ACIT (CIR.) - 6(1)(2), MUMBAI vs. BHANDAR POWER LTD., MUMBAI

Per Rajesh Kumar, Accountant Member:

The above titled two appeals have been preferred by the Revenue against the separate orders dated 08.07.12.2016 and 13.07.2016 relevant to assessment year 2010-11 & 2011-12 of the Commissioner of Income Tax (Appeals)-12 [hereinafter referred to as the CIT(A)].

The grounds raised by the revenue in assessment 2. year are as under:- "1) On the facts and in the circumstances of the case and in law, the Ld. CIT(A) is not justified in deleting the disallowance of deduction u/s 80IA of the Income Tax Act of Rs. 42,29,03,244/~ without considering the fact that the provisions of Section 80IA(10) are clearly attracted in this case hence the assessee is not eligible for claiming deduction u/s 80IA of the Income Tax Act.

2 ITA Nos.6061 & 6062/M/2016 M/s. Bhandar Power Ltd. 2) On the facts and in the circumstances of the case and in law, the Ld CIT (A) is not justified in deleting the disallowance of deduction u/s 80IA of the Income Tax Act, without considering the fact that every assessment year is different. 3) on the facts and in the circumstances of the case and in law, the Ld CIT(A) is not justified in deleting the disallowance of managerial support service charges of Rs.5,00,73,084/- without considering the fact that assessee was unable to prove benefit arising of the services obtained from the related party.

The appellant craves leave to amend or alter any ground or add a new ground which may be necessary.”

3 ITA Nos.6061 & 6062/M/2016 M/s. Bhandar Power Ltd. 10CCB that assessee has claimed deduction u/s 80IA in respect of power plant of 155 MW at Hazira, Surat which commenced power generation on 15.01.2006 . The first year of claim of deduction was 2006-07.The total investments in plant and machinery was shown at Rs. 278,94,22,000/-, total sales during the year Rs. 89,65,10,171 with net profits of Rs. 42,29,03,244/-.The AO also observed that the assessee has entered into power purchase agreements (hereinafter called as PPA) with its group concerns for sale and supply of electricity generated by the phase-1 unit. Accordingly AO issued a show cause notice to the assessee to justify the claim of deduction u/s 80IA with the supporting evidences.

Thereafter also the assessee replied the queries raised by the AO in the assessment proceedings from time to time. The AO

4 ITA Nos.6061 & 6062/M/2016 M/s. Bhandar Power Ltd. observed on the basis of the written submissions and replies of the assessee dated 24.08.2012, 29.10.2012, 5.11.2012, 20.12.2012, 11.01.2013, 20.1.2013 & 24.1.2013 and arguments made during the assessment proceedings that the total power produced by all the units of assessee together works out to 2,310 MU only, but the amounts received against corresponding units of power supply were far more than amounts receivable on actual supply of power. Accordingly to the AO, the deduction u/s.80-IA the claim of the assessee u/s 80IA could not be allowed for the following three reasons :- (i) The receipts which are attributable to fixed cost charges as per PPAs are not eligible for deduction and such deduction is permissible only with regard to receipts which directly flow from actual supply of electric power (ii) Entering into PPAs tantamount to colourable tax planning. (iii) Provisions of section 80-IA(10) are also applicable.

5 ITA Nos.6061 & 6062/M/2016 M/s. Bhandar Power Ltd. u/s.SO-IA in respect of the claim of Rs.42.29 crores u/s.80-IA of the I.T. Act. It is an undisputed fact that the appellant has set up a power plant for generation of power. It has been generating power over the years as its sole business and it is not engaged in any other business. Before proceeding to deal with findings of the AO as well as the submissions made by the appellant, it is extremely important to understand the nuances of power business in which all power generating companies operate. The generating company such as the appellant-company enters into long term Power Purchase Agreement (PPA) with its customers which is very prudent across the entire industry so as to ensure steady customers for the power which is generated by the plant. All the prospective customers are required to purchase power and by entering into a long term contract which is very essential to both the power generators as well as the customers as it would ensure lower cost as well as certainty of power on need basis which could be fatal to the entire business model. Further, the AR had also drawn my attention to the regulatory provisions and Notification dated 19.1.2009 issued by the CERC which has categorically stated that the component of tariff for supply of electricity from a thermal generating station shall comprise two parts, namely, capacity charge (for recovery of annual fixed cost consisting of the components specified in regulation 14) and energy charge (for recovery of primary fuel cost and limestone cost where applicable). Broadly, on the basis of the above Notification the appellant-company has been recovering fixed cost from its customers which has been booked as revenue. I have also perused the PPA compiled in the paper book by the appellant. On perusal, it transpires that the appellant-company, based on the capacity allocated for each customer, charges - annual fixed charges such as maintenance cost, interest on debt, depreciation etc. The appellant-company recovered fixed charges as well as variable charges depending upon the terms of the PPA from its respective customers. The claim of the appellant, while filing its return of income, was that the income booked in respect of the above recovery charges should be considered as eligible for deduction u/s 801A of the Act. This claim of the appellant was denied by the Assessing Officer on the ground that such income cannot be considered to have been derived by the undertaking from generation of electricity. The question now arises is whether the said recovery charges would be eligible for deduction u/s.80-IA or not? In order to consider the above, I would like to analyze the provisions of section 80IA of the Income Tax Act, which read as under;

"(1) Where the gross total income of an assessee includes any profit and gains derived by an undertaking or an enterprise from any business referred to in the sub-section (4) (such business being hereinafter referred to as the eligible business), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of an amount equal to one hundred per cent of the profits and gains derived from such business for ten consecutive assessment years.

(4) This section applies to –

(iv) an undertaking which, is set up in any part of India for the generation or generation and distribution of power if it begins to generate power at any

6 ITA Nos.6061 & 6062/M/2016 M/s. Bhandar Power Ltd. time during the period beginning on the 1st day ofApril,1993 and ending on the 31st day of March, 2014 ...... "(underlined for emphasis)

On the analysis of the above provisions, it is noted that the profits and gains derived by an undertaking from the business of generation of power would be eligible for deduction u/s.80-IA(4). Based on the understanding of the power industry, a customer would always enter into the agreement to ensure steady and consistent supply of power based on the requirement for a long period of time. Further, the generator of power would always desire to have some minimum commitment of sale of power. Accordingly, such a company shall enter into Power Purchase Agreements with prospective customers. Revenues have been generated from various PPAs which have been executed by the appellant with other companies only in the interest of business considerations. Copies of PPAs have been placed on record by the appellant. The said PPAs were executed purely on the principles of commercial expediency and in the interest of the appellant company. Further, on analysis of various documents it is seen that there is no doubt that the income was received by the appellant-company by virtue of PPAs which is inextricably linked with the power generation unit and there is no other source other than the income from power generating units. In this respect the appellant- company drew my attention to the decision of the Hon'ble Delhi ITAT in the case of Magnum Power Generation Ltd. vs. DCIT 16 taxmann.com 75 (Del.). The Hon'ble Tribunal has decided the case in favour of the assessee by observing as under:- "9. We have carefully gone through the aforesaid Tribunal's order dated 'November 27, 2009, and find that the identical issue has been decided by the Tribunal in the assessee's favour in the assessment year 2005-06 by observing and holding as under:

"3. We have considered the facts of the case and submissions made before us. Sub-section (1) of section 80-IA grants deduction from the total income of an assessee in respect of any profits and gainsderived by an industrial undertaking from the eligible business, mentioned in sub-section (4). Sub- clause (a) of clause (iv) of subsection (4) is in respect of an undertaking which is set up in any part of India for the generation or generation and distribution of power if it begins to generate power at any time during the period beginning on April 1, 1993 and ending on March 31, 2001. From the assessment order, it is seen that the submissions of the assessee was that the assessee-company commenced operations for power generation in the year 1998. Thus, the power plant was set up in India after April 1, 1993 and before April 1, 2011. Therefore, the condition mentioned in sub-clause (a) stands satisfied in this case. In any case, the Assessing Officer has not raised any dispute in this matter.

3,1 Coming to the issue of income from deemed generation, the same arises when HPGCL does not take power from the power plant of the assessee. In such a situation, it is obliged to pay charges to the assessee to keep the plant in ready condition. There is stipulation to that effect in the agreement entered into between the assessee and HPGCL. There is no dispute about these facts also. Thus, the only question left is whether, the aforesaid income is eligible for deduction under section 80-IA.

7 ITA Nos.6061 & 6062/M/2016 M/s. Bhandar Power Ltd. 3.2 We have already mentioned that where the gross total income of an assessee includes any profits and gains derived by an undertaking specified in sub-section (4), it is entitled to deduction under the provision. There is no dispute that an undertaking set up in any part of India for generation or generation and distribution of power is an eligible undertaking for the purpose of the aforesaid deduction, as provided in sub-section (4)(iv)(a). The words used in the aforesaid sub-clause are an undertaking which 'is set up in any part of India for the generation or generation and distribution of power*. There is no dispute that the undertaking of the assessee is set up for generation of power. The assessee has been selling the power to HPGCL as per terms and conditions of the agreement entered into with it. This agreement has been entered into in the course of business, which is primarily of generation of power. The assessee received revenue for the power actually supplied to HPGCL. Certain income is also received when power is not drawn by HPGCL and the reason for tlie same is stated to be that the assessee has to keep its plant in readiness and for this purpose expenses are incurred. Therefore, the agreement between the assesses and HPGCL is in respect of sale of power, the generation of which is the main business of the assessee. But for carrying on the business of generation of power, the assessee would not have earned income either by way of actual sale of power or by way of deemed generation. In other words, the PPA is entered because the assessee has set up an undertaking for generation of power. The income by way of sale of power and the income by way of deemed generation of power have proximate nexus with the business of the industrial undertaking. Both components of income are included in the gross total income of the assessee. It can also be said that the agreement in respect of both types of revenues received or receivable by the assessee are on account ofpoiver supplied to HPGCL, representing a method to determine the sale proceeds, which has a proximate connection with the business of the assessee." (emphasis supplied)

It has also been held by the Hon'ble Tribunal that income from deemed generation was allowable u/s.80-IA of the Act. In other words, PPAs have been entered because the appellant has set up an undertaking for generation of power and wanted to ensure committed offtake of electricity. Further the proceeds are directly emanating from the PPAs. The fact that the customers are not in a position to purchase or do not purchase because of commercial reasons cannot make the appellant ineligible for deduction. Because the customers of the appellant company were not in a position to purchase electricity they used to compensate the appellant for fixed costs incurred such as depreciation , interest on capital etc. which is in accordance with the PPA as well as the notification relied upon by the appellant. Accordingly, the appellant is eligible for deduction U/S.804A.

Before concluding that the appellant is eligible, it would also relevant to refer to the decision of the Hon'ble Apex Court in the case of CIT vs. Meghalaya Steels Ltd. (Gauhati) 356 ITR 235 wherein the Hon'ble Apex Court has dealt with the definition of the term ''derived from". It may be noted here that the Assessing Officer has time and again stated in the assessment order that the proceeds received by the appellant from the group income cannot be considered to have been derived from

8 ITA Nos.6061 & 6062/M/2016 M/s. Bhandar Power Ltd. the undertaking of generation of power as there is no power generated. The Hon'ble Apex Court has dealt with and explained the rational as under:-

"20. From the decisions referred to above, further submits the learned ASG, it can be safely said that a number of superior judicial authorities have chosen to ignore the word 'from1 or 'by', appearing after the word 'derived', while considering the subject-matter involving and/ or using the said two expressions’.

On perusal of the above finding Hon'ble Apex Court has held that the decision of Liberty India does not come to the aid of the revenue because it was dealing with income from export incentives which is very far removed from reimbursement of costs. In the facts of the case before Hon'ble Apex court the assessee was receiving payment towards transport subsidy, power subsidy, interest subsidy etc. and it having a first degree nexus with the cost of the project was held to be eligible for deduction u/ s 801 A. In the facts of the case, it is seen that the appellant has derived profit from entering into PPAs and nowhere has the Assessing Officer denied that the revenues emanated from any other sources. Further, on perusal of the PPAs it is evident that the revenues are in respect of annual fixed charges such as maintenance cost, interest on debt, depreciation etc. Therefore, respectfully following the Apex Court's decision the said revenue ought to be considered as income derived from the industrial undertaking and therefore eligible for deduction u/s.80-IA. This finding further get strengthened by the fact that on similar facts and circumstances the Assessing Officer had allowed deduction U/S.80-IA for earlier three assessment years i.e. A.Ys. 2007-08. 2008-09 and 2009-10. The very issue has been considered and decided consistently in a number of assessment years in a particular manner and the same in subsequent years. Since in the facts of the case the Assessing Officer has not made any adjustments/ deduction u/s.80-IA for A.Ys. 2007-08, 2008- 09 and 2009-10 nor has he undertaken any proceedings u/s.148 or 263, then, following the decision of the Delhi High Court in the case of CIT vs. Allied Finance Fvt Ltd. 289 ITR 318, 1 would hold that on this ground as well any adjustment made u/s,80-IA is not permissible and hence should be deleted. Further, the Assessing Officer has also alleged that the income generated by the appellant-company is not operating income and the entire transaction structured is a colourable and resulting into abusive tax planning. In this regard, A.O. placed reliance on the decision of the Hon'ble Apex Court in the case of McDowell & Co., 154 ITR 148 as well as several other decisions. I have also perused the submissions made by the appellant to justify that it has not resorted to abusive tax planning. In this respect, the appellant has placed reliance on the decision of the Punjab & Haryana High Court in the case of CIT vs. Punjab State Electricity Board, 320 ITR 469 and Porrits and Spencer (Asia) Ltd. vs. CIT, 329 ITR 222 as well as the Hon'ble Supreme Court decision in the case of Vodafone International Holdings B.V. vs. Union of India, 341 ITR 1. The Hon'ble Apex Court has comprehensively dealt with the issue of tax planning visa-vis colourable and abusive tax planning. As a matter of fact, in the present case, various PPAs have been executed by the appellant-company with other companies in the interest of only business purposes and business considerations. The rationale behind entering into long term PPAs has been explained at length by the appellant

9 ITA Nos.6061 & 6062/M/2016 M/s. Bhandar Power Ltd. both from the angle of purchaser as well as supplier of power. Majority of all the companies with whom the appellant has entered into a PPA have already commissioned their plants, however their commercial production may be at a subsequent date. In any case, the PPAs were executed purely on the principles of commercial expediency so that the purchasing companies are assured uninterrupted supply of power. Therefore, I hold that the PPAs have been genuinely executed for business purposes and there is no angle of tax planning much less colourable tax planning as alleged by the Assessing Officer. Coming to the merits of the case, the Assessing Officer has given a finding that most of the fuel cost in Phase-I was Rs.NIL whereas the entire fuel cost of Rs.99.48 cr. was debited against Fhase-II. Further A.O. has stated that the net profit for Phase-I was 47% as against the net profit in Phase-II atj.7%. Further, at para 4.7 of the order the Assessing Officer has stated that profits from Phase-I was not from supply of power but received from otherwise than supply of power. I have already held above that the appellant company is eligible for deduction in respect of recovery of fixed charges as agreed upon with the customers in PPAs. However, now, going to the fact that the appellant has not incurred any fuel cost in Phase -I. I am convinced with the reasoning of the appellant that the cost has not been incurred because fuel cost was supposed to be borne by Essar Steel India Limited. Therefore, the question of there being no fuel cost incurred by the appellant does not arise. Further, the accounts of the undertaking are audited and no adverse comments by the auditor have been made. Accordingly, I hold that this cannot be the reason to reach to a conclusion that the more than ordinary profits have been reflected in an eligible undertaking of the group u/s 80 IA (10). Now we can come to another reasoning that the profits for Phase II and III are less as compared to Phase I of the appellant company. In this respect the appellant has given detailed reasoning and explained the differences by exhaustive reply vide letter dated 20th December 2012, The reply of the appellant has been ignored by the Assessing Officer. On verification of the said reply as well as the detailed explanations given thereunder it is noted that difference was mainly on account of fuel cost which is variable in nature. Phase II and III were recovering variable charges fuel charges which are included both as cost as well as revenues. On the other hand Phase I generated electricity the fuel cost of which was borne by its customers. Accordingly, to make it comparable, the appellant has rightly submitted before the AO that both the fuel cost as well as revenues attributable should be excluded in order to make Phase II & II comparable with Phase I. Thereby the margin of Phase II and II drop to 25.80% (51.24 crores / 198.59 crores *100). Accordingly the allegation of the AO that phenomenally high profits are shown in eligible undertaking does not hold true. The appellant has gone further and also explained after taking 25.80 % margin as a base that the remaining/balance difference is because of higher interest costs difference( on account of different loans) , higher depreciation cost in Phase I as well as lower Operation and Maintenance cost. If these differences are factored in profits of Phase I would be Rs. 42.45 crores i.e. very close to the actual profits reflected in the audited financial statements of Phase I. Accordingly I am convinced that the margins of the appellant company are in the range with Phase II and III. Therefore, there is no reason for me to concur with the findings of the Assessing Officer. Further, the AO has not pointed out any specific defects in the audited financial statements. Therefore, the disallowance on this ground as well is deleted. Accordingly, this Ground of appeal No.2 is allowed.”

10 ITA Nos.6061 & 6062/M/2016 M/s. Bhandar Power Ltd. 8. The ld DR, while relying heavily on the order of AO, submitted that the ld CIT(A) has failed to consider the fact that the whole arrangement was nothing but a mechanism devised to avail the deduction u/s 80IA of the Act. The ld DR, while referring to operational results of phase 1, submitted that against the sales of Rs.90.49 Cr, the net profits were Rs.42.45 Cr which is app. 47% of the sales. The ld DR contended that the profits were highly unrealistic and were inflated with motive to claim higher deduction u/s 80IA of the Act. The ld DR submitted that on the other hand the sales from phase 11 and 111 were Rs. 298.59 Cr and the net profits were Rs.51.24 Cr which is app. 17%. The ld DR also pointed out that fixed cost were recovered under PPAs irrespective of units of electricity generated and supplied which raised doubts about the genuineness of the claim of the assessee u/s 80IA of the Act. The ld DR stated that PPAs were entered into with group companies and the payments were received under PPAs despite having not supplied any electricity as noted by the AO in page 8 of the assessment order. The ld DR also drew attention of the bench that Essar Steel Ltd was only the company which was supplied power of 448 M.U. by phase 1 against the payment of Rs. 63,54,37,865/- and cost of fuel was also fully borne by M/s. Essar Steel Ltd. as the said amount was claimed to be paid as fixed cost to the assessee company under PPA. The ld Dr also referred to the table on page no. 9 of the assessment order to reinforce his arguments that the assessee supplied power to only one company M/S Essar Steel Ltd of 448 M.U. against the payment of Rs. 63,54,37,865 which was recovered as fixed cost and shown as sales whereas the balance receipts from 6 companies

11 ITA Nos.6061 & 6062/M/2016 M/s. Bhandar Power Ltd. were Rs.26,10,72,305 recovered as fixed cost and shown as sales without supplying any electricity. The ld DR stated that the AO has rightly rejected the claim of the assessee by invoking the provisions of section 80IA(10) of the Act. The ld DR also referred to the fact that 6 customers from whom the payments of Rs.26,10,72, 035 were received have no approval from Chief Electrical Officer to obtain the electricity from the assessee as is apparent from the letter issued by the Chief Electrical Officer, Gandhinagar addressed to the assessee dated 1.4.2011. In other words the assessee was not having any permission to supply electricity to these companies for the instant year. Therefore the ld Dr submitted that the claim of the assessee was false and fabricated and was rightly rejected by invoking the provisions of section 80IA(10) of the Act as the transactions were with the related parties. The ld DR finally prayed before the bench that the decision of the ld CIT(A) is patently wrong as it has failed to consider the sham and false claim of the assessee u/s 80IA of the Act which was an arrangement worked out between the assessee and related parties to circumvent the tax liability by claiming deduction u/s 80IA of the Act and therefore the order of ld CIT(A) deserves to be reversed. On the finding of ld CIT(A) about allowing the similar claim in the earlier three years, the ld DR submitted that nonetheless the claim was allowed in the earlier three years and also there was no pending proceedings either u/s 148 or u/s 263 of the Act, but every year is a distinct year and there is no bar on the AO to accept the claim of the assessee if that is accepted in the past as the principle of resjudicata is not applicable to the income tax proceedings. The

12 ITA Nos.6061 & 6062/M/2016 M/s. Bhandar Power Ltd. ld DR also relied on the following decisions in defense of his arguments: a)Liberty India Ltd Vs CIT (2009) 183 Taxman 349 (SC) b)Pandian Chemcials Ltd Vs CIT (2003) 262 ITR 278 (SC) c)CIT Vs Jyoti Apparels (2008) 166 Taxman 343 d) CIT Vs Mereena Creations (2010) 189 Taxman 71 e)Opera Clothings Vs ITO (2017)-TIOL-38-SC-IT)(SC) f) Cyber Pearl Information Technology Park (P) Ltd Vs ITO (2017) 80 taxmann.com 66(Mad)

13 ITA Nos.6061 & 6062/M/2016 M/s. Bhandar Power Ltd. had borne the fuel cost. Thus the plea of the AO that the entire fuel cost incurred for phase 1 of Rs. 99.48 Cr was debited against phase 11 was wrong and fallacious. The ld CIT(A) has duly negated the controversy by recording a finding of facts in this regards.

14 ITA Nos.6061 & 6062/M/2016 M/s. Bhandar Power Ltd. generation and there was no other business of the assessee. The ld AR stated that the income was received by the assessee under PPA which was connected with the generation of power. The ld counsel argued that no where the AO doubted that revenue of the assessee that it came from any other sources of income. The ld AR submitted that the revenue was received under PPAs in respect of fixed charges such as maintenance cost, interest on debts, depreciation etc. The ld AR referred to the Hon’ble Supreme Court decision in the case of CIT Vs Meghalaya Steel Ltd (Gauhati) 356 ITR 235 wherein the apex court has dealt with the definition of term “derived from” and following the same ratio the said revenue has to be or ought to be considered as income derived from industrial undertaking and eligible for deduction u/s 80IA of the Act. The ld counsel for the assessee also contended that the section 80IA is a beneficial provision which has been enacted with the purpose of allowing benefit to the assessee who has set up power plants or specified undertakings keeping in view the overall economic development of the country. The ld AR also argued that where two views are possible then view in favour of the assessee has to be taken as has been held by the Hon’ble Apex court in the case of CIT Vs Vegetable Products Ltd 88 ITR 192 (SC) , Manish Maheswari Vs ACIT 289 ITR 341(SC) and Pradip J. Mehta Vs CIT 300 ITR 231 (SC).

15 ITA Nos.6061 & 6062/M/2016 M/s. Bhandar Power Ltd. 13. We have heard the rival contentions of both the parties and perused carefully the records as placed before us including the impugned decision of the CIT(A) and case laws relied by both the parties. This is undisputed that the assessee’s only business activity is electricity generation which commenced in the financial year 2006-07 relevant to the assessment year 2007-08. It is also not disputed that the deduction u/s 80IA of the Act has been allowed in the earlier three years in assessments framed u/s 143(3) of the Act and no action u/s 148 or 263 of the Act is pending against the assessee in respect of these years which has also been admitted by the ld DR when a query was put during the course of hearing. The assessment years in which the deduction was allowed u/s 80IA are as under:

2007-08 143(3) dated 23.3.2009 2008-09 143(3) dated 24.12.2010 2009-10 143(3) dated 26.12.2011

16 ITA Nos.6061 & 6062/M/2016 M/s. Bhandar Power Ltd. M/S Essar Steel Ltd. and if the adjustments are made to that effect, the profit would be comparable to other units and thus there is no force in the findings of the AO to this effect. It is also true that assessee has entered into PPAs with various related parties as stated hereinabove out of commercial expediency and commercial considerations to ensure sale of power generated and received revenue in respect of fixed charges but that is done out of business considerations only. So far as the allegations and observations of the AO on the issue of financial arrangement between the group companies are concerned, the ld AR has proved that no evasion of tax has taken place as M/S Essar Steel Ltd from whom substantial revenue has been received is a loss making entity as is apparent from the following data: 1. 2010-11 -29.62 -2990.09 2. 2011-12 -986.77 -3976.86 3. 2012-13 2845.60 -6822.45 4. 2013-14 6321.22 -13,143.67

The ld CIT(A) comprehensively brought out all the facts and taken a very reasoned view considering all the facts. We also note that even the assessee company has been paying MAT every year. So considering all these facts and circumstances we hold that allegation of the AO that there was tax evasion has no weight.

17 ITA Nos.6061 & 6062/M/2016 M/s. Bhandar Power Ltd. of the ld CIT(A) and also the arguments of the ld AR and thus we do not find any reason to interfere in the order of CIT(A) on this issue. Accordingly the ground no. 1 and 2 raised by the Revenue are dismissed.

18 ITA Nos.6061 & 6062/M/2016 M/s. Bhandar Power Ltd. 19. In the appellate proceedings the assessee vide written submissions dated 03rd May, 2016 submitted as under:- “2.4 At the outset, it is submitted that payments were made to Essar Investments Ltd. in the preceding assessment year 2009-10 also on the basis of similar agreement. The Assessing Officer accepted such payments and the same was allowed in theassessment made under scrutiny. Thus, in identical circumstances such service charges have been fully allowed by the Department in the preceding assessment year. Therefore, the well established rule of consistency of approach should apply as already explained elaborately (supra).

2.5 Secondly, there is no basis whatsoever for the Assessing Officer to doubt the genuineness of the agreement entered into between two corporate entities, which are both assessed to income-tax and are filing regular income-tax returns.

2.6 The appellant company would like to most respectfully submit that Bhander Power Ltd. has availed services in the nature of shared service charges from Essar Investments Ltd. and entered into agreement accordingly to which Rs. 5,00,73,084 was incurred. In this connection, the appellant wishes to submit that the Essar Group has been on a growth trajectory and this necessitated a large amount of inputs and advice by experts having extensive experience in various aspects of the businesses that it was engaged in or was foraying into. To meet these requirements, it was considered expedient to create internal skill sets and expertise that could service the various needs of the growing businesses as the Group realized that to approach specialists from various organizations for guidance in each field/ facet of business could prove unviable in terms of time and costs involved. Therefore, Essar Investments Limited (EIL) teams of experts and executives with specialization in various fields, besides transferring existing personnel in various group companies having requisite skills to provide the necessary guidance to businesses on the what's, when's and how's of various activities, for better compliance of regulations and laws and for improving the quality of output service of the group companies, in a timely and cost effective manner. EIL therefore, provided a basket of services to group companies including BPOL, to take advantage of and to avail as and when requited, on an on-going basis. The costs for rendering these services were allocated to group companies who were the beneficiaries of such services.

In particular, in the case of BPOL, the following are some of the technical, managerial and administrative services availed for smooth operations and functioning - • Advising in the areas of finance and treasury functions • Advising on finance controller matters, accounting standards and audits etc • Advising legal matters, litigations (both in India and abroad), arbitrations, disputes. • Advising in identifying leading edge technologies, international bench marking norms and project management systems. • Advising on group corporate governance • Advising the company on personnel policy

19 ITA Nos.6061 & 6062/M/2016 M/s. Bhandar Power Ltd. • Advising regarding environmental managements • Advising regarding risk and insurance management • Co-ordinating with insurance companies and negotiate rate(s), premia with various insurance companies and assisting in following up of claims • Recruit professionals at senior level key areas • Liaise with government agencies and statutory matters • Advising on direct tax matters, appeals, litigations and assisting in follow up • Advising on indirect tax matters, litigations, appeals and assisting in follow up • Identifying good industrial practices for establishing environmental friendly operations and industrial safety • Identifying and developing new business opportunities , strategy alliances and joint ventures for the company, • Strategies and policies for effective external and internal communications to enhance corporate image of the company. BPOL's share of the common expenses amounted to Rs.5.01 crores for the financial year 2009-10 which were recovered by EIL for providing the aforesaid services.

2.7 It will be appreciated that it would be near impossible to avail of these multiple services from a one stop shop outfit on an uninterrupted/ continuous basis and that to approach various reputed organizations individually, for expert services in the various fields mentioned above would have involved a huge fund outflow. Besides, without a doubt, the involvement and engagement right up to the completion of the activity would be greater in the case of a Group company rendering captive services.

2.8 It may kindly be appreciated that the aforesaid factual position was also fully explained before the Assessing Officer but he disallowed the claim merely on the basis of a suspicion that services may not have been rendered. It is submitted that the payment made by the appellant-company is reflected as income in the audited accounts of Essar Investments Ltd. and both the entities being companies, the rate of tax would be the same. Assessment in the case of Essar Investments Ltd. for the A.Y. 2010-11 has been completed on 30.01.2015 u/s.!43(3) wherein the said receipt of Rs.5,00,73,084 has been assessed. The Assessing Officer is totally unjustified in rejecting the claim of the appellant-company on an assumption that this was an arrangement in the nature of colourable tax planning. The appellant-company relies on the Hon'ble Delhi High Court judgement in the case of Pavankumar Jain vs. CIT, 334 ITR 23 and the Headnote of this case is reproduced below for ready reference:-

"The assessee, engaged in the business of manufacture of stainless steel utensils, filed a return for the assessment year 2006-07. The Assessing Officer in the assessment proceedings noticed that the assessee had paid commission to L purportedly, in consideration for standing guarantee for purchases from certain firms/companies. The Assessing Officer was of the view that this transaction was not genuine. The Commissioner (Appeals) as well as the Tribunal confirmed the findings of the Assessing Officer. On

20 ITA Nos.6061 & 6062/M/2016 M/s. Bhandar Power Ltd. appeal : Held, that the assessee had contended that L had filed a return for the assessment year 2006-07 declaring income of Rs. 1,48,50,705 and had paid tax. The Revenue had not suffered any loss, inasmuch as, the taxes were paid by which received the commission. Since this was vital information and had not been considered by the authorities below, the matter was to be restored to the file of the Assessing Officer.

2.7 The appellant-company further relies on the Hon'ble Gujarat High Court in the case of CIT vs. Suzlon Energy Ltd., 354 ITR 630 and the relevant part of this judgement is reproduced below from pages 632 and 633 of the Report:-

"2.1 Question (1) pertains to an amount of Rs. 9.34 crores (rounded off) paid by the assessee towards sales commission. The____Assessing____Officer, however, made an addition of the said amount primarily on the ground that the assessee failed to establish the actual____services____rendered____by____the commission agents. He was of the opinion that the question was whether the amount claimed as expenditure was laid down wholly and exclusively for the purpose of business and the mere existence of the agreements between the assessee and its sales agents or payment of the amount as commission would not establish that such payment was made exclusively and wholly for the purpose of enhancing the assessee's business.

2.2 The assessee carried the matter in appeal. The Commissioner of Income-tax (Appeals) deleted the disallowances on the ground that the assessee had : entered into agreements for payment of commission in respect of the work done by the agents. The payments were__made_as per the agreements. The Commissioner of Income- tax (Appeals) also noted various services that the commission agents had to provide as per the agreements. He further noted that all the payments were made through cheques and the parties were genuine. Such commission agents had in turn confirmed the receipt of the payments and also of having rendered services. Such commission received were shown in their tax returns and taxes were also paid. The commission agents were individual persons and no where related to the assessee-company. He also that there was considerable increase in the sales of the company and that, therefore, the payment of commission was justified. (emphasis supplied)

2.8 It is forcefully submitted that having regard to the past history, the factual position explained above and the legal position which emerges from the cases referred to (supra), there is no justification whatsoever for the disallowance of service charges of Rs.5,00,73,084 merely on surmises and suspicion and therefore this uncalled for addition may kindly be deleted.”

21 ITA Nos.6061 & 6062/M/2016 M/s. Bhandar Power Ltd. 20. The ld CIT(A) after taking into account the various contentions and submissions of the assessee allowed the issue in favour of the assessee by holding and observing as under: “11.3 I have given a careful consideration to all the relevant facts, the case made out by the Assessing Officer in the assessment order and also the written submissions made on behalf of the appellant-company. After duly considering the factual and legal position discussed above, I am of the view that the Assessing Officer has simply disallowed the sums paid to Essar Investment Limited on the ground that no documentation was filed or produced before him and that the said sums were paid to a related party. Copy of the agreement has been placed before me. The detailed scope of services rendered by Essar Investments has been explained at length. It is a settled position that the Assessing Officer cannot challenge why the appellant had not developed in house expertise for rendering such services. Having shared services is very common as the same team can render expert services to the entire group as a whole. The functions / services that Essar Investment renders is for all matters including advising on HR policies , Risk management, Liaise with government agencies , assisting for handling Direct Tax and Indirect tax matters etc. It is not the case that the party to whom payment is made is a bogus party. Transactions have been entered through banking channels. The AO has simply disallowed the above sum on suspicion that no such services have in fact been rendered. Since the appellant has produced the agreement, identified the party and no further inquiries were made by the AO to bring out any evidences that the aforementioned services were not necessary for the business, I direct the AO to delete the addition. Accordingly this Ground of Appeal No.3 stands allowed.

22 ITA Nos.6061 & 6062/M/2016 M/s. Bhandar Power Ltd. 22. The ld AR on the other hand has submitted that M/S Essar Investments have employed 281 personnel in various fields with specialisation in their respective field while the assessee had employed only 47 personnel. Out of 47 employees, 39 were employed in plant to do work in the field of electrical, mechanical, civil, chemical and C&I, 6 in operational and maintenance section and 2 other in health safety and stores. The ld AR while taking us through the pattern of employment in Essar Investments Ltd. submitted that 33 persons were employed in assurance and cost control, 29 in corporate human resources, 10 in corporate legal, 23 corporate relation group, 26 global finance, 79 in investments, 15 mergers and acquisitions, 18 telecom and remaining in various other fields. The ld A.R. also produced before the bench the details of services provided by Essar Investments to various group companies along with the details of payments and submitted that in all the cases the payments were accepted by the revenue even in the assessment framed u/s 143(3) of the Act except the assessee. The ld AR submitted that the assessee has not employed any staff in the field of finance, human resources, assurance and cost control, corporate relation, investments and therefore it clear that for all these services, the assessee was depending on the services provided by Essar Investments. The ld AR submitted that it is the assessee who is to decide as to what expenses were necessary for the business of the assessee and the revenue can not dictate to the assessee. The ld AR submitted that all these expenses were incurred out of business consideration and therefore were rightly allowed by the ld CIT(A). The ld A.R. relied on a series of decisions in defence of his arguments: a)CIT Vs Yum Restaurants India Pvt Ltd. 371 ITR 139 (Delhi)

23 ITA Nos.6061 & 6062/M/2016 M/s. Bhandar Power Ltd. b)CIT Vs Discovery Communication India 370 ITR 57 (Delhi) c)S.A Builders Vs CIT 288 ITR 1 (SC)

The ld AR submitted that the ld CIT(A) has considered all the above aspects while passing the order and therefore the same needs to be affirmed on this issue.

24 ITA Nos.6061 & 6062/M/2016 M/s. Bhandar Power Ltd. In the case of S.A Builders (supra), the Hon’ble Apex Court has held that any particular expenditure may not be incurred under any legal obligation, yet it is allowable as business expenditure as it is incurred on the grounds of commercial expediency. The revenue has not brought any materials before us to controvert the findings of ld CIT(A) who has otherwise taken a correct view of the issue and decided the issue in favour of the assessee. Accordingly, we are inclined to uphold the order of CIT(A) on this issue by dismissing the ground no. 3 of the revenue.

ITA No. 6062/Mum/2016 AY 2011-12 24. The issues raised in this appeal are identical to ones as decided by us in ITA No. 6061/Mum/2016 AY 2010-11 wherein we have dismissed the appeal of the revenue on both the grounds. Therefore our decisions on both the grounds in ITA No. 6061/Mum/2016 AY 2010-11 would, mutatis mutandis, apply to this appeal as well. Accordingly both the grounds raised by the revenue are dismissed.

Order pronounced in the open court on 31.05.2019.

Sd/- Sd/- (Mahavir Singh) (Rajesh Kumar) JUDICIAL MEMBER ACCOUNTANT MEMBER

Mumbai, Dated: 31.05.2019. * Kishore, Sr. P.S.

Copy to: The Appellant The Respondent The CIT, Concerned, Mumbai

25 ITA Nos.6061 & 6062/M/2016 M/s. Bhandar Power Ltd. The CIT (A) Concerned, Mumbai The DR Concerned Bench //True Copy// [ By Order

Dy/Asstt. Registrar, ITAT, Mumbai.