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TATA CHEMICALS LTD.,MUMBAI vs DY CIT 2 (3)(1), MUMBAI | BharatTax

TATA CHEMICALS LTD.,MUMBAI vs. DY CIT 2 (3)(1), MUMBAI

ITA 7912/MUM/2019Status: DisposedITAT Mumbai04 February 2026AY 2015-16144 pages

AI SummaryRemanded

Facts

The assessee company, engaged in manufacturing and sale of chemicals and fertilizers, was subjected to scrutiny assessment. Several additions were made by the Assessing Officer, including transfer pricing adjustments on preference share investments, disallowance under Section 14A, disallowance of deduction under Section 80-IA, disallowance of interest paid, assessment of interest income as 'Income from Other Sources', disallowance of post-retirement medical benefit, disallowance of expenditure on scientific research, non-allowance of provision for bad and doubtful debts, and denial of foreign tax credit.

Held

The tribunal has noted the various grounds of appeal raised by the assessee concerning several additions made by the Assessing Officer. The judgment appears to be in progress, with detailed analysis of each ground expected. Specific findings on each issue will determine the final outcome for the assessee's appeal.

Key Issues

The appeal involves multiple issues including transfer pricing recharacterization, allowability of expenses under Section 14A and other sections, deduction claims for business activities, and treatment of interest and foreign tax credit.

Sections Cited

14A, 80-IA, 35(2AB), 91, 92, 43B

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, MUMBAI BENCH “H” MUMBAI

Before: SHRI OM PRAKASH KANT & SHRI RAHUL CHAUDHARY

For Appellant: Mr. Nitesh Joshi a/w, Mr. Vanish Bhansali &, Mr. Samkit Chaudhary

For Respondent: Mr. Ajay Chandra, CIT-DR

Hearing: 06/11/2025Pronounced: 04/02/2026

ORDER PER OM PRAKASH KANT, AM

This appeal by the assessee is directed against final assessment order dated 30.10.2019 passed by the Ld. Dy. Commissioner of Income-tax, Circle-2(3)(1), Mumbai [hereinafter shall be referred as ‘the Assessing Officer’] pursuant to the direction of the Ld. Dispute Resolution Panel ( in short the ld DRP) dated

Tata Chemicals Ltd. The grounds raised by the assessee are reproduced as 30.09.2019. The grounds raised by the assessee are reproduced as 30.09.2019. The grounds raised by the assessee are reproduced as under:

1. Transfer Pricin 1. Transfer Pricing - adjustments:- Rs. 3,62,01,946/- On the facts and in the circumstances of the case and in law, the On the facts and in the circumstances of the case and in law, the On the facts and in the circumstances of the case and in law, the learned Assessing Officer grossly erred in adding a sum of Rs. learned Assessing Officer grossly erred in adding a sum of Rs. learned Assessing Officer grossly erred in adding a sum of Rs. 3,62,01,946/- u/s 92 of the Act, based on the order of the learned u/s 92 of the Act, based on the order of the learned Transfer Pricing Officer Transfer Pricing Officer u/s 92A(3) of the Act, in respect of u/s 92A(3) of the Act, in respect of adjustment on impugned arm's length interest on the preference adjustment on impugned arm's length interest on the preference adjustment on impugned arm's length interest on the preference share capital of the Associated Enterprise, subscribed by the share capital of the Associated Enterprise, subscribed by the share capital of the Associated Enterprise, subscribed by the Appellant, by recharacterising preference shares as a loan. Appellant, by recharacterising preference shares as a loan.

2.1 For the year under consideration, the assessee filed its return For the year under consideration, the assessee filed its return For the year under consideration, the assessee filed its return of of of income income income on on on 27.11.2015 27.11.2015 27.11.2015 declaring declaring declaring total total total income income income of of of Rs.663,53,31,056/- under the norm under the normal provisions of the Income al provisions of the Income-tax Act, 1961 (in short ‘the Act’) and book profit of Rs.637,97,00,001/-. Act, 1961 (in short ‘the Act’) and book profit of Rs.637,97,00,001/ Act, 1961 (in short ‘the Act’) and book profit of Rs.637,97,00,001/ Subsequently, the return filed by the assessee was selected for Subsequently, the return filed by the assessee was selected for Subsequently, the return filed by the assessee was selected for scrutiny and statutory notices under the Act were issued and scrutiny and statutory notices under the Act were issued and scrutiny and statutory notices under the Act were issued and complied with. The Assessing complied with. The Assessing Officer noticed that that international transactions and domestic transactions and domestic transactions were carrie carried out by the assessee with its Associated E assessee with its Associated Enterprises (AEs). The Assessing . The Assessing Officer referred the matter of determination of the arm’s length price Officer referred the matter of determination of the arm’s length price Officer referred the matter of determination of the arm’s length price of those international tr international transactions and domestic transactions and domestic transactions to the Ld. Transfer Pricing Officer (TPO). The Ld. TPO in his order dated Ld. Transfer Pricing Officer (TPO). The Ld. TPO in his order dated Ld. Transfer Pricing Officer (TPO). The Ld. TPO in his order dated 30.10.2018 passed u/s 92CA(3) of the Act proposed two 30.10.2018 passed u/s 92CA(3) of the Act proposed t 30.10.2018 passed u/s 92CA(3) of the Act proposed t adjustments. Firstly, the adjustment to . Firstly, the adjustment to guarantee commission of guarantee commission of Rs.557,55,275/-. . Secondly, Secondly, adjustment adjustment amounting amounting to to Tata Chemicals Ltd. Rs.3,62,01,946/- of of of interest interest interest for for for characterize characterize characterize investment investment investment of of of preference share/share application money preference share/share application money as loan transaction, loan transaction, No adjustment regarding domestic transaction of captive power adjustment regarding domestic transaction of captive power adjustment regarding domestic transaction of captive power transfer to eligible unit was made. transfer to eligible unit was made. The Assessing Officer after taking ng Officer after taking into consideration, the transfer pricing into consideration, the transfer pricing adjustment and adjustment and addition for other issues arising from the records other issues arising from the records, passed a draft assessment passed a draft assessment order on 28.12.2018 u/s 144C of the Act proposing various order on 28.12.2018 u/s 144C of the Act proposing various order on 28.12.2018 u/s 144C of the Act proposing various additions and computing total income und additions and computing total income under normal er normal provisions of the Act at Rs.874,98,49,681/ the Act at Rs.874,98,49,681/-.

4.5 In its transfer pricing study, the assessee benchmarked the In its transfer pricing study, the assessee benchmarked the In its transfer pricing study, the assessee benchmarked the transactions of subscription and redemption of preference shares transactions of subscription and redemption of preference shares transactions of subscription and redemption of preference shares under the “other method” prescribed under Rule 10AB, contending under the “other method” prescribed under Rule 10AB, conten under the “other method” prescribed under Rule 10AB, conten that the transactions were carried out at face value and did not give that the transactions were carried out at face value and did not give that the transactions were carried out at face value and did not give rise to any income chargeable to tax. The transactions were duly rise to any income chargeable to tax. The transactions were duly rise to any income chargeable to tax. The transactions were duly disclosed in Form No. 3CEB, and supporting documentation such disclosed in Form No. 3CEB, and supporting documentation such disclosed in Form No. 3CEB, and supporting documentation such as share certificates, registers, audited financial statements, and as share certificates, registers, audited financial st as share certificates, registers, audited financial st RBI compliance records were furnished. RBI compliance records were furnished. The assessee The assessee claimed to have filed before TPO before TPO the copy of the compliance made by it with copy of the compliance made by it with the Reserve Bank of India in connection with the subscription of the Reserve Bank of India in connection with the subscription of the Reserve Bank of India in connection with the subscription of such preference at a sample basis such preference at a sample basis. Based on above , it was pleaded that said transaction may not be re that said transaction may not be re-characterized as in the nature characterized as in the nature of loan granted by the assessee to its associated enterprises on of loan granted by the assessee to its associated enterprises on of loan granted by the assessee to its associated enterprises on Tata Chemicals Ltd. which it was alleged to have earned notional interest at an arm’s which it was alleged to have earned notional interest at an arm’s which it was alleged to have earned notional interest at an arm’s length basis.

4.7 The assessee explained that the preference shares were The assessee explained that the preference shares were The assessee explained that the preference shares were redeemable after ten years at the option of the holder, carried a redeemable after ten years at the option of the ho redeemable after ten years at the option of the ho non-cumulative dividend, and were subscribed as a flexible, non cumulative dividend, and were subscribed as a flexible, non- cumulative dividend, and were subscribed as a flexible, non permanent capital structure to meet the funding needs of BEV-1, permanent capital structure to meet the funding needs of BEV permanent capital structure to meet the funding needs of BEV an investment holding company with downstream subsidiaries. It an investment holding company with downstream subsidiaries. It an investment holding company with downstream subsidiaries. It was further contended that subscription to share was further contended that subscription to share capital does not capital does not give rise to a debt obligation, nor to taxable income, and therefore give rise to a debt obligation, nor to taxable income, and therefore give rise to a debt obligation, nor to taxable income, and therefore could not be re-characterised as a loan. characterised as a loan. Regarding the justification Regarding the justification of subscribing preference share capital, the assessee submitted that of subscribing preference share capital, the assessee submitted that of subscribing preference share capital, the assessee submitted that it has already contributed 575 m it has already contributed 575 million US dollar in its AE by way of illion US dollar in its AE by way of permanent share capital through equity share permanent share capital through equity share having face value of having face value of one USD. The assessee further submitted that it has chosen to . The assessee further submitted that it has chosen to . The assessee further submitted that it has chosen to provide non-permanent share capital to meet their investment permanent share capital to meet their investment permanent share capital to meet their investment requirement by way of preferen requirement by way of preference share capital. It was further ce share capital. It was further submitted that it was the only investment opportunit was the only investment opportunity with the AE, was the only investment opportunit

Tata Chemicals Ltd. the assessee company should receive back such funds by he assessee company should receive back such funds by he assessee company should receive back such funds by redemption of the preference shares. The assessee company redemption of the preference shares. The assessee company redemption of the preference shares. The assessee company chooses preference share investment for pro chooses preference share investment for providing non viding non-permanent capital to its AE for assessee’s own convenience and flexibility. It capital to its AE for assessee’s own convenience and flexibility. It capital to its AE for assessee’s own convenience and flexibility. It was submitted that the the assessee company was sole share holder of capital BEV-1 and the assessee company provided the requisite 1 and the assessee company provided the requisite 1 and the assessee company provided the requisite share capital to its AE for the purpose share capital to its AE for the purpose of set up of the AE. The AE of the AE. The AE BEV-1 is the investment holding company and holds investment in 1 is the investment holding company and holds investment in 1 is the investment holding company and holds investment in downstream subsidiary in various countries and the AE BEV-1 in downstream subsidiary in various countries and the AE BEV downstream subsidiary in various countries and the AE BEV terms of provide capital to downstream subsidiary. It was submitted terms of provide capital to downstream subsidiary. It was submitted terms of provide capital to downstream subsidiary. It was submitted that in view of reason, the capi that in view of reason, the capital requirement of AE BEV tal requirement of AE BEV-1 had to be flexible and the same was provided by the assessee company be flexible and the same was provided by the assessee company be flexible and the same was provided by the assessee company being sole shareholder through a non being sole shareholder through a non-permanent capital in the form permanent capital in the form of preference share capital. The assessee company further stated of preference share capital. The assessee company further stated of preference share capital. The assessee company further stated that it had not made any sp that it had not made any specific borrowing for the purpose of ecific borrowing for the purpose of investment in preference share of AE. Regarding the show cause investment in preference share of AE. Regarding the show cause investment in preference share of AE. Regarding the show cause that as why the investment in preference share capital of BEV-1 not that as why the investment in preference share capital of BEV that as why the investment in preference share capital of BEV to be characterized as loan, the assessee company stated that the to be characterized as loan, the assessee company stated that the to be characterized as loan, the assessee company stated that the contribution to the pre contribution to the preference share capital does not give rise to ference share capital does not give rise to debt or loan. Mere subscription to share capital does not give rise to debt or loan. Mere subscription to share capital does not give rise to debt or loan. Mere subscription to share capital does not give rise to income and such transaction fall outside the scope of section 92 of income and such transaction fall outside the scope of section 92 of income and such transaction fall outside the scope of section 92 of the Act.

4.20 The learned counsel for the assessee further assailed the The learned counsel for the assessee further assailed the The learned counsel for the assessee further assailed the findings of the Dispute Resolution Panel and submitted that, while findings of the Dispute Resolution Panel and submitted that, while findings of the Dispute Resolution Panel and submitted that, while disposing of the objections, the DRP mere disposing of the objections, the DRP merely followed its directions ly followed its directions issued for assessment year 2013 issued for assessment year 2013–14, without appreciating the 14, without appreciating the material distinction in facts. material distinction in facts. It was pointed out that, in assessment It was pointed out that, in assessment year 2013–14, the assessee held 1,70,005 preference shares in 14, the assessee held 1,70,005 preference shares in 14, the assessee held 1,70,005 preference shares in Homefield International Private Limi Homefield International Private Limited, Mauritius. In that year, a ted, Mauritius. In that year, a part of the preference shares had been allotted in consideration of part of the preference shares had been allotted in consideration of part of the preference shares had been allotted in consideration of adjustment of loans earlier advanced by the assessee to the said adjustment of loans earlier advanced by the assessee to the said adjustment of loans earlier advanced by the assessee to the said entity. The Transfer Pricing Officer, therefore, treated such portion entity. The Transfer Pricing Officer, therefore, treated such portion entity. The Transfer Pricing Officer, therefore, treated such portion of the preference sha of the preference share investment—arising out of loan conversion arising out of loan conversion— as being in the nature of a loan and made a transfer pricing as being in the nature of a loan and made a transfer pricing as being in the nature of a loan and made a transfer pricing adjustment by imputing notional interest thereon. One of the adjustment by imputing notional interest thereon. One of the adjustment by imputing notional interest thereon. One of the defences raised by the assessee in that year was that the preference defences raised by the assessee in that year was that the preference defences raised by the assessee in that year was that the preference shares issued upon c shares issued upon conversion of loans had already been redeemed, onversion of loans had already been redeemed,

4.25 In support of these submissions, reliance was placed on In support of these submissions, reliance was placed on In support of these submissions, reliance was placed on judicial precedents, including the decision of the Hon’ble Bombay recedents, including the decision of the Hon’ble Bombay recedents, including the decision of the Hon’ble Bombay High Court in PCIT v. Aegis Ltd. PCIT v. Aegis Ltd. [(2019) 102 taxmann.com 495], as [(2019) 102 taxmann.com 495], as also the decision in also the decision in PCIT v. Tops Group Electronic Systems Ltd. PCIT v. Tops Group Electronic Systems Ltd. (Income-tax Appeal No. 1721 of 2016). The learned counsel further tax Appeal No. 1721 of 2016). The learned counsel further tax Appeal No. 1721 of 2016). The learned counsel further relied upon the decision of the Coordinate Bench of the Tribunal in ed upon the decision of the Coordinate Bench of the Tribunal in ed upon the decision of the Coordinate Bench of the Tribunal in SVK Power and Infrastructure Ltd. v. DCIT SVK Power and Infrastructure Ltd. v. DCIT [(2023) 150 taxmann.com [(2023) 150 taxmann.com 534 (Visakhapatnam)], wherein it was held that share application 534 (Visakhapatnam)], wherein it was held that share application 534 (Visakhapatnam)], wherein it was held that share application money advanced for subscription to preference shares could not be money advanced for subscription to preference shares could no money advanced for subscription to preference shares could no re-characterised as a loan, and that no notional interest could be characterised as a loan, and that no notional interest could be characterised as a loan, and that no notional interest could be imputed thereon. It was submitted that the said decision, being imputed thereon. It was submitted that the said decision, being imputed thereon. It was submitted that the said decision, being founded upon the judgment of the Hon’ble Bombay High Court in founded upon the judgment of the Hon’ble Bombay High Court in founded upon the judgment of the Hon’ble Bombay High Court in Aegis Ltd. (supra), squarely supported the assessee’s case (supra), squarely supported the assessee’s case (supra), squarely supported the assessee’s case.

4.27 According to the learned Departmental Representative, the According to the learned Departmental Representative, the According to the learned Departmental Representative, the true nature of the transaction was that of f true nature of the transaction was that of financing, and the inancing, and the Transfer Pricing Officer was therefore justified in re-characterising Transfer Pricing Officer was therefore justified in re Transfer Pricing Officer was therefore justified in re the same as a loan transaction and benchmarking the notional the same as a loan transaction and benchmarking the notional the same as a loan transaction and benchmarking the notional interest thereon by applying LIBOR with an appropriate mark-up. interest thereon by applying LIBOR with an appropriate mark interest thereon by applying LIBOR with an appropriate mark 4.28 We have carefully considered the riva We have carefully considered the rival submissions and l submissions and perused the material placed on record. At the outset, the objection perused the material placed on record. At the outset, the objection perused the material placed on record. At the outset, the objection raised by the assessee as to whether the investment in preference raised by the assessee as to whether the investment in preference raised by the assessee as to whether the investment in preference shares constitutes an international transaction does not merit shares constitutes an international transaction does not merit shares constitutes an international transaction does not merit he impugned transaction as acceptance. The assessee itself treated t acceptance. The assessee itself treated the impugned transaction as an international transaction in its transfer pricing documentation an international transaction in its transfer pricing documentation an international transaction in its transfer pricing documentation and benchmarked the same by applying the “other method” and benchmarked the same by applying the “other method” and benchmarked the same by applying the “other method” tax Rules, 1962. It was prescribed under Rule 10AB of the Income prescribed under Rule 10AB of the Income-tax Rules, 1962. It was Tata Chemicals Ltd. the assessee’s own case that the subscrip the assessee’s own case that the subscription of ordinary and tion of ordinary and preference shares at par represented their arm’s length value and preference shares at par represented their arm’s length value and preference shares at par represented their arm’s length value and that redemption of preference shares at par was justified, having that redemption of preference shares at par was justified, having that redemption of preference shares at par was justified, having regard to the absence of accumulated profits in the Associated regard to the absence of accumulated profits in the Associated regard to the absence of accumulated profits in the Associated Enterprise (“AE”).

Tata Chemicals Ltd. be readily quantifiable with precision, a reasonable estimate is be readily quantifiable with precision, a reasonable estimate is be readily quantifiable with precision, a reasonable estimate is required to be made for the purposes of section 14A. required to be made for the purposes of section 14A. required to be made for the purposes of section 14A. 5.11 Relying upon the decision of the Relying upon the decision of the ITAT special Bench, ITAT special Bench, Mumbai in the case of M/s. Daga capital management Pvt. Ltd. Mumbai in the case of M/s. Daga capital management Pvt. Ltd. Mumbai in the case of M/s. Daga capital management Pvt. Ltd. (ITANo. 8057/ Mum/03), / Mum/03),. and the judgment of the jurisdictional and the judgment of the jurisdictional High Court in Godrej & Boyce Manufacturing Co. Ltd. Godrej & Boyce Manufacturing Co. Ltd.(supra), the Godrej & Boyce Manufacturing Co. Ltd. Assessing Officer held that Rule 8D was mandatorily applicable for Assessing Officer held that Rule 8D was mandatorily applicable for Assessing Officer held that Rule 8D was mandatorily applicable for the assessment year under consideration and that the method the assessment year under consideration and that the method the assessment year under consideration and that the method prescribed therein was binding. He further observed that, post therein was binding. He further observed that, post therein was binding. He further observed that, post introduction of Rule 8D, the discretion available to the Assessing introduction of Rule 8D, the discretion available to the Assessing introduction of Rule 8D, the discretion available to the Assessing Officer to estimate expenditure on a reasonable basis stood replaced Officer to estimate expenditure on a reasonable basis stood replaced Officer to estimate expenditure on a reasonable basis stood replaced by a statutory formula, rendering past assessments irrelevant. by a statutory formula, rendering past assessments irrelevant. by a statutory formula, rendering past assessments irrelevant. Being thus satisfied, the Assessing Officer proceeded to compute g thus satisfied, the Assessing Officer proceeded to compute g thus satisfied, the Assessing Officer proceeded to compute the disallowance under section 14A read with Rule 8D as under: the disallowance under section 14A read with Rule 8D as under: the disallowance under section 14A read with Rule 8D as under:

"Under such facts and circumstances, a presumption would come into "Under such facts and circumstances, a presumption would come into "Under such facts and circumstances, a presumption would come into play that the assessee had made investments from their own funds play that the assessee had made investments from their own funds play that the assessee had made investments from their own funds as has been he as has been held by the Hon'ble Bombay High Court in the case of ld by the Hon'ble Bombay High Court in the case of HDFC Bank Ltd. 366 IIR 505 and accordingly, no disallowance can HDFC Bank Ltd. 366 IIR 505 and accordingly, no disallowance can HDFC Bank Ltd. 366 IIR 505 and accordingly, no disallowance can be made under clause (ii) of Rule 8D(2) of rules in such facts and be made under clause (ii) of Rule 8D(2) of rules in such facts and be made under clause (ii) of Rule 8D(2) of rules in such facts and circumstances of the case. It is seen from the working of circumstances of the case. It is seen from the working of circumstances of the case. It is seen from the working of disallowance mad disallowance made by the AO at para 4.2 that she has not made any e by the AO at para 4.2 that she has not made any disallowance under clause (i) of Rule 8D(2) and the disallowance as disallowance under clause (i) of Rule 8D(2) and the disallowance as disallowance under clause (i) of Rule 8D(2) and the disallowance as per clause (ii) has been worked out at Rs. 0.93 crores. The said per clause (ii) has been worked out at Rs. 0.93 crores. The said per clause (ii) has been worked out at Rs. 0.93 crores. The said disallowance made under clause (ii) of Rule 8D(2) is directed to be disallowance made under clause (ii) of Rule 8D(2) is directed to be disallowance made under clause (ii) of Rule 8D(2) is directed to be deleted in view of the facts of assessee having own funds far in ed in view of the facts of assessee having own funds far in ed in view of the facts of assessee having own funds far in excess of the investments capable of yielding exempt income and in excess of the investments capable of yielding exempt income and in excess of the investments capable of yielding exempt income and in view of the decision of Hon'ble Bombay High Court in the case of view of the decision of Hon'ble Bombay High Court in the case of view of the decision of Hon'ble Bombay High Court in the case of HDFC Bank Ltd. HDFC Bank Ltd. Therefore, the working of Rule 8D, on the basis o Therefore, the working of Rule 8D, on the basis o Therefore, the working of Rule 8D, on the basis of which the disallowance has been made should be reduced by Rs. 0.63 Crs. disallowance has been made should be reduced by Rs. 0.63 Crs. disallowance has been made should be reduced by Rs. 0.63 Crs. Accordingly, without prejudice to our contention that Rule 8D is not Accordingly, without prejudice to our contention that Rule 8D is not Accordingly, without prejudice to our contention that Rule 8D is not applicable, the disallowance as per Rule 8D should be restricted to applicable, the disallowance as per Rule 8D should be restricted to applicable, the disallowance as per Rule 8D should be restricted to Rs 4.34 Cr.” 5.15 The Ld. DRP following the f The Ld. DRP following the finding of the DRP in assessment inding of the DRP in assessment year 2012-13 and 2013 13 and 2013-14 rejected the objection of the assessee 14 rejected the objection of the assessee and upheld the disallowance made by the Assessing Officer u/s 14A and upheld the disallowance made by the Assessing Officer u/s 14A and upheld the disallowance made by the Assessing Officer u/s 14A of the Act. The relevant finding of the Ld. DRP is reproduced as of the Act. The relevant finding of the Ld. DRP is reproduced as of the Act. The relevant finding of the Ld. DRP is reproduced as under:

5.3 The DRP has noted that on the basis of the facts of 5.3 The DRP has noted that on the basis of the facts of the case, the A.O. has recorded its non-satisfaction with satisfaction with the correctness of the claim made by the assessee ss of the claim made by the assessee company, as mandated by sub-section (2) of section 144. section (2) of section 144. After giving such a categorical finding, the A.O. After giving such a categorical finding, the A.O. proceeded with calculating the disallowance as per the proceeded with calculating the disallowance as per the prescribed Rule 8D, as the assessee company's case fell prescribed Rule 8D, as the assessee company's case fell under sub-section (3) of section 14A of the I.T. Act 1961. section (3) of section 14A of the I.T. Act 1961. The provisions of sub- section (3) of section 14A clearly section (3) of section 14A clearly states that Rule 8D shall also apply in a case, where the states that Rule 8D shall also apply in a case, where the assessee company claims that no expenditure has been assessee company claims that no expenditure has been incurred. 5.4 In this regard, it is important to reproduce the it is important to reproduce the contents of Section 14A, which are as below : contents of Section 14A, which are as below :- "144. Expenditure incurred in relation to income not "144. Expenditure incurred in relation to income not includible in total income. (1) For the purposes of computing the total income under (1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of lowed in respect of expenditure incurred by the assessee in relation to expenditure incurred by the assessee in relation to income which does not form part of the total income income which does not form part of the total income under this Act. (2) The Assessing Officer shall determine the amount of (2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which expenditure incurred in relation to such income which does not form part of the total income under this Act in ot form part of the total income under this Act in accordance with such method as may be prescribed, if accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in uch expenditure in Tata Chemicals Ltd. relation to income which does not form part of the total 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 section (2) shall also apply in relation to a case where an assessee claims that no relation to a case where an assessee claims that no expenditure has been incurred by him in relatio expenditure has been incurred by him in relation to income which does not form part of the total income income which does not form part of the total income under this Act: Provided that nothing contained in this section shall Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise already made or otherwise increasing the liability of the assessee under section increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 154, for any assessment year beginning on or before the Ist day of April, 2001." 5.5 It is amply clear from the above provisions that the main 5.5 It is amply clear from the above provisions that the main 5.5 It is amply clear from the above provisions that the main operating portion is sub operating portion is sub-section (1) of Section 14A and the n (1) of Section 14A and the subsequent amendments has not changed the wordings of sub subsequent amendments has not changed the wordings of sub subsequent amendments has not changed the wordings of sub section (1). The Finance Act, 2006 has introduced w.e.f. section (1). The Finance Act, 2006 has introduced w.e.f. section (1). The Finance Act, 2006 has introduced w.e.f. 1.4.2007, sub section (2) and sub section (3) of section 14A. The 1.4.2007, sub section (2) and sub section (3) of section 14A. The 1.4.2007, sub section (2) and sub section (3) of section 14A. The sub section (2) of Section 14A basically lays sub section (2) of Section 14A basically lays down the manner in down the manner in which the disallowance u/s 14A has to be calculated, read with which the disallowance u/s 14A has to be calculated, read with which the disallowance u/s 14A has to be calculated, read with Rule 8D of the I.T Rules, 1962. Further, sub section (3) of Section Rule 8D of the I.T Rules, 1962. Further, sub section (3) of Section Rule 8D of the I.T Rules, 1962. Further, sub section (3) of Section 14A only clarifies that even if the assessee claims that no 14A only clarifies that even if the assessee claims that no 14A only clarifies that even if the assessee claims that no expenditure has been incurred in relation to t expenditure has been incurred in relation to the exempt income he exempt income then also, sub section (2) of section 14A can be applied. The then also, sub section (2) of section 14A can be applied. The then also, sub section (2) of section 14A can be applied. The legislature in its own wisdom, to remove the subjectivity legislature in its own wisdom, to remove the subjectivity legislature in its own wisdom, to remove the subjectivity involved in the calculation of disallowance under section 144 involved in the calculation of disallowance under section 144 involved in the calculation of disallowance under section 144 has standardized the amount of disallowance to be made un has standardized the amount of disallowance to be made un has standardized the amount of disallowance to be made under section 144. This amendment was necessary as the Assessing section 144. This amendment was necessary as the Assessing section 144. This amendment was necessary as the Assessing Officers were making disallowances u/s 14A on estimate basis Officers were making disallowances u/s 14A on estimate basis Officers were making disallowances u/s 14A on estimate basis without any scientific and logical reasoning. It is precisely for without any scientific and logical reasoning. It is precisely for without any scientific and logical reasoning. It is precisely for this reason that Rule 8D has been inserted w.e.f. 24.3.2008. this reason that Rule 8D has been inserted w.e.f. 24.3.2008. this reason that Rule 8D has been inserted w.e.f. 24.3.2008. 5.6 In the case of Godrej & Boyce Mfg. Co. Ltd. Vs. DCIT & Anr., n the case of Godrej & Boyce Mfg. Co. Ltd. Vs. DCIT & Anr., n the case of Godrej & Boyce Mfg. Co. Ltd. Vs. DCIT & Anr., (2010) 328 ITR 0081, the Hon'ble Bombay High Court has held (2010) 328 ITR 0081, the Hon'ble Bombay High Court has held (2010) 328 ITR 0081, the Hon'ble Bombay High Court has held that if the AO is not satisfied with the claim of the assessee, that if the AO is not satisfied with the claim of the assessee, that if the AO is not satisfied with the claim of the assessee, then the legislature directs him to follow the method that has then the legislature directs him to follow the method that has then the legislature directs him to follow the method that has been pres been prescribed. The relevant portion of the judgment of the cribed. The relevant portion of the judgment of the Hon'ble Bombay High Court is reproduced below: Hon'ble Bombay High Court is reproduced below:- The following principles would emerge from s. 14A: (a) The following principles would emerge from s. 14A: (a) the mandate of s. 14A is to prevent claims for deduction the mandate of s. 14A is to prevent claims for deduction of expenditure in relation to income which does not form of expenditure in relation to income which does not form part of the total income of the assessee; (b) sec. 14A(1) is part of the total income of the assessee; (b) sec. 14A(1) is enacted to ensure that only expenses incurred in respect enacted to ensure that only expenses incurred in respect of earning taxable income are allowed; (c) the principle of of earning taxable income are allowed; (c) the principle of apportionment of expenses is widened by s. 14A to apportionment of expenses is widened by s. 14A to include even the apportionment of expenditure between e apportionment of expenditure between taxable and non-taxable income of an indivisible taxable income of an indivisible

144.

Income which does not form part of the total income is broadly adverted to as exempt part of the total income is broadly adverted to as exempt income as an abbreviated appellation. Under sub income as an abbreviated appellation. Under sub-s. (2), the AO is required to determine the amount of he AO is required to determine the amount of expenditure incurred by an assessee in relation to such expenditure incurred by an assessee in relation to such income which does not form part of the total income income which does not form part of the total income under the Act in accordance with such method as may under the Act in accordance with such method as may be prescribed. The method, having regard to the mea be prescribed. The method, having regard to the meaning of the expression 'prescribed' in s. 2(33), must be of the expression 'prescribed' in s. 2(33), must be prescribed by rules made under the Act. What merits prescribed by rules made under the Act. What merits emphasis is that the jurisdiction of the AO to determine emphasis is that the jurisdiction of the AO to determine the expenditure incurred in relation to such income which the expenditure incurred in relation to such income which does not form part of the total income, in accordance income, in accordance with the prescribed method, arises if the AO is not with the prescribed method, arises if the AO is not satisfied with the correctness of the claim of the satisfied with the correctness of the claim of the assessee in respect of the expenditure which the assessee in respect of the expenditure which the assessee claims to have incurred in relation to income assessee claims to have incurred in relation to income which does not form part of the total income. Moreover, the total income. Moreover, the satisfaction of the AO has to be arrived at, having the satisfaction of the AO has to be arrived at, having regard to the accounts of the assessee. Hence, sub regard to the accounts of the assessee. Hence, sub-s. (2) does not ipso facto enable the AO to apply the method does not ipso facto enable the AO to apply the method prescribed prescribed by by the the rules rules straightaway straightaway without without considering whether the claim made by the assessee in ether the claim made by the assessee in respect of the expenditure incurred in relation to income respect of the expenditure incurred in relation to income which does not form part of the total income is correct. which does not form part of the total income is correct. The AO must, in the first instance, determine whether The AO must, in the first instance, determine whether the claim of the assessee in that regard is cor the claim of the assessee in that regard is correct and the determination must be made having regard to the the determination must be made having regard to the accounts of the assessee. The satisfaction of the AO accounts of the assessee. The satisfaction of the AO must be arrived at on an objective basis. It is only when must be arrived at on an objective basis. It is only when the AO is not satisfied with the claim of the assessee, the AO is not satisfied with the claim of the assessee, that the legislature directs him to follow the method that him to follow the method that may be prescribed. Sub-s. (3) of s. 14A provides for the s. (3) of s. 14A provides for the application of sub-s. (2) also to a situation where the s. (2) also to a situation where the assessee claims that no expenditure has been incurred assessee claims that no expenditure has been incurred by him in relation to income which does not form part of by him in relation to income which does not form part of the total income under the Act. CIT vs. Walfort Share & he total income under the Act. CIT vs. Walfort Share & Stock Brokers (P) Ltd. (2010) 233 CTR (SC) 42: (2010) 41 Stock Brokers (P) Ltd. (2010) 233 CTR (SC) 42: (2010) 41 DTR (SC) 233 relied on." 5.7 The provisions of section 14A read with Rule 8D ensure that 5.7 The provisions of section 14A read with Rule 8D ensure that 5.7 The provisions of section 14A read with Rule 8D ensure that the tax incentive to certain incomes like dividend sho the tax incentive to certain incomes like dividend sho the tax incentive to certain incomes like dividend should not be used to reduce the tax payable on taxable income by debiting used to reduce the tax payable on taxable income by debiting used to reduce the tax payable on taxable income by debiting

Tata Chemicals Ltd. expenses incurred to earn non expenses incurred to earn non-taxable income against the taxable income against the taxable income. Similar views have been echoed by the Hon'ble taxable income. Similar views have been echoed by the Hon'ble taxable income. Similar views have been echoed by the Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. Vs. DCIT & Anr., (2010) 328 ITR 0081, wherein it was held as DCIT & Anr., (2010) 328 ITR 0081, wherein it was held as DCIT & Anr., (2010) 328 ITR 0081, wherein it was held as under:- "Sec. 14A represents a serious attempt on the part of "Sec. 14A represents a serious attempt on the part of Parliament to ensure that the tax incentive to certain Parliament to ensure that the tax incentive to certain incomes should not he used to reduce the tax payable on incomes should not he used to reduce the tax payable on taxable income by debiting expenses incurred to earn g expenses incurred to earn non-taxable income against the taxable income. In other taxable income against the taxable income. In other words, what s. 14A effectuates is that a shareholder words, what s. 14A effectuates is that a shareholder should not get the benefit both of an exemption under s. should not get the benefit both of an exemption under s. 10(33) and also a deduction in respect of the expenditure 10(33) and also a deduction in respect of the expenditure laid out towards earning tax-free income. If the dividend free income. If the dividend income had not been exempt under s. 10(33), the income had not been exempt under s. 10(33), the Revenue would have. taxed such dividend income and Revenue would have. taxed such dividend income and the assessee would have been entitled to a deduction in the assessee would have been entitled to a deduction in respect of its expenditure in relation to that respect of its expenditure in relation to that income. Dividend income does not form part of the total income Dividend income does not form part of the total income under s. 10(33). Sec. 14A ensures that the shareholder under s. 10(33). Sec. 14A ensures that the shareholder whose income from dividend is not included in the total whose income from dividend is not included in the total income of a previous year shall not claim a deduction in income of a previous year shall not claim a deduction in respect of the expenditure incurred in relation to earning e incurred in relation to earning such income. Sec. 14A is founded on a valid rationale such income. Sec. 14A is founded on a valid rationale that the basic principle of taxation is to tax net income that the basic principle of taxation is to tax net income that is to say, gross income minus the expenditure. On that is to say, gross income minus the expenditure. On that analogy the exemption is also in respect of net that analogy the exemption is also in respect of net income and expenses allowed can only be in relation to come and expenses allowed can only be in relation to the earning of taxable income. Therefore, the submission the earning of taxable income. Therefore, the submission of the assessee that an absurdity would result on the of the assessee that an absurdity would result on the application of the literal interpretation of s. 14A cannot application of the literal interpretation of s. 14A cannot be accepted." 5.8 The provisions 5.8 The provisions of section 14A read with Rule 8D is an of section 14A read with Rule 8D is an attempt on the part of the legislature to remove the subjectivity attempt on the part of the legislature to remove the subjectivity attempt on the part of the legislature to remove the subjectivity in the calculation of expenditure to be disallowed and thus in the calculation of expenditure to be disallowed and thus in the calculation of expenditure to be disallowed and thus introduce uniformity. It has been held in the case of Godrej & introduce uniformity. It has been held in the case of Godrej & introduce uniformity. It has been held in the case of Godrej & Boyce Mfg. Co. Ltd. Vs. DCIT Boyce Mfg. Co. Ltd. Vs. DCIT & Anr., (2010) 328 ITR 0081 by the & Anr., (2010) 328 ITR 0081 by the Hon'ble Bombay High Court as under: Hon'ble Bombay High Court as under:- "Sub-s. (2) of s. 14A prescribes a uniform method for s. (2) of s. 14A prescribes a uniform method for determining the amount of expenditure incurred in determining the amount of expenditure incurred in relation to income which does not form part of the total relation to income which does not form part of the total income only in a situation where the AO, having regard tion where the AO, having regard to the accounts of the assessee is not satisfied with the to the accounts of the assessee is not satisfied with the correctness of the claim of the assessee in respect of correctness of the claim of the assessee in respect of such expenditure. It therefore merits emphasis that sub such expenditure. It therefore merits emphasis that sub- s. (2) of s. 14A does not authorize or empower the AO s. (2) of s. 14A does not authorize or empower the AO to apply the prescribed method irrespective of the nature of apply the prescribed method irrespective of the nature of the claim made by the assessee. The AO has to first the claim made by the assessee. The AO has to first consider the correctness of the claim of the assessee consider the correctness of the claim of the assessee

Tata Chemicals Ltd. having regard to the accounts of the assessee. The accounts of the assessee. The satisfaction of the AO has to be objectively arrived at on tively arrived at on the basis of those accounts and after considering all the the basis of those accounts and after considering all the relevant facts and circumstances. The application of the relevant facts and circumstances. The application of the prescribed method arises in a situation where the claim prescribed method arises in a situation where the claim made by the assessee in respect of expenditure which is made by the assessee in respect of expenditure which is relatable to the earning of income which does not form e to the earning of income which does not form part of the total income under the Act is found to be part of the total income under the Act is found to be incorrect. In such a situation a method had to be devised incorrect. In such a situation a method had to be devised for apportioning the expenditure incurred by the for apportioning the expenditure incurred by the for apportioning the expenditure incurred by the assessee between what is incurred in relation to assessee between what is incurred in relation to the earning of taxable income and that which is incurred in earning of taxable income and that which is incurred in relation to the earning of non-taxable income. As a taxable income. As a matter matter of of fact, fact, the the Memorandum Memorandum Explaining Explaining the the Provisions of the Finance Bill, 2006 and the CBDT Provisions of the Finance Bill, 2006 and the CBDT Circular No. 14 of 2006, dt. 28th Dec., 2006 st Circular No. 14 of 2006, dt. 28th Dec., 2006 state that since the existing provisions of s. 14A did not provide a since the existing provisions of s. 14A did not provide a method of computing the expenditure incurred in relation method of computing the expenditure incurred in relation to income which did not form part of the total income, to income which did not form part of the total income, there was a considerable dispute between taxpayers there was a considerable dispute between taxpayers and the Department on the method of determining such method of determining such expenditure. It was in this background that sub expenditure. It was in this background that sub-s. (2) was inserted so as to provide a uniform method was inserted so as to provide a uniform method applicable where the AO is not satisfied with the applicable where the AO is not satisfied with the correctness of the claim of the assessee. Sub correctness of the claim of the assessee. Sub-s. (3) clarifies that the application of the method would be cation of the method would be attracted even to a situation where the assessee has attracted even to a situation where the assessee has claimed that no expenditure at all was incurred in claimed that no expenditure at all was incurred in relation to the earning of non-taxable income. Parliament taxable income. Parliament has provided an adequate safeguard to the invocation of has provided an adequate safeguard to the invocation of the power to determine the expenditure incurred in r to determine the expenditure incurred in relation to the earning of non- taxable income by taxable income by adoption of the prescribed method. The invocation of the adoption of the prescribed method. The invocation of the power is made conditional on the objective satisfaction of power is made conditional on the objective satisfaction of the AO in regard to the correctness of the clai the AO in regard to the correctness of the claim of the assessee, having regard to the accounts of the assessee. assessee, having regard to the accounts of the assessee. A decision by the AO has to be arrived at in good faith on A decision by the AO has to be arrived at in good faith on relevant considerations. The AO must furnish to the relevant considerations. The AO must furnish to the assessee a reasonable opportunity to show cause on the assessee a reasonable opportunity to show cause on the correctness of the claim made by him. In the event that made by him. In the event that the AO is not satisfied with the correctness of the claim the AO is not satisfied with the correctness of the claim made by the assessee, he must record reasons for his made by the assessee, he must record reasons for his conclusion. These safeguards which are implicit in the conclusion. These safeguards which are implicit in the requirements of fairness and fair procedure under Art. requirements of fairness and fair procedure under Art. 14 must be observed by the AO when he arrives at his must be observed by the AO when he arrives at his satisfaction under sub-s. (2) of s. 14A.-M.A. Rasheed vs. M.A. Rasheed vs. State of Kerala AIR 1974 SC 2249 relied on." State of Kerala AIR 1974 SC 2249 relied on." 5.9 In the case of Godrej & Boyce Mfg. Co. Ltd. Vs. DCIT & Anr., 5.9 In the case of Godrej & Boyce Mfg. Co. Ltd. Vs. DCIT & Anr., 5.9 In the case of Godrej & Boyce Mfg. Co. Ltd. Vs. DCIT & Anr., (2010) 328 ITR 0081, the Hon'ble Bomba (2010) 328 ITR 0081, the Hon'ble Bombay High Court has y High Court has clearly held that the provisions of sub clearly held that the provisions of sub-ss. (2) and (3) of s. 14A ss. (2) and (3) of s. 14A are constitutionally valid and further provisions of Rule 8D are are constitutionally valid and further provisions of Rule 8D are are constitutionally valid and further provisions of Rule 8D are Tata Chemicals Ltd. not ultra not ultra-vires to the provisions of s. 14A, and do not offend Art. vires to the provisions of s. 14A, and do not offend Art. 14 of the Constitution. It was further h 14 of the Constitution. It was further held by the Hon'ble eld by the Hon'ble Bombay High Court that in view of clear enunciation in the Bombay High Court that in view of clear enunciation in the Bombay High Court that in view of clear enunciation in the Memorandum Explaining the Memorandum Explaining the provisions of the Finance Bill, 2006 provisions of the Finance Bill, 2006 and further clarification by CBDT, vide Circular No. 14 of 2006, and further clarification by CBDT, vide Circular No. 14 of 2006, and further clarification by CBDT, vide Circular No. 14 of 2006, the sub the sub-section (2) of section 14A is applicable from asst. yr. rom asst. yr. 2007-08 onwards, and the provisions of Rule 8D, which have 08 onwards, and the provisions of Rule 8D, which have 08 onwards, and the provisions of Rule 8D, which have been notified w.e.f. 24th March, 2008 are applicable with effect been notified w.e.f. 24th March, 2008 are applicable with effect been notified w.e.f. 24th March, 2008 are applicable with effect from A.Y. 2008 from A.Y. 2008-09. 5.10 In the case of ACIT Vs. Citicorp Finance (India) Ltd. (2007) 5.10 In the case of ACIT Vs. Citicorp Finance (India) Ltd. (2007) 5.10 In the case of ACIT Vs. Citicorp Finance (India) Ltd. (2007) 108 ITD 0457, the Hon'ble ITAT Mu 108 ITD 0457, the Hon'ble ITAT Mumbai 'C' Bench has held that mbai 'C' Bench has held that it is not correct to say that dividend income can be earned by it is not correct to say that dividend income can be earned by it is not correct to say that dividend income can be earned by incurring no or nominal expenses and all expenses connected incurring no or nominal expenses and all expenses connected incurring no or nominal expenses and all expenses connected with such exempt income have to be disallowed under s. 14A with such exempt income have to be disallowed under s. 14A with such exempt income have to be disallowed under s. 14A regardless of whether they are direct or indi regardless of whether they are direct or indirect, fixed or rect, fixed or variable and managerial or financial. The relevant observations variable and managerial or financial. The relevant observations variable and managerial or financial. The relevant observations of the Hon'ble ITAT in this regard are as below: of the Hon'ble ITAT in this regard are as below:- "Sec. 14A clearly makes a distinction between exempt "Sec. 14A clearly makes a distinction between exempt income and taxable income. It treats both of them as income and taxable income. It treats both of them as separate classes for computation of income after computation of income after allocation of expenditure relating thereto and mandates allocation of expenditure relating thereto and mandates that no deduction in respect of any expenditure shall be that no deduction in respect of any expenditure shall be allowed against taxable income which is incurred in allowed against taxable income which is incurred in relation to exетрі income. The underlying object is to relation to exетрі income. The underlying object is to compute both the exempt income and taxable income both the exempt income and taxable income correctly, which is possible only after the expenditure correctly, which is possible only after the expenditure incurred in relation thereto is allocated to them. In other incurred in relation thereto is allocated to them. In other words, s. 14A bars the deduction of expenditure incurred words, s. 14A bars the deduction of expenditure incurred in relation to exempt income out of taxable income, as le income, as this would have the effect of artificially inflating the this would have the effect of artificially inflating the exempt income and thereby deflating the taxable income. exempt income and thereby deflating the taxable income. The prohibition for allowing the deduction under s. 14A The prohibition for allowing the deduction under s. 14A for and from usst. yr. 1962 for and from usst. yr. 1962-63 is "in respect of 63 is "in respect of expenditure incurred by the assessee in relation to the assessee in relation to income" which does not form part of the total income. The income" which does not form part of the total income. The term "expenditure" occurring in s. 14A would take in its term "expenditure" occurring in s. 14A would take in its sweep not only direct expenditure but also all forms of sweep not only direct expenditure but also all forms of expenditure regardless of whether they are fixed, expenditure regardless of whether they are fixed, variable, direct, indirect, administrative, managerial or e, direct, indirect, administrative, managerial or financial. The phraseology used in s. 14A prohibiting the financial. The phraseology used in s. 14A prohibiting the financial. The phraseology used in s. 14A prohibiting the deduction in respect of expenditure incurred by the deduction in respect of expenditure incurred by the assessee in relation to exempt income is thus wide assessee in relation to exempt income is thus wide enough to cover all forms of expenses provided they have ed they have some connection with the exempt income. This is based some connection with the exempt income. This is based on the principle that expenses must be allocated to that on the principle that expenses must be allocated to that income to which they are connected to avoid distortions income to which they are connected to avoid distortions in the computation of both taxable as well as exempt in the computation of both taxable as well as exempt income. (Paras 11 & 12) (Paras 11 & 12)

It is difficult to accept the hypothesis that one can earn It is difficult to accept the hypothesis that one can earn substantial dividend income without incurring any substantial dividend income without incurring any expenses expenses whatsoever whatsoever including including management management or or administrative expenses. By same logic, it is equally administrative expenses. By same logic, it is equally difficult to accept that the only expenses invol difficult to accept that the only expenses involved in earning the dividend income are those incurred on earning the dividend income are those incurred on collection of dividend or on encashing a few dividend collection of dividend or on encashing a few dividend warrants. A company cannot earn dividend without its warrants. A company cannot earn dividend without its existence and management. Investment decisions are existence and management. Investment decisions are very complex in nature. They require substantial market tantial market research, day-to-day analysis of market trends and day analysis of market trends and decisions with regard to acquisition, retention and decisions with regard to acquisition, retention and sale of shares at the most appropriate time. They require of shares at the most appropriate time. They require huge investment in shares and consequential blocking of huge investment in shares and consequential blocking of funds. It is well known funds. It is well known that capital has cost and that that capital has cost and that element of cost is represented by interest. Besides, element of cost is represented by interest. Besides, investment decisions are generally taken in the meetings investment decisions are generally taken in the meetings of the board of directors for which administrative of the board of directors for which administrative expenses are incurred. It is therefore not correct to say expenses are incurred. It is therefore not correct to say that dividend income can be earned by incurring no or ividend income can be earned by incurring no or nominal expenditure. All expenses connected with the nominal expenditure. All expenses connected with the exempt income have to be disallowed under s. 14A exempt income have to be disallowed under s. 14A regardless of whether they are direct or indirect, fixed or regardless of whether they are direct or indirect, fixed or variable and managerial or financial in accord variable and managerial or financial in accordance with law. In this connection, the provisions of sub law. In this connection, the provisions of sub-s. (2) or (3) of s. 14A inserted by the Finance Act, 2006 deserve to be of s. 14A inserted by the Finance Act, 2006 deserve to be noted. The procedure for computation of disallowance noted. The procedure for computation of disallowance has now been provided in sub-ss. (2) and (3) of s. 14A. It ss. (2) and (3) of s. 14A. It is no longer open to the AO to apply his discretion in en to the AO to apply his discretion in computing computing the the disallowance disallowance or or make make ad ad hoc hoc disallowance under s. 14A. Substantive provisions are disallowance under s. 14A. Substantive provisions are contained in sub- s. (1) of s. 14A prohibiting deduction in s. (1) of s. 14A prohibiting deduction in respect of expenditure incurred in relation to exempt respect of expenditure incurred in relation to exempt income while while procedural procedural provisions provisions regarding regarding computation of the aforesaid disallowance are contained computation of the aforesaid disallowance are contained in sub-ss. (2) and (3) thereof. Sub-ss. (2) and (3) seek to ss. (2) and (3) seek to achieve the underlying object of s. 144(1) that any achieve the underlying object of s. 144(1) that any expenditure incurred in relation to exempt income expenditure incurred in relation to exempt income should not be allowed deduction. It is fairly well-settled by a settled by a catena of decisions that procedural provisions apply to catena of decisions that procedural provisions apply to all all pending pending matters matters and and that that the the rule rule against against retrospectivity does not hit them. AO is statutorily retrospectivity does not hit them. AO is statutorily required to compute the disallowance in the manner in the manner provided by sub-ss. (2) and (3) of s. 14A. Therefore the ss. (2) and (3) of s. 14A. Therefore the orders passed by the CIT(A) and the AO in this behalf orders passed by the CIT(A) and the AO in this behalf are set aside and the matter is restored to the AO for a are set aside and the matter is restored to the AO for a fresh examination and decision in the light of the fresh examination and decision in the light of the fresh examination and decision in the light of the provisions of s. 141 including sub-ss. (2) and (3) thereof, ss. (2) and (3) thereof, in accordance with law. Southern Petro Chemical in accordance with law. Southern Petro Chemical Industries vs. Dy. CIT (2005) 93 TTJ (Chennai) 161, Industries vs. Dy. CIT (2005) 93 TTJ (Chennai) 161, Harish Krishnakant Bhatt vs. ITO (2004) 85 TTJ (Ahd) Harish Krishnakant Bhatt vs. ITO (2004) 85 TTJ (Ahd) 872: (2004) 91 ITD 311 (Ahd), Dy. CIT vs. S.G. 872: (2004) 91 ITD 311 (Ahd), Dy. CIT vs. S.G.

Investments & Industries Ltd. (2004) 84 TTJ (Kol) 143: stries Ltd. (2004) 84 TTJ (Kol) 143: (2004) 89 ITD 44 (Kol) and Asstt. CIT vs. Premier (2004) 89 ITD 44 (Kol) and Asstt. CIT vs. Premier Consolidated Capital Trust (I) Ltd. (2004) 83 TTJ Consolidated Capital Trust (I) Ltd. (2004) 83 TTJ (Mumbai) 843 relied on. (Paras 13 to 15 & 17)" (Paras 13 to 15 & 17)" 5.11 The plea of the assessee company that no finance cost has 5.11 The plea of the assessee company that no finance cost has 5.11 The plea of the assessee company that no finance cost has been incu been incurred for investing in the shares of group companies is rred for investing in the shares of group companies is also not borne out from the facts on record. The utilization of the also not borne out from the facts on record. The utilization of the also not borne out from the facts on record. The utilization of the secured and unsecured loans raised by the assessée company secured and unsecured loans raised by the assessée company secured and unsecured loans raised by the assessée company during the year under consideration has not been filed during during the year under consideration has not been filed during during the year under consideration has not been filed during the course o the course of the proceedings. The assessee company has not f the proceedings. The assessee company has not given any allocation of expenses between the various business given any allocation of expenses between the various business given any allocation of expenses between the various business activities, namely exempt and taxable. In view of this, it is a fit activities, namely exempt and taxable. In view of this, it is a fit activities, namely exempt and taxable. In view of this, it is a fit case which attracts the provisions of Section 14A read with Rule case which attracts the provisions of Section 14A read with Rule case which attracts the provisions of Section 14A read with Rule 8D. 5.12 The 5.12 The provisions of Section 14A clearly make a distinction provisions of Section 14A clearly make a distinction between exempt income and taxable income. It treats both of between exempt income and taxable income. It treats both of between exempt income and taxable income. It treats both of them as separate classes for the purposes of computation of them as separate classes for the purposes of computation of them as separate classes for the purposes of computation of income and mandates that no deduction in respect of income and mandates that no deduction in respect of income and mandates that no deduction in respect of any expenditure shall be allowe expenditure shall be allowed against taxable income, which is d against taxable income, which is incurred in relation to exempt income. The underlying object is to incurred in relation to exempt income. The underlying object is to incurred in relation to exempt income. The underlying object is to compute both the exempt income and taxable income separately compute both the exempt income and taxable income separately compute both the exempt income and taxable income separately and correctly, which is possible only after the expenditure and correctly, which is possible only after the expenditure and correctly, which is possible only after the expenditure incurred in relation to each cate incurred in relation to each category of income is allocated gory of income is allocated properly. properly. 5.13 In other words, Section 14A bars the deduction of 5.13 In other words, Section 14A bars the deduction of 5.13 In other words, Section 14A bars the deduction of expenditure incurred in relation to exempt income out of taxable expenditure incurred in relation to exempt income out of taxable expenditure incurred in relation to exempt income out of taxable income as this would have the effect of artificially inflating the income as this would have the effect of artificially inflating the income as this would have the effect of artificially inflating the exempt income and thereby defla exempt income and thereby deflating the taxable income. The ting the taxable income. The term "expenditure" occurring in section 14A takes into its sweep term "expenditure" occurring in section 14A takes into its sweep term "expenditure" occurring in section 14A takes into its sweep not only direct expenditure but also all forms of expenditure, not only direct expenditure but also all forms of expenditure, not only direct expenditure but also all forms of expenditure, regardless of whether they are fixed, variable, direct, indirect, regardless of whether they are fixed, variable, direct, indirect, regardless of whether they are fixed, variable, direct, indirect, administrative, managerial or fin administrative, managerial or financial. The phraseology used in ancial. The phraseology used in section 14A prohibiting the deduction in respect of expenditure section 14A prohibiting the deduction in respect of expenditure section 14A prohibiting the deduction in respect of expenditure incurred by the assessee in relation to exempt income is thus incurred by the assessee in relation to exempt income is thus incurred by the assessee in relation to exempt income is thus wide enough to cover all forms of expenses provided they have a wide enough to cover all forms of expenses provided they have a wide enough to cover all forms of expenses provided they have a bearing with the exempt income. Th bearing with the exempt income. This is based on the principle is is based on the principle that expenses must be allocated to that income to which they that expenses must be allocated to that income to which they that expenses must be allocated to that income to which they are connected to avoid distortions in the computation of both are connected to avoid distortions in the computation of both are connected to avoid distortions in the computation of both taxable as well as exempt income. taxable as well as exempt income. 5.14 It is difficult to accept the hypothesis that one can earn 5.14 It is difficult to accept the hypothesis that one can earn 5.14 It is difficult to accept the hypothesis that one can earn exempt income without incurring any expenses. By same logic, it income without incurring any expenses. By same logic, it is equally difficult to accept that the only expense involved in is equally difficult to accept that the only expense involved in is equally difficult to accept that the only expense involved in earning the dividend income are those incurred on collection of earning the dividend income are those incurred on collection of earning the dividend income are those incurred on collection of dividend or on en dividend or on en-cashing a few dividend warrants. A company cashing a few dividend warrants. A company cannot e cannot earn dividend without the active involvement and arn dividend without the active involvement and participation of the management. Investment decisions are very participation of the management. Investment decisions are very participation of the management. Investment decisions are very

Tata Chemicals Ltd. complex in nature and needs special attention of the top complex in nature and needs special attention of the top complex in nature and needs special attention of the top management. management. management. They They They require require require substantial substantial substantial market market market research, research, research, analysis of market trends and deci analysis of market trends and decisions are required to be made sions are required to be made with regard to acquisition, retention and sale of such with regard to acquisition, retention and sale of such with regard to acquisition, retention and sale of such shares/investments at the most appropriate time. They require shares/investments at the most appropriate time. They require shares/investments at the most appropriate time. They require huge investment and consequential blocking of funds. It is well huge investment and consequential blocking of funds. It is well huge investment and consequential blocking of funds. It is well known that capital has cost and that element known that capital has cost and that element known that capital has cost and that element of cost is represented by interest. Besides, investment decisions are represented by interest. Besides, investment decisions are represented by interest. Besides, investment decisions are generally taken in the Board meetings of the company for which generally taken in the Board meetings of the company for which generally taken in the Board meetings of the company for which administrative expenses are incurred. So, it will not be correct to administrative expenses are incurred. So, it will not be correct to administrative expenses are incurred. So, it will not be correct to assume that dividend income can be earned by incurring assume that dividend income can be earned by incurring assume that dividend income can be earned by incurring nil or nominal expenditure. Such expenses, relating to the investments nominal expenditure. Such expenses, relating to the investments nominal expenditure. Such expenses, relating to the investments made for earning exempt income have to be disallowed as per made for earning exempt income have to be disallowed as per made for earning exempt income have to be disallowed as per section 144 of the Income Tax Act. Further, the intention of the section 144 of the Income Tax Act. Further, the intention of the section 144 of the Income Tax Act. Further, the intention of the legislature was not to allow any expenditure against the tax legislature was not to allow any expenditure against the tax legislature was not to allow any expenditure against the tax free income. Therefore, section 14A was inserted by the Finance Act, income. Therefore, section 14A was inserted by the Finance Act, income. Therefore, section 14A was inserted by the Finance Act, 2001 with retrospective effect from 1.4.1962. 2001 with retrospective effect from 1.4.1962.

2. A sum paid out". There, the term "expense" has been defined at the same page of the the term "expense" has been defined at the same page of the the term "expense" has been defined at the same page of the aforesaid dictionary as follows: "An expenditure of money, time, aforesaid dictionary as follows: "An expenditure of money, time, aforesaid dictionary as follows: "An expenditure of money, time, labor, or resources to accomplish a result; esp., business labor, or resources to accomplish a result; esp., business labor, or resources to accomplish a result; esp., business expenditure chargeable again expenditure chargeable against revenue for a specific period st revenue for a specific period- expense." The expense." The "expense has many forms, namely accrued "expense has many forms, namely accrued expense, administrative expense, business expense, capital expense, administrative expense, business expense, capital expense, administrative expense, business expense, capital expense, expense, expense, capitalized capitalized capitalized expense, expense, expense, current current current expense, expense, expense, deferred deferred deferred expense, funeral expense, general administrative expen expense, funeral expense, general administrative expen expense, funeral expense, general administrative expense, medical expense, moving expense, operating expense, ordinary medical expense, moving expense, operating expense, ordinary medical expense, moving expense, operating expense, ordinary and necessary expense, organizational expense, out and necessary expense, organizational expense, out and necessary expense, organizational expense, out-of-pocket expense, expense, expense, prepaid prepaid prepaid expense, expense, expense, travel travel travel expense. expense. expense. The The The term term term "expenditure" occurring in section 14A would thus take in its "expenditure" occurring in section 14A would thus take in its "expenditure" occurring in section 14A would thus take in its sweep not only di sweep not only direct expenditure but also all forms of rect expenditure but also all forms of expenditure. expenditure. 5.16 The term "incur" has been defined at page 771 of the 5.16 The term "incur" has been defined at page 771 of the 5.16 The term "incur" has been defined at page 771 of the aforesaid dictionary as follows: "incur, to suffer to bring on aforesaid dictionary as follows: "incur, to suffer to bring on aforesaid dictionary as follows: "incur, to suffer to bring on oneself (a liability or expense)." One of the meanings given to the oneself (a liability or expense)." One of the meanings given to the oneself (a liability or expense)." One of the meanings given to the word "relate" u word "relate" under the head "Law" at page 2534 in "The New nder the head "Law" at page 2534 in "The New Shorter Oxford English Dictionary" (1993 Edition) is "Have some Shorter Oxford English Dictionary" (1993 Edition) is "Have some Shorter Oxford English Dictionary" (1993 Edition) is "Have some connection with, be connected to." The phraseology used in connection with, be connected to." The phraseology used in connection with, be connected to." The phraseology used in section 14A prohibiting the deduction in respect of expenditure section 14A prohibiting the deduction in respect of expenditure section 14A prohibiting the deduction in respect of expenditure incurred by the assessee incurred by the assessee in relation to exempt income is thus in relation to exempt income is thus wide enough to cover all form of expenses provided they have wide enough to cover all form of expenses provided they have wide enough to cover all form of expenses provided they have some connection with the exempt income. some connection with the exempt income. 5.17 This is also required as per the matching principle of 5.17 This is also required as per the matching principle of 5.17 This is also required as per the matching principle of accountancy. In Taparia Tools Ltd. Vs. Jt. CIT (2003) 260 accountancy. In Taparia Tools Ltd. Vs. Jt. CIT (2003) 260 accountancy. In Taparia Tools Ltd. Vs. Jt. CIT (2003) 260 ITR

102, the Hon'ble High Court has explained the matching 102, the Hon'ble High Court has explained the matching 102, the Hon'ble High Court has explained the matching principle as follows: principle as follows:- "Under this matching concept, revenue and income earned "Under this matching concept, revenue and income earned "Under this matching concept, revenue and income earned during an accounting period, irrespective of actual cash in during an accounting period, irrespective of actual cash in during an accounting period, irrespective of actual cash in-flow, is required to be compared with expenses incurred d is required to be compared with expenses incurred d is required to be compared with expenses incurred during the. same period, irrespective of actual out same period, irrespective of actual out-flow of cash. In this case, flow of cash. In this case, the assessee is following the mercantile system of accounting. the assessee is following the mercantile system of accounting. the assessee is following the mercantile system of accounting. This matching concept is very relevant to compute taxable This matching concept is very relevant to compute taxable This matching concept is very relevant to compute taxable income" income" 5.18 In view of the above factual and legal posi 5.18 In view of the above factual and legal posi 5.18 In view of the above factual and legal position and following the DRP's order for A.Y. 2010 following the DRP's order for A.Y. 2010-11 on this issue, the 11 on this issue, the disallowance made by the A.O. u/s 14A amounting Rs. disallowance made by the A.O. u/s 14A amounting Rs. disallowance made by the A.O. u/s 14A amounting Rs. 8,44,38,527/ 8,44,38,527/- is upheld and the objection raised by the is upheld and the objection raised by the assessee company is rejected." assessee company is rejected." 8.2 In view of the above factual and legal pos 8.2 In view of the above factual and legal position and following ition and following the DRP's order for A.Y. 2011 the DRP's order for A.Y. 2011-12 on this issue, the disallowance 12 on this issue, the disallowance made by the A.O. u/s 14A is upheld and the ground of objection made by the A.O. u/s 14A is upheld and the ground of objection made by the A.O. u/s 14A is upheld and the ground of objection raised by the assessee company is rejected." raised by the assessee company is rejected." 15.2 Material facts remaining same during the year under refere 15.2 Material facts remaining same during the year under refere 15.2 Material facts remaining same during the year under reference, following the views and findings of the DRP on this issue in earlier following the views and findings of the DRP on this issue in earlier following the views and findings of the DRP on this issue in earlier years, we upheld the disallowance made by the AO u/s.14A. The years, we upheld the disallowance made by the AO u/s.14A. The years, we upheld the disallowance made by the AO u/s.14A. The ground of objection is rejected accordingly. ground of objection is rejected accordingly.” 5.18 Elaborating further, the learned counsel submitted that the Elaborating further, the learned counsel submitted that the Elaborating further, the learned counsel submitted that the had, on its own accord, disallowed a sum of ₹9,46,335 as assessee had, on its own accord, disallowed a sum of had, on its own accord, disallowed a sum of administrative expenditure attributable to earning exempt income. administrative expenditure attributable to earning exempt income. administrative expenditure attributable to earning exempt income. Such disallowance was computed by allocating a reasonable Such disallowance was computed by allocating a reasonable Such disallowance was computed by allocating a reasonable percentage of the salaries of the CFO, Deputy CFO, Head of percentage of the salaries of the CFO, Deputy CFO, Head of percentage of the salaries of the CFO, Deputy CFO, Head of Treasury, and other treasury staff, together with an allocation of Treasury, and other treasury staff, together with an allocat Treasury, and other treasury staff, together with an allocat overheads to the extent of 10%. Before rejecting this computation overheads to the extent of 10%. Before rejecting this computation overheads to the extent of 10%. Before rejecting this computation and resorting to Rule 8D, it was incumbent upon the Assessing and resorting to Rule 8D, it was incumbent upon the Assessing and resorting to Rule 8D, it was incumbent upon the Assessing Officer to record a clear, objective, and reasoned dissatisfaction with Officer to record a clear, objective, and reasoned dissatisfaction with Officer to record a clear, objective, and reasoned dissatisfaction with the assessee’s claim.

Tata Chemicals Ltd. It was emphasised tha It was emphasised that any deficiency in the recording of such t any deficiency in the recording of such dissatisfaction cannot be cured at the appellate stage, as the dissatisfaction cannot be cured at the appellate stage, as the dissatisfaction cannot be cured at the appellate stage, as the validity of invocation of Rule 8D must be tested solely on the validity of invocation of Rule 8D must be tested solely on the validity of invocation of Rule 8D must be tested solely on the reasons recorded by the Assessing Officer. The satisfaction so reasons recorded by the Assessing Officer. The satisfaction so reasons recorded by the Assessing Officer. The satisfaction so recorded is subject to ju recorded is subject to judicial scrutiny and cannot be supplemented dicial scrutiny and cannot be supplemented or improved upon subsequently. or improved upon subsequently. 5.20 The learned counsel further submitted that, prior to the The learned counsel further submitted that, prior to the The learned counsel further submitted that, prior to the insertion of Rule 8D, disallowance under section 14A was required insertion of Rule 8D, disallowance under section 14A was required insertion of Rule 8D, disallowance under section 14A was required to be made on a reasonable basis. For assessment years up to to be made on a reasonable basis. For assessment years to be made on a reasonable basis. For assessment years 2007–08, the method adopted by the assessee, namely, allocation of 08, the method adopted by the assessee, namely, allocation of 08, the method adopted by the assessee, namely, allocation of a proportion of salary costs of key managerial and treasury a proportion of salary costs of key managerial and treasury a proportion of salary costs of key managerial and treasury personnel along with overheads, had been consistently accepted by personnel along with overheads, had been consistently accepted by personnel along with overheads, had been consistently accepted by the Revenue and affirmed by appellate authorities. It was contended the Revenue and affirmed by appellate authorities. It wa the Revenue and affirmed by appellate authorities. It wa that a method found to be reasonable and acceptable in earlier that a method found to be reasonable and acceptable in earlier that a method found to be reasonable and acceptable in earlier years could not, in the absence of any material change in facts, be years could not, in the absence of any material change in facts, be years could not, in the absence of any material change in facts, be rejected as unsatisfactory in subsequent years. rejected as unsatisfactory in subsequent years. 5.21 With reference to the investment schedule, it was submitted With reference to the investment schedule, it was submitted With reference to the investment schedule, it was submitted that there was no substantial change in the investment portfolio that there was no substantial change in the investment portfolio that there was no substantial change in the investment portfolio during the relevant year, except for a reduction in shareholding in during the relevant year, except for a reduction in shareholding in during the relevant year, except for a reduction in shareholding in Oriental Hotels Ltd. and a reclassification of certain investments Oriental Hotels Ltd. and a reclassification of certain investments Oriental Hotels Ltd. and a reclassification of certain investments from current to non from current to non-current. Dividend receipts were cred current. Dividend receipts were credited electronically, and no significant administrative effort was required electronically, and no significant administrative effort was required electronically, and no significant administrative effort was required for such activity. In these circumstances, the allocation of for such activity. In these circumstances, the allocation of for such activity. In these circumstances, the allocation of administrative expenses made by the assessee was asserted to be administrative expenses made by the assessee was asserted to be administrative expenses made by the assessee was asserted to be fair and reasonable.

5.25 The learned counsel further drew support from decisions of The learned counsel further drew support from decisions of The learned counsel further drew support from decisions of the jurisdictional High Court and of various coordinate benches of the jurisdictional High Court and of various coordinate benches of the jurisdictional High Court and of various coordinate benches of the Tribunal, including PCIT v. Bombay Stock Exchange Ltd. (2020) the Tribunal, including PCIT v. Bombay Stock Exchange Ltd. (2020) the Tribunal, including PCIT v. Bombay Stock Exchange Ltd. (2020) 113 taxmann.com 303 ; PCIT 113 taxmann.com 303 ; PCIT v. Tata Capital Ltd. (2024) 161 v. Tata Capital Ltd. (2024) 161 taxmann.com 557and CIT v. Sesa Goa Ltd. (2021) 436 ITR 17; VIP taxmann.com 557and CIT v. Sesa Goa Ltd. (2021) 436 ITR 17; VIP taxmann.com 557and CIT v. Sesa Goa Ltd. (2021) 436 ITR 17; VIP Industries Ltd. v. DCIT in Industries Ltd. v. DCIT in ; ; M/s Greatship (India) Ltd. v. NFAC in for AY 2017-18 and (India) Ltd. v. NFAC in for AY 2017 (India) Ltd. v. NFAC in for AY 2017 HDFC Bank Ltd., Mumbai HDFC Bank Ltd., Mumbai-ITAT, AY 2002-03 TO 2020 03 TO 2020-21, order dt. 28.01.2025 , wherein it has been consistently held that a wherein it has been consistently held that a wherein it has been consistently held that a mechanical or presumptive invocation of Rule 8D, without objective mechanical or presumptive invocation of Rule 8D, without objective mechanical or presumptive invocation of Rule 8D, without objective satisfaction based on the assessee’s accounts, is unsustainable in satisfaction based on the assessee’s accounts, is unsustainable in satisfaction based on the assessee’s accounts, is unsustainable in law. Applying these principles t law. Applying these principles to the facts of the present case, it was o the facts of the present case, it was submitted that the Assessing Officer having failed to record the submitted that the Assessing Officer having failed to record the submitted that the Assessing Officer having failed to record the requisite satisfaction, the disallowance under section 14A ought to requisite satisfaction, the disallowance under section 14A ought to requisite satisfaction, the disallowance under section 14A ought to be restricted to the am be restricted to the amount of suo-motu disallowance made by the disallowance made by the assessee.

Tata Chemicals Ltd. dissatisfaction with regard to the suo motu disallowance made dissatisfaction with regard to the suo motu disallowance made dissatisfaction with regard to the suo motu disallowance made under section 14A cannot be accepted. A perusal of paragraph 4.1 under section 14A cannot be accepted. A perusal of paragraph 4.1 under section 14A cannot be accepted. A perusal of paragraph 4.1 of the assessment order clearly reveals that the Assessing Officer of the assessment order clearly reveals that the Assessing Officer of the assessment order clearly reveals that the Assessing Officer recorded reasons for his dissatisfaction. He observed that recorded reasons for his dissatisfaction. He observed that recorded reasons for his dissatisfaction. He observed that investments of the magnitude held by the assessee cannot be estments of the magnitude held by the assessee cannot be estments of the magnitude held by the assessee cannot be managed without incurring inherent expenditure towards market managed without incurring inherent expenditure towards market managed without incurring inherent expenditure towards market analysis, specialised expertise, and continuous monitoring. He analysis, specialised expertise, and continuous monitoring. He analysis, specialised expertise, and continuous monitoring. He further noted that such activities necessarily involve generation and further noted that such activities necessarily involve generation and further noted that such activities necessarily involve generation and evaluation of daily, fortnightly, and monthly reports to facilitate uation of daily, fortnightly, and monthly reports to facilitate uation of daily, fortnightly, and monthly reports to facilitate informed decisions regarding deployment and redemption of informed decisions regarding deployment and redemption of informed decisions regarding deployment and redemption of investments. The Assessing Officer also referred to various heads of investments. The Assessing Officer also referred to various heads of investments. The Assessing Officer also referred to various heads of expenditure and observed that, though such costs may not be expenditure and observed that, though such costs may not be expenditure and observed that, though such costs may not be capable of precise quantification, their incurrence was inevitable. le of precise quantification, their incurrence was inevitable. le of precise quantification, their incurrence was inevitable. He, therefore, found the overhead allocation adopted by the He, therefore, found the overhead allocation adopted by the He, therefore, found the overhead allocation adopted by the assessee to be unsatisfactory and proceeded to invoke Rule 8D, assessee to be unsatisfactory and proceeded to invoke Rule 8D, assessee to be unsatisfactory and proceeded to invoke Rule 8D, placing reliance on the decision of the Special Bench of the Tribunal placing reliance on the decision of the Special Bench of the Tribunal placing reliance on the decision of the Special Bench of the Tribunal in Daga Capital Management Pvt. Ltd.(supra) Daga Capital Management Pvt. Ltd.(supra)

Tata Chemicals Ltd. On examination of the suo motu disallowance made by the On examination of the suo motu disallowance made by the On examination of the suo motu disallowance made by the assessee, we find that no rational or cogent basis was furnished for assessee, we find that no rational or cogent basis was fu assessee, we find that no rational or cogent basis was fu restricting the salary cost of the CFO, Deputy CFO, and Head of restricting the salary cost of the CFO, Deputy CFO, and Head of restricting the salary cost of the CFO, Deputy CFO, and Head of Treasury to 1%. The allocation appears to have been made purly on Treasury to 1%. The allocation appears to have been made purly on Treasury to 1%. The allocation appears to have been made purly on an ad hoc and arbitrary basis, unsupported by any evidence such an ad hoc and arbitrary basis, unsupported by any evidence such an ad hoc and arbitrary basis, unsupported by any evidence such as work allocation or time spent on investment as work allocation or time spent on investment-rel related activities. Similarly, no basis was explained for estimating 5% of the salary of Similarly, no basis was explained for estimating 5% of the salary of Similarly, no basis was explained for estimating 5% of the salary of certain employees, nor were the names or roles of such employees certain employees, nor were the names or roles of such employees certain employees, nor were the names or roles of such employees identified. Further, no justification was provided for allocating identified. Further, no justification was provided for allocating identified. Further, no justification was provided for allocating overheads at 10% of the salary so appor overheads at 10% of the salary so apportioned. In the absence of tioned. In the absence of any rational or scientific basis, the estimation adopted by the any rational or scientific basis, the estimation adopted by the any rational or scientific basis, the estimation adopted by the assessee cannot be accepted as reasonable. assessee cannot be accepted as reasonable.

6.2 The Ld. counsel for the assessee has referred to the decision of The Ld. counsel for the assessee has referred to the decision of The Ld. counsel for the assessee has referred to the decision of the Hon’ble Supreme Court in the case of National Thermal Power the Hon’ble Supreme Court in the case of National Thermal Power the Hon’ble Supreme Court in the case of National Thermal Power Co. Ltd. v. CIT reported in 229 ITR 383 (SC). In the said case the Co. Ltd. v. CIT reported in 229 ITR 383 (SC). In the said case Co. Ltd. v. CIT reported in 229 ITR 383 (SC). In the said case assessee had raised an additi assessee had raised an additional ground urging that interest onal ground urging that interest earned by it on deposit placed during construction period should be earned by it on deposit placed during construction period should be earned by it on deposit placed during construction period should be reduced from the capital work in progress and need not be reduced from the capital work in progress and need not be reduced from the capital work in progress and need not be separately reflected as income. In paragraph 3 thereof, the Hon’ble separately reflected as income. In paragraph 3 thereof, the Hon’ble separately reflected as income. In paragraph 3 thereof, the Hon’ble Court has noted that the said Court has noted that the said additional ground was raised by the additional ground was raised by the assessee as it learned that the interest income assessee as it learned that the interest income was not was not taxable in view of two orders of the Special Benches of the Tribunal in the view of two orders of the Special Benches of the Tribunal in the view of two orders of the Special Benches of the Tribunal in the cases of Arasan Aluminum Industries (P) Ltd cases of Arasan Aluminum Industries (P) Ltd (supra) (supra) & Nagarjuna Steels Ltd. (supra). In In the case, though the facts as necessary for the case, though the facts as necessary for Tata Chemicals Ltd. adjudicating the additional ground formed part of the record, adjudicating the additional ground formed part of the record adjudicating the additional ground formed part of the record the Hon’ble Supreme Court held that if where investigation of fresh the Hon’ble Supreme Court held that if where investigation of fresh the Hon’ble Supreme Court held that if where investigation of fresh facts is required, the appellate authorities have discretion to allow facts is required, the appellate authorities have discretion to allow facts is required, the appellate authorities have discretion to allow or not to allow a new ground to be raised. The relevant finding of llow a new ground to be raised. The relevant finding of llow a new ground to be raised. The relevant finding of the Hon’ble Supreme Court is reproduced as under: the Hon’ble Supreme Court is reproduced as under:

“5. Under section 254 of the Income 5. Under section 254 of the Income-tax Act, 1961, the Tribunal may, tax Act, 1961, the Tribunal may, after giving both the parties to the appeal giving both the parties to the appeal an opportunity of being an opportunity of being heard, pass heard, pass such orders thereon as it thinks fit. The power of the orders thereon as it thinks fit. The power of the Tribunal in dealing Tribunal in dealing with appeals is, thus, expressed in the widest appeals is, thus, expressed in the widest possible terms. The purpose of the assessment proceedings before possible terms. The purpose of the assessment proceedings possible terms. The purpose of the assessment proceedings the taxing authorities is to assess correctly the tax liability of an the taxing authorities is to assess correctly the tax liability of an the taxing authorities is to assess correctly the tax liability of an assessee in accordance with law. If, for assessee in accordance with law. If, for example, as a result of a example, as a result of a judicial decision given while the appeal is pending before the judicial decision given while the appeal is pending before the judicial decision given while the appeal is pending before the Tribunal, it is found Tribunal, it is found that a non-taxable item is taxed or a permissible taxable item is taxed or a permissible deduction is denied, we do not see any reason why the assessee deduction is denied, we do not see any reason why the deduction is denied, we do not see any reason why the should be prevented from raising that question before the Tribunal should be prevented from raising that question before the Tribunal should be prevented from raising that question before the Tribunal for the first time, so long as the for the first time, so long as the relevant facts are on record in relevant facts are on record in respect of that item. We do not see any reason to restrict the power respect of that item. We do not see any reason to restrict the power respect of that item. We do not see any reason to restrict the power of the Tribunal under section 254 only to d Tribunal under section 254 only to decide the grounds which ecide the grounds which arise from the order of the Commissioner(Appeals). Both the arise from the order of the Commissioner(Appeals). Both the arise from the order of the Commissioner(Appeals). Both the assessee as well as the Department have a right to file an assessee as well as the Department have a right to file an assessee as well as the Department have a right to file an appeal/cross appeal/cross-objections before the Tribunal. We fail to see why the the Tribunal. We fail to see why the Tribunal should be prevented from considering questions of law Tribunal should be prevented from considering Tribunal should be prevented from considering arising in assessment proceedings although not raised earlier. assessment proceedings although not raised earlier. assessment proceedings although not raised earlier.

Tata Chemicals Ltd. authority may have in deciding the question before it subject to the authority may have in deciding the question before it subject to the authority may have in deciding the question before it subject to the restrictions or limitations, if any, prescribed by the statutory restrictions or limitations, if any, prescribed by the statutory restrictions or limitations, if any, prescribed by the statutory provisions. In the absence of any statutory provision, the appellate provisions. In the absence of any statutory provision, the appellate provisions. In the absence of any statutory provision, the appellate authority is vested with all authority is vested with all the plenary powers which the the plenary powers which the subordinate authority may have in the matter. There is no good subordinate authority may have in the matter. There is no good subordinate authority may have in the matter. There is no good reason to justify curtailment of the power of the AAC in entertaining reason to justify curtailment of the power of the AAC in entertaining reason to justify curtailment of the power of the AAC in entertaining an additional ground raised by the assessee in seeking modification an additional ground raised by the assessee in seeking modification an additional ground raised by the assessee in seeking modification of the order of assessmen of the order of assessment passed by the ITO. This Court further t passed by the ITO. This Court further observed that there may be several factors justifying the raising of a observed that there may be several factors justifying the raising of a observed that there may be several factors justifying the raising of a new plea in an appeal and each case has to be considered on its new plea in an appeal and each case has to be considered on its new plea in an appeal and each case has to be considered on its own facts. The AAC must be satisfied that the ground raised was own facts. The AAC must be satisfied that the ground raised was own facts. The AAC must be satisfied that the ground raised was bona fide and tha bona fide and that the same could not have been raised earlier for t the same could not have been raised earlier for good reasons. The AAC should exercise his discretion in permitting good reasons. The AAC should exercise his discretion in permitting good reasons. The AAC should exercise his discretion in permitting or not permitting the assessee to raise an additional ground in or not permitting the assessee to raise an additional ground in or not permitting the assessee to raise an additional ground in accordance with law and reason. The same observations would accordance with law and reason. The same observations would accordance with law and reason. The same observations would apply to appeal apply to appeals before the Tribunal also.

".............The above observations do not rule out a case for raising an ".............The above observations do not rule out a case for raising an ".............The above observations do not rule out a case for raising an additional ground before the AAC if the additional ground before the AAC if the ground so raised could not have ground so raised could not have been raised at that particular stage when the return was filed or when the been raised at that particular stage when the return was filed or when the been raised at that particular stage when the return was filed or when the assessment order was made or that the ground became available on assessment order was made or that the ground became available on assessment order was made or that the ground became available on account of change of circumstances or law. There maybe several factors account of change of circumstances or law. There maybe several factors account of change of circumstances or law. There maybe several factors justifying raising of such new plea in appeal, and each case has to be ising of such new plea in appeal, and each case has to be ising of such new plea in appeal, and each case has to be considered on its own facts. If the AAC is satisfied he would be acting considered on its own facts. If the AAC is satisfied he would be acting considered on its own facts. If the AAC is satisfied he would be acting within his jurisdiction in considering the question so raised in all its within his jurisdiction in considering the question so raised in all its within his jurisdiction in considering the question so raised in all its aspects. Of course, while permitting the assessee to Of course, while permitting the assessee to Of course, while permitting the assessee to raise an additional ground, the AAC should exercise his discretion in additional ground, the AAC should exercise his discretion in additional ground, the AAC should exercise his discretion in accordance with law and reason. accordance with law and reason. He must be satisfied that the ground He must be satisfied that the ground raised was bona fide and that the same could not have been raised earlier raised was bona fide and that the same could not have been raised earlier raised was bona fide and that the same could not have been raised earlier for good reasons. The satisfaction of the A for good reasons. The satisfaction of the AAC depends upon the facts and AC depends upon the facts and circumstances of each case and no rigid principles or any hard and fast circumstances of each case and no rigid principles or any hard and fast circumstances of each case and no rigid principles or any hard and fast rule can be laid down for this purpose." rule can be laid down for this purpose."

Tata Chemicals Ltd. authority has to be in accordance with law and reasons. We note authority has to be in accordance with law and reasons. We note authority has to be in accordance with law and reasons. We note that the Hon’ble Supreme Court in the case of National Thermal that the Hon’ble Supreme Court in the case of National Thermal that the Hon’ble Supreme Court in the case of National Thermal Power Co. Ltd. (supra) has considered the decision of the Hon’ble Power Co. Ltd. (supra) has considered the decision of the Hon’ble Power Co. Ltd. (supra) has considered the decision of the Hon’ble Supreme Court in the case Jute Corporation Supreme Court in the case Jute Corporation of India Ltd. (supra). of India Ltd. (supra). 6.7 We find that the Hon’ble Bombay High Court in the case of We find that the Hon’ble Bombay High Court in the case of We find that the Hon’ble Bombay High Court in the case of Ultratech Ultratech Ultratech Cement Cement Cement Ltd. Ltd. Ltd. v. v. v. Additional Additional Additional CIT CIT CIT reported reported reported in in in 81 81 81 taxmann.com 74 (Bombay) taxmann.com 74 (Bombay) upheld the conclusion reached by the upheld the conclusion reached by the Tribunal in that case rejecting the admission of the additional Tribunal in that case rejecting the admission of the Tribunal in that case rejecting the admission of the ground for deduction u/s 80IA of the Act raised based on the for deduction u/s 80IA of the Act raised based on the for deduction u/s 80IA of the Act raised based on the finding in another year. The Hon’ble High Court in paragraphs 22 in paragraphs 22 finding in another year. The Hon’ble High Court and 23 while dealing with the Full Bench judgment in the case of while dealing with the Full Bench judgment in the case of while dealing with the Full Bench judgment in the case of Ahmedabad Electricity Co. Ltd. v. CIT (1993) 199 ITR 351, noted Ahmedabad Electricity Co. Ltd. v. CIT (1993) 199 ITR 3 Ahmedabad Electricity Co. Ltd. v. CIT (1993) 199 ITR 3 that additional ground in the case before the Full Bench, had been that additional ground in the case before the Full Bench, had been that additional ground in the case before the Full Bench, had been raised in view of a judgment of the Bombay High Court in the case raised in view of a judgment of the Bombay High Court in the case raised in view of a judgment of the Bombay High Court in the case of Amalgamated Electricity Co. Ltd. of Amalgamated Electricity Co. Ltd.(supra), wherein, it was held , wherein, it was held that deduction had to be allowed in respect of a that deduction had to be allowed in respect of amounts transferred mounts transferred to contingency reserve and dividend control reserve. Referring to the to contingency reserve and dividend control reserve. Referring to the to contingency reserve and dividend control reserve. Referring to the aforesaid judgment of the Apex Court in the case of Jute aforesaid judgment of the Apex Court in the case of Jute aforesaid judgment of the Apex Court in the case of Jute Corporation of India Ltd. (supra), it is observed Corporation of India Ltd. (supra), it is observed "...............The Full Bench observed that the Apex Court ...............The Full Bench observed that the Apex Court in Jute Corporation in Jute Corporation of India Ltd. (supra) made reference to the decision of the Apex Court in of India Ltd. (supra) made reference to the decision of of India Ltd. (supra) made reference to the decision of Addl. CIT v. Gurjargravures (P.) Ltd. [1978] 111 ITR 1, and held that it Addl. CIT v. Gurjargravures (P.) Ltd. [1978] 111 ITR 1, and held that it Addl. CIT v. Gurjargravures (P.) Ltd. [1978] 111 ITR 1, and held that it does not prohibit the raising of an additional ground before the appellate does not prohibit the raising of an additional ground before the appellate does not prohibit the raising of an additional ground before the appellate authority, when the ground so raised could not have been raised before hen the ground so raised could not have been raised before hen the ground so raised could not have been raised before the Assessing Officer or the ground now becomes available in view of the Assessing Officer or the ground now becomes available in view of the Assessing Officer or the ground now becomes available in view of Tata Chemicals Ltd. changed circumstances such as a decision of a Court allowing a particular changed circumstances such as a decision of a Court allowing a particular changed circumstances such as a decision of a Court allowing a particular deduction.

“27. There can be no dispute that whether or not to allow an additional There can be no dispute that whether or not to allow an additional There can be no dispute that whether or not to allow an additional ground to be raised before the a ground to be raised before the appellate authority is to be decided by the ppellate authority is to be decided by the appellate authority in exercise of its discretion considering the facts and appellate authority in exercise of its discretion considering the facts and appellate authority in exercise of its discretion considering the facts and circumstances of the case before it. Where only a pure question of law circumstances of the case before it. Where only a pure question of law circumstances of the case before it. Where only a pure question of law arises from facts which are already on record, then there is no reason why arises from facts which are already on record, then there is no re arises from facts which are already on record, then there is no re the appellate authority should not consider the question of law so as to the appellate authority should not consider the question of law so as to the appellate authority should not consider the question of law so as to determine the correct tax liability of an assessee in accordance with law. determine the correct tax liability of an assessee in accordance with law. determine the correct tax liability of an assessee in accordance with law. However, where evidence is to be examined and that is not on record, then However, where evidence is to be examined and that is not on record, then However, where evidence is to be examined and that is not on record, then it will be considered onl it will be considered only if the parties seeking to raise the additional y if the parties seeking to raise the additional ground satisfies the authority concerned that for good and sufficient ground satisfies the authority concerned that for good and sufficient ground satisfies the authority concerned that for good and sufficient reasons, the ground could not be raised before the lower authorities. In the reasons, the ground could not be raised before the lower authorities. In the reasons, the ground could not be raised before the lower authorities. In the present facts, no such ground has been made out by the Appellant before present facts, no such ground has been made out by the Appel present facts, no such ground has been made out by the Appel the Tribunal........."

6.11 At the outset, it is beyond dispute th At the outset, it is beyond dispute that the power of the at the power of the Tribunal under section 254 of the Income Tribunal under section 254 of the Income-tax Act, 1961, is wide tax Act, 1961, is wide and and and enabling, enabling, enabling, intended intended intended to to to advance advance advance the the the cause cause cause of of of correct correct correct determination of tax liability in accordance with law. Equally well determination of tax liability in accordance with law. Equally well determination of tax liability in accordance with law. Equally well settled, however, is the principle that the exerc settled, however, is the principle that the exercise of such power is ise of such power is discretionary and not automatic discretionary and not automatic, and must be guided by , and must be guided by judicial discipline, bona fides of the party seeking indulgence, and the discipline, bona fides of the party seeking indulgence, and the discipline, bona fides of the party seeking indulgence, and the stage and manner in which the plea is sought to be introduced. stage and manner in which the plea is sought to be introduced stage and manner in which the plea is sought to be introduced 6.12 Before us, the Ld. counsel for the asse Before us, the Ld. counsel for the assessee submitted that the ssee submitted that the assessee has two captive power plants at Mithapur in Gujarat being two captive power plants at Mithapur in Gujarat being two captive power plants at Mithapur in Gujarat being Power plant - 'Turbine ECT 'Turbine ECT-11 & LPT-10' and 'Turbine TT 10' and 'Turbine TT-12'. The assessee submitted that the first power plant commenced its assessee submitted that the first power plant commenced its assessee submitted that the first power plant commenced its Tata Chemicals Ltd. operation on 07.01.2002 and the assessee operation on 07.01.2002 and the assessee claimed deduction under claimed deduction under section 80-IA in respect of the profits derived from the said plant IA in respect of the profits derived from the said plant IA in respect of the profits derived from the said plant from AY 2009-10. The second power plant commenced its 10. The second power plant commenced its 10. The second power plant commenced its operations on 14.09.2009 and deduction under the said section has operations on 14.09.2009 and deduction under the said section has operations on 14.09.2009 and deduction under the said section has been claimed from AY 2013 been claimed from AY 2013-14. The Form 10CC 14. The Form 10CCB i.e. form prescribed for deduction u/s 80IA , including the audited financial prescribed for deduction u/s 80IA , including the audited financial prescribed for deduction u/s 80IA , including the audited financial statements of the first unit are available statements of the first unit are available at pages 164 to 177 of at pages 164 to 177 of Paper Book 2, wherein, the Profit and Loss Account is wherein, the Profit and Loss Account is wherein, the Profit and Loss Account is at page 172 and the computation of income in respect the and the computation of income in respect thereof is reof is at page 169 and the said Form is available and the said Form is available at pages 164 to 167. Along with the . Along with the audited financial statements Notes to accounts have also been audited financial statements Notes to accounts have also been audited financial statements Notes to accounts have also been annexed, wherein, in Note 4 it has been clarified that "The sale of annexed, wherein, in Note 4 it has been clarified that " annexed, wherein, in Note 4 it has been clarified that " steam generated by the power plant has steam generated by the power plant has been recorded at cost of been recorded at cost of producing the same. The sale of steam could not be recorded at The sale of steam could not be recorded at The sale of steam could not be recorded at fair market value as there is no ready market for steam i.e., fair market value as there is no ready market for steam i.e., fair market value as there is no ready market for steam i.e., steam is not a marketable product under the facts and steam is not a marketable product under the facts and steam is not a marketable product under the facts and circumstances of the company. circumstances of the company. Similarly cost of stea Similarly cost of steam consumed is also booked at its cost of production." In Note 3 thereof, it is In Note 3 thereof, it is is also booked at its cost of production." explained that sale of power has been recorded at an amount explained that sale of power has been recorded at an amount explained that sale of power has been recorded at an amount equivalent cost of power if such power would have been purchased equivalent cost of power if such power would have been purchased equivalent cost of power if such power would have been purchased from the local state electricity board that is Guja from the local state electricity board that is Gujarat State Electricity rat State Electricity Board. Form 10CCB including the audited financial statements of Board. Form 10CCB including the audited financial statements of Board. Form 10CCB including the audited financial statements of the second unit are at pages 178 to 191 of Paper Book 2 at pages 178 to 191 of Paper Book 2 at pages 178 to 191 of Paper Book 2, wherein, the Profit and Loss Account is the Profit and Loss Account is at page 187, the computation of the computation of income in respect thereof is income in respect thereof is at page 184 and the said Form is and the said Form is at Tata Chemicals Ltd. pages 178 to 181. Similar notes, with respect to method of Similar notes, with respect to method of computation of transfer value for sale of power and sale of steam is computation of transfer value for sale of power and sale of steam is computation of transfer value for sale of power and sale of steam is also placed in the notes to the audited financial statements of the also placed in the notes to the audited financial statements of the also placed in the notes to the audited financial statements of the second unit. It is submitted that, i second unit. It is submitted that, insofar as the disclosure as made nsofar as the disclosure as made in the audited financial statement is concerned, it has continued to in the audited financial statement is concerned, it has continued to in the audited financial statement is concerned, it has continued to remain the same year after year. remain the same year after year.

6.14 The assessee invited our attention to the application dated The assessee invited our attention to the application dated The assessee invited our attention to the application dated 06.02.2024 filed by before the 06.02.2024 filed by before the Tribunal on 07.02.2024 Tribunal on 07.02.2024 inter-alia pointing out that in the course of appeal hearing for AY 2019 that in the course of appeal hearing for AY 2019-20, on that in the course of appeal hearing for AY 2019 01.01.2024, one of the issues raised by the Hon'ble Bench was why 01.01.2024, one of the issues raised by the Hon'ble Bench was why 01.01.2024, one of the issues raised by the Hon'ble Bench was why the market price prevailing on the Indian Energy Exchange should the market price prevailing on the Indian Energy Exchange should the market price prevailing on the Indian Energy Exchange should not be considered for not be considered for the purpose of valuing the transfer of power by the purpose of valuing the transfer of power by the eligible undertaking. While carrying out research on the aforesaid the eligible undertaking. While carrying out research on the aforesaid the eligible undertaking. While carrying out research on the aforesaid aspect, in the month of January 2024, it came across the Tribunal aspect, in the month of January 2024, it came across the Tribunal aspect, in the month of January 2024, it came across the Tribunal order in the case of Nectar Lifesciences Ltd. v. DCIT in in the case of Nectar Lifesciences Ltd. v. DCIT in in the case of Nectar Lifesciences Ltd. v. DCIT in pronounced on 17.02.2022 by Chandigarh Bench of /Chd/2019 pronounced on 17.02.2022 by Chandigarh Bench of /Chd/2019 pronounced on 17.02.2022 by Chandigarh Bench of the Tribunal (see pages 509 to 526 of Paper Book see pages 509 to 526 of Paper Book see pages 509 to 526 of Paper Book-7). After due consultation with its Counsel and the Chartered Accountants, it consultation with its Counsel and the Chartered Accountants, it consultation with its Counsel and the Chartered Accountants, it

“15. We heard the parties and perused the material on record. The “15. We heard the parties and perused the material on record. The “15. We heard the parties and perused the material on record. The assessee through additional ground is claiming that in respect of assessee through additional ground is claiming that in respect of assessee through additional ground is claiming that in respect of transfer of steam from the 80 transfer of steam from the 80-IA eligible undertaking ought to have ndertaking ought to have been computed by taking its market value instead of cost. From the been computed by taking its market value instead of cost. From the been computed by taking its market value instead of cost. From the perusal of the financial statements of the assessee (page 3 of paper perusal of the financial statements of the assessee (page 3 of paper perusal of the financial statements of the assessee (page 3 of paper book) it is clear that the assessee has accounted the steam book) it is clear that the assessee has accounted the steam book) it is clear that the assessee has accounted the steam consumed from eligible units at cos consumed from eligible units at cost and has stated in the Notes t and has stated in the Notes forming part of Accounts (page 9 of paper book) that the steam forming part of Accounts (page 9 of paper book) that the steam forming part of Accounts (page 9 of paper book) that the steam consumed is booked at cost since steam is not a marketable product. consumed is booked at cost since steam is not a marketable product. consumed is booked at cost since steam is not a marketable product. The contention of the assessee is that the deduction claimed under The contention of the assessee is that the deduction claimed under The contention of the assessee is that the deduction claimed under section 80IA in the return o section 80IA in the return of income includes steam also wherein the f income includes steam also wherein the cost and the revenue are same resulting in zero claim. Therefore cost and the revenue are same resulting in zero claim. Therefore cost and the revenue are same resulting in zero claim. Therefore through additional ground it is contended that the sale value needs through additional ground it is contended that the sale value needs through additional ground it is contended that the sale value needs to be considered at market value and this claim is based on the to be considered at market value and this claim is based on the to be considered at market value and this claim is based on the decision of the Ch decision of the Chandigarh Bench of the Tribunal in the case of andigarh Bench of the Tribunal in the case of Tata Chemicals Ltd. Nectar Lifesciences Ltd (supra). Revenue's contention is that the Nectar Lifesciences Ltd (supra). Revenue's contention is that the Nectar Lifesciences Ltd (supra). Revenue's contention is that the assessee itself has admitted that steam is not a marketable product assessee itself has admitted that steam is not a marketable product assessee itself has admitted that steam is not a marketable product thereby the deduction under section 80IA could not have been made thereby the deduction under section 80IA could not have been made thereby the deduction under section 80IA could not have been made and accordingly it is a fresh claim not made neither in the return of ingly it is a fresh claim not made neither in the return of ingly it is a fresh claim not made neither in the return of income nor in the relevant form claiming 80IA. Therefore it is argued income nor in the relevant form claiming 80IA. Therefore it is argued income nor in the relevant form claiming 80IA. Therefore it is argued that the additional ground should not be accepted. that the additional ground should not be accepted. that the additional ground should not be accepted.

16.

We notice from the perusal of record that the steam and power 16. We notice from the perusal of record that the steam and power 16. We notice from the perusal of record that the steam and power have been considered together while arriving at the profits eligible considered together while arriving at the profits eligible considered together while arriving at the profits eligible for deduction under section 80IA and the assessee in Form 3CEB for deduction under section 80IA and the assessee in Form 3CEB for deduction under section 80IA and the assessee in Form 3CEB has considered the transfer of steam at cost as being at arm's length has considered the transfer of steam at cost as being at arm's length has considered the transfer of steam at cost as being at arm's length by stating that the market value steam cannot be determined as by stating that the market value steam cannot be determined as by stating that the market value steam cannot be determined as there is no open market for steam. Accordingly we see merit in the there is no open market for steam. Accordingly we see merit in the there is no open market for steam. Accordingly we see merit in the contention that the claim made through additional ground is a not contention that the claim made through additional ground is a not contention that the claim made through additional ground is a not fresh one but is only an incremental claim towards transfer at fresh one but is only an incremental claim towards transfer at fresh one but is only an incremental claim towards transfer at market value instead of cost. Now coming to the issue of whether a market value instead of cost. Now coming to the issue of whe market value instead of cost. Now coming to the issue of whe claim which was not made before the lower authorities can be made claim which was not made before the lower authorities can be made claim which was not made before the lower authorities can be made for the first time before the Tribunal through additional ground we for the first time before the Tribunal through additional ground we for the first time before the Tribunal through additional ground we rely on the decision of the Hon'ble Supreme Court in the case of rely on the decision of the Hon'ble Supreme Court in the case of rely on the decision of the Hon'ble Supreme Court in the case of National Thermal Power Co. Ltd. vs CIT ([1998] 97 Taxman 358 (SC)) National Thermal Power Co. Ltd. vs CIT ([1998] 97 National Thermal Power Co. Ltd. vs CIT ([1998] 97 where it has been held that where it has been held that – . . .

before the Tribunal. The assessee in the submissions has stated that before the Tribunal. The assessee in the submissions has before the Tribunal. The assessee in the submissions has the additional ground is raised based on the decision of the Tribunal the additional ground is raised based on the decision of the Tribunal the additional ground is raised based on the decision of the Tribunal which the assessee was not aware of at the time of assessment or which the assessee was not aware of at the time of assessment or which the assessee was not aware of at the time of assessment or at the time of appellate proceeding before DRP. We are of the at the time of appellate proceeding before DRP. We are of the at the time of appellate proceeding before DRP. We are of the considered view that the assessee has a reasonable cause for not considered view that the assessee has a reasona considered view that the assessee has a reasona raising the issue before the lower authorities and therefore we are raising the issue before the lower authorities and therefore we are raising the issue before the lower authorities and therefore we are inclined to admit the additional ground for adjudication by placing inclined to admit the additional ground for adjudication by placing inclined to admit the additional ground for adjudication by placing reliance on the decisions of the Apex Court in the case of National reliance on the decisions of the Apex Court in the case of National reliance on the decisions of the Apex Court in the case of National Thermal Power Co. Ltd (supra) and Thermal Power Co. Ltd (supra) and Jute Corpn. of India Ltd (supra)” Jute Corpn. of India Ltd (supra)” 6.16 Based on above submissions, the ld Counsel for the assessee Based on above submissions, the ld Counsel for the assessee Based on above submissions, the ld Counsel for the assessee prayed that Tribunal may be pleased to admit this additional prayed that Tribunal may be pleased to admit this additional prayed that Tribunal may be pleased to admit this additional ground and remit the issue back to AO for consideration of the ground and remit the issue back to AO for consideration of the ground and remit the issue back to AO for consideration of the market value to be taken for sale market value to be taken for sale of steam.

Applying the aforesaid principles to the facts before us, we find 6.20 Applying the aforesaid principles to the facts before us, we find Applying the aforesaid principles to the facts before us, we find that the additional ground sought to be raised by the assessee does that the additional ground sought to be raised by the assessee does that the additional ground sought to be raised by the assessee does not fall within the first or second category. The assessee has, not fall within the first or second category. The assessee has, not fall within the first or second category. The assessee has, throughout, consciously treated the transfer of steam from its throughout, consciously treated the transfer of steam f throughout, consciously treated the transfer of steam f captive power plant at cost, categorically stating in its audited captive power plant at cost, categorically stating in its audited captive power plant at cost, categorically stating in its audited financial statements that steam is not a marketable product and financial statements that steam is not a marketable product and financial statements that steam is not a marketable product and that no ascertainable market value exists. that no ascertainable market value exists. The annual report of the The annual report of the company with detailed notes to account considering the steam as company with detailed notes to account considering company with detailed notes to account considering was duly approved by the Board of non marketable commodity non marketable commodity was duly approved by the Board of Directors and presented to its shareholders. and presented to its shareholders. This treatment was This treatment was consistently adopted in the return of income as well as during the consistently adopted in the return of income as well as during the consistently adopted in the return of income as well as during the Tata Chemicals Ltd. assessment proceedings and formed the very foundation of the assessment proceedings and formed the very foundatio assessment proceedings and formed the very foundatio claim under section 80 claim under section 80-IA.

Assessee Assessee has, has, vide vide application application da dated ted 30.07.2024, 30.07.2024, submitted submitted Chartered Engineer’s certificate as an additional evidence. By filing Chartered Engineer’s certificate as an additional evidence. By filing Chartered Engineer’s certificate as an additional evidence. By filing additional evidence assessee seeks to revise the sale price of the additional evidence assessee seeks to revise the sale price of the additional evidence assessee seeks to revise the sale price of the steam. Vide the Chartred Engineer’s certificate it is submitted that steam. Vide the Chartred Engineer’s certificate it is submitted that steam. Vide the Chartred Engineer’s certificate it is submitted that rather than Enthalpy or rather than Enthalpy or heat content of a steam, the steam’s “Available heat content of a steam, the steam’s “Available Energy to do the work”, also called as Gibbs free energy or ‘G’, needs Energy to do the work”, also called as Gibbs free energy or ‘G’, needs Energy to do the work”, also called as Gibbs free energy or ‘G’, needs to be taken in consideration to determine the pricing of steam. Based to be taken in consideration to determine the pricing of steam. Based to be taken in consideration to determine the pricing of steam. Based on the Gibbs – – Helmholz law, the G is computed for each stream of Helmholz law, the G is computed for each stream of steam. This Gibbs free energy is converted into equivalent Kilowatt team. This Gibbs free energy is converted into equivalent Kilowatt team. This Gibbs free energy is converted into equivalent Kilowatt hours (Kwh). And by applying the prevalent rate of Gujrat Electricity hours (Kwh). And by applying the prevalent rate of Gujrat Electricity hours (Kwh). And by applying the prevalent rate of Gujrat Electricity Board for Kilowatt hour, the pricing of steam is determined. Board for Kilowatt hour, the pricing of steam is determined. Board for Kilowatt hour, the pricing of steam is determined. It is humbly prayed that the said proposition is false and liable to be It is humbly prayed that the said proposition is false and It is humbly prayed that the said proposition is false and rejected for the following reasons: rejected for the following reasons: i. Firstly, the Gibb’s free energy or Availability or Exergy, as referred Firstly, the Gibb’s free energy or Availability or Exergy, as referred Firstly, the Gibb’s free energy or Availability or Exergy, as referred in Chartered Engineer’s certificate, in Chartered Engineer’s certificate, represents the represents the ideal or maximum useful work that can be obtained useful work that can be obtained from a given stream of steam as i from a given stream of steam as it is brought to equilibrium with its surroundings. The only way to achieve brought to equilibrium with its surroundings. The only way to achieve brought to equilibrium with its surroundings. The only way to achieve such ideal or maximum useful work such ideal or maximum useful work is by employing Carnot Cycle is by employing Carnot Cycle which uses reversible thermodynamic processes. In other words, a which uses reversible thermodynamic processes. In other words, a which uses reversible thermodynamic processes. In other words, a theoretical and idealized heat engine working on the Carnot cycle, theoretical and idealized heat engine working on the theoretical and idealized heat engine working on the which employs reversible thermodynamic processes, can only generate which employs reversible thermodynamic processes, can only generate which employs reversible thermodynamic processes, can only generate such maximum possible useful work represented by ‘G’. Since Carnot such maximum possible useful work represented by ‘G’. Since Carnot such maximum possible useful work represented by ‘G’. Since Carnot Cycle represents a theoretical ideal cycle therefore same is impossible Cycle represents a theoretical ideal cycle therefore same is impossible Cycle represents a theoretical ideal cycle therefore same is impossible to execute. Therefore, in reality, to execute. Therefore, in reality, the Rankine cycle is used as a the Rankine cycle is used as a practical, real-world cycle that approximates steam power plants. The world cycle that approximates steam power plants. The world cycle that approximates steam power plants. The Tata Chemicals Ltd. important point to note here is that the efficiency of Rankine cycle is important point to note here is that the efficiency of Rankine cycle is important point to note here is that the efficiency of Rankine cycle is quite less than Carnot Cycle. quite less than Carnot Cycle. ii. Secondly, in real Secondly, in real-world power plants, the Rankine cyc world power plants, the Rankine cycle faces various inefficiencies such as under: various inefficiencies such as under: Irreversible Processes: Irreversible Processes: Friction in the turbine and pump, heat losses Friction in the turbine and pump, heat losses during the process (e.g., heat transfer to the surroundings), and non- during the process (e.g., heat transfer to the surroundings), and non during the process (e.g., heat transfer to the surroundings), and non isentropic expansion/compression reduce efficiency. isentropic expansion/compression reduce efficiency. Pressure Drops: Pressure Drops: Pressure losses in the boiler, condenser, and piping Pressure losses in the boiler, condenser, and piping reduce the overall efficiency. reduce the overall efficiency. Turbine and Pump Efficiencies: Turbine and Pump Efficiencies: The real turbine and pump have The real turbine and pump have efficiencies quite less than 100%, meaning they don't deliver the efficiencies quite less than 100%, meaning they don't deliver the efficiencies quite less than 100%, meaning they don't deliver the theoretical amount of work. theoretical amount of work. Heat Losses: Heat is lost to the surroundings during the heating and eat is lost to the surroundings during the heating and cooling processes. cooling processes.

Thus, the efficiency of actual steam cycle or steam power plant running Thus, the efficiency of actual steam cycle or steam power plant running Thus, the efficiency of actual steam cycle or steam power plant running on Rankine cycle is just nearly 30% of that of Carnot Cycle. In other on Rankine cycle is just nearly 30% of that of Carnot Cycle. on Rankine cycle is just nearly 30% of that of Carnot Cycle. words, actual useful work extracted fr words, actual useful work extracted from a given stream of om a given stream of steam is only around 30% as compared to maximum possible steam is only around 30% as compared to maximum possible steam is only around 30% as compared to maximum possible work that can be extracted, as represented by ‘G’ i.e. Exergy or work that can be extracted, as represented by ‘G’ i.e. Exergy or work that can be extracted, as represented by ‘G’ i.e. Exergy or Availability of steam. Availability of steam. iii. In absolute contrast to the above scientific and practical analysis, In absolute contrast to the above scientific and practical analysis, In absolute contrast to the above scientific and practical analysis, what assessee is prop what assessee is proposing to say that fair market value of steam osing to say that fair market value of steam should be taken at ‘G’ i.e. 100% of Exergy or Availability of steam. In should be taken at ‘G’ i.e. 100% of Exergy or Availability of steam. In should be taken at ‘G’ i.e. 100% of Exergy or Availability of steam. In other words, through additional evidence assessee is submitting that other words, through additional evidence assessee is submitting that other words, through additional evidence assessee is submitting that the given stream of steam should be valued by considering that it will the given stream of steam should be valued by considering that it will the given stream of steam should be valued by considering that it will deliver work output at ideal 100% efficiency which just cannot be deliver work output at ideal 100% efficiency which just cannot be deliver work output at ideal 100% efficiency which just cannot be acceptable even by general common logic. The above analysis clearly acceptable even by general common logic. The above analysis clearly acceptable even by general common logic. The above analysis clearly proves the impossibility of claim which assessee seeks to make at this proves the impossibility of claim which assessee seeks to make at this proves the impossibility of claim which assessee seeks to make at this stage. Therefore, the additional evidence should n stage. Therefore, the additional evidence should not be accepted as it ot be accepted as it is beyond scientific possibilities governing the process of steam power is beyond scientific possibilities governing the process of steam power is beyond scientific possibilities governing the process of steam power plants. iv. Further for example if we consider the case of Turbine TT Further for example if we consider the case of Turbine TT Further for example if we consider the case of Turbine TT – 12. From the details submitted by the assessee, it is seen that the steam at the details submitted by the assessee, it is seen that the details submitted by the assessee, it is seen that pressure of 1550 p pressure of 1550 psig and temperature of 900 Degree Farhenite sig and temperature of 900 Degree Farhenite generates 6,22,26,000 units of electricity. Then, the pertinent generates 6,22,26,000 units of electricity. Then, the pertinent generates 6,22,26,000 units of electricity. Then, the pertinent question is how the same amount of steam at pressure of just question is how the same amount of steam at pressure of just question is how the same amount of steam at pressure of just

15 to 20 psig and temperature of 350 degree Farhenite can 15 to 20 psig and temperature of 350 degree Farhenite can 15 to 20 psig and temperature of 350 degree Farhenite can generate 8,30,30,415 units of generate 8,30,30,415 units of electricity? (152.40 * 5,44,819 = (152.40 * 5,44,819 = 8,30,30,415). In other words the steam at 1550 psig and 900 In other words the steam at 1550 psig and 900 In other words the steam at 1550 psig and 900 Degree Farhenite generates electricity worth Rs.38.2 Crores. Degree Farhenite generates electricity worth Rs.38.2 Crores. Degree Farhenite generates electricity worth Rs.38.2 Crores. And how the same amount of steam at just 15 to 20 psig and And how the same amount of steam at just 15 to 20 psig and And how the same amount of steam at just 15 to 20 psig and 350 degree Farhenite can generate electri 350 degree Farhenite can generate electricity worth Rs. 51 city worth Rs. 51 Crores? v. In other words, on relying on the computation of Chartered Engineer, In other words, on relying on the computation of Chartered Engineer, In other words, on relying on the computation of Chartered Engineer, the value of G for steam at 1550 psig and 900 Degree Farhenite comes the value of G for steam at 1550 psig and 900 Degree Farhenite comes the value of G for steam at 1550 psig and 900 Degree Farhenite comes around 589 BTU per lb, which, if converted further, as per the around 589 BTU per lb, which, if converted further, as per the around 589 BTU per lb, which, if converted further, as per the computation of Chartered Eng computation of Chartered Engineer, to the equivalent units of ineer, to the equivalent units of Electricity, the same comes around 20,83,40,000 units of Electricity. In Electricity, the same comes around 20,83,40,000 units of Electricity. In Electricity, the same comes around 20,83,40,000 units of Electricity. In other words, the “Available energy to do the work” for a steam of the other words, the “Available energy to do the work” for a steam of the other words, the “Available energy to do the work” for a steam of the given quantity of 5,44,819 metric tonns at 1550 psig and 900 Degree given quantity of 5,44,819 metric tonns at 1550 psig and 900 Degree given quantity of 5,44,819 metric tonns at 1550 psig and 900 Degree Farhenite is around 20,83,40,000 units of Electricity. However, the s around 20,83,40,000 units of Electricity. However, the s around 20,83,40,000 units of Electricity. However, the actual units of electricity generated is only 6,22,26,000 units of actual units of electricity generated is only 6,22,26,000 units of actual units of electricity generated is only 6,22,26,000 units of electricity. Thus, assessee’s own example makes it clear that the electricity. Thus, assessee’s own example makes it clear that the electricity. Thus, assessee’s own example makes it clear that the actual efficiency of useful work or energy extracted as compared to actual efficiency of useful work or energy extracted as compared t actual efficiency of useful work or energy extracted as compared t maximum possible work output is just around 30%. Further at lesser maximum possible work output is just around 30%. Further at lesser maximum possible work output is just around 30%. Further at lesser pressure and temperature like 20 psig and 350 degree Farhenite, the pressure and temperature like 20 psig and 350 degree Farhenite, the pressure and temperature like 20 psig and 350 degree Farhenite, the thermal efficiency will be even less than 30%. Same is the situation thermal efficiency will be even less than 30%. Same is the situation thermal efficiency will be even less than 30%. Same is the situation with respect to claim of assessee in regard to oth with respect to claim of assessee in regard to other turbine. In such er turbine. In such scenario claim of assessee that the maximum work potential of steam scenario claim of assessee that the maximum work potential of steam scenario claim of assessee that the maximum work potential of steam should be taken for its valuation is just cannot be acceptable. just cannot be acceptable. In should be taken for its valuation is other words 100 Kwh of electricity is equivalent to almost 100Kwh of other words 100 Kwh of electricity is equivalent to almost 100Kwh of other words 100 Kwh of electricity is equivalent to almost 100Kwh of useful work. However, whether st useful work. However, whether steam with G value of 100 Kwh i.e. eam with G value of 100 Kwh i.e. maximum work potential of 100 Kwh can generate electricity of maximum work potential of 100 Kwh can generate electricity of maximum work potential of 100 Kwh can generate electricity of 100Kwh. Certainly not. It can generate maximum useful work up to 30 100Kwh. Certainly not. It can generate maximum useful work up to 30 100Kwh. Certainly not. It can generate maximum useful work up to 30 % of G value only. % of G value only. In view of the above the additional evidence and additional ground In view of the above the additional evidence and additional ground In view of the above the additional evidence and additional ground filed by assessee be rejected in toto. y assessee be rejected in toto. 6.29 But, since we have already rejected the application of the since we have already rejected the application of the since we have already rejected the application of the assessee for raising additional ground, the request of the assessee assessee for raising additional ground, the request of the assessee assessee for raising additional ground, the request of the assessee for admitting additional evidence in relation to the issue does not for admitting additional evidence in relation to the issue does not for admitting additional evidence in relation to the issue does not survive and accordingly also rejected. ordingly also rejected.

Tata Chemicals Ltd. The learned DRP also following its consistent stand, The learned DRP also following its consistent stand, The learned DRP also following its consistent stand, sustained the finding of the Assessing Officer. nding of the Assessing Officer. 7.15 The learned counsel for the assessee learned counsel for the assessee, however, , however, extensively argued this ground of appeal and continued his argument on this argued this ground of appeal and continued his argument on this argued this ground of appeal and continued his argument on this issue even at the time of the rejoinder. at the time of the rejoinder. The ld counsel instead of The ld counsel instead of addressing on the cost of electricity generation, which was disputed addressing on the cost of electricity generation, which was disputed addressing on the cost of electricity generation, which was disputed by the ld AO, he focused his arguments on what should be fair y the ld AO, he focused his arguments on what should be fair y the ld AO, he focused his arguments on what should be fair market value of electrical power generated and transferred by the market value of electrical power generated and transferred by the market value of electrical power generated and transferred by the captive power plant to other units of the assessee. captive power plant to other units of the assessee. 7.16 The learned counsel submitted that assessee is eligible for The learned counsel submitted that assessee is eligible for The learned counsel submitted that assessee is eligible for deduction under section 80. IA in r nder section 80. IA in respect of a captive power plant. espect of a captive power plant. Though issue was neither contested by the ld AO nor by ld DRP. Though issue was neither contested by the ld AO nor by ld DRP. Though issue was neither contested by the ld AO nor by ld DRP. 7.17 The learned counsel submitted that the assessee’s entitlement The learned counsel submitted that the assessee’s entitlement The learned counsel submitted that the assessee’s entitlement to deduction under section 80 to deduction under section 80-IA in respect of captive power IA in respect of captive power generation is no longer res integra and, in fact, was not disputed ion is no longer res integra and, in fact, was not disputed ion is no longer res integra and, in fact, was not disputed either by the Assessing Officer or by the Dispute Resolution Panel. either by the Assessing Officer or by the Dispute Resolution Panel. either by the Assessing Officer or by the Dispute Resolution Panel. In this regard, reliance was placed on the orders of the Tribunal in In this regard, reliance was placed on the orders of the Tribunal in In this regard, reliance was placed on the orders of the Tribunal in the assessee’s own case for assessment years 2006–07 and 2007– the assessee’s own case for assessment years 2006 the assessee’s own case for assessment years 2006 08, wherein the entire history of the issue from assessment years 08, wherein the entire history of the issue from assessment years 08, wherein the entire history of the issue from assessment years 2001–02 to 2005–06 had been examined. It was pointed out that 06 had been examined. It was pointed out that 06 had been examined. It was pointed out that the Tribunal, after considering the judgments of the Madras High the Tribunal, after considering the judgments of the Madras High the Tribunal, after considering the judgments of the Madras High Court in the case of Tamilnadu Petro Products Ltd. v. ACIT reported Court in the case of Tamilnadu Petro Products Ltd. v. ACIT r Court in the case of Tamilnadu Petro Products Ltd. v. ACIT r in (2011)

Tata Chemicals Ltd. Orient Abrassive Ltd. (order dated 31.07.2014) in Abrassive Ltd. (order dated 31.07.2014) in Abrassive Ltd. (order dated 31.07.2014) in and Ors upheld the assessee’s claim. The same view was upheld the assessee’s claim. The same view was upheld the assessee’s claim. The same view was reiterated by the Tribunal for assessment year 2008 reiterated by the Tribunal for assessment year 2008– –09. 7.18 It was further submitted that the legislative intent underlying was further submitted that the legislative intent underlying was further submitted that the legislative intent underlying section 80-IA(8) is explicit. The provision contemplates transfer of IA(8) is explicit. The provision contemplates transfer of IA(8) is explicit. The provision contemplates transfer of goods or services from the eligible undertaking to other businesses goods or services from the eligible undertaking to other businesses goods or services from the eligible undertaking to other businesses of the assessee and mandates that such transfer be valued at of the assessee and mandates that such transfer be valued of the assessee and mandates that such transfer be valued market value for the purpose of computing eligible profits. Thus, the market value for the purpose of computing eligible profits. Thus, the market value for the purpose of computing eligible profits. Thus, the statute itself recognises captive consumption. The only statutory statute itself recognises captive consumption. The only statutory statute itself recognises captive consumption. The only statutory requirement is that the valuation must reflect market value. requirement is that the valuation must reflect market value. requirement is that the valuation must reflect market value. Reliance was placed on the decision of the Hon’ble Bombay High Reliance was placed on the decision of the Hon’ble Bomba Reliance was placed on the decision of the Hon’ble Bomba Court in CIT v. Reliance Industries Ltd. CIT v. Reliance Industries Ltd. [(2020) 421 ITR 686], [(2020) 421 ITR 686], wherein deduction under section 80 wherein deduction under section 80-IA in respect of power IA in respect of power generated by a captive unit was upheld. generated by a captive unit was upheld. 7.19 In view of the above, In view of the above, the ld Counsel urged that the Tribunal urged that the Tribunal may be pleased to hol may be pleased to hold that the Appellant is entitled to claim d that the Appellant is entitled to claim deduction in respect of captive power plants deduction in respect of captive power plants 7.20 The ld Counsel further argued that why the market value The ld Counsel further argued that why the market value The ld Counsel further argued that why the market value adopted by the assessee while claiming deduction u/s 80IA for adopted by the assessee while claiming deduction u/s 80IA for adopted by the assessee while claiming deduction u/s 80IA for transfer of electrical power from captive powe transfer of electrical power from captive power plant to other units r plant to other units is correct. 7.21 On the issue of determination of market value of power, the On the issue of determination of market value of power, the On the issue of determination of market value of power, the learned counsel submitted that the assessee had correctly adopted learned counsel submitted that the assessee had correctly adopted learned counsel submitted that the assessee had correctly adopted

Tata Chemicals Ltd. the average rate at which the Gujarat Electricity Board supplies the average rate at which the Gujarat Electricity Board supplies the average rate at which the Gujarat Electricity Board supplies power to its consumers. power to its consumers. It was contended that section 80 It was contended that section 80-IA(8), read with the Explanation thereto, permits determination of market with the Explanation thereto, permits determination of market with the Explanation thereto, permits determination of market value either as the price which the goods would ordinarily fetch in value either as the price which the goods would ordinarily fetch in value either as the price which the goods would ordinarily fetch in the open market [clause (i)] or, where the transaction is a specified the open market [clause (i)] or, where the transaction is a specified the open market [clause (i)] or, where the transaction is a specified domestic transaction, at the arm’s length price in terms of section ansaction, at the arm’s length price in terms of section ansaction, at the arm’s length price in terms of section 92F(ii) [clause (ii)]. 7.22 The learned counsel pointed out that the Tribunal, in the The learned counsel pointed out that the Tribunal, in the The learned counsel pointed out that the Tribunal, in the assessee’s own case for assessment years 2006 assessee’s own case for assessment years 2006–07 and 2007 07 and 2007–08 (order dated 31.03.2023), had approved adoption of the rate at (order dated 31.03.2023), had approved adoption of (order dated 31.03.2023), had approved adoption of which power was supplied by the Gujarat Electricity Board to the which power was supplied by the Gujarat Electricity Board to the which power was supplied by the Gujarat Electricity Board to the assessee. The same view was followed for assessment year 2008–09 assessee. The same view was followed for assessment year 2008 assessee. The same view was followed for assessment year 2008 by order dated 10.11.2023. by order dated 10.11.2023. 7.23 The ld Counsel submitted that The ld Counsel submitted that this issue again arose this issue again arose in the case of assessee for for AY 2017-18, wherein, after treating the 18, wherein, after treating the transaction to be a specified domestic transaction, the AO had transaction to be a specified domestic transaction, the AO had transaction to be a specified domestic transaction, the AO had made a reference to the TPO for determination of arms' length price made a reference to the TPO for determination of arms' length price made a reference to the TPO for determination of arms' length price of this transaction. In its Order dated 10.10.2023 the Tribunal has of this transaction. In its Order dated 10.10.2023 the Tribunal has of this transaction. In its Order dated 10.10.2023 the Tribunal has summarized the findings of the TPO ndings of the TPO The TPO had carried out a FAR he TPO had carried out a FAR analysis of the said transaction to reject its claim. The ld DRP analysis of the said transaction to reject its claim. The analysis of the said transaction to reject its claim. The adopted the rate at which power was supplied by Torrent Power adopted the rate at which power was supplied by Torrent Power adopted the rate at which power was supplied by Torrent Power Limited to the Gujarat Electricity Board based on determination of Limited to the Gujarat Electricity Board based on determination of Limited to the Gujarat Electricity Board based on determination of such rate by the Gujarat Electricity Regulatory Commission. he Gujarat Electricity Regulatory Commission. he Gujarat Electricity Regulatory Commission. The Tribunal analyzed the Explanation below Section 80-IA(8) to hold Tribunal analyzed the Explanation below Section 80 Tribunal analyzed the Explanation below Section 80

Tata Chemicals Ltd. that the clauses therein give a choice to the that the clauses therein give a choice to the assessee assessee to compute the market value of such goods as they would ordinarily fetch in the the market value of such goods as they would ordinarily fetch in the the market value of such goods as they would ordinarily fetch in the open market as per clause (i) or by determination of its arms' length market as per clause (i) or by determination of its arms' length market as per clause (i) or by determination of its arms' length price as per section 92F(ii) in accordance with clause(ii). Based price as per section 92F(ii) in accordance with clause(ii). Based price as per section 92F(ii) in accordance with clause(ii). Based thereon and the Judgements of the Jurisdictional High Court in the thereon and the Judgements of the Jurisdictional High Court in the thereon and the Judgements of the Jurisdictional High Court in the case of CIT v. Reliance Industries Limited (supra) and the Gujarat case of CIT v. Reliance Industries Limited (supra) and the case of CIT v. Reliance Industries Limited (supra) and the High Court in PCIT v. Gujarat Fluorochemicals Limited, The High Court in PCIT v. Gujarat Fluorochemicals Limited, High Court in PCIT v. Gujarat Fluorochemicals Limited, Tribunal upheld the determination of market value as done by the upheld the determination of market value as done by the upheld the determination of market value as done by the assessee and held that the price charged by Torrent Power Limited held that the price charged by Torrent Power Limited held that the price charged by Torrent Power Limited for supplying electricity to Gujarat Electricity Board based on such for supplying electricity to Gujarat Electricity Board ba for supplying electricity to Gujarat Electricity Board ba determination by the Gujarat Electricity Regulatory Commission determination by the Gujarat Electricity Regulatory Commission determination by the Gujarat Electricity Regulatory Commission would not be permissible. would not be permissible. 7.24 Ld Counsel further submitted that t Ld Counsel further submitted that this issue has also been his issue has also been considered by the Tribunal in the appellant's own case for the AY considered by the Tribunal in the appellant's own case for the AY considered by the Tribunal in the appellant's own case for the AY 2019-20 where, by its or 20 where, by its order dated 28.05.2024, it has again upheld der dated 28.05.2024, it has again upheld the said position. For the said year again, a reference had been the said position. For the said year again, a reference had been the said position. For the said year again, a reference had been made by the AO to TPO who had determined the arms' length price made by the AO to TPO who had determined the arms' length price made by the AO to TPO who had determined the arms' length price by adopting the power purchase cost as charged by Gujarat Urja by adopting the power purchase cost as charged by Gujarat Urja by adopting the power purchase cost as charged by Gujarat Urja Vikas Nigam Limited fo Vikas Nigam Limited for purchasing power from Coal based thermal r purchasing power from Coal based thermal power generating units in Gujarat power generating units in Gujarat. The Tribunal relied upon its he Tribunal relied upon its earlier order for the AY 2017 earlier order for the AY 2017-18. In paragraph 8 reliance has been In paragraph 8 reliance has been placed on judgement of the Hon'ble Supreme Court in the case of placed on judgement of the Hon'ble Supreme Court in the case of placed on judgement of the Hon'ble Supreme Court in the case of CIT v. Jindal Steel & Power Limited (2024) 460 ITR 162. Thereafter, l & Power Limited (2024) 460 ITR 162. Thereafter, l & Power Limited (2024) 460 ITR 162. Thereafter, in paragraph 9, the Tribunal concluded that the rates at which in paragraph 9, the Tribunal concluded that the rates at which in paragraph 9, the Tribunal concluded that the rates at which Tata Chemicals Ltd. transactions are executed on the Indian Energy Exchange cannot transactions are executed on the Indian Energy Exchange cannot transactions are executed on the Indian Energy Exchange cannot be regarded as a valid comparable for the present purposes. Lastly, be regarded as a valid comparable for the present purposes. Lastly, be regarded as a valid comparable for the present purposes. Lastly, in paragraph 10, , assuming that clause (ii) of the Explanation ph 10, , assuming that clause (ii) of the Explanation ph 10, , assuming that clause (ii) of the Explanation below section 80-IA(8) is applicable, the rate at which the Gujarat IA(8) is applicable, the rate at which the Gujarat IA(8) is applicable, the rate at which the Gujarat Electricity Board supplied power to its customers had been Electricity Board supplied power to its customers had been Electricity Board supplied power to its customers had been regarded as a valid external CUP for the purposes of determination regarded as a valid external CUP for the purposes of determination regarded as a valid external CUP for the purposes of determination of arms length price in accordance with the transfer pricing length price in accordance with the transfer pricing length price in accordance with the transfer pricing provisions. 7.25 The ld Counsel submitted that i The ld Counsel submitted that in view of the above, it is n view of the above, it is submitted that both for the earlier as well as the later years and submitted that both for the earlier as well as the later years and submitted that both for the earlier as well as the later years and considering either of the clauses of the Explanation below section considering either of the clauses of the Explanation below se considering either of the clauses of the Explanation below se 80-IA(8), the Tribunal in the appellant's own case has upheld the IA(8), the Tribunal in the appellant's own case has upheld the IA(8), the Tribunal in the appellant's own case has upheld the determination of market value for supply of power in the manner as determination of market value for supply of power in the manner as determination of market value for supply of power in the manner as done by it. 7.26 He reffered to the decision of the Hon’ble Supreme Court in He reffered to the decision of the Hon’ble Supreme Court in He reffered to the decision of the Hon’ble Supreme Court in Jindal Steel & Power Limited, where the Jindal Steel & Power Limited, where the hon’ble Court hon’ble Court construed the expression “open market” to mean a price discovered through expression “open market” to mean a price discovered through expression “open market” to mean a price discovered through voluntary interaction between a willing buyer and a willing seller in voluntary interaction between a willing buyer and a willing seller in voluntary interaction between a willing buyer and a willing seller in the normal course of trade, governed solely by the forces of demand the normal course of trade, governed solely by the forces of demand the normal course of trade, governed solely by the forces of demand and supply and free from sta and supply and free from statutory or regulatory compulsion. The tutory or regulatory compulsion. The Court held that a price fixed under a regulatory regime, where the Court held that a price fixed under a regulatory regime, where the Court held that a price fixed under a regulatory regime, where the seller has no freedom of choice as to the purchaser and no scope for seller has no freedom of choice as to the purchaser and no scope for seller has no freedom of choice as to the purchaser and no scope for negotiation, cannot partake the character of an open market price. negotiation, cannot partake the character of an open market price. negotiation, cannot partake the character of an open market price. Where the assessee is statutorily constrained to sell surplus power ee is statutorily constrained to sell surplus power ee is statutorily constrained to sell surplus power

Tata Chemicals Ltd. The ld Counsel further submitted that in the assessee’s own The ld Counsel further submitted that in the assessee’s own The ld Counsel further submitted that in the assessee’s own case for Assessment Year 2017 case for Assessment Year 2017–18, while repelling the relian 18, while repelling the reliance placed by the Dispute Resolution Panel on the tariff at which M/s placed by the Dispute Resolution Panel on the tariff at which M/s placed by the Dispute Resolution Panel on the tariff at which M/s Torrent Power Ltd. was supplying electricity to the Gujarat Torrent Power Ltd. was supplying electricity to the Gujarat Torrent Power Ltd. was supplying electricity to the Gujarat Electricity Board, the Tribunal, in paragraphs 17 and 18 of its Electricity Board, the Tribunal, in paragraphs 17 and 18 of its Electricity Board, the Tribunal, in paragraphs 17 and 18 of its order, recorded cogent findings. The Tribunal observed that there order, recorded cogent findings. The Tribunal observed that the order, recorded cogent findings. The Tribunal observed that the was no material to establish that M/s Torrent Power Ltd. was was no material to establish that M/s Torrent Power Ltd. was was no material to establish that M/s Torrent Power Ltd. was supplying electricity to any entity other than the Gujarat Electricity supplying electricity to any entity other than the Gujarat Electricity supplying electricity to any entity other than the Gujarat Electricity Board and that the entire sale was confined to a single purchaser. Board and that the entire sale was confined to a single purchaser. Board and that the entire sale was confined to a single purchaser. In such a situation, where the sale is exclusively to one entity and In such a situation, where the sale is exclusively to In such a situation, where the sale is exclusively to the price and attendant conditions are wholly influenced by that the price and attendant conditions are wholly influenced by that the price and attendant conditions are wholly influenced by that entity, even if routed through a regulatory mechanism, the entity, even if routed through a regulatory mechanism, the entity, even if routed through a regulatory mechanism, the transaction assumes the character of a controlled and tainted transaction assumes the character of a controlled and tainted transaction assumes the character of a controlled and tainted transaction. transaction. transaction. Relying Relying Relying upon upon upon the the the statutory statutory statutory deeming deeming deeming provision provisi provisi contained in section 92A(2)(i) of the Act, the Tribunal held that such contained in section 92A(2)(i) of the Act, the Tribunal held that such contained in section 92A(2)(i) of the Act, the Tribunal held that such price, being influenced by the purchaser, cannot constitute a valid price, being influenced by the purchaser, cannot constitute a valid price, being influenced by the purchaser, cannot constitute a valid comparable for the purpose of determining the arm’s length price. It comparable for the purpose of determining the arm’s length price. It comparable for the purpose of determining the arm’s length price. It was accordingly concluded that the tariff at was accordingly concluded that the tariff at which the Gujarat which the Gujarat Electricity Board purchased power from M/s Torrent Power Ltd. Electricity Board purchased power from M/s Torrent Power Ltd. Electricity Board purchased power from M/s Torrent Power Ltd. was not an appropriate benchmark. The Tribunal thus upheld the was not an appropriate benchmark. The Tribunal thus upheld the was not an appropriate benchmark. The Tribunal thus upheld the price of ₹6.90 per unit, being the price available in the open market 6.90 per unit, being the price available in the open market 6.90 per unit, being the price available in the open market and also the price at which the assessee it and also the price at which the assessee itself procured power from self procured power from the Gujarat Electricity Board, as representing the true market the Gujarat Electricity Board, as representing the true market the Gujarat Electricity Board, as representing the true market value. The said position has been consistently followed by the value. The said position has been consistently followed by the value. The said position has been consistently followed by the Tribunal in the Appellant’s own case for Assessment Year 2019–20. Tribunal in the Appellant’s own case for Assessment Year 2019 Tribunal in the Appellant’s own case for Assessment Year 2019

Tata Chemicals Ltd. He further submitted submitted that in any event, in the present case, vent, in the present case, the Assessing Officer had made a reference to the Transfer Pricing the Assessing Officer had made a reference to the Transfer Pricing the Assessing Officer had made a reference to the Transfer Pricing Officer for determination of the arm’s length price of the specified Officer for determination of the arm’s length price of the specified Officer for determination of the arm’s length price of the specified domestic transactions reported in Form No. 3CEB. Pursuant domestic transactions reported in Form No. 3CEB. Pursuant domestic transactions reported in Form No. 3CEB. Pursuant thereto, the Transfer Pricing Offic thereto, the Transfer Pricing Officer issued a notice dated er issued a notice dated 03.11.2017 calling for detailed information. In response, and during 03.11.2017 calling for detailed information. In response, and during 03.11.2017 calling for detailed information. In response, and during the course of the transfer pricing proceedings, the assessee the course of the transfer pricing proceedings, the assessee the course of the transfer pricing proceedings, the assessee furnished comprehensive submissions dated 30.08.2018 and furnished comprehensive submissions dated 30.08.2018 and furnished comprehensive submissions dated 30.08.2018 and 18.09.2018, wherein it placed on record the 18.09.2018, wherein it placed on record the particulars of all particulars of all specified domestic transactions, the benchmarking methodology specified domestic transactions, the benchmarking methodology specified domestic transactions, the benchmarking methodology adopted for each such transaction, including for the preceding three adopted for each such transaction, including for the preceding three adopted for each such transaction, including for the preceding three years, as well as the audited financial statements of the two eligible years, as well as the audited financial statements of the two eligible years, as well as the audited financial statements of the two eligible units claiming deduction under sect units claiming deduction under section 80-IA of the Act. Upon due IA of the Act. Upon due examination of the material so furnished, the Transfer Pricing examination of the material so furnished, the Transfer Pricing examination of the material so furnished, the Transfer Pricing Officer passed an order dated 30.10.2018 proposing adjustments Officer passed an order dated 30.10.2018 proposing adjustments Officer passed an order dated 30.10.2018 proposing adjustments only in respect of commission on corporate guarantee and interest only in respect of commission on corporate guarantee and interest only in respect of commission on corporate guarantee and interest on preference shares treated as l on preference shares treated as loans. Significantly, no adjustment oans. Significantly, no adjustment whatsoever was suggested in respect of the sale of power and sale of whatsoever was suggested in respect of the sale of power and sale of whatsoever was suggested in respect of the sale of power and sale of steam transactions reported in Form No. 3CEB, thereby evidencing steam transactions reported in Form No. 3CEB, thereby evidencing steam transactions reported in Form No. 3CEB, thereby evidencing the Transfer Pricing Officer’s acceptance of such transactions as the Transfer Pricing Officer’s acceptance of such transactions as the Transfer Pricing Officer’s acceptance of such transactions as being at arm’s length being at arm’s length. Once this factual position is accepted, and as . Once this factual position is accepted, and as rightly conceded by the learned Departmental Representative, the rightly conceded by the learned Departmental Representative, the rightly conceded by the learned Departmental Representative, the provisions of clause (iii) of the Explanation below section 80A(6) or provisions of clause (iii) of the Explanation below section 80A(6) or provisions of clause (iii) of the Explanation below section 80A(6) or clause (ii) of the Explanation below section 80 clause (ii) of the Explanation below section 80-IA(8) alone would IA(8) alone would govern the field. Inasmuch as the arm’s length price of the specified the field. Inasmuch as the arm’s length price of the specified the field. Inasmuch as the arm’s length price of the specified

7.31 The ld Counsel relied on various decisions, including following: The ld Counsel relied on various decisions, including following: The ld Counsel relied on various decisions, including following: (i) CIT v. Godawari Power & Ispat Limited (2014) 42 CIT v. Godawari Power & Ispat Limited (2014) 42 CIT v. Godawari Power & Ispat Limited (2014) 42 taxmann.com 551 (Chhattisgarh) taxmann.com 551 (Chhattisgarh) (ii) PCIT v. Gujarat Alkalies & Chemicals Limited (2017) PCIT v. Gujarat Alkalies & Chemicals Limited PCIT v. Gujarat Alkalies & Chemicals Limited 395 ITR 247 395 ITR 247 Gujarat High Court (iii) PCIT v. Gujarat Fluorochemicals Limited being PCIT v. Gujarat Fluorochemicals Limited being PCIT v. Gujarat Fluorochemicals Limited being orders dated 17.06.2019 orders dated 17.06.2019 Gujarat High Court Gujarat High Court (iv) PCIT PCIT PCIT v. v. v. DCM DCM DCM Shriram Shriram Shriram Limited Limited Limited (2025) (2025) (2025) 170 170 170 taxmann.com 631 taxmann.com 631 Delhi High Court 7.32 The learned Departmental Representative, opposing The learned Departmental Representative, opposing The learned Departmental Representative, opposing the contentions advanced on behalf of the assessee, submitted that the contentions advanced on behalf of the assessee, submitted that the contentions advanced on behalf of the assessee, submitted that the reliance placed on earlier judicial precedents approving adoption of reliance placed on earlier judicial precedents approving adoption of reliance placed on earlier judicial precedents approving adoption of the tariff charged by the State Electricity Board to its consumers as the tariff charged by the State Electricity Board to its consumers as the tariff charged by the State Electricity Board to its consumers as the market value of power is no longer justified in view of the market value of power is no longer justifi the market value of power is no longer justifi subsequent statutory amendments. It was urged that clause (ii) of subsequent statutory amendments. It was urged that clause (ii) of subsequent statutory amendments. It was urged that clause (ii) of the Explanation below section 80 the Explanation below section 80-IA(8), inserted by the Finance Act, IA(8), inserted by the Finance Act, 2012 with effect from 1 April 2013, and sub 2012 with effect from 1 April 2013, and sub-section (6) of section section (6) of section Tata Chemicals Ltd. inserted by the Finance (No. 2) Act 80A, inserted by the Finance (No. 2) Act, 2009 with retrospective , 2009 with retrospective effect from 1 April 2009, have materially altered the legal position. effect from 1 April 2009, have materially altered the legal position. effect from 1 April 2009, have materially altered the legal position. 7.33 Referring to clause (i) of the Explanation below section 80A(6), Referring to clause (i) of the Explanation below section 80A(6), Referring to clause (i) of the Explanation below section 80A(6), the learned Departmental Representative submitted that, since the the learned Departmental Representative submitted that, since the the learned Departmental Representative submitted that, since the transaction in question transaction in question relates to transfer of power from the captive relates to transfer of power from the captive power plant to the assessee’s manufacturing unit, the market value power plant to the assessee’s manufacturing unit, the market value power plant to the assessee’s manufacturing unit, the market value must be determined as the price which such goods would fetch if must be determined as the price which such goods would fetch if must be determined as the price which such goods would fetch if sold by the eligible undertaking in the open market, subject to sold by the eligible undertaking in the open market, subject to sold by the eligible undertaking in the open market, subject to statutory or regulatory restrictions, if any. On this basis, it was gulatory restrictions, if any. On this basis, it was gulatory restrictions, if any. On this basis, it was contended that the tariff determined by the Electricity Regulatory contended that the tariff determined by the Electricity Regulatory contended that the tariff determined by the Electricity Regulatory Commission, in terms of sections 61 and 45 of the Electricity Act, Commission, in terms of sections 61 and 45 of the Electricity Act, Commission, in terms of sections 61 and 45 of the Electricity Act, 2003, constitutes the appropriate benchmark for determining 2003, constitutes the appropriate benchmark for determining 2003, constitutes the appropriate benchmark for determining market value.

Tata Chemicals Ltd. The learned Departmental Representative also relied upon the The learned Departmental Representative also relied upon the The learned Departmental Representative also relied upon the decision of the Hyderabad Bench of the Tribunal in of the Hyderabad Bench of the Tribunal in of the Hyderabad Bench of the Tribunal in Sanghi Industries Ltd. v. DCIT in ITA (TP) No. 104/Hyd/2022 (order dated Industries Ltd. v. DCIT in ITA (TP) No. 104/Hyd/2022 Industries Ltd. v. DCIT in ITA (TP) No. 104/Hyd/2022 23.01.2025), to submit that the price charged by electricity boards 23.01.2025), to submit that the price charged by electricity boards 23.01.2025), to submit that the price charged by electricity boards to consumers includes transmission and distribution costs, to consumers includes transmission and distribution costs, to consumers includes transmission and distribution costs, whereas no such costs are incurred in the internal transfer of power h costs are incurred in the internal transfer of power h costs are incurred in the internal transfer of power from a captive power plant to the assessee’s own units. It was urged from a captive power plant to the assessee’s own units. It was urged from a captive power plant to the assessee’s own units. It was urged that, in the absence of such costs, the fair market value of that, in the absence of such costs, the fair market value of that, in the absence of such costs, the fair market value of electricity supplied internally cannot be equated with the price paid electricity supplied internally cannot be equated with the price paid electricity supplied internally cannot be equated with the price paid by the assessee to the electricity board. y the assessee to the electricity board. 7.36 It was further contended that, after the insertion of the It was further contended that, after the insertion of the It was further contended that, after the insertion of the Explanation to section 80 Explanation to section 80-IA(8), determination of market value must IA(8), determination of market value must ordinarily proceed on the basis of the arm’s length price of the ordinarily proceed on the basis of the arm’s length price of the ordinarily proceed on the basis of the arm’s length price of the domestic transaction. However, it was argued that clause (iii) of the on. However, it was argued that clause (iii) of the on. However, it was argued that clause (iii) of the Explanation below section 80A(6) and clause (ii) of the Explanation Explanation below section 80A(6) and clause (ii) of the Explanation Explanation below section 80A(6) and clause (ii) of the Explanation below section 80-IA(8), which deem the arm’s length price to be the IA(8), which deem the arm’s length price to be the IA(8), which deem the arm’s length price to be the market value in the case of specified domestic transactions, would market value in the case of specified domestic transactions, would market value in the case of specified domestic transactions, would apply only where a reference has in fact been made to the Transfer pply only where a reference has in fact been made to the Transfer pply only where a reference has in fact been made to the Transfer Pricing Officer for determination of such arm’s length price. Pricing Officer for determination of such arm’s length price. Pricing Officer for determination of such arm’s length price. According to the learned Departmental Representative, in cases According to the learned Departmental Representative, in cases According to the learned Departmental Representative, in cases where no such reference has been made, the only permissible mode where no such reference has been made, the only permissible mode where no such reference has been made, the only permissible mode of determining market value is under clause (i) of the Explanation of determining market value is under clause (i) of the Explanation of determining market value is under clause (i) of the Explanation below section 80A(6). below section 80A(6).

Tata Chemicals Ltd. In rejoinder, the learned counsel for the assessee assailed the In rejoinder, the learned counsel for the assessee assailed the In rejoinder, the learned counsel for the assessee assailed the submissions advanced by the learned Departmental Representative. submissions advanced by the learned Departmental Representative. submissions advanced by the learned Departmental Representative. At the threshold, it was submitte At the threshold, it was submitted that the arguments now urged by d that the arguments now urged by the Revenue do not emanate from either the assessment order or the Revenue do not emanate from either the assessment order or the Revenue do not emanate from either the assessment order or the order passed by the Dispute Resolution Panel. None of the the order passed by the Dispute Resolution Panel. None of the the order passed by the Dispute Resolution Panel. None of the issues presently canvassed by the Revenue were raised during the issues presently canvassed by the Revenue were raised during the issues presently canvassed by the Revenue were raised during the assessment proceedings or before assessment proceedings or before the DRP. It was contended that the DRP. It was contended that such contentions have been raised for the first time before the such contentions have been raised for the first time before the such contentions have been raised for the first time before the Tribunal, and that too in an appeal preferred by the assessee. The Tribunal, and that too in an appeal preferred by the assessee. The Tribunal, and that too in an appeal preferred by the assessee. The learned counsel submitted that the Tribunal, being an appellate learned counsel submitted that the Tribunal, being an appellate learned counsel submitted that the Tribunal, being an appellate authority, is required to adj authority, is required to adjudicate only upon the controversy as it udicate only upon the controversy as it arises from the orders impugned before it. Neither the respondent arises from the orders impugned before it. Neither the respondent arises from the orders impugned before it. Neither the respondent nor the Tribunal can be permitted to enlarge the scope of the nor the Tribunal can be permitted to enlarge the scope of the nor the Tribunal can be permitted to enlarge the scope of the dispute beyond what was adjudicated by the lower authorities. dispute beyond what was adjudicated by the lower authorities. dispute beyond what was adjudicated by the lower authorities. 7.38 On merits, and withou On merits, and without prejudice to the above preliminary t prejudice to the above preliminary objection, the learned counsel submitted that even assuming— objection, the learned counsel submitted that even assuming objection, the learned counsel submitted that even assuming without admitting—that sub that sub-section (6) of section 80A, as inserted section (6) of section 80A, as inserted by the Finance (No. 2) Act, 2009, applies to the present case, the by the Finance (No. 2) Act, 2009, applies to the present case, the by the Finance (No. 2) Act, 2009, applies to the present case, the adoption of market value adoption of market value based on the tariff determined by the based on the tariff determined by the State Electricity Regulatory Commission for purchase of power by State Electricity Regulatory Commission for purchase of power by State Electricity Regulatory Commission for purchase of power by distribution companies would still be legally untenable. Clause (i) of distribution companies would still be legally untenable. Clause (i) of distribution companies would still be legally untenable. Clause (i) of the Explanation below section 80A(6) defines “market value” to the Explanation below section 80A(6) defines “market value” to the Explanation below section 80A(6) defines “market value” to mean the price whic mean the price which the goods or services would fetch if sold in h the goods or services would fetch if sold in the open market, subject to statutory or regulatory restrictions, if the open market, subject to statutory or regulatory restrictions, if the open market, subject to statutory or regulatory restrictions, if Tata Chemicals Ltd. any. It was emphasised that the governing test remains the price any. It was emphasised that the governing test remains the price any. It was emphasised that the governing test remains the price discoverable in the open market, and regulatory constraints, if discoverable in the open market, and regulatory constraints, if discoverable in the open market, and regulatory constraints, if relevant, can only be incidental to such determination and not an only be incidental to such determination and not an only be incidental to such determination and not determinative of it. 7.39 The learned counsel further clarified that the hearing had The learned counsel further clarified that the hearing had The learned counsel further clarified that the hearing had earlier been adjourned at the instance of the assessee only to earlier been adjourned at the instance of the assessee only to earlier been adjourned at the instance of the assessee only to enable filing of a comprehensive rejoinder in the light of the enable filing of a comprehensive rejoinder in the light enable filing of a comprehensive rejoinder in the light impending decision of the Hon’ble Third Member in the case of impending decision of the Hon’ble Third Member in the case of impending decision of the Hon’ble Third Member in the case of Aditya Birla Nuvo Ltd. (since amalgamated with Grasim Industries Aditya Birla Nuvo Ltd. (since amalgamated with Grasim Industries Aditya Birla Nuvo Ltd. (since amalgamated with Grasim Industries Ltd.) v. DCIT which had been heard but was then awaiting Ltd.) v. DCIT which had been heard but was then awaiting Ltd.) v. DCIT which had been heard but was then awaiting pronouncement.

7.40 In In In response, response, response, the the the learned learned learned Departmental Departmental Departmental Represe Representative Represe reiterated his reliance on the decision of the Hyderabad Bench in reiterated his reliance on the decision of the Hyderabad Bench in reiterated his reliance on the decision of the Hyderabad Bench in Sanghi Industries Ltd.(supra) Sanghi Industries Ltd.(supra) and on the submissions earlier and on the submissions earlier advanced before the Hon’ble Third Member in advanced before the Hon’ble Third Member in Aditya Birla Nuvo Aditya Birla Nuvo Ltd.(supra), contending that a captive power plant is compa , contending that a captive power plant is comparable to , contending that a captive power plant is compa a power generating company selling electricity to a distribution a power generating company selling electricity to a distribution a power generating company selling electricity to a distribution licensee, and that the conclusion reached by the Third Member— licensee, and that the conclusion reached by the Third Member licensee, and that the conclusion reached by the Third Member namely, that the appropriate comparable is the rate at which power namely, that the appropriate comparable is the rate at which power namely, that the appropriate comparable is the rate at which power is supplied by the distribution company to the consumer—is is supplied by the distribution company to the consum is supplied by the distribution company to the consum erroneous. Reference was made to the amendments introduced by erroneous. Reference was made to the amendments introduced by erroneous. Reference was made to the amendments introduced by insertion of section 80A(6) with retrospective effect from 01.04.2009 insertion of section 80A(6) with retrospective effect from 01.04.2009 insertion of section 80A(6) with retrospective effect from 01.04.2009 and further amendments made by the Finance Act, 2012, to urge and further amendments made by the Finance Act, 2012, to urge and further amendments made by the Finance Act, 2012, to urge

7.41 After pronouncement of the Third Member decision in After pronouncement of the Third Member decision in After pronouncement of the Third Member decision in Aditya Birla Nuvo Ltd., the assessee filed a detailed written rejoinder. It was , the assessee filed a detailed written rejoinder. It was , the assessee filed a detailed written rejoinder. It was submitted therein that the controversy relating to valuation of submitted therein that the controversy relating to valuation of submitted therein that the controversy relating to valuation of power and steam stands concluded at the threshold by application tands concluded at the threshold by application tands concluded at the threshold by application of the transfer pricing provisions. The transfer of power and steam of the transfer pricing provisions. The transfer of power and steam of the transfer pricing provisions. The transfer of power and steam from the captive power plants to the manufacturing unit constitutes from the captive power plants to the manufacturing unit constitutes from the captive power plants to the manufacturing unit constitutes a specified domestic transaction, which was duly benchmarked in a specified domestic transaction, which was duly benchmarked in a specified domestic transaction, which was duly benchmarked in accordance with Chapter X of the Act. It was pointed out that the ce with Chapter X of the Act. It was pointed out that the ce with Chapter X of the Act. It was pointed out that the Comparable Uncontrolled Price (CUP) method was adopted in Form Comparable Uncontrolled Price (CUP) method was adopted in Form Comparable Uncontrolled Price (CUP) method was adopted in Form No. 3CEB, and that the Assessing Officer had made a reference to No. 3CEB, and that the Assessing Officer had made a reference to No. 3CEB, and that the Assessing Officer had made a reference to the Transfer Pricing Officer under section 92CA(1). Upon detailed the Transfer Pricing Officer under section 92CA(1). Upon detailed the Transfer Pricing Officer under section 92CA(1). Upon detailed examination, the Transfer Pricing Officer accepted the arm’s length ination, the Transfer Pricing Officer accepted the arm’s length ination, the Transfer Pricing Officer accepted the arm’s length nature of the transactions relating to sale of power and steam and nature of the transactions relating to sale of power and steam and nature of the transactions relating to sale of power and steam and proposed adjustments only in respect of unrelated international proposed adjustments only in respect of unrelated international proposed adjustments only in respect of unrelated international transactions. It was contended that once the arm’s length price has transactions. It was contended that once the arm’s length pri transactions. It was contended that once the arm’s length pri been so accepted, the Assessing Officer is statutorily bound by such been so accepted, the Assessing Officer is statutorily bound by such been so accepted, the Assessing Officer is statutorily bound by such determination in view of section 92CA(4), and no further determination in view of section 92CA(4), and no further determination in view of section 92CA(4), and no further adjustment or recomputation is permissible. adjustment or recomputation is permissible.

7.43 Without prejudice, it was reiterated that the Revenue’ Without prejudice, it was reiterated that the Revenue’ Without prejudice, it was reiterated that the Revenue’s arguments travel beyond the findings recorded by the Assessing arguments travel beyond the findings recorded by the Assessing arguments travel beyond the findings recorded by the Assessing Officer, the Transfer Pricing Officer, and the DRP, which is Officer, the Transfer Pricing Officer, and the DRP, which is Officer, the Transfer Pricing Officer, and the DRP, which is impermissible in appellate proceedings. On merits, it was urged impermissible in appellate proceedings. On merits, it was urged impermissible in appellate proceedings. On merits, it was urged that the settled judicial position, consistently affirmed by the that the settled judicial position, consistently affirmed by the that the settled judicial position, consistently affirmed by the Supreme Court and various High Courts, is that the appropriate upreme Court and various High Courts, is that the appropriate upreme Court and various High Courts, is that the appropriate comparable for determining market value of captive power is the comparable for determining market value of captive power is the comparable for determining market value of captive power is the rate at which electricity is supplied by the State Electricity Board or rate at which electricity is supplied by the State Electricity Board or rate at which electricity is supplied by the State Electricity Board or distribution licensee to consumers, and not the rate at which power distribution licensee to consumers, and not the rate at wh distribution licensee to consumers, and not the rate at wh is sold by a generating company to a distribution company. The is sold by a generating company to a distribution company. The is sold by a generating company to a distribution company. The latter transaction, it was contended, is regulated, non-competitive, latter transaction, it was contended, is regulated, non latter transaction, it was contended, is regulated, non and does not represent an open market price. and does not represent an open market price.

7.55 The assessee has filed form no. 10CCB in relation to Turbine The assessee has filed form no. 10CCB in relation to Turbine The assessee has filed form no. 10CCB in relation to Turbine ECT-11 and LPT-10, which is available on paperbook page 164 to 10, which is available on paperbook page 164 to 10, which is available on paperbook page 164 to 167. According to the 167. According to the clause 27 of said report, total sale of the clause 27 of said report, total sale of the undertaking has been reported at undertaking has been reported at ₹ 1, 24, 33, 30, 98 1, 24, 33, 30, 986/- (including steam). In clause 29 profit and gains derived by the undertaking steam). In clause 29 profit and gains derived by the undertaking steam). In clause 29 profit and gains derived by the undertaking from eligible business has been reported at from eligible business has been reported at ₹ 26, 75, 65, 520/ 26, 75, 65, 520/- and in clause 30 equivalent amount of equivalent amount of ₹ 26, 75, 65, 520/ 26, 75, 65, 520/-has been claimed as deduction under section 80IA of the act. On pages 168 s deduction under section 80IA of the act. On pages 168 s deduction under section 80IA of the act. On pages 168 of the paperbook, inspection report by the Chief Electrical of the paperbook, inspection report by the Chief Electrical of the paperbook, inspection report by the Chief Electrical Inspector, Gandhinagar is placed on record, wherein he has Inspector, Gandhinagar is placed on record, wherein he has Inspector, Gandhinagar is placed on record, wherein he has mentioned inspection o mentioned inspection of two Turbo Generators namely LPT f two Turbo Generators namely LPT-10( 13MW) and ECT-11 ( 7.1 MW) and permission was granted under 11 ( 7.1 MW) and permission was granted under 11 ( 7.1 MW) and permission was granted under rule 47A of the Indian electricity rules, 1956 to charge the above rule 47A of the Indian electricity rules, 1956 to charge the above rule 47A of the Indian electricity rules, 1956 to charge the above two Turbo Generators. On paper book page 169 detail of two Turbo Generators. On paper book page 169 detail of two Turbo Generators. On paper book page 169 detail of computation of income for the year computation of income for the year under consideration has been under consideration has been Tata Chemicals Ltd. reported. On page 170 of the paperbook, the auditor report is reported. On page 170 of the paperbook, the auditor report is reported. On page 170 of the paperbook, the auditor report is available, wherein he has prepared balance available, wherein he has prepared balance-sheet as well as profit sheet as well as profit and loss account for the relevant units. For issue in dispute in and loss account for the relevant units. For issue in dispute in and loss account for the relevant units. For issue in dispute in hand, the profit and loss account hand, the profit and loss account and relevant schedule is and relevant schedule is important. The assessee has reported sale of electricity at ₹ 568, important. The assessee has reported sale of electricity at important. The assessee has reported sale of electricity at 322, 532/-and sale of the steam at and sale of the steam at ₹ 675, 008, 454/ 675, 008, 454/-. In this manner total sale of the undertaking has been reported at Rs.1, manner total sale of the undertaking has been reported at Rs.1, manner total sale of the undertaking has been reported at Rs.1, 243, 330, 986/-. For ready reference, . For ready reference, said profit and loss account is said profit and loss account is reproduced as under: reproduced as under:

7.60 On the other hand, the Revenue has consistently contended On the other hand, the Revenue has consistently contended On the other hand, the Revenue has consistently contended that in a thermal captive power plant, high that in a thermal captive power plant, high-pressure steam is pressure steam is generated primarily for the purpose of rotating the turbine to generated primarily for the purpose of rotating the turbine to generated primarily for the purpose of rotating the turbine to generate electricity. The steam generate electricity. The steam enters at very pressure into turbi enters at very pressure into turbine, After rotating the turbine, steams which comes out of turbine is After rotating the turbine, steams which comes out of turbine After rotating the turbine, steams which comes out of turbine merely residual steam of low merely residual steam of low pressure. Such residual steam is not pressure. Such residual steam is not generated independently, nor does it involve any separate or generated independently, nor does it involve any separate or generated independently, nor does it involve any separate or identifiable cost of production. The assessee has also not identifiable cost of production. The assessee has also not identifiable cost of production. The assessee has also not demonstrated, with supporting evidence, the precise manner or emonstrated, with supporting evidence, the precise manner or emonstrated, with supporting evidence, the precise manner or extent to which such residual steam was used in chemical extent to which such residual steam was used in chemical extent to which such residual steam was used in chemical processing. The ld DR The ld DR brought our attention to the profit and loss brought our attention to the profit and loss account available on paperbook page 172 and submitted that sale account available on paperbook page 172 and submitted that sale account available on paperbook page 172 and submitted that sale value of the steam has been shown that f the steam has been shown that ₹ 675, 008, 454/ 675, 008, 454/-, which is even much higher than the sale of electricity reported by the even much higher than the sale of electricity reported by the even much higher than the sale of electricity reported by the assessee at ₹ 568, 322, 532/ 568, 322, 532/-. According to him, this even defies . According to him, this even defies the basic purpose for which captive power plant was installed. In the basic purpose for which captive power plant was installed. In the basic purpose for which captive power plant was installed. In view of him, entire cost of produc view of him, entire cost of production was towards electricity tion was towards electricity generation and after removing the quantum of sale of the steam, the generation and after removing the quantum of sale of the steam, the generation and after removing the quantum of sale of the steam, the result would be loss as cost of the production of the unit is ₹ 993, result would be loss as cost of the production of the unit is result would be loss as cost of the production of the unit is 148, 193/-.

Tata Chemicals Ltd. for conversion of thermal energy into mechanical energy, and for conversion of thermal energy into mechanical energy, and for conversion of thermal energy into mechanical energy, and thereafter into electrical energy. The generation of steam is thereafter into electrical energy. The generation of steam is thereafter into electrical energy. The generation of steam is integrally and inseparably linked to electricity generation. The use, integrally and inseparably linked to electricity generation. The use, integrally and inseparably linked to electricity generation. The use, if any, of residual steam after it has performed its primary function sidual steam after it has performed its primary function sidual steam after it has performed its primary function does not warrant attribution of a separate cost unless supported by does not warrant attribution of a separate cost unless supported by does not warrant attribution of a separate cost unless supported by cogent technical and financial evidence. In the absence of such cogent technical and financial evidence. In the absence of such cogent technical and financial evidence. In the absence of such evidence, the bifurcation of cost adopted by the assessee is clearly evidence, the bifurcation of cost adopted by the assessee is clearl evidence, the bifurcation of cost adopted by the assessee is clearl artificial and self-serving. We also note that the value attributed by serving. We also note that the value attributed by serving. We also note that the value attributed by the assessee to steam exceeds the value attributed to electricity, the assessee to steam exceeds the value attributed to electricity, the assessee to steam exceeds the value attributed to electricity, which prima facie defies commercial logic and the very purpose for which prima facie defies commercial logic and the very purpose for which prima facie defies commercial logic and the very purpose for which a captive power plant is ordinarily installed. Once the which a captive power plant is ordinarily install which a captive power plant is ordinarily install artificially attributed value of steam is excluded, the eligible artificially attributed value of steam is excluded, the eligible artificially attributed value of steam is excluded, the eligible undertaking results in a loss, as rightly concluded by the Assessing undertaking results in a loss, as rightly concluded by the Assessing undertaking results in a loss, as rightly concluded by the Assessing Officer.

7.63 The learned DR made DR made another argument to convey to convey that the steam generated from the plant is not power and therefore not steam generated from the plant is not power and therefore not steam generated from the plant is not power and therefore not entitled for deduction under section 80IA of the Act. He submitted entitled for deduction under section 80IA of the Act. He submitted entitled for deduction under section 80IA of the Act. He submitted that the power as defined in textbook of physics is the rate at which that the power as defined in textbook of physics is the rate at which that the power as defined in textbook of physics is the rate at which Tata Chemicals Ltd. work is done or energy is transferred, converted or used over time. or energy is transferred, converted or used over time. or energy is transferred, converted or used over time. It measures how fast the system performs task calculated at work It measures how fast the system performs task calculated at work It measures how fast the system performs task calculated at work divided by time. The SI unit for measurement of power is watt divided by time. The SI unit for measurement of power is watt divided by time. The SI unit for measurement of power is watt defined as one joule per second. He further submitted that electrical defined as one joule per second. He further submitted that electrical defined as one joule per second. He further submitted that electrical power is the rate at which electrical energy is transferred , r is the rate at which electrical energy is transferred , r is the rate at which electrical energy is transferred , consumed or converted into other forms like heat, or light or consumed or converted into other forms like heat, or light or consumed or converted into other forms like heat, or light or mechanical energy) within the circuit per unit time, which is mechanical energy) within the circuit per unit time, which is mechanical energy) within the circuit per unit time, which is measured in watts. He submitted that fundamental formula for measured in watts. He submitted that fundamental formula for measured in watts. He submitted that fundamental formula for measure of the electric power is voltage multiplied by current. He e electric power is voltage multiplied by current. He e electric power is voltage multiplied by current. He submitted that while both the chemical processing as well as power submitted that while both the chemical processing as well as power submitted that while both the chemical processing as well as power generation used both the same medium of the steam but they generation used both the same medium of the steam but they generation used both the same medium of the steam but they achieve different goals. He submitted that in chemical processing achieve different goals. He submitted that in chemical processing achieve different goals. He submitted that in chemical processing steam’s primary heat transfer medium used for heating, distillation imary heat transfer medium used for heating, distillation imary heat transfer medium used for heating, distillation and a sterilization, whereas in power generation steam is a working and a sterilization, whereas in power generation steam is a working and a sterilization, whereas in power generation steam is a working fluid used to convert thermal energy into mechanical energy fluid used to convert thermal energy into mechanical energy fluid used to convert thermal energy into mechanical energy (spinning of turbine), which is not in case of steam used in chemical , which is not in case of steam used in chemical , which is not in case of steam used in chemical reaction. Accordingly Accordingly, he submitted that leftover steam used by the leftover steam used by the assessee for chemical reaction if any is not entitled for direction assessee for chemical reaction if any is not entitled for direct assessee for chemical reaction if any is not entitled for direct under section 80 IA of the Act a under section 80 IA of the Act as same is not source of power s same is not source of power entitled for deduction under section 80 IA the A uction under section 80 IA the Act.

7.65 Further, we also note that t Further, we also note that the meaning of word ‘power’ used in he meaning of word ‘power’ used in section in Section 80 in Section 80-IA(4)(iv)(a) cannot be read in isolation IA(4)(iv)(a) cannot be read in isolation. It must be read alongside clause (iv)(b), which s be read alongside clause (iv)(b), which speaks of undertakings that peaks of undertakings that start "transmission or distribution by laying a network of new start "transmission or distribution by laying a network of new start "transmission or distribution by laying a network of new transmission or distribution lines." transmission or distribution lines." This language is uniquely and This language is uniquely and exclusively applicable to the electrical power sector. Electricity is exclusively applicable to the electrical power sector. Electricity is exclusively applicable to the electrical power sector. Electricity is transmitted over long distanc transmitted over long distances through a grid. The inclusion of es through a grid. The inclusion of clause (b) acts as a contextual illuminator, clarifying that clause (b) acts as a contextual illuminator, clarifying that clause (b) acts as a contextual illuminator, clarifying that Parliament's focus was on the electrical grid and its components. Parliament's focus was on the electrical grid and its components. Parliament's focus was on the electrical grid and its components. Interpreting "power" to include " Interpreting "power" to include "steam power" renders the specific " renders the specific language of clause (b) inc language of clause (b) incongruous and out of place, violating the ongruous and out of place, violating the principle of harmonious construction. principle of harmonious construction. Every tax incentive provision Every tax incentive provision is enacted with a specific economic objective. The objective of is enacted with a specific economic objective. The objective of is enacted with a specific economic objective. The objective of Section 80-IA was to overcome the critical shortage of electrical IA was to overcome the critical shortage of electrical IA was to overcome the critical shortage of electrical power in the country by encouraging private investment in power try by encouraging private investment in power try by encouraging private investment in power plants. The Memorandum explaining the provisions of the Finance plants. The Memorandum explaining the provisions of the Finance plants. The Memorandum explaining the provisions of the Finance Bill, 1993, which introduced this incentive, consistently refers to Bill, 1993, which introduced this incentive, consistently refers to Bill, 1993, which introduced this incentive, consistently refers to boosting "power generation" in the context of the national boosting "power generation" in the context of the national boosting "power generation" in the context of the national infrastructure deficit. icit. To extend this benefit to a standard piece of To extend this benefit to a standard piece of industrial equipment like a industrial equipment like a steam generation would be to completely divorce the provision from its intended purpose. It would completely divorce the provision from its intended purpose. It would completely divorce the provision from its intended purpose. It would transform a targeted infrastructure incentive into an unintended, transform a targeted infrastructure incentive into an unintended, transform a targeted infrastructure incentive into an unintended,

8.1 Briefly stated, the facts relevant to the issue are that the Briefly stated, the facts relevant to the issue are that the Briefly stated, the facts relevant to the issue are that the Assessing Officer noticed that the assessee had debited interest essing Officer noticed that the assessee had debited interest essing Officer noticed that the assessee had debited interest expenditure of ₹186.79 crores to its profit 186.79 crores to its profit and loss account, which, and loss account, which, , included interest of ₹146,72,82,057/ inter-alia, included interest of 146,72,82,057/- incurred on External Commercial Borrowings (ECB) and Non-Convertible External Commercial Borrowings (ECB) and Non External Commercial Borrowings (ECB) and Non Debentures (NCDs) . These borrowings had been utilised for making Debentures (NCDs) . These borrowings had been utilised for making Debentures (NCDs) . These borrowings had been utilised for making investment in the assessee’s overseas subsidiary. According to the assessee’s overseas subsidiary. According to the assessee’s overseas subsidiary. According to the Assessing Officer, the income, if any, arising from such foreign Assessing Officer, the income, if any, arising from such foreign Assessing Officer, the income, if any, arising from such foreign investments or subsidiaries was neither taxable in India nor were investments or subsidiaries was neither taxable in India nor were investments or subsidiaries was neither taxable in India nor were those entities resident in India. On this premise, the assessee was those entities resident in India. On this premise, the assessee was those entities resident in India. On this premise, the assessee was called upon to explain as to why the corresponding interest upon to explain as to why the corresponding interest upon to explain as to why the corresponding interest expenditure should not be treated as capital in nature and expenditure should not be treated as capital in nature and expenditure should not be treated as capital in nature and disallowed.

8.3 The assessee explained that the borrowings had been raised in The assessee explained that the borrowings had been raised in The assessee explained that the borrowings had been raised in the financial year 2008 the financial year 2008-09 for the purpose of acquiring General 09 for the purpose of acquiring General Chemical Industrial Products Inc. (GCIP), USA, a major player in Industrial Products Inc. (GCIP), USA, a major player in Industrial Products Inc. (GCIP), USA, a major player in the global soda ash market, for a total consideration of the global soda ash market, for a total consideration of the global soda ash market, for a total consideration of approximately ₹4,036 crores. It was submitted that this acquisition 4,036 crores. It was submitted that this acquisition 4,036 crores. It was submitted that this acquisition enabled the assessee to consolidate its position as the second- enabled the assessee to consolidate its position as the second enabled the assessee to consolidate its position as the second largest soda ash producer in the world and marked a significant a ash producer in the world and marked a significant a ash producer in the world and marked a significant milestone in the growth of its soda ash business. The acquisition milestone in the growth of its soda ash business. The acquisition milestone in the growth of its soda ash business. The acquisition opened new markets in North and South America and other opened new markets in North and South America and other opened new markets in North and South America and other regions, at a time when global demand for soda ash was steadily regions, at a time when global demand for soda ash was steadily regions, at a time when global demand for soda ash was steadily increasing. The assessee further highlighted that the acquisition of ssessee further highlighted that the acquisition of ssessee further highlighted that the acquisition of cost-effective natural soda ash assets provided it with a distinct effective natural soda ash assets provided it with a distinct effective natural soda ash assets provided it with a distinct competitive advantage in the global market. competitive advantage in the global market.

Tata Chemicals Ltd. The assessee placed reliance on the decision The assessee placed reliance on the decision The assessee placed reliance on the decision of the Hon’ble Supreme Court in DCIT v. Core Health Care Ltd. DCIT v. Core Health Care Ltd. (298 ITR 194), wherein it is held that interest on borrowed capital is allowable wherein it is held that interest on borrowed capital is allowable wherein it is held that interest on borrowed capital is allowable under section 36(1)(iii) irrespective of whether the borrowing is under section 36(1)(iii) irrespective of whether the borrowing is under section 36(1)(iii) irrespective of whether the borrowing is utilised for acquisition of a capital asset or utilised for acquisition of a capital asset or otherwise, so long as the otherwise, so long as the borrowing is for business purposes. It was further submitted that borrowing is for business purposes. It was further submitted that borrowing is for business purposes. It was further submitted that the expression “for the purposes of the business” is wider in scope the expression “for the purposes of the business” is wider in scope the expression “for the purposes of the business” is wider in scope than the expression “for the purpose of earning profits” and than the expression “for the purpose of earning profits” and than the expression “for the purpose of earning profits” and includes all acts incidental to th includes all acts incidental to the carrying on of business. e carrying on of business. According to the assessee, the earning of dividend income was According to the assessee, the earning of dividend income was According to the assessee, the earning of dividend income was merely incidental or ancillary to the principal business objective, merely incidental or ancillary to the principal business objective, merely incidental or ancillary to the principal business objective, and therefore the allowability of interest under section 36(1)(iii) and therefore the allowability of interest under section 36(1)(iii) and therefore the allowability of interest under section 36(1)(iii) could not be denied. could not be denied. 8.6 Without prejudice, the assessee alternatively claimed that ut prejudice, the assessee alternatively claimed that ut prejudice, the assessee alternatively claimed that interest incurred on borrowed funds utilised for investment in interest incurred on borrowed funds utilised for investment in interest incurred on borrowed funds utilised for investment in shares, yielding dividend income chargeable to tax, was allowable shares, yielding dividend income chargeable to tax, was allowable shares, yielding dividend income chargeable to tax, was allowable as a deduction under section 57(iii) of the Act. as a deduction under section 57(iii) of the Act. 8.7 It was also pointed It was also pointed out that a similar issue had arisen in the out that a similar issue had arisen in the assessee’s own case for the first time in assessment year 2009-10. assessee’s own case for the first time in assessment year 2009 assessee’s own case for the first time in assessment year 2009 Although the Assessing Officer had disallowed the claim, the Although the Assessing Officer had disallowed the claim, the Although the Assessing Officer had disallowed the claim, the Dispute Resolution Panel, by its directions dated 27.12.2013, Dispute Resolution Panel, by its directions dated 27.12.2013, Dispute Resolution Panel, by its directions dated 27.12.2013, accepted the assessee’ accepted the assessee’s contention and held that the investment s contention and held that the investment had infused synergy into the overall business of the assessee. had infused synergy into the overall business of the assessee. had infused synergy into the overall business of the assessee. Relying on the judgments of the Hon’ble Supreme Court in Core Relying on the judgments of the Hon’ble Supreme Court in Relying on the judgments of the Hon’ble Supreme Court in Tata Chemicals Ltd. Health Care Ltd. (supra) and of the jurisdictional High Court in (supra) and of the jurisdictional High Court in (supra) and of the jurisdictional High Court in CIT v. Lokhandwala Construction Industries Ltd. (260 ITR 579), the DRP (260 ITR 579), the DRP v. Lokhandwala Const held that the distinction between utilisation of borrowed funds for held that the distinction between utilisation of borrowed funds for held that the distinction between utilisation of borrowed funds for capital or revenue purposes was irrelevant for the purposes of capital or revenue purposes was irrelevant for the purposes of capital or revenue purposes was irrelevant for the purposes of section 36(1)(iii). 8.8 The assessee submitted that although the Revenue had The assessee submitted that although the Revenue had The assessee submitted that although the Revenue had preferred appeals against such directions for certain earlier years, preferred appeals against such directions for certain earlier years, preferred appeals against such directions for certain earlier years, which were pending before the Tribunal, the same issue continued which were pending before the Tribunal, the same issue continued which were pending before the Tribunal, the same issue continued to arise in subsequent years as well. From assessment year 2012- to arise in subsequent years as well. From assessment year 2012 to arise in subsequent years as well. From assessment year 2012 13 onwards, in view of the statutory limitation on the Revenue’s 13 onwards, in view of the statutory limitation on the Rev 13 onwards, in view of the statutory limitation on the Rev right to appeal against final assessment orders passed in conformity right to appeal against final assessment orders passed in conformity right to appeal against final assessment orders passed in conformity with the DRP’s directions, the issue was decided against the with the DRP’s directions, the issue was decided against the with the DRP’s directions, the issue was decided against the assessee only to keep the matter alive, and such view was followed assessee only to keep the matter alive, and such view was followed assessee only to keep the matter alive, and such view was followed for later years including assessment years 2013 for later years including assessment years 2013-14 a 14 and 2014-15. The assessee’s appeals for those years were stated to be pending The assessee’s appeals for those years were stated to be pending The assessee’s appeals for those years were stated to be pending adjudication before the Tribunal. adjudication before the Tribunal. 8.9 The Assessing Officer, however, did not accept the assessee’s The Assessing Officer, however, did not accept the assessee’s The Assessing Officer, however, did not accept the assessee’s explanation. According to him, the investments were reflected in the explanation. According to him, the investments were reflected in the explanation. According to him, the investments were reflected in the books of account as capital investments and not as stock account as capital investments and not as stock-in-trade. account as capital investments and not as stock He observed that the borrowed funds had been utilised for He observed that the borrowed funds had been utilised for He observed that the borrowed funds had been utilised for acquiring and maintaining controlling interest in the overseas acquiring and maintaining controlling interest in the overseas acquiring and maintaining controlling interest in the overseas subsidiaries, rather than for carrying on the assessee’s business. subsidiaries, rather than for carrying on the assessee’s business. subsidiaries, rather than for carrying on the assessee’s business. Emphasis was laid on the classification of the shares as as laid on the classification of the shares as as laid on the classification of the shares as investments in the books of account, which, according to the investments in the books of account, which, according to the investments in the books of account, which, according to the Tata Chemicals Ltd. Assessing Officer, indicated that investment in shares was not the Assessing Officer, indicated that investment in shares was not the Assessing Officer, indicated that investment in shares was not the business of the assessee. It was further held that the expenditure business of the assessee. It was further held that the expenditure business of the assessee. It was further held that the expenditure was not incurred for the purposes of business and was, therefore, ed for the purposes of business and was, therefore, ed for the purposes of business and was, therefore, not allowable under section 36(1)(iii) of the Act. not allowable under section 36(1)(iii) of the Act. 8.10 The Assessing Officer further held that dividend income, if The Assessing Officer further held that dividend income, if The Assessing Officer further held that dividend income, if any, arising from the subsidiaries would be assessable under the any, arising from the subsidiaries would be assessable under the any, arising from the subsidiaries would be assessable under the head “Income from othe head “Income from other sources”. Placing reliance on the decision r sources”. Placing reliance on the decision of the jurisdictional High Court in of the jurisdictional High Court in CIT v. R. Amritaben Shah CIT v. R. Amritaben Shah (238 ITR 777), it was held that interest expenditure incurred for ITR 777), it was held that interest expenditure incurred for ITR 777), it was held that interest expenditure incurred for acquiring controlling interest could not be allowed as a deduction acquiring controlling interest could not be allowed as a deduction acquiring controlling interest could not be allowed as a deduction under section 57(iii) of the Act, since such expenditure was not iii) of the Act, since such expenditure was not iii) of the Act, since such expenditure was not incurred wholly and exclusively for the purpose of earning dividend incurred wholly and exclusively for the purpose of earning dividend incurred wholly and exclusively for the purpose of earning dividend income. Accordingly, the Assessing Officer concluded that the Accordingly, the Assessing Officer concluded that the Accordingly, the Assessing Officer concluded that the interest expenditure of ₹146,72,85,057/- was capital in nature, interest expenditure of was capital in nature, disallowed the same, and added it back to the total income of the same, and added it back to the total income of the same, and added it back to the total income of the assessee. Penalty proceedings under section 271(1)(c) of the Act assessee. Penalty proceedings under section 271(1)(c) of the Act assessee. Penalty proceedings under section 271(1)(c) of the Act were also initiated. The relevant finding of the Assessing Officer is The relevant finding of the Assessing Officer is The relevant finding of the Assessing Officer is reproduced as under: reproduced as under: “ 5.3 The explanation of the assessee has been considered The explanation of the assessee has been c The explanation of the assessee has been c however the same is not acceptable. however the same is not acceptable. The assessee has The assessee has purchased the shares foreign investments/ subsidiary/JVs. purchased the shares foreign investments/ subsidiary/JVs. purchased the shares foreign investments/ subsidiary/JVs. Since the assessee is not earning any income from the under the Since the assessee is not earning any income from the under the Since the assessee is not earning any income from the under the head business and profession from the said investment, the head business and profession from the said investment, the head business and profession from the said investment, the same cannot same cannot be treated as a business expense. The interest be treated as a business expense. The interest expenditure has been incurred towards the capital borrowed to expenditure has been incurred towards the capital borrowed to expenditure has been incurred towards the capital borrowed to make investment in a subsidiary. If investment in shares was make investment in a subsidiary. If investment in shares was make investment in a subsidiary. If investment in shares was the business of the assessee, the assessee would have categorized the the above investments in its books as stock ts in its books as stock-in-

Tata Chemicals Ltd. trade. The fact that the assessee is showing the above shares, trade. The fact that the assessee is showing the above shares, trade. The fact that the assessee is showing the above shares, acquired, as investment in its books is also one of the indicators acquired, as investment in its books is also one of the indicators acquired, as investment in its books is also one of the indicators that the assessee is not involved in the business of investment. that the assessee is not involved in the business of investment. that the assessee is not involved in the business of investment. In fact it is seen that the afore In fact it is seen that the aforesaid investment has been made said investment has been made only for the purpose of maintaining controlling interest in the only for the purpose of maintaining controlling interest in the only for the purpose of maintaining controlling interest in the said subsidiary company and not with a motive of business said subsidiary company and not with a motive of business said subsidiary company and not with a motive of business consideration, consideration, including including capital capital appreciation. appreciation. Using the borrowed funds for making investment with a motive of borrowed funds for making investment with a mot borrowed funds for making investment with a mot acquiring and maintaining controlling interest cannot be held to acquiring and maintaining controlling interest cannot be held to acquiring and maintaining controlling interest cannot be held to be business of the assessee company. Considering the above it be business of the assessee company. Considering the above it be business of the assessee company. Considering the above it is conclusively held that making investment or acquiring shares is conclusively held that making investment or acquiring shares is conclusively held that making investment or acquiring shares is not the business of the assessee. There is no connection of is not the business of the assessee. There is no connectio is not the business of the assessee. There is no connectio business in business in the said investment in business in the said investment in the said investment in whatever manner. whatever manner. whatever manner. Considering that the above investment is not for the purpose of Considering that the above investment is not for the purpose of Considering that the above investment is not for the purpose of the business, the cost of making investment cannot be allowed the business, the cost of making investment cannot be allowed the business, the cost of making investment cannot be allowed as business expenditure. as business expenditure. 5.4 The only income from the subsidiary is dividend The only income from the subsidiary is dividend income. Since, income. Since, dividend income is taxable as income from other sources, the dividend income is taxable as income from other sources, the dividend income is taxable as income from other sources, the allowability of interest expenditure under Section 57 has to be allowability of interest expenditure under Section 57 has to be allowability of interest expenditure under Section 57 has to be considered. In the present case, the main motive of the assessee is not considered. In the present case, the main motive of the assessee is not considered. In the present case, the main motive of the assessee is not to earn dividend income but to acquire the c to earn dividend income but to acquire the controlling stake in ontrolling stake in subsidiary. Since the interest expenditure is incurred to obtaining a subsidiary. Since the interest expenditure is incurred to obtaining a subsidiary. Since the interest expenditure is incurred to obtaining a controlling interest in a foreign company, the allowability of interest controlling interest in a foreign company, the allowability of interest controlling interest in a foreign company, the allowability of interest expenditure u/s 57 is also not possible. Reliance is placed on the ratio 57 is also not possible. Reliance is placed on the ratio 57 is also not possible. Reliance is placed on the ratio of the judgment in the case of CIT Vs R.Amritaben Shah reported in e case of CIT Vs R.Amritaben Shah reported in 238 e case of CIT Vs R.Amritaben Shah reported in ITR 777 (Bombay High Court) which held that expenditure incurred for ITR 777 (Bombay High Court) which held that expenditure incurred for ITR 777 (Bombay High Court) which held that expenditure incurred for the purpose of controlling interest the purpose of controlling interest is not an allowable expenditure is not an allowable expenditure u/s.57(iii) of the Act. The court held as under: “Section 57(iii) provides that in order to get deduction the expenditure should be vides that in order to get deduction the expenditure should be vides that in order to get deduction the expenditure should be incurred wholly and exclusively for the purpose ‘of making or earning income from other exclusively for the purpose ‘of making or earning income from other exclusively for the purpose ‘of making or earning income from other sources’ and that it should not be in the nature of capital expenditure. Section 58(1)(a) sources’ and that it should not be in the nature of capital expenditure. Section 58(1)(a) sources’ and that it should not be in the nature of capital expenditure. Section 58(1)(a) further provides that no deduction shall be allowed in s that no deduction shall be allowed in case the expenditure expenditure is in the nature of personal expenses expenses of the assessee. In the instant case, case, there was no dispute that shares in question question were purchased by the assessee for for the purpose of acquiring controlling interest in the company and not for earning dividend. That being so, terest in the company and not for earning dividend. That being so, terest in the company and not for earning dividend. That being so, the expenditure incurred by way of interest on loan taken by the assessee assessee for the said purpose could not not be held to be an expenditure incurred wholly and expenditure incurred wholly and exclusively for the purpose of earn exclusively for the purpose of earning income by way of dividends. From the nature ing income by way of dividends. From the nature of transaction, it was clear that the expenditure was not for the purpose of earning of transaction, it was clear that the expenditure was not for the purpose of earning of transaction, it was clear that the expenditure was not for the purpose of earning income by way of dividends but for the purpose of acquiring controlling interest in income by way of dividends but for the purpose of acquiring controlling interest in income by way of dividends but for the purpose of acquiring controlling interest in the company and, therefore, it would no therefore, it would not be allowable as a deduction under Section t be allowable as a deduction under Section Tata Chemicals Ltd.

57(iii)” 5.5 In the present case, interest expense is claimed incurred for the In the present case, interest expense is claimed incurred for the In the present case, interest expense is claimed incurred for the purpose of acquiring controlling interest. Hence, in view of the above purpose of acquiring controlling interest. Hence, in view of the above purpose of acquiring controlling interest. Hence, in view of the above discussions, interest amounting to Rs. 146,72,85,057/- is disallowed as discussions, interest capital expenditure and and is accordingly added back to the total the total income of the assessee. Penalty Penalty proceedings u/s 271(1)(c) of the IT Act is initiated for is initiated for furnishing inaccurate particulars of income. furnishing inaccurate particulars of income. 8.11 The ld DRP affirmed the view of the ld AO. The o The ld DRP affirmed the view of the ld AO. The o The ld DRP affirmed the view of the ld AO. The only reasons given by ld DRP is that proceeding before them are continuation of given by ld DRP is that proceeding before them are continuation of given by ld DRP is that proceeding before them are continuation of assessment proceedings. Since, the Revenue cannot file an appeal assessment proceedings. Since, the Revenue cannot file an appeal assessment proceedings. Since, the Revenue cannot file an appeal against the final assessment order passed pursuant to the against the final assessment order passed pursuant to the against the final assessment order passed pursuant to the directions given by the DRP and with a view to keep the issue alive directions given by the DRP and with a view to keep th directions given by the DRP and with a view to keep th they have taken a different view for the year under consideration as they have taken a different view for the year under consideration as they have taken a different view for the year under consideration as compared to AYs 2009 compared to AYs 2009-10 to 2011-12 8.12 Before us the assessee submitted Before us the assessee submitted that the interest expenditure that the interest expenditure incurred on borrowings utilised for acquiring controlling interest in incurred on borrowings utilised for acquiring controlling interest in incurred on borrowings utilised for acquiring controlling interest in its overseas subsidiary, GCIP, USA, is squarely allowable under its overseas subsidiary, GCIP, USA, is squarely allowable under its overseas subsidiary, GCIP, USA, is squarely allowable under section 36(1)(iii) of the Act. section 36(1)(iii) of the Act.

8.18 As regards the proviso to section 36(1)(iii), it is submitte As regards the proviso to section 36(1)(iii), it is submitte As regards the proviso to section 36(1)(iii), it is submitted that the same is inapplicable to the facts of the present case. The proviso the same is inapplicable to the facts of the present case. The proviso the same is inapplicable to the facts of the present case. The proviso is attracted only where interest is paid on capital borrowed for is attracted only where interest is paid on capital borrowed for is attracted only where interest is paid on capital borrowed for acquisition of a tangible asset for extension of business, for the acquisition of a tangible asset for extension of business, for the acquisition of a tangible asset for extension of business, for the period up to the date such asset is first put period up to the date such asset is first put to use. Acquisition of to use. Acquisition of controlling interest in a subsidiary by purchase of shares does not controlling interest in a subsidiary by purchase of shares does not controlling interest in a subsidiary by purchase of shares does not Tata Chemicals Ltd. fall within the mischief of the proviso. In any event, even assuming fall within the mischief of the proviso. In any event, even assuming fall within the mischief of the proviso. In any event, even assuming the proviso applies, the shares had already been acquired in earlier the proviso applies, the shares had already been acquired in earlier the proviso applies, the shares had already been acquired in earlier years and stood “put to use years and stood “put to use” immediately upon acquisition, as the ” immediately upon acquisition, as the business benefits and strategic control flowed from that very date. business benefits and strategic control flowed from that very date. business benefits and strategic control flowed from that very date. Hence, no disallowance can be made in the year under Hence, no disallowance can be made in the year under Hence, no disallowance can be made in the year under consideration.

8.22 The Ld. DR submitted that assessee is not in the business of The Ld. DR submitted that assessee is not in the business of The Ld. DR submitted that assessee is not in the business of investments and it has been made as capital investment into the investments and it has been made as capital investment i investments and it has been made as capital investment i shareholding of subsidiaries which are independent entities shareholding of subsidiaries which are independent entities shareholding of subsidiaries which are independent entities separate from the assessee. They have their own business and separate from the assessee. They have their own business and separate from the assessee. They have their own business and paying taxes into the relevant countries. He submitted that if paying taxes into the relevant countries. He submitted that if paying taxes into the relevant countries. He submitted that if assessee is claiming the deduction u/s 36(1)(iii) then one has to see assessee is claiming the deduction u/s 36(1)(iii) then one has t assessee is claiming the deduction u/s 36(1)(iii) then one has t whether the assessee is declaring any income from such whether the assessee is declaring any income from such whether the assessee is declaring any income from such investments under the relevant head of the profit and gains of investments under the relevant head of the profit and gains of investments under the relevant head of the profit and gains of business or profession, since the deduction u/s 36(1)(iii) is falling business or profession, since the deduction u/s 36(1)(iii) is falling business or profession, since the deduction u/s 36(1)(iii) is falling under the provisions related to profit and gains of business or under the provisions related to profit and gains of business o under the provisions related to profit and gains of business o profession. He submitted that interest expenditure has to be profession. He submitted that interest expenditure has to be profession. He submitted that interest expenditure has to be considered for allowance subject to considered for allowance subject to as under which under which ‘head’ the income generated there therefrom is being offered by the assessee from is being offered by the assessee in the return of income. He submitted that if income from such . He submitted that if income from such . He submitted that if income from such investment is offered by the assessee under the head business and nt is offered by the assessee under the head business and nt is offered by the assessee under the head business and profession then assessee is eligible for deduction u/s 36(1)(iii) profession then assessee is eligible for deduction u/s 36(1)(iii) profession then assessee is eligible for deduction u/s 36(1)(iii) otherwise if income is offered under the head ‘capital gain’ or otherwise if income is offered under the head ‘capital gain’ or otherwise if income is offered under the head ‘capital gain’ or ‘income from other sources’ then said interest expenses will also go ‘income from other sources’ then said interest expenses will also go ‘income from other sources’ then said interest expenses will also go under respective head under respective head subject to provisions of law subject to provisions of law. He submitted that investment made by the assessee in that investment made by the assessee in so called ‘ so called ‘capital asset’ is not contributing to the business income of the assessee. He not contributing to the business income of the assessee. He not contributing to the business income of the assessee. He

8.23 Regarding the alternate request for allowing the said interest Regarding the alternate request for allowing the said interest Regarding the alternate request for allowing the said interest u/s 57(1) of the Act, the Ld. DR submitted that in view of decision u/s 57(1) of the Act, the Ld. DR submitted that in view of decision u/s 57(1) of the Act, the Ld. DR submitted that in view of decision of the Hon’ble Bombay of the Hon’ble Bombay High Court in the case of Amritaben Shah High Court in the case of Amritaben Shah (supra) when investment is made for obtaining, controlling interest when investment is made for obtaining, controlling interest when investment is made for obtaining, controlling interest and then in such circumstances deduction u/s 57(iii) is not and then in such circumstances deduction u/s and then in such circumstances deduction u/s allowable against the dividend income. allowable against the dividend income. 8.24 He further submitted that He further submitted that when investmen investment in shares of foreign subsidiaries can yield or is capable of yielding- ‘Income from foreign subsidiaries can yield or is capable of yielding foreign subsidiaries can yield or is capable of yielding other sources’ only; deduction of such interest expenditure can only other sources’ only; deduction of such interest expenditure can only other sources’ only; deduction of such interest expenditure can only be examined under the head ‘Income from Other Sources’. be examined under the head ‘Income from Other Sources’. be examined under the head ‘Income from Other Sources’. Therefore, allowability of interest expendit Therefore, allowability of interest expenditure of Rs.146.73 crores ure of Rs.146.73 crores has to be examined only under the provisions of Section 57(iii) of has to be examined only under the provisions of Section 57(iii) of has to be examined only under the provisions of Section 57(iii) of the Act. As per Section 57(iii) of the Act only such interest the Act. As per Section 57(iii) of the Act only such interest the Act. As per Section 57(iii) of the Act only such interest expenditure can be allowed as a deduction which has been laid out expenditure can be allowed as a deduction which has been laid out expenditure can be allowed as a deduction which has been laid out or expended wholly and exclusively f or expended wholly and exclusively for the purpose of making or or the purpose of making or earning dividend income. In this case, the purpose of incurring earning dividend income. In this case, the purpose of incurring earning dividend income. In this case, the purpose of incurring interest expenditure was not wholly and exclusively for earning interest expenditure was not wholly and exclusively for earning interest expenditure was not wholly and exclusively for earning

Tata Chemicals Ltd. dividend income because as per the assessee’s own admission such dividend income because as per the assessee’s own admission such dividend income because as per the assessee’s own admission such an investment was made to acquire an investment was made to acquire and manage the controlling and manage the controlling stake in foreign subsidiary. stake in foreign subsidiary. The ld DR relied on the decision of t The ld DR relied on the decision of the Hon’ble Bombay High Court in the case of Amritaben Shah (supra) Hon’ble Bombay High Court in the case of Amritaben Shah Hon’ble Bombay High Court in the case of Amritaben Shah where in it is held as under: held as under: “Section 57(iii) provides that in order to get deduction the “Section 57(iii) provides that in order to get deduction the “Section 57(iii) provides that in order to get deduction the expenditure should be incurred wholly and exclusively for the diture should be incurred wholly and exclusively for the diture should be incurred wholly and exclusively for the purpose ‘of making or earning income from other sources’ and purpose ‘of making or earning income from other sources’ and purpose ‘of making or earning income from other sources’ and that it should not be in the nature of capital expenditure. that it should not be in the nature of capital expenditure. that it should not be in the nature of capital expenditure. Section 58(1)(a) further provides that no deduction shall be Section 58(1)(a) further provides that no deduction shall be Section 58(1)(a) further provides that no deduction shall be allowed in case the expenditure is in the nature of personal he expenditure is in the nature of personal he expenditure is in the nature of personal expenses of the assessee. In the instant case, there was no expenses of the assessee. In the instant case, there was no dispute that shares in question were purchased by the dispute that shares in question were purchased by the dispute that shares in question were purchased by the assesssee for the purpose of acquiring controlling interest in assesssee for the purpose of acquiring controlling interest in assesssee for the purpose of acquiring controlling interest in the company and not for earning dividend. That being so, the the company and not for earning di vidend. That being so, the expenditure incurred by way of interest on loan taken by the expenditure incurred by way of interest on loan taken by the expenditure incurred by way of interest on loan taken by the assessee for the said purpose could not be held to be an assessee for the said purpose could not be held to be an assessee for the said purpose could not be held to be an expenditure incurred wholly and exclusively for the purpose of expenditure incurred wholly and exclusively for the purpose of expenditure incurred wholly and exclusively for the purpose of earning income by way of dividends. From the n earning income by way of dividends. From the nature of transaction, it was clear that the expenditure was not for the transaction, it was clear that the expenditure was not for the transaction, it was clear that the expenditure was not for the purpose of earning income by way of dividends but for the purpose of earning income by way of dividends but for the purpose of earning income by way of dividends but for the purpose of acquiring controlling interest in the company and, purpose of acquiring controlling interest in the company and, purpose of acquiring controlling interest in the company and, therefore, it would not be allowable as a deduction under therefore, it would not be allowable as a deduction under therefore, it would not be allowable as a deduction under Section 57(iii).”

Tata Chemicals Ltd. The ld DR further submitted that The ld DR further submitted that even otherwise, as per the ven otherwise, as per the provisions of Section 115BBD Section 115BBD, no deduction can be granted in , no deduction can be granted in computing income by way of dividend from a foreign subsidiary, computing income by way of dividend from a foreign subsidiary, computing income by way of dividend from a foreign subsidiary, where the assessee holds more than 26% of the equity share where the assessee holds more than 26% of the equity sh where the assessee holds more than 26% of the equity sh capital. In the case of this assessee, it hold more than 26% of the capital. In the case of this assessee, it hold more than 26% of the capital. In the case of this assessee, it hold more than 26% of the equity share capital of the foreign subsidiary. For invoking the equity share capital of the foreign subsidiary. For invoking the equity share capital of the foreign subsidiary. For invoking the provisions of Section 115BBD, it is not necessary that the shares of provisions of Section 115BBD, it is not necessary that the shares of provisions of Section 115BBD, it is not necessary that the shares of the foreign subsidiary have actually yielded divi the foreign subsidiary have actually yielded dividend income or not; dend income or not; what is material is that the shares of the foreign subsidiary are what is material is that the shares of the foreign subsidiary are what is material is that the shares of the foreign subsidiary are capable of yielding dividend income only capable of yielding dividend income only and therefore, the and therefore, the provisions of Section 115BBD(2) are clearly applicable. Provisions of provisions of Section 115BBD(2) are clearly applicable. provisions of Section 115BBD(2) are clearly applicable. Section 115BBD(2) clearly states that no Section 115BBD(2) clearly states that no deduction of any deduction of any expenditure under any provision of the Act is allowable against expenditure under any provision of the Act is allowable against expenditure under any provision of the Act is allowable against dividend income from foreign subsidiary dividend income from foreign subsidiary. Therefore, no deduction of Therefore, no deduction of interest is allowable to the assessee in view of Sec 115BBD of the interest is allowable to the assessee in view of Sec 115BBD of the interest is allowable to the assessee in view of Sec 115BBD of the Act.

8.30 By way of illustration, where an assessee acquires plant and By way of illustration, where an assessee acquires plant and By way of illustration, where an assessee acquires plant and machinery out of borrowed funds, such acquisition, though capital machinery out of borrowed funds, such acquisition, though capital machinery out of borrowed funds, such acquisition, though capital in nature, results in the creation of a tangible business asset which in nature, results in the creation of a tangible business asset which in nature, results in the creation of a tangible business asset which is put to use in the course of the assessee’s business and directly put to use in the course of the assessee’s business and directly put to use in the course of the assessee’s business and directly contributes to the generation of business income. In such a contributes to the generation of business income. In such a contributes to the generation of business income. In such a situation, the interest paid on the borrowed capital is allowable as a situation, the interest paid on the borrowed capital is allowable as a situation, the interest paid on the borrowed capital is allowable as a revenue deduction, once the asset is put to use, since the borrowing revenue deduction, once the asset is put to use, since the b revenue deduction, once the asset is put to use, since the b is undeniably for the purposes of the business. Similarly, where is undeniably for the purposes of the business. Similarly, where is undeniably for the purposes of the business. Similarly, where borrowed funds are utilised for acquisition of a building, which is borrowed funds are utilised for acquisition of a building, which is borrowed funds are utilised for acquisition of a building, which is also a capital asset, the allowability of interest depends upon the also a capital asset, the allowability of interest depends upon the also a capital asset, the allowability of interest depends upon the head under which the income arising therefrom head under which the income arising therefrom is assessed. If the is assessed. If the rental income from such building is assessed under the head rental income from such building is assessed under the head rental income from such building is assessed under the head “Profits and gains of business or profession”, the interest paid on “Profits and gains of business or profession”, the interest paid on “Profits and gains of business or profession”, the interest paid on the borrowed funds may be allowable under section 36(1)(iii) of the the borrowed funds may be allowable under section 36(1)(iii) of the the borrowed funds may be allowable under section 36(1)(iii) of the Act. However, where the rental income is Act. However, where the rental income is assessed under the head assessed under the head “Income from house property”, the deduction of interest is governed “Income from house property”, the deduction of interest is governed “Income from house property”, the deduction of interest is governed by the specific provisions applicable to that head, and the interest by the specific provisions applicable to that head, and the interest by the specific provisions applicable to that head, and the interest cannot be allowed under section 36(1)(iii) of the Act. cannot be allowed under section 36(1)(iii) of the Act.

8.31 In the present case, however, the In the present case, however, the borrowed funds have been borrowed funds have been deployed by the assessee towards investment in the share capital of deployed by the assessee towards investment in the share capital of deployed by the assessee towards investment in the share capital of its subsidiary companies. The income arising from such its its subsidiary subsidiary companies. companies. The The income income arising arising from from such such Tata Chemicals Ltd. investments accrues to the assessee either by way of dividend or investments accrues to the assessee either by way of dividend or investments accrues to the assessee either by way of dividend or upon transfer of the shares. It is of consi upon transfer of the shares. It is of considerable significance that derable significance that the assessee itself has accepted that such income is not offered to the assessee itself has accepted that such income is not offered to the assessee itself has accepted that such income is not offered to tax under the head “Profits and gains of business or profession”. tax under the head “Profits and gains of business or profession”. tax under the head “Profits and gains of business or profession”. The disallowance under section 36(1)(iii) of the Act, on the other The disallowance under section 36(1)(iii) of the Act, on the other The disallowance under section 36(1)(iii) of the Act, on the other hand, operates strictly withi hand, operates strictly within the framework of computation of n the framework of computation of income under the head “Profits and gains of business or income under the head “Profits and gains of business or income under the head “Profits and gains of business or profession”. The scheme of the Act envisages a compartmentalised profession”. The scheme of the Act envisages a compartmentalised profession”. The scheme of the Act envisages a compartmentalised method of computation of income under distinct heads. Sections 15 method of computation of income under distinct heads. Sections 15 method of computation of income under distinct heads. Sections 15 to 17 govern computation of income to 17 govern computation of income from salaries; sections 22 to 27 from salaries; sections 22 to 27 deal with income from house property; sections 28 to 44DB provide deal with income from house property; sections 28 to 44DB provide deal with income from house property; sections 28 to 44DB provide for computation of income under the head “Profits and gains of for computation of income under the head “Profits and gains of for computation of income under the head “Profits and gains of business or profession”; sections 45 to 55A relate to computation of business or profession”; sections 45 to 55A relate to computation of business or profession”; sections 45 to 55A relate to computation of capital gains; and sectio capital gains; and sections 56 to 59 prescribe the manner of ns 56 to 59 prescribe the manner of computation of income from other sources. Each head constitutes a computation of income from other sources. Each head constitutes a computation of income from other sources. Each head constitutes a separate and self-contained code, permitting only such deductions contained code, permitting only such deductions contained code, permitting only such deductions as are expressly provided for within the respective computational as are expressly provided for within the respective computational as are expressly provided for within the respective computational provisions. The deduct provisions. The deduction under section 36(1)(iii) is embedded in ion under section 36(1)(iii) is embedded in the statutory scheme governing computation of business income the statutory scheme governing computation of business income the statutory scheme governing computation of business income and, therefore, can be allowed only against income assessable and, therefore, can be allowed only against income assessable and, therefore, can be allowed only against income assessable under the head “Profits and gains of business or profession”. It under the head “Profits and gains of business or profession”. It under the head “Profits and gains of business or profession”. It cannot be extended to i cannot be extended to income which is assessable under other ncome which is assessable under other heads. The statute itself clarifies that interest on capital borrowed heads. The statute itself clarifies that interest on capital borrowed heads. The statute itself clarifies that interest on capital borrowed for acquisition of a capital asset is to be capitalised up to the point for acquisition of a capital asset is to be capitalised up to the point for acquisition of a capital asset is to be capitalised up to the point when the asset is first put to use, and only thereafter does it when the asset is first put to use, and only thereafter does it when the asset is first put to use, and only thereafter does it

Tata Chemicals Ltd. current liability and claiming deduction thereof in the computation current liability and claiming deduction thereof in the computation current liability and claiming deduction thereof in the computation of income. 9.2 The assessee submitted that the li The assessee submitted that the liability was contractual in ability was contractual in nature and was required to be accrued annually in accordance with nature and was required to be accrued annually in accordance with nature and was required to be accrued annually in accordance with the mercantile system of accounting. It was explained that the the mercantile system of accounting. It was explained that the the mercantile system of accounting. It was explained that the provision was created on the basis of an independent actuarial provision was created on the basis of an independent actuarial provision was created on the basis of an independent actuarial valuation, which took into account re valuation, which took into account relevant parameters such as levant parameters such as number number number of of of beneficiaries, beneficiaries, beneficiaries, benefit benefit benefit utilisation utilisation utilisation pattern, pattern, pattern, salary salary salary escalation, and appropriate actuarial discounting factors. The escalation, and appropriate actuarial discounting factors. The escalation, and appropriate actuarial discounting factors. The amount debited, according to the assessee, represented an amount debited, according to the assessee, represented an amount debited, according to the assessee, represented an ascertained liability accrued during the year. ascertained liability accrued during the year. 9.3 The Assessing Officer, however, did not accept the above The Assessing Officer, however, did not accept the above The Assessing Officer, however, did not accept the above explanation and disallowed the claim on the ground that employee explanation and disallowed the claim on the ground that employee explanation and disallowed the claim on the ground that employee benefit expenditure is allowable only on payment basis in terms of benefit expenditure is allowable only on payment basis in terms of benefit expenditure is allowable only on payment basis in terms of section 43B of the Income section 43B of the Income-tax Act, 1961. 9.4 The objections rais The objections raised by the assessee before the Dispute ed by the assessee before the Dispute Resolution Panel were rejected, following the DRP’s own orders for Resolution Panel were rejected, following the DRP’s own orders for Resolution Panel were rejected, following the DRP’s own orders for earlier assessment years earlier assessment years 2012-13 and 2013-14. 9.5 Before us, the learned counsel for the assessee reiterated that Before us, the learned counsel for the assessee reiterated that Before us, the learned counsel for the assessee reiterated that the assessee as a matter of policy, h the assessee as a matter of policy, has been allowing post as been allowing post retirement medical benefit to its retired employees and their family retirement medical benefit to its retired employees and their family retirement medical benefit to its retired employees and their family members and consistently followed the mercantile system of consistently followed the mercantile system of consistently followed the mercantile system of accounting and that a reasonable estimate of post-retirement accounting and that a reasonable estimate of post accounting and that a reasonable estimate of post

Tata Chemicals Ltd. medical benefit expenditure was made on actua medical benefit expenditure was made on actuarial basis. It was rial basis. It was contended that section 43B has no application to the present case. contended that section 43B has no application to the present case. contended that section 43B has no application to the present case. The relevant clauses therein as dealing with payments for the The relevant clauses therein as dealing with payments for the The relevant clauses therein as dealing with payments for the benefits of the employees concerns clause (b) which refers to sum benefits of the employees concerns clause (b) which refers to sum benefits of the employees concerns clause (b) which refers to sum payable by the assessee as an employer by payable by the assessee as an employer by way of contribution to way of contribution to any provident fund or superannuation fund or gratuity fund or any any provident fund or superannuation fund or gratuity fund or any any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of the employees. Since, in the present other fund for the welfare of the employees. Since, in the present other fund for the welfare of the employees. Since, in the present case, no contribution is made to any fund created for the benefit of case, no contribution is made to any fund created for the benefit of case, no contribution is made to any fund created for the benefit of the employees, the said clause the employees, the said clause will have no application. Further, will have no application. Further, clause (f) refers to any sum payable by the assessee as an employer clause (f) refers to any sum payable by the assessee as an employer clause (f) refers to any sum payable by the assessee as an employer in lieu of any leave at the credit of his employee. This clause is also in lieu of any leave at the credit of his employee. This clause is also in lieu of any leave at the credit of his employee. This clause is also not applicable to the present case. not applicable to the present case.

Tata Chemicals Ltd. was ultimately allowed by order dated 09.01.2024. It was further was ultimately allowed by order dated 09.01.2024. It was further was ultimately allowed by order dated 09.01.2024. It was further stated that a similar position obtained for assessment year 2008 similar position obtained for assessment year 2008- similar position obtained for assessment year 2008 09. 9.8 We have heard arrival submission of the parties on the issue We have heard arrival submission of the parties on the issue We have heard arrival submission of the parties on the issue in dispute and perused the relevant material on record and perused the relevant material on record and perused the relevant material on record. The Assessing Officer has disallowed the provision for post-retirement Assessing Officer has disallowed the provision for post Assessing Officer has disallowed the provision for post medical benefits solely on the premise that such expenditure is benefits solely on the premise that such expenditure is benefits solely on the premise that such expenditure is allowable only on payment basis under section 43B of the Act. This allowable only on payment basis under section 43B of the Act. This allowable only on payment basis under section 43B of the Act. This approach, in our considered view, is contrary to the settled legal approach, in our considered view, is contrary to the settled legal approach, in our considered view, is contrary to the settled legal position. As already held by the Tribunal in the assessee’s own case position. As already held by the Tribunal in the assessee’s own c position. As already held by the Tribunal in the assessee’s own c for earlier assessment years, a provision for post for earlier assessment years, a provision for post-retirement medical retirement medical benefits does not fall within any of the clauses of section 43B, benefits does not fall within any of the clauses of section 43B, benefits does not fall within any of the clauses of section 43B, particularly when no contribution is made to any fund and the particularly when no contribution is made to any fund and the particularly when no contribution is made to any fund and the liability is otherwise contractual. However, it is equally well settled liability is otherwise contractual. However, it is equa liability is otherwise contractual. However, it is equa that for a provision to be allowable under the mercantile system of that for a provision to be allowable under the mercantile system of that for a provision to be allowable under the mercantile system of accounting, the liability must be an ascertained liability ascertained liability and not a accounting, the liability must be an mere contingent one. The existence of a scientific and reliable mere contingent one. The existence of a scientific and reliable mere contingent one. The existence of a scientific and reliable actuarial valuation is therefore a cri actuarial valuation is therefore a critical requirement. tical requirement. 9.9 Before us the learned counsel for the assessee submitted that Before us the learned counsel for the assessee submitted that Before us the learned counsel for the assessee submitted that identical issue in assessment year 2007 identical issue in assessment year 2007-08 and 2008 08 and 2008-09, was restored to the file of the Assessing Officer for examination and restored to the file of the Assessing Officer for examination and restored to the file of the Assessing Officer for examination and verification of the actuarial valuation repor verification of the actuarial valuation report. The relevant finding of The relevant finding of the Tribunal is reproduced as under the Tribunal is reproduced as under Tata Chemicals Ltd.

"The ld. AO however, strangely applied the provisions of section 43B The ld. AO however, strangely applied the provisions of section 43B The ld. AO however, strangely applied the provisions of section 43B of the Act and held that of the Act and held that since the said provision made for post since the said provision made for post retirement medical benefits had not been actually paid by the retirement medical benefits had not been actually paid by t retirement medical benefits had not been actually paid by t assessee, the same would become disallowable in terms of Section assessee, the same would become disallowable in terms of Section assessee, the same would become disallowable in terms of Section 43B of the Act. We are unable to comprehend ourselves to understand 43B of the Act. We are unable to comprehend ourselves to understand 43B of the Act. We are unable to comprehend ourselves to understand this contention of the Revenue. On perusal of the provisions of Section this contention of the Revenue. On perusal of the provisions of Section this contention of the Revenue. On perusal of the provisions of Section 43B of the Act, this expenditure provision made 43B of the Act, this expenditure provision made for post retirement for post retirement medical benefits would not fall under any of the clauses provided in medical benefits would not fall under any of the clauses provided in medical benefits would not fall under any of the clauses provided in Section 43B of the Act. Section 43B of the Act. It is an admitted fact that no fund is created by It is an admitted fact that no fund is created by the assessee in respect of this post retirement medical benefits." the assessee in respect of this post retirement medical benefits." the assessee in respect of this post retirement medical benefits." (emphasis supplied). (emphasis supplied). 9.10 In said case actuarial valuation report was not submitted In said case actuarial valuation report was not submitted In said case actuarial valuation report was not submitted before the ld AO during assessment proceedings and as per the before the ld AO during assessment proceedings and before the ld AO during assessment proceedings and directions of the Tribunal the directions of the Tribunal the assessee had submitted the actuarial had submitted the actuarial valuation report. Since the said report was placed before the valuation report. Since the said report was placed before the valuation report. Since the said report was placed before the Tribunal for the first time to justify that the said provision was bunal for the first time to justify that the said provision was bunal for the first time to justify that the said provision was made on a scientific basis, the matter made on a scientific basis, the matter was remanded back to the AO remanded back to the AO for de-novo adjudication in accordance with law. adjudication in accordance with law.

10.2 The assessee submitted that it had three in The assessee submitted that it had three in- -house research and development units, namely, (i) Innovation Centre at Pune, and development units, namely, (i) Innovation Centre at Pune, and development units, namely, (i) Innovation Centre at Pune, Maharashtra, (ii) Centre for Agri Solutions and Technology at Maharashtra, (ii) Centre for Agri Solutions and Te Maharashtra, (ii) Centre for Agri Solutions and Te Aligarh, Uttar Pradesh, and (iii) Mithapur, Gujarat. It was stated Aligarh, Uttar Pradesh, and (iii) Mithapur, Gujarat. It was stated Aligarh, Uttar Pradesh, and (iii) Mithapur, Gujarat. It was stated that all the units were duly recognised by the Department of that all the units were duly recognised by the Department of that all the units were duly recognised by the Department of Scientific and Industrial Research (DSIR), New Delhi, and approval Scientific and Industrial Research (DSIR), New Delhi, and approval Scientific and Industrial Research (DSIR), New Delhi, and approval in Form No. 3CM was granted vide letter dated 30.05.2013, in Form No. 3CM was granted vide letter dated 30. in Form No. 3CM was granted vide letter dated 30. subsequently revised on 10.07.2018, valid up to 31.03.2018. The subsequently revised on 10.07.2018, valid up to 31.03.2018. The subsequently revised on 10.07.2018, valid up to 31.03.2018. The assessee contended that once the facility was approved by the assessee contended that once the facility was approved by the assessee contended that once the facility was approved by the prescribed authority, it was entitled to weighted deduction under prescribed authority, it was entitled to weighted deduction under prescribed authority, it was entitled to weighted deduction under section 35(2AB) on the entire expenditure incurred for in-house section 35(2AB) on the entire expenditure incurred for section 35(2AB) on the entire expenditure incurred for scientific research, as certified by its auditors. scientific research, as certified by its auditors.

10.3 It was submitted that having complied with the requirement It was submitted that having complied with the requirement It was submitted that having complied with the requirement and satisfied the prescribed authority, the assessee company and satisfied the prescribed authority, the assessee company and satisfied the prescribed authority, the assessee company obtained the relevant certificates from the prescribed authority, obtained the relevant certificates from the prescribed authority, obtained the relevant certificates from the prescribed authority, which was sufficient compliance of the provisions in the weighted h was sufficient compliance of the provisions in the weighted h was sufficient compliance of the provisions in the weighted action should be allowed without further enquiry by the Assessing action should be allowed without further enquiry by the Assessing action should be allowed without further enquiry by the Assessing Officer. It was further contended that the role of the secretary, Officer. It was further contended that the role of the secretary, Officer. It was further contended that the role of the secretary, Department of scientific and industrial research, Government of Department of scientific and industrial research, Government o Department of scientific and industrial research, Government o India (DSIR) is confined to approval of the in India (DSIR) is confined to approval of the in- -house research facility and that neither the statute nor the rules empower the facility and that neither the statute nor the rules empower the facility and that neither the statute nor the rules empower the Tata Chemicals Ltd. prescribed authority to determine or restrict individual items of prescribed authority to determine or restrict individual items of prescribed authority to determine or restrict individual items of expenditure, except to the extent expressly excluded by the expenditure, except to the extent expressly excluded by the expenditure, except to the extent expressly excluded by the provision itself.

"7. On the basis of our verification of such books of account and other "7. On the basis of our verification of such books of account and other "7. On the basis of our verification of such books of account and other relevant records and documents referred to above, subject to our relevant records and documents referred to above, subject to our relevant records and documents referred to above, subject to our comments in paragraphs 3 and 6 above and according to the comments in paragraphs 3 and 6 above and according to the comments in paragraphs 3 and 6 above and according to the information and explan information and explanations given to us, we certify that: ations given to us, we certify that: a) It is The Company has maintained separate account for the R&D a) It is The Company has maintained separate account for the R&D a) It is The Company has maintained separate account for the R&D centre. clarified that the Company maintains its books of account in centre. clarified that the Company maintains its books of account in centre. clarified that the Company maintains its books of account in an Electronic Enterprise Resource Planning System in which the an Electronic Enterprise Resource Planning System in which the an Electronic Enterprise Resource Planning System in which the company has identified company has identified and accumulated income and expenditure and accumulated income and expenditure under unique cost centre which forms the basis for preparation of the under unique cost centre which forms the basis for preparation of the under unique cost centre which forms the basis for preparation of the separate account for the R&D Centre. separate account for the R&D Centre. b) The Account has been satisfactorily maintained. The expenditure b) The Account has been satisfactorily maintained. The expenditure b) The Account has been satisfactorily maintained. The expenditure certified is also in consonance with DSIR certified is also in consonance with DSIR guidelines. c) The Company has extended full co c) The Company has extended full co-operation to us in carrying out operation to us in carrying out the audit of the Account of the R&D Centre. the audit of the Account of the R&D Centre. d) The expenditure of Rs.223.48 lakhs reported for the year ended as d) The expenditure of Rs.223.48 lakhs reported for the year ended as d) The expenditure of Rs.223.48 lakhs reported for the year ended as at 31st March, 2013 relevant to the assessment year 2013 at 31st March, 2013 relevant to the assessment year 2013 at 31st March, 2013 relevant to the assessment year 2013-14 as detailed in Appendix II to Annexure IV of DSIR guidelines al para 4 is detailed in Appendix II to Annexure IV of DSIR guidelines al para 4 is detailed in Appendix II to Annexure IV of DSIR guidelines al para 4 is correct, except as mentioned below, to the best of our knowledge and correct, except as mentioned below, to the best of our knowledge and correct, except as mentioned below, to the best of our knowledge and belief as per the result of the audit of the separate cost centre account belief as per the result of the audit of the separate cost centre account belief as per the result of the audit of the separate cost centre account of the R&D centre carried out by us. Also of the R&D centre carried out by us. Also the R&D capital expenditure the R&D capital expenditure and revenue expenditure excluding revenue expenditure of Rs.112.90 and revenue expenditure excluding revenue expenditure of Rs.112.90 and revenue expenditure excluding revenue expenditure of Rs.112.90 lakhs is reflected on page 90. Note 27(c) in the audited financial lakhs is reflected on page 90. Note 27(c) in the audited financial lakhs is reflected on page 90. Note 27(c) in the audited financial statements / annual report as referred to in note 4 of schedule H. statements / annual report as referred to in note 4 of schedule H. statements / annual report as referred to in note 4 of schedule H. Attention is invited to the Attention is invited to the fact that, included therein is expenditure of fact that, included therein is expenditure of Rs.41.62 lakhs, as mentioned in the table below, which are not Rs.41.62 lakhs, as mentioned in the table below, which are not Rs.41.62 lakhs, as mentioned in the table below, which are not allowable as per the DSIR guidelines. However, management allowable as per the DSIR guidelines. However, management allowable as per the DSIR guidelines. However, management represents that there are court decisions in favour of allowability of represents that there are court decisions in favour of allowability of represents that there are court decisions in favour of allowability of such expenses. such expenses. Particulars Amount (Rs. in lakhs) Amount (Rs. in lakhs) Building maintenance, Municipal taxes and rental charges Building maintenance, Municipal taxes and rental charges 0.78 0.78 being paid Others as being not directly related to R&D expenses Others as being not directly related to R&D expenses 40.84 40.84 Total 41.62 41.62 In respect of Pune Unit, Auditors have observed as under : In respect of Pune Unit, Auditors have observed as under : In respect of Pune Unit, Auditors have observed as under :- d) The expendi d) The expenditure of Rs.1,596.12 lakhs reported for the year ended ture of Rs.1,596.12 lakhs reported for the year ended as at 31^{st} March, 2013 relevant to the assessment year 2013 as at 31^{st} March, 2013 relevant to the assessment year 2013 as at 31^{st} March, 2013 relevant to the assessment year 2013-14 as detailed in Appendix II to Annexure IV of DSIR guidelines at para as detailed in Appendix II to Annexure IV of DSIR guidelines at para as detailed in Appendix II to Annexure IV of DSIR guidelines at para 4 is correct, except as mentioned below, to the best of our knowled 4 is correct, except as mentioned below, to the best of our knowled 4 is correct, except as mentioned below, to the best of our knowledge and belief as per the result of the audit of the separate cost centre and belief as per the result of the audit of the separate cost centre and belief as per the result of the audit of the separate cost centre account of the R&D centre carried out by us. Also the R&D capital account of the R&D centre carried out by us. Also the R&D capital account of the R&D centre carried out by us. Also the R&D capital

Tata Chemicals Ltd. expenditure and revenue expenditure excluding revenue expenditure expenditure and revenue expenditure excluding revenue expenditure expenditure and revenue expenditure excluding revenue expenditure of Rs.112.90 lakhs is reflected on page 90. Note 27 of Rs.112.90 lakhs is reflected on page 90. Note 27(c) in the audited (c) in the audited financial statements / annual report as referred to in note 5 of financial statements / annual report as referred to in note 5 of financial statements / annual report as referred to in note 5 of schedule M. However, attention is invited to the fact that, included therein are However, attention is invited to the fact that, included therein are However, attention is invited to the fact that, included therein are expenditure of Rs.141.83 lakhs, as mentioned in the table below, expenditure of Rs.141.83 lakhs, as mentioned in the table below, expenditure of Rs.141.83 lakhs, as mentioned in the table below, which are not allowable as which are not allowable as per the DSIR guidelines. However, per the DSIR guidelines. However, management represents that there are court decisions in favour of management represents that there are court decisions in favour of management represents that there are court decisions in favour of allowability of such expenses. allowability of such expenses. Particulars Amount (Rs. in lakhs) Amount (Rs. in lakhs) Building maintenance, Municipal taxes and rental charges 35.48 Building maintenance, Municipal taxes and rental charges 35.48 being paid Others as being not directly related to R&D expenses g not directly related to R&D expenses 106.35 106.35 Total 141.83 141.83 42.2 Similar issue also came up before DRP in A.Y. 2012 42.2 Similar issue also came up before DRP in A.Y. 2012 42.2 Similar issue also came up before DRP in A.Y. 2012-13 wherein the DRP as observed as under : the DRP as observed as under : 22.1 On this issue, the DRP has noted that the auditors in Para 7(d) 22.1 On this issue, the DRP has noted that the auditors in Para 7(d) 22.1 On this issue, the DRP has noted that the auditors in Para 7(d) of its audit report specific of its audit report specifically qualified that expenditure worth Rs. ally qualified that expenditure worth Rs. 24.34 lakhs for the Aligarh Unit and worth Rs. 113.65 lakhs for Pune 24.34 lakhs for the Aligarh Unit and worth Rs. 113.65 lakhs for Pune 24.34 lakhs for the Aligarh Unit and worth Rs. 113.65 lakhs for Pune Unit is not allowable, as per the DSIR guidelines. The DRP has noted Unit is not allowable, as per the DSIR guidelines. The DRP has noted Unit is not allowable, as per the DSIR guidelines. The DRP has noted that these expenses have been incurred for building maintenance, that these expenses have been incurred for building maintenance, that these expenses have been incurred for building maintenance, municipal taxes, rental charges, market research, sales promotion, axes, rental charges, market research, sales promotion, axes, rental charges, market research, sales promotion, quality control etc.. The details furnished before the DRP reveals that quality control etc.. The details furnished before the DRP reveals that quality control etc.. The details furnished before the DRP reveals that these expenses are not directly related to R&D expenses. these expenses are not directly related to R&D expenses. these expenses are not directly related to R&D expenses. 22.2 The guidelines issued by the DSIR for issuance of Audit Report 22.2 The guidelines issued by the DSIR for issuance of Audit Report 22.2 The guidelines issued by the DSIR for issuance of Audit Report by the Auditors has to certify that the expenditure claimed does not the Auditors has to certify that the expenditure claimed does not the Auditors has to certify that the expenditure claimed does not include the following: include the following: - i. Expenditure on outsourced R&D activities. i. Expenditure on outsourced R&D activities. ii. Expenditure purely related to market research, sales promotion, ii. Expenditure purely related to market research, sales promotion, ii. Expenditure purely related to market research, sales promotion, quality control, testing, commercial production, sty quality control, testing, commercial production, style changes, routine le changes, routine data collection or activities of a like nature. data collection or activities of a like nature. iii. Lease rent paid for research farms or research labs. iii. Lease rent paid for research farms or research labs. iii. Lease rent paid for research farms or research labs. iv. Expenditure on foundation seeds multiplication, demonstration iv. Expenditure on foundation seeds multiplication, demonstration iv. Expenditure on foundation seeds multiplication, demonstration crops and grow out test etc. beyond breeder seed development. crops and grow out test etc. beyond breeder seed development. crops and grow out test etc. beyond breeder seed development. v. Foreign patent filing expenditure. Foreign patent filing expenditure. vi. Foreign consultancy expenditure. vi. Foreign consultancy expenditure.

Tata Chemicals Ltd. vii. Building maintenance, Municipal taxes and rental charges being vii. Building maintenance, Municipal taxes and rental charges being vii. Building maintenance, Municipal taxes and rental charges being paid. viii. Any interest component on loans for R&D. viii. Any interest component on loans for R&D. ix. Clinical trial activities carried out outside the approved ix. Clinical trial activities carried out outside the approved ix. Clinical trial activities carried out outside the approved facilities. x. Contract research expenses duly certified by chartered accountant. x. Contract research expenses duly certified by chartered accountant. x. Contract research expenses duly certified by chartered accountant. xi. Expenditure on any payments made to members of the board of xi. Expenditure on any payments made to members of the board of xi. Expenditure on any payments made to members of the board of Directors or any other part time employees working for R&D. Directors or any other part time employees working for R&D. Directors or any other part time employees working for R&D. 22.3 It is clear from the above guidelines of DSI 22.3 It is clear from the above guidelines of DSIR that the following R that the following items of expenditure are not allowable: items of expenditure are not allowable:- Expense Head IC Pune (In Rs.) CAT Aligarh (In Rs.) CAT Aligarh (In Rs.) Foreign Tour Expenses 2,233,466 4,621 Corporate Overheads Allocation Corporate Overheads Allocation 1,861,259 - Bus Hire Charges - Staff 1,277,013 164,134 Telephone, Telex & Fax Charges x & Fax Charges 1,041,529 175,010 Canteen Expenses 595,477 - Stationery & Printing 350,378 39,009 Forex 220,534 - Loss on Assets Discarded 155,737 - Courier Charges 133,753 28,860 Recoveries (540,021) - Travelling Expenses - 1,097,501 Security and Person - 457,617 Office Car Expenses - 171,544 House Keeping Expenses - 69,000 General Expenses - 40,710 Seminar Expenses - 33,000 Others 104,106 81,396 Building Maintenance, 39,27,000 72,000 Municipal Taxes, Rental Charges etc. Expenditure purely related to 5000 - market research, sales promotion, quality control etc. Total 1,13,65,000 24,34,000 24,34,000 22.4 In view of the above discussion, the AO has rightly disallowed 22.4 In view of the above discussion, the AO has rightly disallowed 22.4 In view of the above discussion, the AO has rightly disallowed the deduction u/s 35(2AB) of the I.T. Act 1961. Accordingly, this the deduction u/s 35(2AB) of the I.T. Act 1961. Accordingly, this the deduction u/s 35(2AB) of the I.T. Act 1961. Accordingly, this ground of objection ground of objection of the assessee company is rejected." of the assessee company is rejected." 42.3 Before us no specific details of the expenses were furnished, 42.3 Before us no specific details of the expenses were furnished, 42.3 Before us no specific details of the expenses were furnished, however, the AO has relied on the Auditors' Report for disallowance however, the AO has relied on the Auditors' Report for disallowance however, the AO has relied on the Auditors' Report for disallowance

Tata Chemicals Ltd. of expenses. (Para 29.1.5.) The approach of AO appears to be of expenses. (Para 29.1.5.) The approach of AO appears to be of expenses. (Para 29.1.5.) The approach of AO appears to be reasonable. 42.4 In view of the auditors finding and following the decision of DRP ew of the auditors finding and following the decision of DRP ew of the auditors finding and following the decision of DRP in earlier year, the action of AO does not require any interference, this in earlier year, the action of AO does not require any interference, this in earlier year, the action of AO does not require any interference, this objection is therefore rejected." objection is therefore rejected." 10.8 Before us, the learned counsel for the assessee explained, Before us, the learned counsel for the assessee explained, Before us, the learned counsel for the assessee explained, item-wise, the nature o wise, the nature of the expenses excluded by the auditors and f the expenses excluded by the auditors and sought to justify their eligibility as expenditure incurred wholly and sought to justify their eligibility as expenditure incurred wholly and sought to justify their eligibility as expenditure incurred wholly and exclusively for in-house scientific research and development. These house scientific research and development. These house scientific research and development. These included, inter alia, capital items used in the R&D canteen, included, inter alia, capital items used in the R&D canteen, included, inter alia, capital items used in the R&D canteen, consultancy and retainership fees paid to technical and support and retainership fees paid to technical and support and retainership fees paid to technical and support personnel, lease rent and repairs of R&D premises, clinical trial personnel, lease rent and repairs of R&D premises, clinical trial personnel, lease rent and repairs of R&D premises, clinical trial expenditure incurred outside approved premises, foreign patent expenditure incurred outside approved premises, foreign patent expenditure incurred outside approved premises, foreign patent filing expenses, and other general expenses incurred at the R&D filing expenses, and other general expenses incurred at the R&D filing expenses, and other general expenses incurred at the R&D units. Relevant explanation filed by the assessee is reproduced as anation filed by the assessee is reproduced as anation filed by the assessee is reproduced as under:

Travelling expenses of Rs. 17,810 relating to non R& D staff will also Travelling expenses of Rs. 17,810 relating to non R& D staff will also Travelling expenses of Rs. 17,810 relating to non R& D staff will also bear the same c bear the same character. These includes hiring of technical and haracter. These includes hiring of technical and support personnel as and when required. Based on the requirement support personnel as and when required. Based on the requirement support personnel as and when required. Based on the requirement of manpower which includes the technical personnel who actually of manpower which includes the technical personnel who actually of manpower which includes the technical personnel who actually assist in carrying out the research and development work and assist in carrying out the research and development work and assist in carrying out the research and development work and administrative administrative and support staff, consultants or personnel are hired and support staff, consultants or personnel are hired by the Appellant. The senior technical people are paid consultation by the Appellant. The senior technical people are paid consultation by the Appellant. The senior technical people are paid consultation fees or retainership fees, whereas, the assistant/s or the junior staff fees or retainership fees, whereas, the assistant/s or the junior staff fees or retainership fees, whereas, the assistant/s or the junior staff whether technical or forming part of the administrative, house whether technical or forming part of the administrative, house whether technical or forming part of the administrative, house-keeping and support staff are paid through contract manpower hiring and support staff are paid through contract manpower hiring and support staff are paid through contract manpower hiring agencies. In respect of such employees who are on the pay agencies. In respect of such employees who are on the pay agencies. In respect of such employees who are on the pay-roll of the Appellant's research and development Department, there is no Appellant's research and development Department, there is no Appellant's research and development Department, there is no dispute. Merely, because a part of the personnel has bee dispute. Merely, because a part of the personnel has bee dispute. Merely, because a part of the personnel has been hired on need basis cannot lead to the conclusion that the said expenditure is need basis cannot lead to the conclusion that the said expenditure is need basis cannot lead to the conclusion that the said expenditure is not with respect to scientific research. Further, expenditure on not with respect to scientific research. Further, expenditure on not with respect to scientific research. Further, expenditure on scientific research cannot be restricted to only the technically qualified scientific research cannot be restricted to only the technically qualified scientific research cannot be restricted to only the technically qualified team directly working on the resear team directly working on the research. However, they also need ch. However, they also need support from the administration, house support from the administration, house-keeping and other such staff keeping and other such staff forming part of the research and development unit. forming part of the research and development unit. c. Lease rent paid for research laboratory at Pune being Rs.7,82,024 Lease rent paid for research laboratory at Pune being Rs.7,82,024 Lease rent paid for research laboratory at Pune being Rs.7,82,024 and repairs and maintenance on the buildin and repairs and maintenance on the building at Pune of Rs.11,98,988 g at Pune of Rs.11,98,988 and Rs.7,65,295 at Aligarh. A part of the facility forming an integral and Rs.7,65,295 at Aligarh. A part of the facility forming an integral and Rs.7,65,295 at Aligarh. A part of the facility forming an integral part of the research and development unit has been taken on lease on part of the research and development unit has been taken on lease on part of the research and development unit has been taken on lease on which rent has been paid. Repairs and maintenance expenditure which rent has been paid. Repairs and maintenance expenditure which rent has been paid. Repairs and maintenance expenditure represents such expenses inc represents such expenses incurred with respect to the building where urred with respect to the building where the research and development activity is being carried out. In such the research and development activity is being carried out. In such the research and development activity is being carried out. In such circumstances, such rent and repairs and maintenance expenditure circumstances, such rent and repairs and maintenance expenditure circumstances, such rent and repairs and maintenance expenditure should also qualify as a part of any expenditure on scientific research. should also qualify as a part of any expenditure on scientific research. should also qualify as a part of any expenditure on scientific research.

Tata Chemicals Ltd. d. Clinical trial activities carried out outside the approved premises as trial activities carried out outside the approved premises as trial activities carried out outside the approved premises as relatable to Aligarh unit of Rs.53,334 relatable to Aligarh unit of Rs.53,334 - Any research carried out by a Any research carried out by a research unit has to be validated by clinical trial being carried out. At research unit has to be validated by clinical trial being carried out. At research unit has to be validated by clinical trial being carried out. At times, the facility to carry out the clinical tr times, the facility to carry out the clinical trial is not available in ial is not available in house. In such circumstances, assistance of outside agencies needs to house. In such circumstances, assistance of outside agencies needs to house. In such circumstances, assistance of outside agencies needs to be taken. In the present case, such expenditure had to be incurred for be taken. In the present case, such expenditure had to be incurred for be taken. In the present case, such expenditure had to be incurred for validation of research carried out at the Aligarh unit. validation of research carried out at the Aligarh unit. validation of research carried out at the Aligarh unit. e. Foreign patent filing expenditure Foreign patent filing expenditure incurred at Pune Rs.28,51,410. This incurred at Pune Rs.28,51,410. This expenditure represents expenses incurred for registration of the patent expenditure represents expenses incurred for registration of the patent expenditure represents expenses incurred for registration of the patent with respect to the research carried out by the research unit. This is with respect to the research carried out by the research unit. This is with respect to the research carried out by the research unit. This is necessary to protect it from someone else exploiting it without necessary to protect it from someone else exploiting it without necessary to protect it from someone else exploiting it without authority. f. Expenditure of general nature at Pune, Rs.42,51,925 (it majorly Expenditure of general nature at Pune, Rs.42,51,925 (it majorly Expenditure of general nature at Pune, Rs.42,51,925 (it majorly includes conference charges, recruitment charges, staff training includes conference charges, recruitment charges, staff training includes conference charges, recruitment charges, staff training expenses, legal & registration expenses, transport charges, stationery expenses, legal & registration expenses, transport charges, stationery expenses, legal & registration expenses, transport charges, stationery & printing charges, etc.) - This expenditure also repr & printing charges, etc. This expenditure also represents expenses incurred at the research and development Unit and, hence, forms part incurred at the research and development Unit and, hence, forms part incurred at the research and development Unit and, hence, forms part of any expenditure on scientific research. of any expenditure on scientific research.

10.18 During the relevant assessment year, the statutory During the relevant assessment year, the statutory During the relevant assessment year, the statutory framework did not provide for quantification of eligible expenditure framework did not provide for quantification of eligible expenditure framework did not provide for quantification of eligible expenditure by the prescribed authority. In such a sit by the prescribed authority. In such a situation, the onus squarely uation, the onus squarely lay lay lay on on on the the the assessee assessee assessee to to to demonstrate, demonstrate, demonstrate, with with with reference reference reference to to to contemporaneous records, that each item of expenditure claimed contemporaneous records, that each item of expenditure claimed contemporaneous records, that each item of expenditure claimed was incurred wholly and exclusively for in was incurred wholly and exclusively for in-house scientific research. house scientific research. The Assessing Officer, in turn, was require The Assessing Officer, in turn, was required to examine the nature d to examine the nature of such expenditure on the basis of material placed before him of such expenditure on the basis of material placed before him of such expenditure on the basis of material placed before him 10.19 In the present case, the detailed item In the present case, the detailed item-wise justification wise justification for the disputed expenditure has been furnished by the assessee for for the disputed expenditure has been furnished by the assessee for for the disputed expenditure has been furnished by the assessee for the first time before the Tribunal. V the first time before the Tribunal. Verification of such claims would erification of such claims would necessarily require examination of underlying bills, vouchers, necessarily require examination of underlying bills, vouchers, necessarily require examination of underlying bills, vouchers, agreements, and the nexus of each item of expenditure with in- agreements, and the nexus of each item of expenditure with in agreements, and the nexus of each item of expenditure with in house scientific research activities. Such an exercise is essentially house scientific research activities. Such an exercise is essentially house scientific research activities. Such an exercise is essentially

The assessee earned income of ₹15,25,40,506/ 11.1 The assessee earned income of 15,25,40,506/- by way of fees for extending corporate guarantees to its associated enterprises for extending corporate guarantees to its associated enterprises for extending corporate guarantees to its associated enterprises located in various countries. In res located in various countries. In respect of such income, tax was pect of such income, tax was withheld in Kenya by Tata Chemicals Magadi Limited, amounting to withheld in Kenya by Tata Chemicals Magadi Limited, amounting to withheld in Kenya by Tata Chemicals Magadi Limited, amounting to an INR equivalent of ₹15,71,220/-. an INR equivalent of Tata Chemicals Ltd. In the return of income originally filed, the assessee did not In the return of income originally filed, the assessee did not In the return of income originally filed, the assessee did not claim credit for the foreign tax so withheld. The claim for foreign tax claim credit for the foreign tax so withheld. The claim for claim credit for the foreign tax so withheld. The claim for credit was raised for the first time by way of a letter dated credit was raised for the first time by way of a letter dated credit was raised for the first time by way of a letter dated 24.12.2018 during the course of assessment proceedings. 24.12.2018 during the course of assessment proceedings. 24.12.2018 during the course of assessment proceedings. 11.3 The Assessing Officer rejected the claim on the ground that it The Assessing Officer rejected the claim on the ground that it The Assessing Officer rejected the claim on the ground that it was not made in the return of income, placing reliance on the was not made in the return of income, placing reliance on was not made in the return of income, placing reliance on decision of the Hon’ble Supreme Court in decision of the Hon’ble Supreme Court in Goetze (India) Ltd. v. CIT Goetze (India) Ltd. v. CIT (284 ITR 323). 11.4 In proceedings before the Dispute Resolution Panel, the DRP In proceedings before the Dispute Resolution Panel, the DRP In proceedings before the Dispute Resolution Panel, the DRP directed the Assessing Officer to verify the claim and to allow directed the Assessing Officer to verify the claim and to allow directed the Assessing Officer to verify the claim and to allow foreign tax credit in accordance with t foreign tax credit in accordance with the applicable Double Taxation he applicable Double Taxation Avoidance Agreement, if it was found that the corresponding income Avoidance Agreement, if it was found that the corresponding income Avoidance Agreement, if it was found that the corresponding income had been offered to tax in India. However, in the final assessment had been offered to tax in India. However, in the final assessment had been offered to tax in India. However, in the final assessment order passed thereafter, no such credit was granted. order passed thereafter, no such credit was granted. order passed thereafter, no such credit was granted. 11.5 The learned counsel for the assess The learned counsel for the assessee submitted that the ee submitted that the income in question had admittedly been offered to tax in India and, income in question had admittedly been offered to tax in India and, income in question had admittedly been offered to tax in India and, therefore, in terms of the specific directions issued by the DRP, the therefore, in terms of the specific directions issued by the DRP, the therefore, in terms of the specific directions issued by the DRP, the Assessing Officer was duty Assessing Officer was duty-bound to allow the foreign tax credit. It bound to allow the foreign tax credit. It was further pointed out tha was further pointed out that an identical claim for foreign tax credit t an identical claim for foreign tax credit had been allowed by the Tribunal in the assessee’s own case for had been allowed by the Tribunal in the assessee’s own case for had been allowed by the Tribunal in the assessee’s own case for assessment year 2006 assessment year 2006–07, vide order dated 31.03.2023 passed in 07, vide order dated 31.03.2023 passed in ITA No. 9057/Mum/2010. ITA No. 9057/Mum/2010.

11.7 We had heard rival submission of the parties We had heard rival submission of the parties and perused the and perused the relevant material on record vant material on record. The restriction enunciated by the The restriction enunciated by the Hon’ble Supreme Court in Goetze (India) Ltd.(supra) operates only Hon’ble Supreme Court in Goetze (India) Ltd.(supra) operates only Hon’ble Supreme Court in Goetze (India) Ltd.(supra) operates only at the stage of assessment and does not impinge upon the powers of at the stage of assessment and does not impinge upon the powers of at the stage of assessment and does not impinge upon the powers of appellate authorities or the obligation of the Assessing Officer to appellate authorities or the obligation of the Assessing Officer appellate authorities or the obligation of the Assessing Officer faithfully implement directions issued by the Dispute Resolution faithfully implement directions issued by the Dispute Resolution faithfully implement directions issued by the Dispute Resolution Panel. It is evident that the Dispute Resolution Panel had already It is evident that the Dispute Resolution Panel had already It is evident that the Dispute Resolution Panel had already issued a clear and specific direction to the Assessing Officer to issued a clear and specific direction to the Assessing Officer to issued a clear and specific direction to the Assessing Officer to verify the claim of foreign tax credit and to allow the same in verify the claim of foreign tax credit and to allow th verify the claim of foreign tax credit and to allow th accordance with law, subject to verification that the corresponding accordance with law, subject to verification that the corresponding accordance with law, subject to verification that the corresponding income was offered to tax in India. income was offered to tax in India. The grievance of the assessee he grievance of the assessee arises from the non-implementation of the said direction in the final implementation of the said direction in the final implementation of the said direction in the final assessment order. Thus the issue in dispute is te is of non- implementation of a DRP direction implementation of a DRP direction, not denial on merits. , not denial on merits.