. The Indian tax administration also uses the interest rate prevalent in the rupee bond markets in India for bonds of different credit ratings. The difference in the credit ratings between the parent in India and the foreign subsidiary is taken into account and the rate of interest specific to a credit rating of Indian bonds is also considered for determination of the arm's length price of such guarantees. 10.4.10.4. However, the Indian transfer pricing administration is facing a challenge due to non-availability of specialized databases and of comparable transfer prices for cases of complex inter-company loans as well as mergers and acquisitions that involve complex inter- company loan instruments as well as an implicit element of guarantee from the parent company in securing debt." 42. The first paragraph quoted above, rightly stipulates that inter- company loans would require examination of the loan agreement, comparison of the terms and conditions of loan agreements, the determination of credit rating of the lender and the borrower, identification of comparable third party loan agreements and suitable adjustments should be made. In addition to the aforesaid factors, the comparability analysis should also take into account the business relationship and the functions performed by the subsidiary AE for the parent company. In the present case, we are not concerned with paragraph 10.4.10.3 of the United Nations Transfer Pricing Manual. However, we are unable to agree with the position set out and asserted in paragraph 10.4.10.2 of the Manual. The reasoning given therein is contrary to the accepted international tax jurisprudence and the rules adopted and applied. There is no justification or a cogent reason for applying PLR for outbound loan transactions where the Indian parent has advanced loan to an AE abroad. Chapter 10 of the United Nations Practical Manual on Transfer Pricing relates to country practices. The said Chapter sets out an individual country's view point and its experiences for the information of the readers. The said Chapter does not reflect the view of the Manual. Paragraph 10.1 of the United Nations Practical Manual on Transfer Pricing for Developing Countries reads:- "10.1. Preamble by the Subcommittee on Transfer Pricing: Practical Aspects 10.1.1. In the first nine chapters of this Manual, the Subcommittee has sought to provide practical guidance on the application of transfer pricing rules based on Article 9(1) of the UN Model Tax Convention and the arm's length principle embodied in that Article. With regard to chapters one through nine, the Subcommittee has discussed and debated the merits of the guidance that is provided and, while there may be some disagreement on certain points, for the most part the Subcommittee is in agreement that the guidance in those chapters reflects the application of the arm's length principle as embodied in the UN Model Tax Convention. 10.1.2. The Subcommittee recognizes that individual countries, particularly developing and emerging economies, struggle at times with the details of applying these treaty-based principles in a wide variety of practical situations. It therefore seemed appropriate to allow representatives of individual countries an opportunity to set out their individual country viewpoints and experiences for the information of readers. Those individual country views Page | 96

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi are contained in this chapter. It should be emphasized that it does not reflect a consistent or consensus view of the Subcommittee." 43. Normally there would be a difference between the lending rate and borrowing rate in each country. Some authors and writers suggest that the average or mid-point between the two should be taken. However, others like Klaus Vogel, have suggested that economic purpose and substance of the debt-claim or debt for which granting of credit calls for the lending rate would be determinative. Thus, in case of a capital investment, the borrowing rate will apply, whereas in case of credit allowed to a customer on sale of goods, the lending rate would apply. We do not deem it necessary to enter into this controversy and express our view as regards the same. 44. We are also not expressing any view on adjustment for lack of security as this issue does not arise for consideration in terms of the observations of the DRP.‖

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi by this factor. In view of these facts, we do not find any reason that interest charged by the assessee at LIBOR +200 is not at arm‘s-length. 59. Now we come to the other issue where there should be an adjustment of the transaction cost and adjustment for security. The learned Transfer Pricing Officer has made addition of 300 basis points on account of transaction cost. Learned Transfer Pricing Officer has made an adjustment at the rate of 3% on account of transaction cost, security, and single customer risk on interest rate. Contesting this adjustment the learned authorised representative has relied upon the decision of the coordinate bench in case of Bharti Airtel Limited V ACIT [5816/Del/2012] wherein it has been held that that when the Transfer Pricing Officer has taken the lender as the tested party and yet made adjustment for higher risk on account of assumed lack of security and increased risk of single party dealing is not based on any rational for adjustment on account of higher risk. Apparently, in this case the assessee, lender is a tested party and further the loan is advanced to 100% wholly owned subsidiary in Indonesia the facts of the case are clearly covered by the decision of coordinate bench. The honourable Delhi High Court in CIT vs Cotton Naturals (supra) has already held that the transaction cost of hedging cost is borne and paid by the borrower therefore transaction cost is not applicable in case in question the loan had to be repaid in the foreign currency.Even otherwise according to us the markup towards the transaction cost is exorbitant and comparison with the bank is also untenable. In view of this, we do not see any rational in the impugned in further cost and risk premium on the rate directed by the learned Dispute Resolution Panel . Accordingly we direct the learned Transfer Pricing Officer to not to charge any risk premium following the decision of the coordinate bench. In view of this, the transaction cost imputed of 300 basis points cannot be sustained. 60. In view of our above discussion, we find that the learned Transfer Pricing Officer should have considered for both the years the LIBOR +200 basis points in both the financial year financial year for the benchmarking for the interest income of the assessee. 61. In view of this ground number 3 of the appeal for assessment year 2007 – 08 and ground number 4 of appeal of the assessee for assessment year 2008 – 09 is partly allowed. 62. The third issue was with respect to the transfer pricing adjustment made by the learned Transfer Pricing Officer with respect to the International transaction of the corporate guarantee given by the assessee to its associated enterprise. For AY 2007-08, the appellant had issued corporate guarantee for a sum of USD 30 million to the lenders of its associated enterprise, PT Jindal Stainless, Indonesia. The appellant has received commission of Rs. 1,49,21,269 computed @ 1.5% on the amount of loan availed by the associated enterprise Page | 98

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi which is covered by the corporate guarantee. In the transfer-pricing document, the transaction of receipt of guarantee charges was benchmarked considering charges for issuing guarantee charged by State Bank of India from the appellant. Since, the rate of commission charged from the associated enterprise for issue of corporate guarantee at 1.5% was higher than the rate of guarantee charged by State Bank of India at 0.75%, the international transactions of commission received on issue of corporate guarantee was, therefore, considered as being at arm‘s length applying CUP method. The TPO , however, in the impugned order held the transaction of providing bank guarantee as an independent class of international transaction and accordingly benchmarked the same applying the rate charged by State Bank of India at the rate of 1.5% plus a mark-up 200 bps on account of security risk. The adjustment made by the TPO of Rs. 2,29,74,981, in relation to issue of corporate guarantee. For AY 2008-09, appellant has received commission of Rs. 97,01,640 computed @ 1.5% on the amount of loan availed by the associated enterprise which is covered by the corporate guarantee. The rate of commission charged from the associated enterprise for issue of corporate guarantee is comparable / higher than the rate of guarantee charges of 0.75% charged by State Bank of India in uncontrolled transactions. The international transactions of commission received on issue of corporate guarantee is, therefore, considered as being at arm‘s length applying CUP method. The TPO, however, disregarded the internal CUP provided by the appellant and instead imputed a rate of commission of 2.68% plus 200 bps on the basis of information sought from various banks under section 133(6). Accordingly, the TPO has made an adjustment of Rs. 4,78,62,360 in the arm‘s length price of commission on corporate guarantee.

Sub-section (2) of section 92 of the Act, further provides that, where in an international transaction, two or more associated enterprises enter into a mutual agreement or arrangement for allocation or apportionment or contribution to any cost or expenses Page | 99

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi incurred or to be incurred in connection with the benefit, service or facility provided or to be provided by one or more enterprises, the cost or expense allocated or apportioned or contributed by such enterprise shall be determined having regard to the arm‘s length price of such benefit, service or facility as the case may be.

The term ―International transaction‖ is defined in section 92B of the Act to mean a transaction between two or more 'associated enterprises', either of whom is a non- resident. Section 92B of the Act reads as under: ―92B. (1) For the purposes of this section and sections 92, 92C, 92D and 92E, "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 of such enterprises.

xxx xxx xxx Explanation.—For the removal of doubts, it is hereby clarified that— (i) the expression "international transaction" shall include— (a) …………. (b) ………….. xxx xxx xxx (c) capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business; (d) …………. (e) …………..‖

Definition of ‗international transaction‘ as provided in section 92B (1) of the Act has two limbs, viz., (a) any ‗transaction‘ having bearing of profits, income, losses or assets of the enterprise; and (b) a mutual agreement or arrangement between two or more associated enterprises for allocation or apportionment of any contribution, any cost or expense incurred in connection with benefit, service or facility provided to any of such associated enterprise. Page | 100

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi A corporate guarantee, even though, pursuant to a mutual agreement or arrangement between the two associated enterprises, there is no cost or expense incurred in connection with a benefit or facility on this account, which is to be allocated or apportioned in terms of the second limb of section 92B(1) of the Act.

Therefore, the issue for consideration is whether the corporate guarantee in the present case would constitute a ‗transaction‘, having bearing on profits, income, losses or assets of such enterprises, so as to be regarded as an ‗international transaction‘ in terms of the first limb of sub-section (1) of section 92B of the Act.

It is further respectfully submitted that for the purpose of determining whether any guarantee fee was liable to be charged or not in a case where the underlying guarantee is furnished by a parent entity, it needs to be seen whether the guarantee results in a benefit constituting a service to the AE or it is being provided only by the guarantor as a shareholder.

Reference in this regard is made to the OECD Transfer Pricing Guidelines, wherein, the shareholder activity is defined as under: ―Shareholder activity An activity which is performed by a member of an MNE group (usually the parent company or a regional holding company) solely because of its ownership interest in one or more other group members, i.e. in its capacity as shareholder.‖

Further, para 7.10 of the OECD Transfer Pricing Guidelines further provide the following examples of shareholder activity: ―7.10 The following examples (which were described in the 1984 Report) will constitute shareholder activities, under the standard set forth in paragraph 7.6: a) Costs of activities relating to the juridical structure of the parent company itself, such as meetings of shareholders of the parent, issuing of shares in the parent company and costs of the supervisory board; b) Costs relating to reporting requirements of the parent company including the consolidation of reports; c) Costs of raising funds for the acquisition of its participations.‖

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi It is respectfully submitted that shareholder activity is an activity, which is performed by an entity solely because of its ownership interest in other company i.e. in the capacity of shareholder.

In the present case, the appellant is engaged in manufacture and sales of stainless steel coils of various grades. The associated enterprise of the appellant acts as a distributor of products been manufactured by the appellant in India. It is further submitted that with the sales made to the associated enterprise, the appellant is able to maximize its utilization of installed capacity.

In view thereof, it would be appreciated that the corporate guarantee has been given pursuant to an obligation of the appellant as the shareholder. In the present case, the appellant itself was to benefit from supply of stainless steel coils as it will create a larger market for the appellant and the production of additional stainless steel will lower down the fixed cost of production.

The apex Court has in the landmark judgment of Morgan Stanley and Co. Inc. : 292 ITR 416 recognized the concept of stewardship or shareholder services by drawing a distinction between services that benefit the service recipient and those which benefit the service provider itself. In the said case, the Court held that services rendered by the assessee to its India subsidiary in the nature of quality control, monitoring to ensure client confidentiality and supervision aimed in protecting the group interest as a whole, could not be considered as ‗services‘ within the meaning of Article 5(2)(1) of the India- US Tax Treaty. The relevant extract in this regard is re-produced below: ―In such a case it cannot be said that MSCo has been rendering the services to MSAS. In our view MSCo is merely protecting its own interests in the competitive world by ensuring the quality and confidentiality of MSAS services. We do not agree with the ruling of the AAR that the stewardship activity would fall under Article 5(2)(1).‖ It is respectfully submitted that issuance of corporate guarantee being a shareholder activity does not amount to a service to the associated enterprise and therefore has no bearing on the income of the assessee.

It has also been the settled position that the commercial expediency is to be taken into consideration for determining the taxability or otherwise of a transaction.Reference in this regard is also made to the decision of Hon‘ble Delhi High Court in the case of CIT

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi vs. Cotton Naturals (I) Pvt. Ltd. in ITA No. 233/2014, Where the Delhi High Court held as under: ―17. In our opinion, the reasoning recorded therein suffers from a basic and fundamental fallacy. Transfer pricing determination is not primarily undertaken to re-write the character and nature of the transaction, though this is permissible under two exceptions. Chapter X and Transfer Pricing rules do not permit the Revenue authorities to step into the shoes of the assessee and decide whether or not a transaction should have been entered. It is for the assessed to take commercial decisions and decide how to conduct and carry on its business. Actual business transactions that are legitimate cannot be restructured.

xxx xxx xxx

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi 27. Several aspects enunciated above, reflect the correct legal position. We, however, express our inability to accept that commercial expediency and related benefits have no connection or relationship with the rate of interest. In terms of Clause (c) and (d) to Rule 10B (2), contractual relations or terms, and other material facts should be recognized. Having said so, we do accept the force of the alternative argument advanced that this fact could be of marginal significance and effect. It would be for the assessed to show and prove that a transaction separately benchmarked, included consideration for the lower interest rate being paid.

Reliance is placed in this regard on the decision of the Supreme Court in the case of S.A. Builders Ltd. vs. CIT : 288 ITR 1, wherein it is held that where it is obvious that the holding company has deep interest in its subsidiary and the subsidiary has used the funds borrowed for its business, the loan can ordinarily be considered as given to subsidiary as a measure of commercial expediency and accordingly the interest expense on the funds lent should be allowed as a deductible expense to the company. The relevant findings of the Supreme Court read as under:

―20. In Madhav Prasad Jatia v. CIT AIR 1979 SC 1291, this Court held that the expression "for the purpose of business" occurring under the provision is wider in scope than the expression "for the purpose of earning income, profits or gains", and this has been the consistent view of this Court. 21. In our opinion, the High Court in the impugned judgment, as well as the Tribunal and the Income-tax authorities have approached the matter from an erroneous angle. In the present case, the assessee borrowed the fund from the bank and lent some of it to its sister concern (a subsidiary) on interest free loan. The test, in our opinion, in such a case is really whether this was done as a measure of commercial expediency. 22. In our opinion, the decisions relating to section 37 of the Act will also be applicable to section 36(1)(iii) because in section 37 also the expression used is "for the purpose of business". It has been consistently held in decisions relating to section 37 that the expression "for the purpose of business" includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby. 23. Thus in Atherton v. British Insulated &Helsby Cables Ltd. [1925] 10 TC 155, it was held by the House of Lords that in order to claim a deduction, it is enough to show that the money is expended, not of necessity and with a view to direct and immediate benefit, but voluntarily and on grounds of commercial expediency and in order to indirectly to facilitate the carrying on the business. The above test in Atherton's case, (supra) has been approved by this Court in several decisions e.g.Eastern Investments Ltd. v. CIT [1951] 20 ITR 1, CIT v. ChandulalKeshavlal& Co. [1960] 38 ITR 601 etc. 24. In our opinion, the High Court as well as the Tribunal and other income-tax authorities should have approached the question of allowability of interest on the borrowed funds from the above angle. In other words, the High Court and other authorities should have enquired as to whether the interest free loan was given to the Page | 104

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi sister company (which is a subsidiary of the assessee) as a measure of commercial expediency, and if it was, it should have been allowed. 25. The expression "commercial expediency" is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure, if it was incurred on grounds of commercial expediency. 26. No doubt as held in Madhav Prasad Jatia's case (supra), if the borrowed amount was donated for some sentimental or personal reasons and not on the ground of commercial expediency, the interest thereon could not have been allowed under section 36(1)(iii) of the Act. In Madhav Prasad Jatia's case (supra), the borrowed amount was donated to a college with a view to commemorate the memory of the assessee's deceased husband after whom the college was to be named. It was held by this Court that the interest on the borrowed fund in such a case could not be allowed, as it could not be said that it was for commercial expediency. 27. Thus, the ratio of Madhav Prasad Jatia's case (supra) is that the borrowed fund advanced to a third party should be for commercial expediency if it is sought to be allowed under section 36(1)(iii) of the Act. 28. In the present case, neither the High Court nor the Tribunal nor other authorities have examined whether the amount advanced to the sister concern was by way of commercial expediency. 29. It has been repeatedly held by this Court that the expression "for the purpose of business" is wider in scope than the expression "for the purpose of earning profits" videCIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140 , CIT v. Birla Cotton Spg. &Wvg. Mills Ltd. [1971] 82 ITR 166 etc. 30. The High Court and the other authorities should have examined the purpose for which the assessee advanced the money to its sister concern, and what the sister concern did with this money, in order to decide whether it was for commercial expediency, but that has not been done.‖ Also, in the case of CIT vs United Breweries Ltd 204 Taxmann 244 (Karnataka) the Hon‘ble Karnataka High Court held that corporate guarantee fee paid by a company to its managing director for standing as a guarantor is not lawfully allowable under section 37 of the Act. The relevant extract is as under: ―17. In this background, if we look into the facts of this case, though the Chairman has stood as a guarantor in his personal capacity, the Banks have lent money not on the personal guarantee but on the assets of the Company which are offered as a security to the Bank. This personal guarantee is adopted as a means to pay remuneration to the Managing Director for which he was otherwise not entitled to. It is to overcome the directions issued by the RBI. It is to overcome the statutory provision contained in Section 309 of the Companies Act. This payment is characterized as a guarantee commission and the amount is paid. It is not a lawful payment in the facts of the case and therefore, the Assessing Authority was fully justified in disallowing the said Page | 105

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi expenditure under Section 37 of the Act. The said expenditure incurred is not for the purpose of earning profits of the business. Merely because the banks insisted on such guarantee and the Managing Director agreed to stand as a guarantor on payment of such commission, the commission is actually paid. That would not constitute a lawful expenditure so as to claim deduction under Section 37 of the Act.‖ The Chennai bench of the Tribunal in the case of Mascon Global Ltd. vs. ACIT (ITA No. 2205/Mds/2010) has appreciated the concept of shareholder services holding that no interest payment on advances extended to a subsidiary was required where the advances made were to undertake an acquisition and hence arose out of commercial expediency.

The Hon‘ble Ahmadabad Bench of the Tribunal in the case of Micro Ink Ltd vs Addl CIT (ITA No 2873/Ahd/10), too, while relying on the OCED guidelines held that activity which is solely undertaken because of the ownership interest in the subsidiary would not justify a charge from the subsidiary and that shareholder activity, in issuance of corporate guarantees, is to be taken out of the ambit of Intra group services. The Hon‘ble Tribunal further held that the occasion of benchmarking the transaction of issuance of corporate guarantee would arise only when the transaction falls within the definition of the term international transaction and that the transaction of corporate guarantee would fall in the definition of international transaction only when costs are incurred for the same or recoveries, as a matter of abundant caution, for this non chargeable activity. The relevant findings of the Hon‘ble Tribunal read as under: ―43 …………..In view of the above discussions, OECD Guidelines, as a matter of fact, strengthen the claim of the assessee that the corporate guarantees issued by the assessee were in the nature of quasi capital or shareholder activity and, for this reason alone, the issuance of these guarantees should be excluded from the scope of services and thus from the scope of ‗international transactions‘ under section 92B.Of course, once a transaction is held to be covered by the definition of international transaction, whether in the nature of the shareholder activity or quasi capital or not, ALP determination must depend on what an independent enterprise would have charged for such a transaction. In this light of these discussions, we hold that the issuance of corporate guarantees in question was not in the nature of ‗provision for services‘ and these corporate guarantees were required to be treated as shareholder participation in the subsidiaries.

XXX ―44…………..That is, in our considered view, purely fallacious logic. In our considered view, under Section 92 B, corporate guarantees can be covered only under the residuary head i.e. ―any other transaction having a bearing on the profits, income, losses or assets of such enterprise‖. It is for this reason that Section 92 B, in a way, expands the scope of international transaction in the sense that even when guarantees are issued as a shareholder activity but costs are incurred for the same or, as a measure of abundant

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi caution, recoveries are made for this non chargeable activity, these guarantees will fall in the residuary clause of definition of international transactions under section 92B.‖

Further, the Ahmedabad Bench of Tribunal in the case of Micro Inks Limited vs. ACIT (ITA No. 2873/Ahd/2010) for subsequent year, i.e. assessment year 2006-07, extensively dealt with the issue of shareholder‘s activity with respect to transaction of issue of corporate guarantee and held as under: ―33. On a conceptual note, thus, there is a valid school of thought that the corporate guarantees can indeed be a mode of ownership contribution, particularly when, as is often the case, ―where such a guarantee is given it compensates for the inadequacies in the financial position of the borrower; specifically, the fact that the subsidiary does not have enough shareholders‘ funds‖. There can be number of reasons, including regulatory issues and market conditions in the related jurisdictions, in which such a contribution, by way of a guarantee, would justify to be a more appropriate and preferred mode of contribution vis-a-vis equity contribution. It is significant, in this context that the case of the assessee has all along been, as noted in the assessment order itself that ―said guarantees were in the form of corporate guarantees / quasi capital and not in the nature of any services‖. In other words, these guarantees were specifically stated to be in the nature of shareholder activities. The assessee‘s claim of the guarantees being in the nature of quasi capital, and thus being in the nature of a shareholder‘s activity, is not rejected either. The concept of issuance of corporate guarantees as a shareholder activity is not alien to the transfer pricing literature in general. On the contrary, it is recognized in international transfer pricing literature as also in the official documentation and legislation of several transfer pricing jurisdictions. The ‗OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations‘ itself recognizes the distinction between a shareholder activity and a provision for services, when, contrasting the shareholder activity with broader term ―stewardship activity‖ and thus highlighting narrow scope of shareholder activity, it states that ―Stewardship activities covered a range of activities by a shareholder that may include provision for services to other group members, for example services that would be provided by a coordinating centre‖. It proceeded to add, in the immediately following sentence at page 207 of 2010 Guidelines, that ―These latter type of non- shareholder activities could include detailed planning services for particular operations, management or technical advice (trouble shooting) or in some cases assistance in day to day management‖. The shareholder activities are thus seen as conceptually distinct from the provision of services. The issuance of corporate guarantee, as long as it is in the nature of shareholder activity, cannot, therefore, amount to a ―provision for services‖. XXXX 43. It is thus clear that even if we accept the contention of the learned Departmental Representative that issuance of a corporate guarantee amounts to a ‗provision for service‘, such a service needs to be re-characterized to bring it in tune with commercial reality as ―arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner‖. No bank would be willing to issue a clean guarantee, i.e. without underlying asset, to assessee‘s subsidiaries when the banks are not willing to extend those subsidiaries loans on the same terms as without a guarantee. Such a guarantee transaction can only be, and is, motivated by the shareholder, or ownership considerations. No doubt, under the OECD Guidance on the issue, an explicit Page | 107

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi support, such as corporate guarantee, is to be benchmarked and, for that purpose, it is in the service category but that occasion comes only when it is covered by the scope of ‗international transaction‘ under the transfer pricing legislation of respective jurisdiction. The expression ‗provision for services‘ in its normal or legal connotations, as we have seen earlier, does not cover issuance of corporate guarantees, even though once a corporate guarantee is covered by the definition of international transaction‘, it is benchmarked in the service segment. In view of the above discussions, OECD Guidelines, as a matter of fact, strengthen the claim of the assessee that the corporate guarantees issued by the assessee were in the nature of quasi capital or shareholder activity and, for this reason alone, the issuance of these guarantees should be excluded from the scope of services and thus from the scope of ‗international transactions‘ under section 92B. Of course, once a transaction is held to be covered by the definition of international transaction, whether in the nature of the shareholder activity or quasi capital or not, ALP determination must depend on what an independent enterprise would have charged for such a transaction. In this light of these discussions, we hold that the issuance of corporate guarantees in question was not in the nature of ‗provision for services‘ and these corporate guarantees were required to be treated as shareholder participation in the subsidiaries.‖

The Kolkata Bench of Tribunal in the case of Tega Industries Limited vs. DCIT in ITA No. 1912/Kol/2012, held that corporate guarantee furnished by assessee to bank for extending loan to subsidiary company in the Bahamas (SPV), for the purpose of acquiring 2 South African entities is a shareholder function not warranting any commission on issue of such corporate guarantee.

Reliance in this regard is also placed on the decision of Delhi Bench of the Tribunal in the case of Bharti Airtel Limited vs. ACIT (ITA No. 5816/Del/2012), wherein, the Hon‘ble Tribunal held that the guarantees having no impact on income, profits, losses or assets of the assessee cannot be construed as an international transaction. The relevant portion of judgment has been reproduced below for your consideration:-

―22. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case in the light of the applicable legal position.

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi xxxxxxxxxxxxxxxxxx 25. An analysis of this definition of ‗international transaction‘ under Section 92 B, as it stood at the relevant point of time, and its break up in plain words, shows the following: 1. An international transaction can be between two or more AEs, at least one of which should be a non-resident. 2. An international transaction can be a transaction of the following types: a. in the nature of purchase, sale or lease of tangible or intangible property, b. in the nature of provision of services, c. in the nature of lending or borrowing money, or d. in the nature of any other transaction having a bearing on the profits, income, losses or assets of such enterprises 3. An international transaction 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 of such enterprises. 4. Section 92B (2), covering a deeming fiction, provides that even a transaction with non AE in a situation in which such a transaction is defacto controlled by prior agreement with AE or by the terms agreed with the AE. 26. Let us now deal with the Explanation, inserted with retrospective effect from 1st April 2002 i.e. right from the time of the inception of transfer pricing legislation in India, which was brought on the statute vide Finance Act, 2012. 27. This Explanation states that it is merely clarificatory in nature in as much as it is ‗for the removal of doubts‘, and, therefore, one has to proceed on the basis that it does not alter the basic character of definition of ‗international transaction‘ under Section 92 B. Clearly, therefore, this Explanation is to be read in conjunction with the main provisions, and in harmony with the scheme of the provisions, under Section 92 B. Under this Explanation, five categories of transactions have been clarified to have been included in the definition of‗ international transactions‘. 28. The first two categories of transactions, which are stated to be included in the scope of expression ‗international transactions‘ by the virtue of clause (a) and (b) of Explanation to Section 92 B, are transactions with regard to purchase, sale, transfer, lease or use of tangible and intangible properties. These transactions were anyway covered by 2 (a) above which covered transactions ‗in the nature of purchase, sale or lease of tangible or intangible property‘. The only additional expression in the clarification is ‗use‘ as also illustrative and inclusive descriptions of tangible and intangible assets. Similarly, clause (d) deals with the ― provision of services, including provision of market research, market development, marketing management, administration, technical service, repairs, design, consultation, agency, scientific research, legal or accounting service‖ which are anyway covered by 2(b) and 3 above in ―provision for services‖ and ―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 Page | 109

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi to anyone or more of such enterprises‖. That leaves us with two clauses in the Explanation to Section 92 B which are not covered by any of the three categories discussed above or by other specific segments covered by Section 92 B, namely borrowing or lending money. 29. The remaining two items in the Explanation to Section 92 B are set out in clause (c) and (e) thereto, dealing with (a) capital financing and (b) business restructuring or reorganization. These items can only be covered in the residual clause of definition in international transactions, as in Section 92 B(1), which covers ―any other transaction having a bearing on profits, incomes, losses, or assets of such enterprises‖. 30. It is, therefore, essential that in order to be covered by clause (c) and (e) of Explanation to Section 92 B, the transactions should be such as to have bearing on profits, incomes, losses or assets of such enterprise. In other words, in a situation in which a transaction has no bearing on profits, incomes, losses or assets of such enterprise, the transaction will be outside the ambit of expression ‗international transaction‘. This aspect of the matter is further highlighted in clause (e) of the Explanation dealing with restructuring and reorganization, wherein it is acknowledged that such an impact could be immediate or in future as evident from the words ―irrespective of the fact that it ( i.e. restructuring or reorganization) has bearing on the profit, income, losses or assets of such enterprise at the time of transaction or on a future date‖. What is implicit in this statutory provision is that while impact on ―profit, income, losses or assets‖ is sine qua non, the mere fact that impact is not immediate, but on a future date, would not take the transaction outside the ambit of ‗international transaction‘. It is also important to bear in mind that, as it appears on a plain reading of the provision, this exclusion clause is not for ―contingent‖ impact on profit, income, losses or assets but on ―future‖ impact on profit, income, losses or assets of the enterprise. The important distinction between these two categories is that while latter is a certainty, and only its crystallization may take place on a future date, there is no such certainty in the former case… 31. In this light now, let us revert to the provisions of clause (c) of Explanation to Section 92 B which provides that the expression ‗international transaction‘ shall include ―capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business‖. In view of the discussions above, the scope of these transactions, as could be covered under Explanation to Section 92 B read with Section 92B(1), is restricted to such capital financing transactions, including inter alia any guarantee, deferred payment or receivable or any other debt during the course of business, as will have ―a bearing on the profits, income , losses or assets or such enterprise‖. This pre-condition about impact on profits, income, losses orassets of such enterprises is a pre-condition embedded in Section 92B(1) and the only relaxation from this condition precedent is set out in clause (e) of the Explanation which provides that the bearing on profits, income, losses or assets could be immediate or on a future date. The contents of the Explanation fortifies, rather than mitigates, the significance of expression ‗ having a bearing on profits, income, losses or assets‘ appearing in Section 92 B(1).

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi 32. There can be number of situations in which an item may fall within the description set out in clause (c) of Explanation to Section 92 B, 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 Section92B(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 are, as discussed above, excluded. One may have also have a situation in which there is a receivable or any other debt during the course of business and yet these receivables may not have any bearing on its profits, income, losses or assets, for example, when these receivables are out of cost free funds and these debit balances donot cost anything to the person allowing such use of funds. The situations can be endless, but the common thread is that when an assessee extends an assistance to the associated enterprise, which does not cost anything to the assessee and particularly for which the assessee could not have realized money by giving it to someone else during the course of its normal business, such an assistance or accommodation does not have any bearing on its profits, income, losses or assets, and, therefore, it is outside the ambit of international transaction under section 92B (1) of the Act. 33. 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 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. 34. There is one more aspect of the matter. The Explanation to Section 92 B has been brought on the statute by the Finance Act 2012. If one is to proceed on the basis that the provisions of Explanation to Section 92 B enlarge the scope of Section 92B itself, even as it is modestly described as ‗clarificatory‘ in nature, it is an issue to be examined whether an enhancement of scope of this ant avoidance provision can be implemented with retrospective effect. Undoubtedly, the scope of a charging provision can be enlarged with retrospective effect, but an anti-avoidance measure, that the transfer pricing legislation inherently is, not primarily a source of revenue as it mainly seeks compliant behavior from the assessee vis-à-vis certain norms, and these norms cannot be given effect from a date earlier than the date norms are being introduced. However, as we have decided the issue in favour of the assessee on merits and even after taking into account the amendments brought about by Finance Act 2012, we need not deal with this aspect of the matter in greater detail. 36. 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 Page | 111

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi Assessing Officer to delete the impugned ALP adjustment of Rs 33,10,161. The assessee gets the relief accordingly‖

The Ahmedabad Bench of Tribunal in the case of Micro Inks (supra), reiterated their decision in the case of Bharti Airtel and after extensively dealing with the laws and precedents of other countries, vi-a-vis Indian Laws, and held as under: ―44. As for the words ‗provision for services‖ appearing in Section 92 B, and connotations thereof, our humble understanding is that this expression, in its natural connotations, is restricted to services rendered and it does not extend to the benefits of activities per se. Whether we look at the examples given in the OECD material or even in Explanation to Section 92 B, the thrust is on the services like market research, market development, marketing management, administration, technical service, repairs, design, consultation, agency, and scientific research, legal or accounting service or coordination services. As a matter of fact, even in the Explanation to Section 92 B- which we will deal with a little later, guarantees have been grouped in item ‗c‘ dealing with capital financing, rather than in item ‗d‘ which specifically deals with ‗provision for services‘. When the legislature itself does not group ‗guarantees‘ in the ‗provision for services‘ and includes it in the ‗capital financing‘, it is reasonable to proceed on the basis that issuance of guarantees is not to be treated as within the scope of normal connotations of expression ‗provision for services‘. Of course, the global best practices seem to be that guarantees are sometimes included in ‗services‘ but that is because of the extended definition of ‗international transaction‘ in most of the tax jurisdictions. Such a wide definition of services, which can be subject to arm‘s length price adjustment, apart, ―Transfer Pricing and Intra Group Financing – by Bakker &Levvy‖ (ibid) notes that ―the IRS has issued a non binding Field Service Advice (FSA 1995 WL 1918236, 1 May 1995) stating that, in certain circumstances (emphasis, by underling, supplied by us), a guarantee may be treated as a service‖. If the natural connotations of a ‗service‘ were to cover issuance of guarantee in general, there could not have been an occasion to give such hedged advice. This will be stretching the things too far to suggest that just because when guarantees are included in the international transactions, these guarantees are included in service segment in contradistinction with other heads under which international transactions are grouped, the guarantees should be treated as services, and, for that reason, included in the definition of international transactions. That is, in our considered view, purely fallacious logic. In our considered view, under Section 92 B, corporate guarantees can be covered only under the residuary head i.e. ―any other transaction having a bearing on the profits, income, losses or assets of such enterprise‖. It is for this reason that Section 92 B, in a way, expands the scope of international transaction in the sense that even when guarantees are issued as a shareholder activity but costs are incurred for the same or, as a measure of abundant caution, recoveries are made for this non chargeable activity, these guarantees will fall in the residuary clause of definition of international transactions under section 92B. As for the learned Departmental Representative‘s argument that ―whether the service has caused any extra cost to the assessee should not be the deciding factor to determine whether it is an international and then gives an example of brand royalty to make his point. What, in the process, he overlooks is that is that Section 92B(1) specifically covers sale or lease of tangible or intangible property‖. The expression ―bearing on the profits, income, losses or assets of such enterprises‖ is relevant only for residuary clause i.e. any other services not specifically covered by Section 92 B. It was also contended that, while rendering Bharti Airtel decision, the Delhi Tribunal did go overboard in deciding something Page | 112

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi which was not even raised before us. In the written submission, it was stated that ―Hon‘ble Delhi ITAT was not requested by the contesting parties to decide the issue as to whether the provision of guarantee was a service or not‖. That‘s not factually correct. We are unable to see any merits in learned Departmental Representative‘s contention, particularly as decision categorically noted that not only before the Tribunal, but this issue was also raised before the DRP- as evident from the text of DRP decision. We now take up the issue with respect to specific mention of the words in Explanation to Section 92B which states that ―For the removal of doubts, it is hereby clarified that (i) the expression "international transaction" shall include…….. (c) capital financing, including any type of long -term or short -term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business.‖ There is no dispute that this Explanation states that it is merely clarificatory in nature inasmuch as it is ‗for the removal of doubts‘, and, therefore, one has to proceed on the basis that it does not alter the basic character of definition of ‗international transaction‘ under Section 92 B. Accordingly, this Explanation is to be read in conjunction with the main provisions, and in harmony with the scheme of the provisions, under Section 92 B. Under this Explanation, five categories of transactions have been clarified to have been included in the definition of ‗international transactions‘. The first two categories of transactions, which are stated to be included in the scope of expression ‗international transactions‘ by the virtue of clause (a) and (b) of Explanation to Section 92 B, are transactions with regard to purchase, sale, transfer, lease or use of tangible and intangible properties. These transactions were anyway covered by transactions ‗in the nature of purchase, sale or lease of tangible or intangible property‘. The only additional expression in the clarification is ‗use‘ as also illustrative and inclusive descriptions of tangible and intangible assets. Similarly, clause (d) deals with the ― provision of services, including provision of market research, market development, marketing management, administration, technical service, repairs, design, consultation, agency, scientific research, legal or accounting service‖ which are anyway covered in ―provision for services‖ and ―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 of such enterprises ‖. That leaves us with two clauses in the Explanation to Sect ion 92 B which are not covered by any of the three categories discussed above or by other specific segments covered by Section 92 B, namely borrowing or lending money. The remaining two items in the Explanation to Section 92 B are set out in clause (c) and (e) thereto, dealing with (a) capital financing and (b) business restructuring or reorganization. These items can only be covered in the residual clause of definition in international transactions, as in Section 92B (1), which covers ―any other transaction having a bearing on profits, incomes, losses, or assets of such enterprises‖. It is, therefore, essential that in order to be covered by clause (c) and (e) of Explanation to Section 92 B, the transactions should be such as to have beating on profits, incomes, losses or assets of such enterprise. In other words, in a situation in which a transaction has no bearing on profits, incomes, losses or assets of such enterprise, the transaction will be outside the ambit of expression ‗international transaction‘. This aspect of the matter is further highlighted in clause (e) of the Explanation dealing with restructuring and reorganization, wherein it is acknowledged that such an impact could be immediate or in future as evident from the words ―irrespective of the fact that it (i.e. restructuring or reorganization) has bearing on the profit, income, losses or assets of such enterprise at the time of transaction or on a future date‖. What is implicit in this statutory provision is that while impact on ― profit, Page | 113

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi income, losses or assets‖ is sine qua non , the mere fact that impact is not immediate, but on a future date, would not take the transaction outside the ambit of ‗international transaction‘. It is also important to bear in mind that, as it appears on a plain reading of the provision, this exclusion clause is not for ―contingent‖ impact on profit, income, losses or assets but on ―future‖ impact on profit, income, losses or assets of the enterprise. The important distinction between these two categories is that while latter is a certainty, and only its crystallization may take place on a future date, there is no such certainty in the former case. In the case before us, it is an undisputed position that corporate guarantees issued by the assessee to the various banks and crystallization of liability under these guarantees, though a possibility, is not a certainty. In view of the discussions above, the scope of the capital financing transactions, as could be covered under Explanation to Section 92 B read with Section 92B(1), is restricted to such capital financing transactions, including inter alia any guarantee, deferred payment or receivable or any other debt during the course of business, as will have ―a bearing on the profits, income, losses or assets or such enterprise‖. This pre-condition about impact on profits, income, losses or assets of such enterprises is a pre-condition embedded in Section 92B(1) and the only relaxation from this condition precedent is set out in clause (e) of the Explanation which provides that the bearing on profits, income, losses or assets could be immediate or on a future date. These guarantees 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 are, as discussed above, excluded. When an assessee extends an assistance to the associated enterprise, which does not cost anything to the assessee and particularly for which the assessee could not have realized money by giving it to someone else during the course of its normal business, such an assistance or accommodation does not have any bearing on its profits, income, losses or assets, and, therefore, it is outside the ambit of international transaction under section 92B (1) of the Act.

The decision of the Tribunal in the case of Bharti (supra) was followed by the Chennai Bench of Tribunal in the case of Redington (India) Limited vs. JCIT (ITA No.513/Mds/2014). The aforesaid decision in the case of Micro Inks (supra) was followed by the Hon‘ble Ahmedabad bench of Tribunal in the case of Suzlon Energy Limited vs. ACIT (ITA No. 1369/Ahm/2013).

In the following cases too, relying on the decision of Bharti Airtel (supra), Hon‘ble Tribunal held that since no material has been brought by the revenue to show that the corporate guarantee issued by the assessee has bearing on profits, income, losses or assets, no transfer pricing adjustment could be made with respect to corporate guarantee: - Videocon Industries Limited vs. ACIT (ITA No. 6145/mum/2012) - Advanta India Limited vs. ACIT (ITA No. 1643/Ban/12)

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi Reliance is also placed on the recent decision of the Hon‘ble Rajkot bench of the Tribunal in the case of Jyoti CNC Automation Pvt. Ltd., wherein, while dealing with the entire legal position in this regard, the Hon‘ble Tribunal held the corporate guarantee to be in the nature of shareholders‘ activity and, therefore, not give rise to any international transaction. The findings of the Hon‘ble Tribunal in this regard are as under: 36. We have noticed that the 'OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations' specifically recognizes that an activity in the nature of shareholder activity, which is solely because of ownership interest in one or more of the group members, i.e. in the capacity as shareholder "would not justify a charge to the recipient companies". It is thus clear that a shareholder activity, in issuance of corporate guarantees, is taken out of ambit of the group services. Clearly, therefore, as long as a guarantee is on account of, what can be termed as 'shareholder's activities', even on the first principles, it is outside the ambit of transfer pricing adjustment in respect of arm's length price. It is essential to appreciate, at this stage, the distinction in a service and a benefit. One may be benefited even when no services are rendered, and, therefore, in many a situation it's a 'benefit test' which is crucial for transfer pricing legislation, such as in US Regulations 1.482-9(1)(3)(i) which defines 'benefit', form a US Transfer Pricing perspective, as "an activity is considered to be provided a benefit to the recipient if the activity directly results in a reasonably identifiable increment of economic or commercial value that enhances the recipient's commercial position, or that may be reasonably anticipated to do so". The expression "activity", in turn is defined, as "including the performance of functions; the assumption of risks; the use by a rendered of tangible or intangible property or other resources capabilities or knowledge (including knowledge of and ability to take advantage of a particularly advantageous situation or circumstances); and making available to the recipient any property or other resources of the rendered" [Regulation 1.482-9(1)(2)]. The issuance of guarantees is not within the ambit of transfer pricing in United States because it is a service but because it is covered by the specific definition discussed above. As a matter of fact, David S Miller, in a paper titled 'Federal Income Tax Consequences of Guarantees; A Comprehensive Framework for Analysis' published in the 'The American Lawyer Vol. 48, No. 1 (Fall 1994), pp. 103-165 (http://www.jstor.org/stable/20771688), has stated that a guarantee is not a service. The following observations, at pages 114, are important:

The position that guarantees are services has been discredited by the courts with good reason38. Guarantee fees do not represent payments for services any more than payments with respect to other financial instruments constitute payment for services39. A guarantor does not arrange financing for the debtor, but merely executes a financial instrument in its favour. 38 See. e.g., Centel Communications Co. v. Commissioner, 92 T.C. 612, 632 (1989), aff d, 920 F2d 1335 (7th Cir. 1990); Bank of Am. v. United States, 680 F.2d 142, 150 (Cl. Ct. 1982). The Service's current position on the characterization of guarantee fees as payment for services under section 482 is inconsistent with its treatment of guarantee fees under other provisions. See P.L.R. 9410008 (Dec. 13, 1993). 39 But cf Federal Nat'l Mortgage Ass'n v. Commissioner, 100 T.C. 541, 579 (1993) (Fannie Mae provided services by buying mortgages).

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi fact that the OECD considers such activities in the services segment does not alter the character of the activities. While the group entity is thus indeed benefited by the shareholder activities, these activities do not necessarily constitute services. ….. XXX 39. The issuance of financial guarantee in favour of an entity, which does not have adequate strength of its own to meet such obligations, will rarely be done. The very comparison, between the consideration for which banks issue financial guarantees on behalf of its clients with the consideration for which the corporates issue guarantees for their subsidiaries, is ill-conceived because while banks seek to be compensated, even for the secured guarantees, for the financial risk of liquidating the underlying securities andmeeting the financial commitments under the guarantee, the guarantees issued by the corporates for their subsidiaries are rarely, if at all, backed by any underlying security and the risk is entirely entrepreneurial in the sense that it seeks to maximize profitability through and by the subsidiaries. It is inherently impossible to decide arm's length price of a transaction which cannot take place in arm's length situation. The motivation or trigger for issuance of such guarantees is not the kind for consideration for which a banker, for example, issue the guarantees, but it is maximization of gains for the recipient entity and thus the MNE group as a whole. In general, thus, theconsideration for issuance of corporate guarantees are of a different character altogether. XXX 41. As evident from the OECD observation to the effect "In contrast, if for example a parent company raises funds on behalf of another group member which uses them to acquire a new company, the parent company would generally be regarded as providing a service to the group member", it is also to be clear that when the corporate guarantees are issued for the purpose ofsubsidiaries raising funds for acquisitions by such subsidiaries, these guarantees will be deemed to be services to the subsidiaries, and, as a corollary thereto, when corporate guarantees are issued for the subsidiaries to raise funds for their own needs, the corporate guarantees are to be treated as shareholder activity. The use of borrowed funds for own use is a reasonable presumption as it is a matter of course rather than exception. There has to be something on record to indicate or suggest that the funds raised by the subsidiary, with the help of the guarantee given by the assessee, are not for its own business purposes. As a plain look at the details of corporate guarantees would show, these guarantees were issued to various banks in respect of the credit facilities availed by the subsidiaries from these banks. The guarantees were prima facie in the nature of shareholder activity as it was to provide, or compensate for lack of, core strength for raising the finances from banks. No material, indicating to the contrary, is brought on record in this case. Going by the OECD Guidance also, it is not really possible to hold that the corporate guarantees issued by the assessee were in the nature of 'provision for service' and not a shareholder activity which are mutually exclusive in nature. In the light of these discussions, we are of the considered view, and are fully supported by the OECD Guidance in this, that the issuance of corporate guarantees, in the nature of quasi-capital or shareholder activity- as is the uncontroverted position on the facts of this case, does not amount to a service in which respect of which arm's length adjustment can be done. XXX 48. In the present case, we have held that the issuance of corporate guarantees were in the nature of shareholder activities as was the uncontroverted claim of the assessee, and, as such, could not be included in the 'provision for services' under the definition of 'international transaction' under section 92B of the Act. We have also held, taking note Page | 116

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi of the insertion of Explanation to Section 92B of the Act, that the issuance of corporate guarantees is covered by the residuary clause of the definition under section 92B of the Act but since such issuance of corporate guarantees, on the facts of the present case, did not have "bearing on profits, income, losses or assets", it did not constitute an international transaction, under section 92B, in respect of which an arm's length price adjustment can be made. In this view of the matter, and for both these independent reasons, we have to delete the impugned ALP adjustment….. . 49. The second issue is this. We must deal with the question whether in this case the matter should have been referred to a larger bench. The parties before us were opposed to the matter being sent for consideration by the special bench, and at least oneof the reasons for which the grievance of the assessee is upheld, i.e. guarantees being in the nature of shareholder activity and excludible from the scope of services for that reason alone, is anarea which had come up for consideration for the first time. In effect, therefore, there was no conflict on this issue of and the other issues, given decision on the said issue, were wholly academic. It cannot be open to refer the academic questions to the special bench.

Recently, Mumbai Bench of Hon‘ble Tribunal in the case of The Bombay Dyeing & Mfg. Co. Limited vs. DCIT in ITA No. 1716/Mum/2017 dated 27.10.2017, reiterating the principle of Shareholder‘s fu`nction and relying on the decision of Hon‘ble Supreme Court's in case of S.A. Builders Ltd. v. CIT (2007) 288 ITR 1 (SC). The Hon‘ble Tribunal while deleting the transfer pricing adjustment made by the TPO on account of issue of corporate guarantee, upheld the contention of the assessee that reiterates the proposition of the assessee that when the guarantee has been given by 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. The relevant findings of the Tribunal read as under: ―18. Further, we are in agreement with the argument of the assessee that even if providing corporate guarantee falls within the definition of "international transaction", in our view, providing such corporate guarantee by a parent company to its wholly owned subsidiary without charging any commission/fees would still be regarded as being at arm's length price, if such corporate guarantee was provided by the parent company for the overall benefit of the business of the group and therefore, ultimately benefiting the parent company itself. Having regard to the direct or indirect commercial interest of the Page | 117

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi Company, corporate guarantee is given with a view to safeguard and to further business interest.Hence, relying on the Hon'ble Supreme Court's decision in case of S.A. Builders Ltd. v. CIT (2007) 288 ITR 1 (SC), wherein it has been held that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure and having regard to the circumstances of the case.

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi It is further submitted that the Revenue is known to have consistently taken a position that no compensation is required to be paid to the parent /AE for intra group services which are in the nature of shareholder activity.

The present case, however, it is submitted, stands on a better footings, where the corporate guarantee, it would be appreciated, has been given pursuant to an obligation of the appellant as the shareholder to facilitate funding of the associated enterprises, in order to gain benefit from the sale of stainless steel coils without incurring any cost of borrowing to fund the associated enterprises.

However, since the appellant has already charged commission on the guarantee issued on behalf of the aforesaid enterprise, no additional compensation is warranted and the transfer pricing adjustment made by the TPO ought to be deleted.

Re: Benchmarking undertaken by the assessee shall be considered: It is respectfully submitted, in this regard that during the relevant financial year the appellant has charged a commission of 1.5% from its associated enterprise, PT Jindal Indonesia on the amount of guarantee. Further, since the rate of commission charged from the associated enterprise for issue of corporate guarantee is higher than the rate of guarantee charges of 0.75% charged by State Bank of India in uncontrolled transactions, the international transactions of commission received on issue of corporate guarantee is, therefore, considered as being at arm‘s length applying CUP method.

The TPO, in the impugned order has disregarded the internal CUP relied upon by the appellant for benchmarking the aforesaid transaction of commission on corporate guarantee and considered data sought under section 133(6).

Reliance in this regard is placed on the decision of Mumbai Bench of Tribunal in the case of Everest Kanto Cylinder ltd. vs. DCIT (ITA No. 542/Mum/2012), wherein the Hon‘ble Tribunal while rejecting the blanket rate of commission on corporate guarantee at 3% applied by the TPO, upheld the internal rate of commission paid by the assessee to its banks at the rate of 0.6%.

Further, Hon‘ble Bombay High Court in ITA No. 1165 of 2013, dismissing the appeal filed by the revenue against the order of the Tribunal, held that: Page | 119

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi ―In the matter of guarantee commission, the adjustment made by the TPO were based on instances restricted to the commercial banks providing guarantees and did not contemplate the issue of a Corporate Guarantee. No doubt these are contracts of guarantee, however, when they are Commercial banks that issue bank guarantees which are treated as the blood of commerce being easily encashable in the event of default, and if the bank guarantee had to be obtained from Commercial Banks, the higher commission could have been justified. In the present case, it is assessee company that is issuing Corporate Guarantee to the effect that if the subsidiary AE does not repay loan availed of it from ICICI, then in such event, the assessee would make good the amount and repay the loan. The considerations which applied for issuance of a Corporate guarantee are distinct and separate from that of bank guarantee and accordingly we are of the view that commission charged cannot be called in question, in the manner TPO has done. In our view the comparison is not as between like transactions but the comparisons are between guarantees issued by the commercial banks as against a Corporate Guarantee issued by holding company for the benefit of its AE, a subsidiary company. In view of the above discussion we are of the view that the appeal does not raise any substantial question of law and it is dismissed.‖ Similar conclusion has been arrived at in the case of: - Asian Paints Limited v. CIT(ITA408/Mum/2010) - Reliance Industries Limited vs. ACIT(ITA No. 4475/Mum/2007) - Asst. CIT v. M/s. Nimbus Communication Ltd. - Glenmark Pharmaceuticals Ltd. vs. ACIT (ITA No. 5031 & 5488/Mum/2012

It is further submitted that the bank charges guarantee fees on case to case basis. Generally, banks gives discount on the rate of guarantee fees depending upon the credit rating of the customer, the past experience, the future outlook of the customers and various other factors. It is respectfully submitted that, in case of credit rating and reputation, the subsidiary company holds the same as of the holding company.

Reliance in this is placed on the recent decision of Chennai Bench of Tribunal in the case of VVF LTD Vs DCIT [ITA No. 673/Mum/06], where in the Hon‘ble Tribunal, while holding that the rate of interest on loan taken by the appellant from an Indian Bank serves as an internal comparable to the rate of interest of loan extended by the appellant to the associated enterprise for the application of CUP method, has held that the financial position and credit rating of the subsidiaries will be broadly the same as the holding company. In view of the above, it is reiterated that, since the State Bank of India has charged only 0.75% p.a. rate of bank guarantee fees from the appellant, it would have charged the same from the subsidiary of appellant also. Hence, it is respectfully submitted that, since

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi the appellant has charged higher than the rate of commission charged by the State Bank of India, no adjustment can be made on this account. Re: Ad-hoc adjustment of risk upon rate of commission on corporate guarantee: The TPO in the impugned order has allegedly added an ad-hoc markup of 200 bps on the rate of commission of 1.5% charged by various banks as per information sought under section 133(6).

In this regard, at the outset it is respectfully submitted that the TPO has already considered the highest rate of commission charged by State Bank of India on corporate guarantee. It is common understanding that the rate of commission increases depending on the increase in level of risk involved in the providing such guarantee. Accordingly, if the highest rate of commission has been considered, the risk has already been factored in such rates. Further, no cogent basis and reason is provided in the impugned order for charging a markup of 200 bps on account of security and single customer risk. Since the TPO has considered the highest rate of commission charged by the banks without taking into account the credit worthiness and market reputation of the appellant, a markup on account of risk adjustment is unwarranted and liable to be reduced from the arm‘s length rate of interest so determined. 64. The ld DR vehemently relied upon the order of the learned Transfer Pricing Officer, the learned Dispute Resolution Panel , and the learned commissioner of income tax appeals. He submitted that the claim of the assessee that giving a corporate guarantee to its associated enterprise is not an international transaction is devoid of any merit as the assessee itself is considered it is an international transaction and charged price from its associated enterprise. He therefore submitted that all the decisions relied upon by the assessee in that aspect that corporate guarantees are not international transactions is devoid of any merit. He further referred to those decisions relied upon by the assessee and stated that in those decision there was no charge claimed by the assessee from its associated enterprise and therefore it was held that these corporate guarantees are not an international transaction or are shareholder activities. He submitted that in the present case when the assessee itself is classified throughout that it is an international transaction now there is merely an argument without substantiating further, that how it is not an international transaction is devoid of any merit. He further stated that the commission has been imputed by the learned TPO at the rate of 2.68% +200 basis points after obtaining the data under section 133 (6) from various banks. No prejudice is caused to the assessee by obtaining this information as it has also been Page | 121

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi confronted to the assessee in proper opportunity has been given. Even before the tribunal the assessee did not show that how assessee is aggrieved with that. He further stated that assessee has challenged that the commission charged by the State Bank of India to the assessee is at 0.75% while the learned TPO has applied the rate of 4.68%, the assessee is failing to appreciate the fact that before computing the rate of corporate guarantee the 1st thing to consider is the credit rating of the company to whom corporate guarantee has been extended. Clearly, the assessee was able to receive corporate guarantee at such low rate because of its good credit rating, while the associated enterprise does not enjoy the benefit of such good credit rating, thus, the stand taken by the learned Transfer Pricing Officer is as per the methods of transfer pricing. He therefore submitted that the learned TPO called for the information from different banks under section 133 (6) of the Income Tax Act, 1961 and applied a suitable markup of 200 basis points considering the risk profile of the associated enterprise. He therefore submitted that no fault is found in the approach of the learned Transfer Pricing Officer. He therefore submitted that the addition made by the learned TPO, confirmed by the learned CIT appeal and approved by the learned Dispute Resolution Panel is deserves to be upheld. 65. We have carefully considered the rival contention. Briefly stated the facts of the case is that assessee has issued a corporate guarantee for a sum of US dollars 30 million to the lenders of its associated enterprise PT Jindal stainless, Indonesia. For assessment year 2007 – 08 the assessee received the commission of ₹ 1 4921269 computer that the rate of 1.5% on the amount of loan availed by the associated enterprise and further for assessment year 2008 – 09 at the same rate the assessee received the sum of ₹ 9 701640/–. The learned Transfer Pricing Officer computed the ALP @ of 3.5% for assessment year 2007 – 08 making an adjustment of 200 basis points on account of adjustment for risk and 4.68% for assessment year 08-09 considering the margin of 25%, proposing a markup of 200 basis point and made the respective adjustment. For AY 2007 – 08 the learned commissioner of income tax appeals and for assessment year 2008 – 09 the learned Dispute Resolution Panel upheld the adjustment made by the learned Transfer Pricing Officer. 66. The first contention of the assessee is that corporate guarantee is not an international transaction as it is not at behest of the AE but it is an obligation of the assessee. For this, it has relied upon several decisions. We have carefully perused all the decisions and find that in none of the decisions cited assessee has charged on its own the guarantee commission. In the present case, the assessee itself has charged 1.5% guarantee commission. It has shown this transaction as an international transaction, benchmarked it applying CUP method. Further, no Page | 122

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi evidence has been laid down before us that it is part of the shareholders activity and not an independent international transaction. No evidence is placed before us that it is not at the behest of the AE but an obligation of the assessee. In view of this we reject this contention of the assessee that corporate guarantee issued by the assessee is not an international transaction. 67. The second contention raised before us is that benchmarking by the assessee should be accepted. The assessee has charged guarantee commission from AE @ 1.5 %. The ld TPO has bench marked it after obtaining the quotation from various banks, which are 2.68 %. He further added 2 % as mark up because of security and margin adjustments. The assessee substantiated the Alp stating that ING Vasya bank has given a quote of 1.5 % further similar is stated to be the quote of Indusind bank. The TPO has also taken the quotes of Axis Bank, Canara Bank, PNB, and ICICI bank, bank of Baroda, HDFC bank, and SBI. He arrived at Arithmetic mean of 2.68 %. In the present case the ld TPO has benchmarked the transaction by obtaining the quote from bankers and Hon Bombay High court in case of [2015-TII-16-HC-MUM-TP] THE COMMISSIONER OF INCOME TAX, MUMBAI Vs M/s EVEREST KENTO CYLINDERS LTD as relied by the ld AR has held as under :-

―In the matter of guarantee commission, the adjustment made by the TPO were based on instances restricted to the commercial banks providing guarantees and did not contemplate the issue of a Corporate Guarantee. No doubt, these are contracts of guarantee, however, when they are Commercial banks that issue bank guarantees, which are treated as the blood of commerce being easily encashable in the event of default, and if the bank guarantee had to be obtained from Commercial Banks, the higher commission could have been justified. In the present case, it is assessee company that is issuing Corporate Guarantee to the effect that if the subsidiary AE does not repay loan availed of it from ICICI, then in such event, the assessee would make good the amount and repay the loan. The considerations which applied for issuance of a corporate guarantee are distinct and separate from that of bank guarantee and accordingly we are of the view that commission charged cannot be called in question, in the manner TPO has done. In our view the comparison is not as between like transactions but the comparisons are between guarantees issued by the commercial banks as against a Corporate Guarantee issued by holding company for the benefit of its AE, a subsidiary company.‖

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi 68. Even otherwise the commission charged by the assessee also in conformity with the rates quoted by Indusind bank and ING vasya bank. Further, the reasons given by us with respect to Risk adjustments and margins while deciding the issue of Interest receipt relying on the decision of Bharti Airtel decision (Supra) are equally applicable for this transaction too. In view of this Ground No 5 for Ay 2008-09 and Ground No 4 for Ay 2007-08 are partly allowed. 69. The fourth issue was with respect to Disallowance under section 14 A of the Income Tax Act. For AY 2007-08, during the year under consideration, the appellant earned dividend income of Rs. 11,62,000. The assessing officer, however, applied Rule 8D of the Rules, holding that the appropriate cost of composite funds needed to be allocated towards investments made for earning exempt income. Accordingly, the assessing officer disallowed Rs. 3,92,14,001 under section 14A of the Act, applying Rule 8D of the Rules on notional basis. For AY 2008-09 the appellant had earned dividend income of Rs. 2,37,000 in respect of investment made in shares and mutual funds, which was exempt under section 10(34) of the Act. It was submitted before the assessing officer that the appellant had not incurred any expense for earning aforesaid dividend income and no portion of expenses were disallowable under section 14A of the Act. However, the appellant suo-moto disallowed a sum of Rs. 1,00,000 on estimate basis. The assessing officer, however, made disallowance of expenses to the tune of Rs. 4,48,08,080 under section 14A of the Act by applying Rule 8D of the Rules on the ground that provisions of that Rule are procedural in nature and have retrospective operation. 70. The ld AR submitted as under :- The disallowance made by the assessing officer is bad in law and is not sustainable for the following reasons submitted as under:

At the outset it is submitted that issue of retrospective applicability of Rule 8D is now been settled by the Hon‘ble Supreme Court in CIT vs. Essar Teleholdings Limited, reported at 30 CTR (SC) 561, wherein, the Hon‘ble Supreme Court has held: There is no indication in Rule 8D to the effect that Rule 8D intended to apply retrospectively. 48. Applying the principles of statutory interpretation for interpreting retrospectivity of a fiscal statute and looking into the nature and purpose of sub-section (2) and sub- section (3) of Section 14A as well as purpose and intent of Rule 8D coupled with the explanatory notes in the Finance Bill, 2006 and the departmental understanding as

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi reflected by Circular dated 28.12.2006, we are of the considered opinion that Rule 8D was intended to operate prospectively.

It is submitted that the Mumbai High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. CIT: 328 ITR 81 (which is now been affirmed by the Hon‘ble Supreme Court in Civic Appeal No.7020 of 2011) and Hon‘ble Delhi High Court in the case of Maxopp Investment Ltd. : 347 ITR 272, too held that Rule 8D is not retrospective and applies from assessment year 2008-09 only. In view of the above Rule 8D has wrongly been applied by the assessing officer.

Even otherwise, the disallowance made by the assessing officer is not sustainable for the following reasons submitted as under:

The provisions of section 14A of the Act provide that no deduction shall be allowed in respect of expenditure incurred by the appellant in relation to income that does not form part of the total income. The said section reads as under: ―Expenditure incurred in relation to income not includible in total income. 14A. (1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the appellant in relation to income which does not form part of the total income under this Act. (2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the AssessingOfficer, having regard to the accounts of the appellant, is not satisfied with the correctness of the claim of the appellant in respect of such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an appellant claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the appellant under section 154, for any assessment year beginning on or before the 1st day of April, 2001.‖

In terms of sub-section (1) of section 14A of the Act, any expenditure incurred in relation to exempt income is not allowable deduction. Sub-section (2) of the section empowers/ enables the assessing officer (‗AO‘) to determine such expenditure where the AO is not satisfied with the claim of appellant or the quantum of such expenditure.

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi The provisions of section 14A clearly postulate disallowance of expenditure only in a case where it is proved that the expenses incurred have a real relationship with the income which does not form part of the total income. In the absence of such nexus being established, it is not open to the assessing officer, it is respectfully submitted, to disallow any part of the expenditure on proportionate basis.

Reference in this regard is drawn to the decision of Hon‘ble Supreme Court in the case of CIT vs Walfort Share & Stock Brokers: 326 ITR 1 (SC),wherein it has been held by the apex Court that there must be a proximate relationship of expenditure with exempt income, for the purposes of making disallowance of same under section 14A of the Act. In that case, the subject matter before the Supreme Court was allowability of loss incurred on sale of mutual funds, pursuant to decline in their value on declaration/ receipt of dividend, being exempt from tax, on such mutual funds. One of the contentions that were raised by the Department before the Supreme Court was that the aforesaid loss had accrued to the appellant on account of earning of exempt dividend declared on such mutual fund and therefore, the same needs to be disallowed under section 14A of the Act. The relevant portions of the decision of Supreme Court, wherein the contentions of the Department have been dealt are as under: ―According to the Department, the differential amount between the purchase and sale price of the units constituted "expenditure incurred" by the appellant for earning tax- free income, hence, liable to be disallowed under Section 14A. As a result of the dividend pay-out, according to the Department, the NAV of the mutual fund, which was Rs. 17.23 per unit on the record date, fell to Rs. 13.23 on 27.3.2000 (the next trading date) and, thus, Rs. 4/- per unit, according to the Department, constituted "expenditure incurred" in terms of Section 14A of the Act. In its return, the appellant, thus, claimed the dividend received as exempt under Section 10(33) and also claimed set-off for the loss against its taxable income, thereby seeking to reduce its tax liability and gain tax advantage.‖ The Supreme Court negated the contentions of the Department and held that there needs to be a proximate nexus of an expenditure with exempt income before a disallowance of same can be made under section 14A of the Act. The relevant observations of the Court are as follows: ―Expenditure is a pay-out. It relates to disbursement. A pay-back is not expenditure in the scheme of Section 14A. For attracting Section 14A, there has to be a proximate cause for disallowance, which is its relationship with the tax exempt income. Pay-back or return of investment is not such proximate cause, hence, Section 14A is not applicable in the present case. Thus, in the absence of such proximate cause for disallowance, Section 14A cannot be invoked. In our view, return of investment cannot Page | 126

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi be construed to mean "expenditure" and if it is construed to mean "expenditure" in the sense of physical spending still the expenditure was not such as could be claimed as an "allowance" against the profits of the relevant accounting year under Sections 30 to 37 of the Act and, therefore, Section 14A cannot be invoked. Hence, the two asset theory is not applicable in this case as there is no expenditure incurred in terms of Section 14A.‖ The aforesaid decision has also been followed by the Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. CIT: 328 ITR 81 which is now been affirmed by the Hon‘ble Supreme Court in Civic Appeal No.7020 of 2011 The aforesaid decisions, it is respectfully submitted, fortifies the interpretation of the provisions of section 14A of the Act that only direct expenses, having proximate nexus, with earning of exempt income can be disallowed under section 14A of the Act. Reliance is also placed on the decision of Delhi High Court in the case of Maxopp Investment Ltd:347 ITR 272 (Del) wherein after considering the aforesaid decision of Supreme Court, the High Court has analyzed the scope of provisions of section 14A and the powers vested with the assessing officer before invoking the same. The High Court held, that the expression ―expenditure incurred‖ refers to actual expenditure and not to some imagined expenditure. It was held, that the provisions of sub-section (2)/ (3) of section 14A read with Rule 8D of the Rules can be applied from assessment year 2008-09 and onwards, only if the assessing officer first rejects the claim of the appellant of having not incurred any expenditure in relation to earning of exempt income, with cogent reasons. In other words, the onus is on the assessing officer to establish nexus of expenses with exempt income, before rejecting the claim of appellant and computing disallowance under section 14A as per Rule 8D of the Rules. The relevant observations of the High Court are as under: ―……….. Thus, we will have to consider the argument of the asssessees in respect of the expression "expenditure incurred" in the context of the expenditure being in connection with or pertaining to income which does not form part of the total income under the said Act. 27. A reference was made to the decision of the Punjab and Haryana High Court in the case of CIT-II v. Hero Cycles Ltd [ITA No. 331/2009: decided on 4/11/2009] wherein it was observed that:- "Disallowance under Section 14A requires finding of incurring expenditure where it is found that for earning exempted income no expenditure has been incurred, disallowance under Section 14A cannot stand." 28. It was contended that unless and until there was actual expenditure for earning the exempted income, there could not be any disallowance under section 14A. While we Page | 127

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi agree that the expression "expenditure incurred" refers to actual expenditure and not to some imagined expenditure we would like to make it clear that the 'actual' expenditure that is in contemplation under section 14A(1) of the said Act is the 'actual' expenditure in relation to or in connection with or pertaining to exempt income. The corollary to this is that if no expenditure is incurred in relation to the exempt income, no disallowance can be made under section 14A of the said Act.‖ (emphasis supplied) Attention is also invited to the decision of Punjab & Haryana High Court in the case of CIT vs Hero Cycles: 323 ITR 518,wherein, too, High Court held that disallowance under section 14A can be made only if assessing officer establishes proximate nexus of expenditure with exempt income. In that case, the appellant had earned exempt dividend income during the relevant year. The assessing officer made disallowance of expenses under section 14A of the Act on the basis of presumption. On appeal before the CIT (A) and ITAT, the appellant conclusively established that non-interest bearing funds were utilized for making investment in shares reaping exempt dividend income and no portion of interest expenditure incurred during the year was related to exempt dividend income. The Tribunal deleted the disallowance made by the assessing officer on the ground that facts clearly show that no expenditure was incurred to earn dividend income and disallowance under section 14A cannot be made on the basis of mere presumption. On further appeal before the High Court, it was contended by the Revenue that disallowance under section 14A could be made on the basis of presumption as some expenditure, directly or indirectly, is always incurred, which needs to be disallowed under that section. For the aforesaid proposition, the Revenue relied upon provisions of Rule 8D of the Rules.

However, the High Court negated the contentions of the Revenue and held that disallowance under section 14A requires clear finding of incurring of expenditure and the disallowance cannot be made on the basis of presumption. The relevant observations of the High Court are as under: ―…….. Learned counsel for the appellant relies upon Section 14A(2) and Rule 8D (1) (b) to submit that even where the appellant claimed that no expenditure had been incurred, the correctness of such claim could be gone into by the Assessing Officer and in the present case, the claim of the appellant that no expenditure was incurred was found to be not acceptable by the Assessing Officer and thus disallowance was justified. We are unable to accept the submission.

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi 4. In view of finding reproduced above, it is clear that the expenditure on interest was set off against the income from interest and the investment in the share and funds were out of the dividend proceeds. In view of this finding of fact, disallowance under Section 14A was not sustainable. Whether, in a given situation, any expenditure was incurred which was to be disallowed, is a question of fact. The contention of the revenue that directly or indirectly some expenditure is always incurred which must be disallowed under Section 14A and the impact of expenditure so incurred cannot be allowed to be set off against the business income which may nullify the mandate of Section 14A, cannot be accepted. Disallowance under Section 14A requires finding of incurring of expenditure where it is found that for earning exempted income no expenditure has been incurred, disallowance under Section 14A cannot stand. In the present case finding on this aspect, against the revenue, is not shown to be perverse. Consequently, disallowance is not permissible.‖ Reliance in this regard is further placed on the decision of the Delhi Bench of Tribunal in the case of SIL Investment Ltd vs ACIT: ITA No. 2431/Del/2010, wherein the Tribunal held that the assessing officer cannot make disallowance under section 14A, without bringing any evidence on record to establish that any expenditure had been incurred by the appellant for earning exempt income. The relevant extract of the Tribunal‘s decision is as under: ―………..In the present case, the AO did not bring any evidence on record to establish that any expenditure had been incurred by the appellant company for earning the exempt income. In the absence of such evidence, it was wrong on the part of the AO to proceed to compute disallowance of the expenses u/s 14A of the Act by merely applying Rule 8D(2)(iii) of the Rules‖ (emphasis supplied) Recently, the Delhi Bench of the Tribunal in the case of NIIT GIS Ltd vs Assistant CIT in ITA No .2087/Del/2013, held that the assessing officer has to record cogent reasons for rejecting the claim of the appellant with respect to incurrence/ non-incurrence of expenditure for earning exempt income, before invoking the provisions of the said section. Relevant extract of the decision is reproduced hereunder: ―9. Having gone through the orders of the authorities below and the decisions relied upon, we find that the assessing officer has not recorded his dissatisfaction as to how the disallowance of Rs.2,52,252 suo moto made by the appellant under sec 14A on the basis of given working by the appellant was not correct. As per sub-section (2) of sec. 14A of the Act, the assessing officer can determine the amount of expenditure having relation with exempt income in accordance with the method provided in Rule 8D of the Rules, if the assessing officer is not satisfied with the correctness of claim suo moto made by the appellant . The assessing officer has dealt with the issue in para Nos. 3, 3.1 to 3.8 of the assessment order but he has not recorded his dissatisfaction in specific wording as to how the working of disallowance under section 14A of the Act at Rs.2,55,252 suo moto made by the appellant is erroneous and thus cannot be accepted. The satisfaction of the assessing officer is not an empty/ idle formality and has to be Page | 129

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi based on objective satisfaction of the assessing officer. The assessing officer needs to point out the mistake/ incorrectness in the claim of the appellant and only thereafter can the assessing officer proceed to complete disallowances as per Rule 8D of the I.T. Rules. On the other hand, we find that the appellant considering the time span by the employee in relation to the investment activity has attributed 10% of the salary and other overheads relating to said employee as having relation with making investment /earning exempt dividend income has computed the amount of Rs.2,40,000 as disallowable under section 14A of the Act, and in the manner as explained above in the submissions of the Learned AR. In addition to above the appellant has further allocated 10% of administrative expenses per head amounting to RS.15,252 to cover further indirect cost in relation to various services that the financial controller may have used while performing investment decision. In absence of dissatisfaction recorded by the assessing officer on the working of the above disallowance made under section 14A of the Act and offered by the appellant, we are of the view that the assessing officer was not justified in making the disallowance of Rs.30,29,248 (Rs.32,84,500 – Rs.2,55,252).In this regard, we also find strength from the decision of the Hon‘ble jurisdictional High Court of Delhi in the case of Max Opp Investment Ltd v. CIT (supra) wherein the Hon‘ble High Court has been pleased to hold that sub-section (2) of section 14A deals with cases where the appellant specifies a positive amount of expenditure in relation to income which does not form part of the total income under the Act and sub-section (3) applies to cases where the appellant asserts that no expenditure had been incurred in relation to exempt income. In both cases, the Assessing Officer, if satisfied with the correctness of the claim of the appellant in respect of such expenditure or no expenditure, as the same may be, cannot embark upon a determination of amount of expenditure in accordance with any prescribed method as mentioned in sub-section (2) of sec. 14A of the Act. It is only if the assessing officer is not satisfied with the correctness of the claim of the appellant, in both case, that the assessing officer gets jurisdiction to determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the Act in accordance with the prescribed method. The prescribed method is the method stipulated in Rule 8D of the Rules. While rejecting the claim of the appellant with regard to the expenditure or no expenditure, as the case may be, in relation to the exempt income, the assessing officer would have to indicate cogent reasons for the same. It is, therefore, clear that determination of the amount of expenditure in relation to exempt income under Rule 8D would only come into play when the assessing officer rejects the claim of the appellant in this regard, held the Hon‘ble High Court. We thus respectfully following the above ratios laid down by the Hon‘ble jurisdictional High Court, set aside the orders of the authorities below with direction to the assessing officer to delete the addition of Rs. 13,29,248. The grounds involving the issue are accordingly allowed.‖ (emphasis supplied) To the same effect are the following decisions:  CIT v. Metalman Auto P. Ltd.: 336 ITR 434 (P&H)  CIT v. Reliance Industries Ltd. : 339 ITR 632 (Bom) Page | 130

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi  Chemical &Mettallurgical Design Co. Ltd : ITA No. 803/2008 (Delhi HC)  CIT v. Torrent Power Ltd.: 363 ITR 474 (Guj)  CIT Vs Ms. Sushma Kapoor : 319 ITR 299 (Delhi)  CIT v. Adarsh Kumar Goel: [2011] 199 Taxman 149 (Punj. &Har.)(Mag.)  Wimco Seedlings Limited vs. DCIT : 107 ITD 267 (Del.)(TM)  Minda Investments Ltd. v. DCIT: 138 TTJ 240 (Del.)  Maruti Udyog Limited V. DCIT: 92 ITD 119 (Del.)  ACIT v. Eicher Limited: 101 TTJ 369 (Del.)  DLF Ltd. vs. CIT: 27 SOT 22 (Del)  Punjab National Bank V. DCIT: 103 TTJ 908 (Del.)  Vidyut Investment Ltd: [2006] 10 SOT 284 (Del.)  Impulse (India) Pvt. Ltd.: (2008) 22 SOT 368 (Del.)  D.J. Mehta v. ITO: 290 ITR 238 (Mum.)(AT)  Jindal Photo Ltd vs. DCIT: ITA No. 814 (Del) 2011  CIT v. K. Raheja Corporation Ltd.: ITA No. 1260/2009 (Bom.) Hence, only expenditure which has direct nexus with the earning of exempt income, ought to be disallowedunder section 14A of the Act.

That apart and without prejudice to the above, even otherwise, no expenditure debited to the profit & loss account including interest expenditure has proximate, leave alone remote nexus with investments in shares/ mutual funds, as demonstrated as under:

On perusal of the balance sheet of the appellant for the relevant previous year ending 31st March, 2007, it would be noted that the appellant held investments aggregating to Rs. 18855.93 lacs as on 31.3.2007 vis-à-vis investment of Rs. 31021.77 lacs held as at the beginning of the previous year.

Accordingly, the appellant had not made fresh deployment of funds during the previous year and fresh investment made in the year are from redemption of old investments. In view of the same, the question of nexus of any portion of the borrowed funds, being outstanding at the beginning of the year, and interest paid thereon, with the fresh investments made during the year does not arise.

Further, it is submitted that the appellant company has accumulated sufficient reserves to the tune of Rs. 137412.76 lacs as on March, 2007, increasing from reserves of Rs. 98309.97 lacs from the preceding year. Therefore, all investment have been made out of the accumulated profit and no borrowed fund have been utilized for investment in shares.

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi In view of the above, considering that the appellant had mixed pool of funds, wherein the interest free funds were sufficient for making investment in shares/ mutual funds, no part of the borrowed funds shall be deemed to have been utilized for making such investments and therefore, question of nexus of interest expenditure incurred on such opening balance of borrowed funds with the investment in shares does not arise.

Reliance in this regard is placed on the following decisions, wherein, it has been held that where appellant had sufficient funds/ deposits for advancing interest free loans or making investment in shares, etc., and there is nothing on record to show that borrowed funds have been directly utilized for such purpose, a presumption in favour of the appellant can be drawn with respect to utilization of interest free and borrowed funds:  Indian Explosives Ltd. vs CIT: 147 ITR 392 (Cal.)  Woolcombers of India Ltd. v. CIT: 134 ITR 219 (Cal.) - approved by Supreme Court in the case of East India Pharmaceutical Works Ltd. v. CIT: 224 ITR 627  CIT v. Reliance Utilities and Power Ltd.: 313 ITR 340 (Bom.)  CIT vs. M/s. Ashok Commercial Enterprises: ITA No. No.2985 of 2009 (Bom) While following the ratio emanating from the aforesaid decisions, it has been held that interest expenditure cannot be disallowed under section 14A of the Act, where the appellant had sufficient surplus funds and there was no finding by the assessing officer of any direct nexus of borrowed funds with investments.

The Gujarat HC in the case of CIT vs UTI Bank Ltd: 215 Taxman 8, held that where there are sufficient interest free funds to meet tax free investments, they are presumed to be made from interest free funds and not loaned funds and no disallowance can be made under section 14A of the Act. Relevant extract of the judgment is reproduced as under: ―3. The issue pertains to disallowance under Section 14A of the Act made by the Assessing Officer which was partially deleted by the CIT(A). Such order of CIT(A) gave rise to cross appeals at the hands of the appellant as well as the revenue. Tribunal confirmed the view of the CIT(A) making following observations: "33. We have heard the rival contentions and perused the material on record, The undisputed facts are that during the year the appellant has earned interest of Rs. 17.45 crore on tax free bond and debentures as against which the appellant had suomotu disallowed Rs. 5.53 crore being the interest expenses u/s. 14A as against which the AO has worked out the disallowance of Rs. 32.76 crore. After giving the credit of disallowance of Rs. 5.53 crore made by the Appellant, the AO disallowed Rs. 27.23 crore u/s. 14A. As on 31st March, 2003, the interest free funds available with the appellant was to the tune of Rs. 3404 crore (comprising of share capital of Rs. 230 crore Reserves of Rs. 689 crores and interest free demand deposits and Rs. 2485 crores) as against which the tax free investments were to the tune of Rs. 589 crore. Thus the Page | 132

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi interest free funds were far in excess of the investments. CIT(A) has given a finding that the facts in AY 2003-04 are identical to the facts of the case in AY 2002-03 and accordingly he has followed the decision of CIT(A) for AY 2002-03. These facts have not been controverted by the Ld. D.R. nor have they brought on record any facts to the contrary. Hon'ble Bombay High Court in case of CIT v. Reliance Utilities & Power Ltd. (supra) has held that if there are interest free funds available to an appellant sufficient to meet its investments and at the same time the appellant has raised a loan it can be presumed that the investments were from interest free funds available. In the present case, since the appellant has suo moto disallowed Rs. 5.53 crore u/s. 14A, respectfully following the decision of Bombay High Court, we are of the view that in the facts of the present case, no further disallowance over and above than what has been disallowed by the Appellant is called for.…………." 4. In our opinion the Tribunal has committed no error. Basically the entire disallowance has been made on the basis of facts emerging on record. The Tribunal also relied on the decision of the Bombay High Court in case of CIT v. Reliance Utilities & Power Ltd. [2009] 313 ITR 340/178 Taxman 135. Additionally, we find that the Assessing Officer had, without giving a finding as to how much administrative expenditure have been incurred to earn the exempt income, had made disallowance. In the earlier years also, similar position obtained. That being the fact, no question of law arises.‖ (emphasis supplied) To the same effect are the following decisions:  Lubi Submersibles Ltd.: ITA No.868 of 2010 (Guj.)  CIT v. K. Raheja Corporation Pvt. Ltd: ITA No.1260 of 2009 (Bom.)  CIT v. Gujarat Power Corporation Ltd.: 352 ITR 583 (Guj)  Gujarat State Fertilizers and Chemicals Ltd : Tax Appeal No. 82 of 2013 (Guj HC)  CIT v. Torrent Power Ltd.: 363 ITR 474 (Guj)  CIT vs. Suzlon Energy Ltd.: 215 Taxman 272 (Guj)  M/s Agrovet Ltd. v. ACIT: ITA No. 1629/Mum/09 (Mum.)  Dy.CIT v. EimcoElecon (India) Ltd.: 142 ITD 52 (Ahd)  Dy.CIT v. Jammu & Kashmir Bank Ltd.: 142 ITD 553 (Asr.)  Hero Honda Finlease Ltd vs. ACIT: ITA No. 3726/Del/2012 (Del)  ACIT vs. Champion Commercial Co Ltd: 152 TTJ 241 (Kol)  TML Drive Lines Ltd vs. ACIT : ITA No. 6064/Mum/2010 (Mum)  Kulgam Holdings Pvt. Ltd. vs. ACIT : ITA No. 1259/Ahd/2006 (Ahd)  Max India Limited vs. DCIT: ITA No. 103/2006 (Amr) It is submitted that the aforesaid interest expenditure being presumed to have not been incurred for investment in shares/mutual funds cannot even be disallowed under section 14A by applying sub-rule 2(ii) of Rule 8D for the following reasons:

In accordance with provisions of Sub-Rule (2)(ii) of Rule 8D of the Rules, interest expenditure, which is not directly attributable to any particular income or receipt, can be disallowed by applying formula prescribed therein, viz., ratio of average value of

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi investment to average value of total assets. As a necessary corollary, interest expenditure which is directly related to other business activity, other than resulting in earning of exempt income, cannot be disallowed under the aforesaid sub-rule.

Your Honour‘s attention, in this regard, is invited to the provisions of rule 8D of the Rules, which reads as under: ―Rule 8D. Method for determining amount of expenditure in relation to income not includible in total income. (1) Where the Assessing Officer, having regard to the accounts of the appellant of a previous year, is not satisfied with – (a) the correctness of the claim of expenditure made by the appellant; or (b) the claim made by the appellant that no expenditure has been incurred in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2). (2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely :— (i) the amount of expenditure directly relating to income which does not form part of total income; (ii) in a case where the appellant has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula, namely :— A x B/C Where A = amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the previous year; B = the average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the appellant, on the first day and the last day of the previous year; C = the average of total assets as appearing in the balance sheet of the appellant, on the first day and the last day of the previous year; (iii) an amount equal to one-half per cent of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the appellant, on the first day and the last day of the previous year. 3. For the purposes of this rule, the 'total assets' shall mean, total assets as appearing in the balance sheet excluding the increase on account of revaluation of assets but including the decrease on account of revaluation of assets.‖ Page | 134

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi In terms of sub-rule 2(ii) of Rule 8D, interest expenditure incurred by the appellant, which is not directly attributable to any particular income or receipt, can be disallowed proportionally as per prescribed method.

The provisions of the aforesaid sub-rule, in our respectful submission, are attracted, where borrowed funds are not directly attributable to any particular activity, i.e., taxable or non-taxable.

However, where borrowed funds have direct relation with particular activity/ income/ expenditure, the interest expenditure incurred thereon, is not liable for apportionment in that Rule.

Reliance in this regard is placed on the decision of Kolkata Bench of Tribunal in the case of ACIT vs Champion Commercial Co Ltd: ITA No. 644/ Kol./2012, wherein, the Tribunal held that, while computing disallowance under Rule 8D(2)(ii), only common interest expenditure is to be considered, i.e., after excluding interest directly relatable to any particular income/ expenditure, including amount considered for disallowance under Rule 8D(2)(i) of the Rules. The relevant extract of Tribunal‘s observations in this regard is reproduced hereunder for your Honour‘s reference: ―Viewed thus, the correct application of the formula set out in rule 8D(2)(ii) is that, as has been noted by Hon‘ble Bombay High Court in the case of Godrej and Boyce (supra), ―amount of expenditure by way of interest that will be taken (as 'A' in the formula) will exclude any expenditure by way of interest which is directly attributable to any particular income or receipt (for example—any aspect of the appellant's business such as plant/machinery etc.)‖. Accordingly, even by revenue‘s own admission, interest expenses directly attributable to tax exempt income as also directly attributable to taxable income, are required to be excluded from computation of common interest expenses to be allocated under rule 8D(2)(ii). ………………………………………………………………………… In our considered view, therefore, the right course of action will be that while we uphold the action of the CIT(A) in principle, assuming that it was based on principle discussed earlier in this order that quantum of allocated common interest expenses were reduced, we remit the matter to the file of the Assessing Officer for adjudication de novo in the light of the legal position discussed above. We make it clear that common interest expenses which are to be allocated in terms of the formula under rule 8D(2)(ii) will only be such interest expenses as are neither directly attributable to borrowings specifically used for tax exempt incomes or receipts, nor are directly attributable to borrowings specifically used for taxable incomes or receipts.‖

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi The Hon‘ble Delhi High Court in the case of Pr. Commissioner of Income-tax Delhi-2 vs Bharat Overseas Pvt Ltd in ITA 802/2015 vide order dated 17.12.2015, held that disallowance under section 14A read with Rule 8D(2)(ii) cannot be made in absence of common interest expenditure and while computing disallowance, not only interest directly attributable to tax exempt income, but also interest directly relatable to taxable income has to be excluded from variable A of Formula prescribed under Rule 8D(2)(ii). Relevant extracts of the judgment are reproduced as under: ―16. The object behind Section 14A (1) is to disallow only such expense which is relatable to tax exempt income and not expenditure in relation to any taxable income. This object behind Section 14A has to be kept in view while examining Rule 8D (2) (ii). In any event a rule can neither go beyond nor restrict the scope of the statutory provision to which it relates. 17. Rule 8D (2) states that the expenditure in relation to income which is exempt shall be the aggregate of (i) the expenditure attributable to tax exempt income, (ii) and where there is common expenditure which cannot be attributed to either tax exempt income or taxable income then a sum arrived at by applying the formula set out thereunder. What the formula does is basically to "allocate" some part of the common expenditure for disallowance by the proportion that average value of the investment from which the tax exempt income is earned bears to the average of the total assets. It acknowledges that funds are fungible and therefore it would otherwise be difficult to allocate the sum constituting borrowed funds used for making tax-free investments. Given that Rule 8 D (2) (ii) is concerned with only 'common interest expenditure' i.e. expenditure which cannot be attributable to earning either tax exempt income or taxable income, it is indeed incongruous that variable A in the formula will not also exclude interest relatable to taxable income. This is precisely what the ITAT has pointed out in Champion Commercial (supra). There the ITAT said that by not excluding expenditure directly relatable to taxable income, Rule 8D (2) (ii) ends up allocating "expenditure by way of interest, which is not directly attributable to any particular income or receipt, plus interest which is directly attributable to taxable income." This is contrary to the intention behind Rule 8D (2) (ii) read with Section 14A of (1) and (2) of the Act.‖ In view of the above, it is only the common interest expenditure, incurred on borrowed funds, not directly attributable to any particular activity (taxable or non-taxable), which can only be considered for apportionment under Rule 8D(2)(ii).

In the case of the appellant, since such borrowed funds have nexus with regular business activities of the appellant, in light of the discussion above, the same will not be considered for disallowance in the above Rule. Without prejudice, it is submitted that the Hon‘ble ITAT in appellant‘s own case for the assessment year 2005-06 (ITA No. 2518/Del/2013) and 2006-07 (ITA No. 4111/Del/2013), has sustained disallowance of Rs. 25,000 against ad-hoc disallowance of Rs. 50,000 made by the assessing officer, in reference to section 14A of the Act. Page | 136

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi officer. Even otherwise it is also a settled law that the disallowance under section 14 A of the Income Tax Act cannot exceed the exempt income which is only Rs. 237000/-for this year. In absence of any satisfaction recorded by the assessing officer the disallowance made cannot be sustained. Hence, we direct the learned assessing officer to delete the disallowance of ₹ 4 4808080/- under section 14 A of the act. Accordingly, ground number six of the appeal of the assessee for assessment year 2008 – 09 is allowed. 74. The next issue is the disallowance of depreciation on cars sold to employees. This issue is only relevant for AY 2008-09. Brief facts shows that the appellant has sold 7 cars to its employees @ Rs. 100 each amounting to a total sales consideration of Rs. 700/-. Details of cars sold and WDV is as under: Detail of Cars sold during the F.Y.2007-08 -08 Sr. Particulars Year of Cap. Vehicle No. Original Cost No. (Rs.) 1 Lancer 2001-02 DL9CC-8287 826,901 2 Esteem LX 2002-03 HR20H-4527 487,520 3 Santro LP 2002-03 DL9CH-0327 336,557 4 Santro LP 2002-03 DL9CH-0350 336,557 5 Esteem 2002-03 DL8CJ-0300 513,135 6 Esteem 2002-03 DL9CC-9938 510,563 7 Maruti Esteem 2003-04 HR20J-3912 516,404 Total 3,527,637

The difference in WDV and actual sale consideration comes to Rs. 13,21,410. The assessing officer, denied depreciation amounting to Rs.1,25,330 in the relevant previous year on the WDV value of cars sold.

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi assets sold during the year. Reliance in this regard is placed on the decision of High Court of Delhi in the case of CIT vs Oswal Agro Mills Ltd. and Oswal Chemicals and Fertilizers Ltd. 341 ITR 467, wherein it was held that depreciation is to be allowed on the asset, forming part of the 'block of assets' even if it is not used, i.e. the depreciation is to be allowed with respect to the block of assets and not the individual assets. The action of the assessing officer therefore is inconsistent with the scheme of depreciation provided under section 32(1) of the Act. 76. Learned departmental representative relied upon the orders of the lower authorities.

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi deducted the balance outstanding to the assessee. The details are at pages 345-346 of the paper book accordingly, during the year under consideration, the assessee has written off Rs. 411.57 lacs as irrecoverable bad debts in the books of accounts. The various correspondence entered into with the customer is enclosed as pages 345-366 of the paper book. The assessing officer, however while completing the assessment made disallowance of deduction of bad debts amounting to Rs. 411.57 Lacs, alleging that (i) large part of bad debt is related to Public sector undertaking, which by no stretch of imagination can be construed as bad debt and (ii) the deduction claimed by the assessee does not qualify the condition as enunciated in the provision of 36(2) of the Act.

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi 82. We have also carefully considered the rival contention and find that on into the power supply equipments and computer peripherals are held to be the part of the computers and are eligible for depreciation at the rate of 60%. The issue is squarely covered by the decision of the honourable jurisdictional High Court in favour of the assessee. The learned departmental representative could not point out any other decision, which binds us. Therefore, respectfully following the decision of the honourable High Court‘s the disallowance deleted by the learned commissioner appeals of ₹ 231402/– on account of excess claim of depreciation is confirmed. Accordingly, ground number 2 of the appeal of the learned AO for 2007 – 08 is dismissed. 83. The Next issue is with respect to Disallowance of Rs. 21.74 crores on account of capitalization of interest. This ground is raised by the learned assessing officer for assessment year 2007 – 08 vide ground number three of the appeal. 84. Both the parties submitted that The issue is covered by the decision of Hon‘ble Delhi Bench of Tribunal in the assessee‘s own case for the assessment year 2005-06 (ITA No. 2518/Del/2013) and 2006-07 (ITA No. 4111/Del/2013), wherein, the Hon‘ble Tribunal upheld the alternative contention of the assessee and allowed deduction of interest expense incurred on earning interest on short term deposits under section 57 (iii) of the Act. further, the assessing officer, vide order dated 17.12.2012 passed under section 154 of the Act (enclosed at pages 48-51 of the appeal memo), rectified the amount of disallowance to Rs. 818.92 lacs after excluding profit on sale of investment of Rs. 1355.47, which has already been offered to tax by the assessee. 85. In view of the order of the learned assessing officer as well as the order of the coordinate bench in assessee‘s own case for earlier years, we confirm the finding of the learned CIT A in deleting the addition of ₹ 21.74 crores on account of interest capitalization. Consequently, ground number 3 of the appeal of the revenue for assessment year 2007 – 08 is dismissed. 86. Therefore ITA number 4110/Del/2013 filed by the learned deputy Commissioner of income tax, New Delhi for assessment year 2007 – 08 is dismissed. Appeals of the assessee for AY 2007-08 and 2008-09 are also party allowed. 87. Order pronounced in the open court on 19 /11/2018. -Sd/- -Sd/- (DIVA SINGH) (PRASHANT MAHARISHI) JUDICIAL MEMBER ACCOUNTANT MEMBER

ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/Del/2013 A Y 2007-08 and 2008-09 Jindal Steel Limited Vs ACIT Cen Circle 4(1) , New Delhi Dated: 19 /11/2018 A K Keot Copy forwarded to 1. Applicant 2. Respondent 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, New Delhi