ASST CIT (LTU) 2, MUMBAI vs. RELIANCE INDUSTRIES LTD, MUMBAI

The assessee company is engaged in the business of Oil & Gas Exploration, Refining of Crude oil, Manufacture and sale of petrochemicals, polyester fibre, textiles etc. It is also engaged in the business of generation and distribution of power, operation of jetties and related infrastructure, retail marketing of petroleum products. It is also engaged in investment activities.

We shall first take up the appeals relating to Assessment year 2010-11. The first issue urged by the revenue and the first issue urged by the revenue relates to the Sales tax exemption of Rs.776.76 crores. The assessee established plants at Hazira, Jamnagar, Gandhar, Allahabad and Barabanki, which are located in the States of Gujarat and Uttar Pradesh. Both the Governments provided incentives in the form of Sales tax exemption.During the year under consideration, the assessee appropriated sales tax amount embedded in the Sales, which are eligible for Sales tax exemption. The amount of sales tax so appropriated was Rs.776.76 crores and claimed the same as Capital receipts and accordingly did not offer the same for taxation. The AO took the view that the assessee has appropriated sales tax on notional basis. Further, the AO noticed that in the preceding years viz., AY 2007-08 to 2009-10, the assessing officer had treated the sales tax incentive as revenue receipts. Following the same, the AO rejected the claim of the assessee and assessed the sales tax incentive of Rs.776.76 crores as income of the assessee.

The Ld CIT(A) noticed that the Special bench of Tribunal had considered an identical issue in the assessee’s own case reported in 88 ITD 273, wherein it was held that the Sales tax incentive was capital in nature. The Ld CIT(A) noticed that his predecessor has followed the above said decision of Special Bench and held that the sales tax incentive is capital receipt. Since the facts are identical in nature, the Ld CIT(A) held that the Sales tax incentive is Capital in nature and accordingly reversed the decision of the AO.

Before Ld CIT(A), the assessee had raised an alternative contention on this issue. The assessee’s plea was that, if the sales tax incentive is considered as

Aggrieved by the decision rendered by Ld CIT(A) in holding that the Sales tax exemption amount is Capital Receipts, the revenue has filed appeal. The assessee is aggrieved in rejecting the alternative claim of the assessee.

We heard the parties on this issue and perused the record. The assessee has been given Sales tax exemption by Government of Gujarat and Uttar Pradesh and the Special bench of Tribunal in the asseessee’s own case (referred supra) has held the notional sales tax receipt is Capital in nature. We notice that the co-ordinate benches of Tribunal has followed the decision rendered by the Special bench in AY 2003-04 to 2009-10 and upheld the decision rendered by Ld CIT(A) in holding that the Sales tax incentive is capital in nature. Before us, the assessee placed reliance on the following case laws also to support the decision rendered by the co-ordinate bench in the earlier years on this issue:- (a) Shree Balaji Alloys Ltd vs. CIT (138 DTR 36)(SC)

We notice that the Ld CIT(A) has followed by the decision rendered by Special Bench in holding that the Sales tax incentive is capital in nature. We also notice that the co-ordinate benches of the Tribunal have, in the earlier years, upheld the view taken by the Ld CIT(A) in AY 2006-07 to 2009-10. The assessee has also taken support of decisions cited above in this regard. Hence, we are of the view that the Ld CIT(A) was justified in holding that the Sales tax incentive is in the nature of Capital Receipt and hence not liable to tax.

The alternative ground urged by the assessee is to allow the deduction u/s 43B of the Act, if the Sales tax incentive is treated as revenue receipt. We noticed that the co-ordinate bench in the assessee’s own case relating to AY 2003-04 to 2006-07 (ITA Nos.4475/Mum/2007 and Others dated 13-09-2013) has held, in paragraph 60.3 of its order, that the Ld CIT(A) was justified in declining to adjudicate the alternative plea of the assessee claiming notional sales tax (sales tax incentive) is allowable as deduction u/s 43B of the Act. Since the sales tax incentive is held to be capital receipt, there is no necessity to adjudicate the alternative ground of the assessee and accordingly we also reject the same.

The second issue urged by the assessee relates to the disallowance of depreciation of Rs.8,71,508/- on the capitalised value of goods purchased from Durga Iron & Steel Ltd and Surjbahan Rajkumar P Ltd in AY 2003-04. The assessee had purchased certain materials from the above said parties in the year relevant to AY 2003-04 and had capitalised it. The assessee claimed depreciation on the amount so capitalised. Later it was noticed that the purchases made from the above said parties were alleged to be bogus in nature. Hence the AO disallowed the depreciation claimed on the value of purchases made from the above said parties in AY 2003-04 and the same kind of disallowance was continued in the subsequent years also. The Ld CIT(A) confirmed the disallowance of depreciation so made in all the years. Hence, in

At the time of hearing, the Ld A.R fairly conceded that this issue has been decided against the assessee by the co-ordinate benches of the Tribunal in the earlier years, meaning thereby, the disallowance made by the AO has been confirmed by the Tribunal in the earlier years. We notice that the co- ordinate bench of the Tribunal has decided this issue in AY 2007-08 to 2009- 10 in paragraph 67 of its order and confirmed the decision rendered by Ld CIT(A) on an identical issue. Consistent with the view taken by the co-ordinate benches, we decide this issue against the assessee, i.e., we confirm the order passed by Ld CIT(A) on this issue.

The next issue contested by the assessee relates to the Transfer pricing adjustment on the interest free advances paid by the assessee to its foreign Associated Enterprises (AE). The assessee had given interest free advances to two of its subsidiary companies, named RNBV, Reliance India Middle East DMCC (RIME) in the earlier years and the same were outstanding as on 1.4.2009. The assessee repaid the same on 23.10.2009. The TPO computed interest on this advance by adopting interest rate of 6.94% for the outstanding period of the loan and made TP adjustment of Rs.320.82 lakhs. The ld CIT(A), following his earlier order, directed the AO/TPO to compute interest by adopting LIBOR rate plus 3.25% for the outstanding period.

The Ld A.R submitted that the purpose of the investment was to fund RIME to acquire majority stake in GAPO group which is engaged in marketing of petroleum products in African Countries. Accordingly he submitted that the assessee had indirectly used the advance for fulfilling its own objective of gaining majority control in overseas acquisitions. He submitted that the intention was not to provide loan to earn interest. He submitted that the advance provided is in the nature of shareholder activities, which do not require any compensation as it will indirectly benefit the shareholders.

The Ld A.R further submitted that the “Capital financing” has been included in the definition of “International Transactions” w.e.f. from 1.4.2012 and hence the same shall apply from the assessment year 2013-14 only. In this regard, he placed reliance on the decision rendered by Mumbai bench of ITAT in the case of Siro Clinpharm P Ltd vs. DCIT (ITA No.2618/Mum/2014 dated 31.03.2016). Accordingly he submitted that the tax authorities are not justified in making T.P adjustment in respect of Capital financing transactions.

The Ld A.R, in the alternative, submitted that the co-ordinate bench of Tribunal has sustained the addition to the extent of Libor rate plus 150 bps on an identical issue in the earlier years.

We heard Ld D.R on this issue and perused the record. We notice that the co-ordinate bench in the earlier years have taken a consistent view and sustained addition to the extent of LIBOR rate plus 150 bps. Hence we modify the order passed by Ld CIT(A) on this issue and direct the AO/TPO to compute interest by applying rate of LIBOR rate plus 150 bps for the outstanding period of loan.

The assessee has also raised following legal grounds by way of Additional Grounds of Appeal in respect of T.P adjustments:- a. The order of the learned TPO is invalid, illegal, bad in law, in excess of and/or in want of jurisdiction.

The next issue contested by the assessee in the Additional Ground relates to the addition made to the book profit u/s 115JB of the Act in respect of expenses related to exempt income. The AO had computed the disallowance u/s 14A r.w. rule 8D of the I.T Rules for computing total income under normal provisions of the Act. The AO adopted the same figure for making addition to the Net profit for the purpose of computing book profit u/s 115JB of the Act. The disallowance computed by AO as per Rule 8D consisted of interest disallowance u/r 8D(2)(ii) and administrative expenses u/r 8D(2)(iii) of the I.T Rules. The Ld CIT(A) deleted the disallowance of interest expenditure made u/s 8D(2)(ii) of the I T Rules, since the own funds available with the assessee was more than the value of investments. In this regard, the Ld CIT(A) followed the decision rendered by Hon’ble Bombay High Court in the case of CIT vs. Reliance Utilities and Power Ltd (313 ITR 340). However the Ld CIT(A) confirmed the disallowance made out of administrative expenses as per Rule 8D(2)(iii) computed @ 0.5% of the value of average investments. The Ld CIT(A) directed the AO to adopt the same for the purposes of sec. 115JB of the Act also for computing Book Profit. The assessee is aggrieved by the direction so given Ld CIT(A) for the purposes of sec.115JB of the Act.

The Ld A.R submitted that the Special bench of Tribunal has held in the case of ACIT vs. Vireet Investment P Ltd (165 ITD 27) that the provisions of sec. 14A r.w.r 8D is not applicable while computing book profit u/s 115JB of the Act. He submitted that the co-ordinate bench has also taken identical view in the assessee’s own case in AY 2009-10 (vide Corrigendum order dated 02- 04-2018) and in AY 2007-08 also.

We heard Ld D.R on this issue. In view of the decision rendered by the Special bench in the case of Vireet Investments P Ltd (supra), the tax authorities are not correct in law in applying the provisions of sec.14A r.w.r 8D for computing disallowance for meeting the requirement of clause (f) of Explanation 1 to sec.115JB(2). The Special Bench has held that the addition, for the purpose of clause (f) of sec.115JB(2), should be computed without having resort to sec.14A r.w.r. 8D of the I.T Rules. Accordingly we set aside the order passed by Ld CIT(A) with regard to the addition made for the purpose of sec. 115JB of the Act and direct the AO to compute the disallowance for the purpose of clause (f) of Explanation 1 to sec. 115JB(2) without having resort to sec.14A r.w.r 8D of the I T Rules.

The next additional ground urged by the assessee relates claim for exclusion of notional Sales tax incentive of R.776.76 lakhs for the purposes of computing Book Profit. The relevant additional grounds read as under:- (a) The learned CIT(A)-57, Mumbai erred in not excluding notional sales tax incentive of Rs.776.76 lakhs held as Capital receipt not liable to tax (while computing income under the normal provisions of the Income tax Act, 1961 from the Book Profit computed u/s 115JB of the Act.

The claim of the assessee is that the Sales tax incentive has been held to be “capital receipt” for the purpose of computing total income under normal provisions of the Act. Since the capital receipts are not liable for tax under normal provisions of the Act, it is contended that the same should also be excluded from net profit for the purposes of computing Book Profit u/s 115JB of the Act.

We heard the parties on this issue. The Ld A.R placed his reliance on various case laws and submitted that Tribunal/High Court has held that the capital receipts, which are not liable for taxation under the Income tax, are to

Consistent with the view taken by the co-ordinate benches on an identical issue, we direct the AO to exclude the amount of Sales tax incentive from the Net Profit for the purpose of computing book profit u/s 115JB of the Act, as the same is Capital in nature.

We shall now take up the appeal filed by the revenue for AY 2010-11. The first ground relates to the taxability of Sales tax incentive. We have dealt with this issue in the earlier paragraphs while dealing with the alternative grounds of the assessee. We have upheld the view taken by Ld CIT(A) that the sales tax incentive constitutes Capital receipt not liable to tax, as the Ld CIT(A) has followed the decision rendered by Special bench in the assessee’s own case. Hence this ground of the revenue is dismissed.

The next issue contested by the revenue in ground no.2 relates to the relief granted by Ld CIT(A) in respect of depreciation disallowed by the AO. The facts relating to this issue are that the assessee, in the earlier years prior to AY 2002-03, did not claim depreciation on certain assets on the plea that the depreciation claim is optional in nature. In this regard, the assessee took support of the decision rendered by Hon’ble Supreme Court in the case of Mahindra Mills Ltd (243 ITR 56), wherein it was held that the claim of depreciation is optional in nature. The depreciation claim was made mandatory w.e.f. 1.4.2002 as per Explanation 5 inserted in sec. 32(1) of the Act. Hence the assessee started claiming depreciation on the original Cost of assets w.e.f. AY 2002-03. However, the AO took the view that the depreciation is allowable only on the Written Down Value (WDV) as on 1.4.2002. Accordingly he computed WDV of the asset as on 1.4.2002 by reducing the notional amount of depreciation relating to earlier years. Accordingly he allowed the difference amount of depreciation, i.e., difference between the depreciation computed on Cost of Assets and the depreciation computed on the WDV of assets. This has resulted in reduction of depreciation by an amount of Rs.125.83 lakhs in the year under consideration. The Ld CIT(A) deleted the disallowance by following the decision rendered by the Tribunal in the assessee’s own case, wherein it was held that the AO was not entitled to thrust upon depreciation on the assessee.

We heard the parties on this issue. We notice that the co-ordinate benches have upheld identical view taken by the Ld CIT(A) in the earlier years. We notice that the co-ordinate bench has considered an identical issue in AY 2007-08 to 2009-10, wherein it has followed the decision rendered by another co-ordinate bench in the assessee’s own case on AY 2003-04 to 2006-07 (ITA No.4475/Mum/2007 & others dated 13-09-2013) and upheld the view taken by the Ld CIT(A) on this issue.

Since the facts relating to this issue are identical with the facts of earlier years and since Ld CIT(A) has followed the decision rendered by Tribunal in

The next issue contested by the revenue in ground no.3 relates to the computation of “profit from Power plants” for the purpose of allowing deduction u/s 80IA of the Act. The assessee computed the sales price of power generated from captive power plants by adopting the price charged by the State power distribution Agency for supply of electricity to the industrial consumers. Accordingly it computed the profit from captive power plants and claimed the same as deduction u/s 80IA of the Act. The AO, however, computed the profit by adopting rate of return of 16% on the capital base, as per the parameters prescribed by the Regulatory authorities. The ld CIT(A) noticed that an identical issue was considered by him in AY 2006-07 (reopened assessment) and the addition made by the AO was deleted by him by following the decision rendered by ITAT and also the decision rendered by him in other years. Accordingly he held that the computation of profit by adopting rate of return of 16% of capital investment made in power plants in terms of MERC order is not correct and accordingly directed the AO to allow deduction u/s 80IA as claimed by the assessee.

We notice that an identical issue was considered by the co-ordinate bench in the assessee’s own case in AY 2007-08 to 2009-10 (referred supra). The co-ordinate bench has noted that an identical issue has been decided in favour of the assessee in AY 2006-07 by another co-ordinate bench. However in AY 2007-08 to 2009-10, the revenue had placed reliance on the decision rendered by the Calcutta High Court in the case of ITC Ltd (2015)(64 Taxman.com 214) and submitted that the State distribution agencies would incur expenses on distribution of electricity, where as there is no distribution expenses for the assessee. Accordingly it was contended that to the extent of distribution expenses, which has not been actually incurred by the assessee, profit would increase. Accordingly it was contended that portion of profit cannot be said to be derived from industrial undertaking and therefore, to that

We notice that the facts relating to the claim of deduction u/s 80IA is identical in nature. We notice that the ld CIT(A) has followed the decision rendered by the co-ordinate bench of Tribunal in earlier years. We also notice

The next issue contested by the revenue in ground no.4 relates to the decision of Ld CIT(A) in directing the AO to consider only those investments, which have yielded dividend for the purpose of computing disallowance u/r 8D(2)(iii) of the I.T Rules. As noticed earlier, the AO computed disallowance u/s 14A of the Act as per Rule 8D. Since the own funds available with the assessee was more than the value of investments, the Ld CIT(A) deleted the interest disallowance made under Rule 8D(2)(ii) of I.T Rules. With regard to the disallowance made out of administrative expenses under rule 8D(2)(iii) of the I.T Rules, the Ld CIT(A) directed the AO to consider only those investments which have yielded dividend income during the year under consideration for the purpose of computing disallowance u/r 8D(2)(iii). He further held that, if the expenditure disallowed by the assessee out of administrative expenses is more the amount computed by the AO, then the disallowance made by the assessee should be adopted.

We heard the parties on this issue. The decision rendered by Ld CIT(A) is directly covered by the decision rendered by Special bench of Tribunal in the case of Vireet Investments P Ltd (supra), wherein it was held that only those investments, which have yielded dividend, should be considered for the purpose of Rule 8D of the I T Rules. Accordingly we uphold the order passed by Ld CIT(A) on this issue.

The next issue urged by the revenue in ground no.5 relates to the direction given by Ld CIT(A) to consider only those investments which have yielded dividend for the purpose of computing disallowance u/s 115JB of the Act. In the preceding paragraphs, we have already held that the provisions of

The next issue urged by the revenue in Ground No.6 relates to the relief granted by the Ld CIT(A) in respect of disallowance of Rs.153.61 lakhs relating to the principal component of lease rent paid by the assessee. The facts relating to this issue are that the assessee has been using Baroda Dahej Pipeline for transportation of gas/raw materials. It paid lease rent of Rs.160.94 lakhs for the above said pipe line. Following AS-19 issued by ICAI, the above said pipe line was shown as asset of the assessee in the books of account. However, since the pipeline was not actually owned by the assessee, it did not claim depreciation thereon and accordingly claimed lease rent actually paid by it as deduction. The assessee did not debit the profit and loss account with the amount of Rs.160.94 lakhs and claimed the same in the computation of income. The AO took the view that the lease entered by the assessee was only a finance lease and accordingly allowed only financial charges, which resulted in disallowance of part of lease rent amount of Rs.153.61 lakhs claimed by the assessee. The ld CIT(A) noticed that this issue was considered by the Tribunal in the assessee’s own case in AY 2005-06 (ITA No.1426/Ahd/2009) and in AY 2006-07 (ITA 4005/Mum/ 2003) and the disallowance was deleted by the Tribunal. Accordingly the Ld CIT(A) also deleted the disallowance by following the order of the Tribunal.

The co-ordinate bench has considered an identical issue in the assessee’s own case in AY 2007-08 to 2009-10 (supra) and noticed that the decision in ITA No.1426/Ahd/2009 was rendered in the case of Indian Petrochemicals Corp. Ltd, which has since been merged with the assessee.

The next issue contested by the revenue in ground no.7 relates to the relief granted by Ld CIT(A) in respect of “mark to market loss” of Rs.94.09 crores disallowed by the AO. The assessee, as on the Balance sheet date, revalued the forex derivative contracts, which were taken to cover the risk arising on foreign currency exposures like import of raw materials, export of finished products etc. The assessee did so, since it was following mercantile system of accounting. The same resulted in a loss of Rs.94.09 crores. The AO rejected the above said claim of the assessee, by holding the same is contingent loss. The Ld Ld CIT(A) however, deleted the disallowance by following the decision rendered by the co-ordinate bench in the assessee’s own case in ITA No.7223/Mum/2011 dated 20.11.2013 relating to AY 2008-09.

We heard the parties on this issue. Before us the Ld A.R placed reliance on the decision rendered by the co-ordinate bench in ITA No.7223/Mum/2011 relating to AY 2008-09. We notice that the co-ordinate bench has followed the decision rendered by Hon’ble Supreme Court in the case of Woodward Governor India (P) Ltd (312 ITR 254) and also in the case of ONGC Ltd vs. CIT (322 ITR 180), wherein it was held that the loss arising on revaluation of foreign exchange on revenue account is allowable as deduction u/s 37(1) of the Act. In the instant case, there is no dispute that the revaluation loss claimed by the assessee related to the revenue items only. Accordingly we are of the view that the order passed by Ld CIT(A) on this issue does not call for any interference as he has followed the decision rendered by the co-ordinate bench in deciding this issue in favour of the assessee, which in turn had followed the decisions rendered Hon’ble Supreme Court.

The next issue urged by the revenue in Ground No.8 and 9 relates to the relief granted in respect of disallowance of T.P adjustment of Rs.10.79 crores relating to debt receivable from AE, by holding that recharacterisation of such transactions is not permissible under the law. The revenue is contending that the TPO has not recharacterised the debtors as loan and held the same as receivable. The revenue is also contending that the comparables relied upon by the assessee for benchmarking its transactions are not related to actual transactions and hence the same cannot be held to be valid CUP.

The facts relating to the issue are described by the Ld CIT(A) as under:- 13.9 During the financial year 2008-09 & 2009-1O, the Appellant had sold petroleum products to it's AE's M/s. Gapco Kenya; M/s. R1L USA Inc and M/s. International Oil Trading Ltd. In this connection the Appellant had provided a credit period of 60 days to its AE's for payment of the sale proceeds. However in respect of certain sales made during financial year 2008-09 & 20O9-10, the proceeds were received beyond the aforesaid credit period. Accordingly, in respect of such sales, the Appellant has raised the following debit note on the AE's towards interest on delayed payments beyond the normal credit period agreed upon.

The submissions made by the assessee before Ld CIT(A) are extracted below:- 13.12 During the course of appellate proceedings, the Appellant has made the following submissions:

The decision rendered by Ld CIT(A) on this issue is extracted below:- 13.13. The contentions raised by the Appellant during the course of the appellate proceedings have been examined and the orders of the TPO/AO are perused.

The Ld D.R supported the order passed by the AO and the grounds urged by the revenue. The Ld A.R, on the contrary, submitted that the Ld CIT(A) has deleted the addition made by the AO on the reasoning that the TPO has not given any reasoning for rejecting the benchmarking done by the assessee. However in the ground taken by the revenue, it is stated that the Ld CIT(A) has deleted the addition on the reasoning that recharacterisation of transaction is not permissible. Accordingly the Ld A.R submitted that the ground urged by the revenue is not based on correct facts. Further the revenue has taken a ground stating that the assessee has benchmarked the transactions on the basis of quotations given by certain financial companies and not based on actual transactions. The Ld A.R submitted that the assessee has actually availed loans from those financial companies and hence this ground of revenue is also not based on actual facts. The Ld A.R further submitted that the assessee has correctly benchmarked its transactions on the basis of internal CUP, which could not be found fault with by the TPO. Accordingly he submitted that the Ld CIT(A) was justified in deleting the addition made by the AO.

We heard the parties on this issue and perused the record. It is the submission of the assessee that it has availed short term loans from M/s BNP Paribas and M/s Intesa Sanpaola at Libor plus 45 bps. The assessee has charged interest at the rate of Libor plus 125 bps for the delayed payments.

The next issue urged by the revenue in ground no.10 relates to the relief granted by Ld CIT(A) in respect of T.P addition of Rs.36.24 crores relating to interest on investment in preference shares of Associated Enterprises. The facts relating thereto are stated in brief. During the year under consideration, the assessee subscribed to preference shares issued by its Foreign Associate Enterprises and the preference shares were allotted during the year itself. The details are tabulated as under by Ld CIT(A) in page 52 of his order:-

Before Ld CIT(A), the assessee contended that the application made for subscribing preference shares cannot be treated as interest free loan and hence no T.P adjustment could have been made. In this regard, the assessee placed reliance on the decision rendered by Delhi ITAT in the case of Bharti Airtel Limited vs. ACIT (ITA No.5816/Del/2012 reported in TS-76-ITAT-2014), wherein also identical T.P adjustment had been made. It was held in the above said case that character of payment, i.e., subscription amount cannot be changed as interest free loan, merely due to delay in allotment of shares, as there is no such deeming fiction under Income tax Act. It was further held that it is not open to the TPO to recharacterise the transaction under Income tax Act, unless it is found to be sham or bogus. It was further held that, even under judge-made law, recharacterisation is possibly only if transactions are found to be substantially at variance with the stated form. In the absence of any such finding and also in the absence of anything on record to show that an unrelated applicant for preference shares would be entitled for interest for the period till the date of allotment of shares, the ITAT deleted the addition. The above said ruling was followed by Mumbai bench of ITAT in the case of Parle biscuits P Ltd (ITA No.9010/Mum/2010 reported in TS-127-ITAT-2014). The assessee also placed reliance on the decision rendered by Hon’ble jurisdictional High Court in the case of DIT (Intl. Taxation) vs. Besix Kier Dhabhol SA (210 Taxman 151), wherein it was held that re-characterisation of share application money as loan is not permitted under the provisions of Income tax Act. It was also submitted that the General Anti Avoidance provisions inserted in Chapter X-A of the Act by Finance Act 2013, shall apply prospectively from AY 2016-17 onwards only. Accordingly it was contended that the T.P adjustment made on share application money is not sustainable.

The Ld CIT(A), by following the decision rendered by Hon’ble Bombay High Court in the case of Besix Kier Dhabhol SA (supra) and also following decisions rendered by Tribunal held that the re-characterisation of Share Application money as interest free advance is not permissible:- (a) Parle biscuits P Ltd of Mumbai ITAT (supra) (b) Bharti Airtel Limited of Delhi ITAT (supra) (c) Tooltech Global Engineering P Ltd (TS-271-ITAT-2014)(Pune) (d) Allcargo Global Logistics Ltd (TS-176-ITAT-2014)(Mum)

We heard the parties on this issue and perused the record. The Ld D.R strongly supported the order passed by AO, while the Ld A.R supported the order passed by Ld CIT(A). We notice that the Ld CIT(A) has followed the decision rendered by Hon’ble jurisdictional High Court in the case of Besix Kier Dabhol (supra) in order to hold that re-characterisation of transaction is not permissible. In the case of Bharti Airtel Ltd (supra), the Delhi ITAT has held that it is not open to the TPO to recharacterise transaction under Income tax Act, unless it is found to be sham or bogus. It was further held that, even under judge-made law, recharacterisation is possibly only if transactions are found to be substantially at variance with the stated form. In the absence of any such finding and also in the absence of anything on record to show that unrelated applicant was to be paid interest for the period ending till the date of allotment of shares, the ITAT deleted the addition. In the case of Bharti Airtel Ltd (supra), there was delay in allotment of shares and still, the Tribunal held

In view of the foregoing discussions, we are of the view the order passed by Ld CIT(A) needs no interference, particularly in view of the decision rendered by Hon’ble Bombay High Court in the case of Besix Kier Dhabhol (supra). Accordingly we uphold the order passed by Ld CIT(A) on this issue.

The next issue urged by the revenue in Ground No.11 relates to the T.P adjustment of Rs.1.15 crores made by the AO/TPO towards excess payment on investment in preference shares issued by Associated Enterprises. The facts relating to this issue are stated in brief. We have noticed earlier that the assessee has subscribed to Preference shares issued by its foreign associated enterprises. The AO/TPO carried out analysis to find out as to whether the subscription made by the assessee was at a discount or at premium to the value of equity shares. In respect of one AE named M/s RNBV, the AO/TPO determined the ALP of investment @ Eruo 0.05 per share on the basis of book value of equity shares. The assessee had subscribed to the preference shares @ Euro 1 per share. Hence the AO/TPO considered the same as excess payment to the tune of Euro 0.95 per preference share and accordingly worked out T.P adjustment of Rs.1,14,58,320/-.

The contentions made by the assessee before Ld CIT(A) against the above said T.P adjustment has been summarised as under by Ld CIT(A):-

The Ld CIT(A) agreed with the contentions of the assessee that the sine qua non to apply Chapter X of the Income tax Act is the existence of income element out of international transactions. He also observed that the capital receipts are outside the scope of the definition of income given u/s 2(24) of the Act. The Ld CIT(A) took support of the decision rendered by Hon’ble Bombay High Court in the case of Vodafone India Services P Ltd vs. Union of India (368 ITR 001), wherein it was held that the share premium is capital receipt not liable to tax under the Income tax Act. The Ld CIT(A) further observed that Chapter X of the Act does not change the character of receipts but only permits re-quantification of income uninfluenced by the relationship between the AE. The Ld CIT(A) also took support of following decisions rendered by Hon’ble Bombay High Court:- (a) Shell India Markets P Ltd (369 ITR 516)

We heard the parties on this issue. The Ld D.R submitted that the TPO was justified in making T.P adjustment in respect of subscription of Preference shares, as the assessee has made excess payment. On the contrary, the Ld A.R submitted that the subscription to preference shares is a Capital account transaction and hence the same is outside the scope of T.P provisions. He submitted that the Hon’ble Bombay High Court has considered the issue relating to “receipt” of share premium in the case of Vodafone India Services P Ltd. However, the ratio laid down therein equally applies to the “payment” made towards subscription of preference shares. The Ld A.R further submitted that there is basic flaw in the approach of TPO, as he has compared book value of equity shares for the purposes of computing fair value of Preference shares. He submitted that the rights and liabilities attached to Equity shares are different from Preference shares. He further submitted that the assessee does not derive any income from the transaction of subscription of preference shares. He further submitted that the decision rendered by Mumbai bench of Tribunal in the case of Topsgroup Electronic Systems Ltd (ITA No.2115/Mum/2015 dated 19-02-2016) squarely applies to the facts of the present case, wherein the T.P adjustment made towards excess payment of share application money was deleted.

In the case of Topsgroup Electronic Systems Ltd (supra), the said assessee invested in the shares of its AE named Tops BV Netherlands. The TPO held that the share premium paid by the assessee was nothing but a loan given by the assessee to its AE. Accordingly he made T.P adjustment of Rs.124.17 lakhs. The Tribunal, by placing reliance on the decision rendered

We agree with the contentions of Ld A.R that the decision rendered by the co-ordinate bench in the case of Topsgroup Electronic Sytems (supra) would squarely apply to the present issue. Accordingly, following the said decision, we uphold the order passed by Ld CIT(A) on this issue.

The last issue urged by the revenue in Ground No.12 relates to the T.P adjustment made by the AO/TPO in respect of Guarantee Commission. During the year under consideration, the assessee has provided corporate guarantee to banks in connection with loans taken by its foreign Associated Enterprises named M/s Recron (Malaysia) Sdn bhd; M/s Reliance Industries (Middle East) DMCC (RIME); M/s Reliance Europe Ltd; M/s Reliance Global Energy Services Ltd (RGESL) and M/s RIL USA Inc. The assessee charged guarantee commission @ 0.30% of the guarantee amount so given. A major portion of the guarantees was provided to Hongkong Shanghai Banking Corporation (HSBC). The assessee used internal CUP to benchmark the transactions. The assessee produced a letter dated 10-03-2011 received from HSBC stating that, in line with market pricing, their offer for an indicative pricing for guarantees is as follows:-

The TPO, however, proposed to apply external CUP on the basis of quotations received from SBI (1.75%) plus a mark up of 1.25% for various risk factors such as currency risk, entity risk and Country specific risk. Accordingly the TPO adopted the guarantee commission fee at 3% and thus made adjustment of Rs.67.19 crores.

Before Ld CIT(A), the assessee contended that the respective AEs have provided enough security to the respective banks and the Corporate Guarantee has been provided by the assessee to banks in its capacity as the parent of AEs in order to provide comfort to the banks for due performance of its obligations by respective AEs in connection with the loans given to them. It is submitted that it is a normal commercial practice to provide comfort guarantees and the same is not a business transaction. Accordingly it was submitted that the assessee has not incurred any cost for providing guarantee to banks. The assessee submitted that the maximum rate charged by SBI for an amount exceeding Rs.10 crores was only 1.75%.

It was further submitted that, as per OECD guidelines and international commentaries on Transfer Pricing, in cases where both internal CUP and external CUP are available, the internal CUP should be preferred over the external one. It was submitted that the assessee has followed actual guarantee commission rates charged in the respective Countries of AEs. The assessee also placed reliance on the decision rendered by Hon’ble Bombay High Court in the case of CIT vs. Everest Kento Cylinders Ltd [TS-200-HC-2015 (Bom)-TP]. The assessee also placed reliance on the decision rendered by Ld CIT(A) in earlier years, wherein the rate of guarantee commission ranged between 0.38% - 0.58%. The assessee further submitted that the ALP of guarantee commission would fall in the range of 0.30% p.a. to 0.40% p.a. based on the documentary evidences furnished by the assessee.

The Ld CIT(A) noticed that his predecessor has considered the guarantee commission rate charged by the banks to its AE for the purpose of bench marking the transactions. He further noticed that the Tribunal has considered an identical issue in the assessee’s own case in AY 2003-04 to 2006-07 (TS- 260-ITAT-2013 dated 13.09.2013) and held that the guarantee commission @ 0.38% would meet the arms length test. The Ld CIT(A) also noticed that the decision rendered by the Tribunal in the case of Everest Kanto (supra) rejecting the quotations received from banks was upheld by the Hon’ble Bombay High Court. The Ld CIT(A) noticed that the TPO has not established similarity between the quotes obtained from SBI and the assessee’s transactions with its AE. Accordingly he held that the TPO was not justified in taking the SBI quotes as comparable without establishing the parity of facts. He also held that the TPO was not also justified in making further mark-up of 1.25%. Accordingly the Ld CIT(A) rejected the T.P workings made by TPO.

The ld CIT(A) held that the comparables given by the assessee in the form of actual debit notes issued by Citibank charging guarantee commission @ 0.30% and the quotes of HSBC bank Middle East Limited quoting 0.40% to M/s RIME could be considered as reliable internal comparables. He noticed

The Ld D.R submitted that the assessee has benchmarked the transactions on the basis quotations received from banks and not on the basis of actual transactions. He submitted that the Ld CIT(A) has also rendered his decision on the basis of quotes received from banks. The actual commission charged was by the banks of different countries and hence it should not have been taken as comparable basis. On the contrary, the Ld A.R submitted that the TPO has also adopted the rate of 1.75% on the basis of quotes received from SBI and further added a mark-up of 1.25% to it. Accordingly the ld A.R submitted that the external CUP adopted by the TPO is also not based on actual transactions. He submitted that the rate of 0.30% charged by Citibank is based on actual transactions. He further submitted that the co-ordinate bench of Tribunal has held in the following cases that quotes given by banks can be taken as valid CUP, which has been upheld by High Courts:- (a) CIT vs. Toll Global Forwarding India P Ltd (ITA No.5025/Del/10 dated 18-11-2014), which has since been upheld by Hon’ble Delhi High Court in (2016)(66 taxmann.com 53)(Delhi)

We heard rival contentions on this issue and perused the record. We notice that the assessee has also partially considered the quotes received banks for issuing Guarantees and the TPO has also considered only the quotes given by SBI. In any case, the quote given by banks has been considered to be valid CUP in the above cited cases. Hence, we do not find merit in the grounds urged by the revenue stating that the quotes from banks should not have been considered by Ld CIT(A). For the sake of completion on this matter, we prefer to extract the operative portion of the order passed by the co-ordinate bench in the case of Gulf Energy Maritine Services P Ltd (supra):- 6. We have noted that even as the Assessing Officer has rejected the determination of arm's length price by the assessee and has proceeded to ascertain the arm's length price on his own, he has not done so on the basis of any known method of determining the arm's length price or on the legally sustainable basis. It is not open to the Assessing Officer to decide that for each variation in the number of crew members on the job, the charges must vary. The computation of fees on the basis of number of members, as done by the Assessing Officer, is devoid of any legally sustainable basis. While determining arm's length price, the Assessing Officer can only decide as to what is the arm's length price for services rendered but he has to do so on the basis of a legally recognized method. The arm's length price so determined has not been decided on the basis of a recognized method. Even if one is to proceed on the basis that determination of ALP by the assessee is incorrect, the Assessing Officer cannot ascertain the ALP on an adhoc basis or make adhoc disallowances. The determination of the ALP, under the scheme of the Act, is to be done on the basis of a recognized method. That has not been done in the present case. Even the basis on which minimum wages per crew member is computed, though with certain assumptions which are not established to be correct, is assessee's transactions with its AE but then intra AE transactions can never be legally acceptable inputs for application of CUP method. We have noted that the assessee had given certain quotations, the Assessing Officer duly examined these quotations and did not dispute the bonafides of these quotations. The rejection by the Assessing Officer is only on the basis of his observation that no actual transactions have taken place on the basis of these quotations, and, therefore, this I.T.A. No.3812/Mum/2015 Assessment year: 2011- 12 quotations cannot be valid inputs for the CUP method. Undoubtedly, under rule 10B(1)(a), the valid inputs for CUP method can only be "the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions". This rigidity about the price being for an actual transaction has, however, been considerably relaxed when we take into account the rule 10AB

Even though the Ld D.R contended that the actual commission charged was by banks operating in a different country, yet the Ld D.R could not show to us that the commission rate charged in the Country for which guarantee was given by the assessee was more. In the instant year, the Ld CIT(A) has considered two comparables, one is actual commission charged by Citibank on the AE and another one is the quote received from HSBC bank by the AE. The weighted average rate of commission worked out to 0.31% and the rate charged by the assessee was 0.30%. The ld CIT(A) found that the amount received by the assessee fell within the range of +/- 5% and accordingly held that the transactions are at arm’s length. Before us, no fault was found by the revenue with the workings given by Ld CIT(A) except the apprehension that the actual rates related to different Country. Accordingly we are of the view that the order passed by Ld CIT(A) on this issue does not call for any interference.

The second issue urged by the assessee in ground no.2 relates to the disallowance of depreciation of Rs.7,40,782/- on the capitalised value of goods purchased from Durga Iron & Steel Ltd and Surajbhan Rajkumar P Ltd. Identical issue has been considered by us in AY 2010-11 in the earlier paragraphs and we have confirmed the disallowance made by the AO, by following the decision rendered by the Tribunal in the earlier years. Following the same, we confirm the order passed by Ld CIT(A) on this issue.

The third issue urged in Ground no.3 of the assessee relates to the depreciation rate applicable on office equipments which are in the nature of Plant & Machinery. The assessee claimed depreciation @ 15%, being the rate applicable to plant & Machinery. However, the AO allowed depreciation at the rate of 10% applicable to furniture and fittings. The Ld CIT(A) restored the matter to the file of the AO for examining the claim of the assessee. At the time of hearing, the Ld A.R submitted that similar claim made by the assessee in AY 2012-13 has been allowed by the AO while giving effect to the order of Ld CIT(A). Accordingly, the Ld A.R submitted that the AO is expected to allow the claim of the assessee in this year also, while giving effect to the order of Ld CIT(A). In view of this submission, we are of the view that the order passed by Ld CIT(A) on this issue does not call for any interference.

The next issue urged by the assessee in ground no.4 relates to the deduction claimed u/s 80IB(9) of the Act in respect of Refinery SEZ undertaking. The facts relating to this issue are discussed in brief. The assessee is having a refinery in Jamnagar-SEZ, which is eligible for 100% deduction u/s 10AA of the Act as well as u/s 80IB of the Act. During the year under consideration, the assessee earned profit of Rs.5036.35 crores from this unit. As per the formula prescribed in sec.10AA of the Act, the deduction allowable u/s 10AA on the above said profit worked out to Rs.4379.13 crores, i.e., as against the profit of Rs.5036.35 crores, the deduction actually allowed u/s 10AA of the Act was Rs.4379.13 crores only. The difference between the two figures was Rs.657.22 crores. The assessee claimed deduction u/s 80IB(9) of the Act on the above said profit, which was worked out to of Rs.421.39 crores and the said deduction was claimed over and above the amount of Rs.4379.13 crores claimed u/s 10AA of the Act. The amount of deduction of Rs.421.38 crores u/s 80IB(9) of the Act was arrived at by the assessee as under:- Profit from Refinery in SEZ - 5036.35 crores Less:- Set off brought forward loss - 4614.96 crores ------------- 421.39 crores == ======== The assessee contended that there is no restriction in any of the provisions of the Act in claiming both the deductions (except sub section 10 of sec.10AA, which was inserted by Finance (No.2) Act, 2014). In this regard, the assessee referred to section 80A(4) and sec. 80IA(9) of the Act, which is made applicable to sec. 80IB(9) also. The assessee contended that the above said provisions make it clear that there should not be double deduction for “same amount of profit” and further the aggregate amount of deduction should not exceed the profit earned from SEZ unit. Accordingly it was submitted that both the deductions were not claimed on “same amount of profit” and the aggregate amount of both the deducitons does not exceed the amount of profit earned from SEZ unit.

The AO, however, took the view that once the profit of an undertaking is considered for deduction u/s 10AA of the Act and also allowed deduction, no further deduction under any other sections of the Act can be allowed in respect of the profits of the SEZ refinery unit. Accordingly, he rejected the claim for deduction u/s 80IB(9) of the Act.

The ld CIT(A) also confirmed the order passed by the AO on this issue. The Ld CIT(A) noticed that the assessee has adopted two different parameters to compute the eligible amount of deduction u/s 10AA and u/s 80IB(9) of the Act. The profit from SEZ refinery unit was determined at Rs.5036.35 crores. The same was considered for determining the deduction u/s 10AA of the Act, which was worked out to Rs.4379.13 crores. For computing deduction u/s 80IB(9) of the Act, the assessee again proceeded with the very same profit figure of Rs.5036.35 crores, from which it deducted the brought forward unabsorbed depreciation of Rs.4614.96 crores from the earlier years. Accordingly, it computed eligible amount of Rs.421.39 crores for deduction u/s 80IB(9) of the Act. The Ld CIT(A), thus, noticed that the assessee has followed two different parameters of computing profit and eligible amount of deduction u/s 10AA and u/s 80IB(9) of the Act. The Ld CIT(A) held that the adoption of two different parameters is not correct. Further, the Ld CIT(A) took cognizance of provisions of sub.sec.(8) of sec.10AA of the Act, which states that sub.sec (5) and (6) of sec.10A of the Act shall apply to sec.10AA of the Act. The said provisions of sub.sec.(5) and (6) of sec.10A of the Act prohibit claiming of deduction u/s 80HH or sec. 80HHA or sec. 80I or sec. 80IA or sec. 80IB in relation to the profits of undertaking. The Ld CIT(A) also placed reliance on the following case laws to butress his view that the assessee is not entitled to claim deduction u/s 80IB(9) as well:- (a) CIT vs. TEI Technologies P Ltd (2012)925 taxmann.com 5)(Delhi) (b) CIT vs. Sasken Communication Technologies Ltd (2014)(50 taxmann.com 134)(Kar) (c) Reviera Home Furnishing vs. Addl CIT (2016)(65 taxmann.com 287)(Delhi) (d) CIT vs. KEI Industries Ltd (2015)(57 taxmann.com) 412)(Delhi)

Before the tax authorities, the assessee relied upon various case laws to contend that both the deductions could be claimed by it. Before us also, following cases were relied upon by the assessee:- (a) Associated capsules P Ltd vs. DCIT (332 ITR 42)(Bom) (b) ACIT vs. Grindwell Norton Ltd (32 CCH 177)(Mum) (c) Jindal Exports (P) Ltd vs. ACIT (31 ITD 217)(Delhi)

The ld A.R relied upon the submissions made before the tax authorities and contended that the assessee has not claimed any double deduction. He submitted that the amount of deduction claimed u/s 80IB(9) on the profit remaining after allowing deduction u/s 10AA of the Act, i.e., the same is over and above the deduction claimed and allowed u/s 10AA of the Act. He submitted that the provisions of sec.80A(4) and 80IA(9) prohibits claiming deduction on “same amount of profit”. He further submitted that the provisions of sub.sec.(5) and (6) of sec.10A shall apply only for the periods succeeding the years in which the assessee was eligible to claim deduction u/s 10AA of the Act. Hence those provisions do not apply to the year under consideration, as the assessee is eligible to claim deduction u/s 10AA of the Act for the year under consideration.

The Ld A.R submitted that the legislature has made specific provision in the Act, wherever it intended to put blanket bar for double deduction. The Ld A.R submitted that the provisions of sec. 80HHB(5) provided that if any deduction is permitted u/s 80HHB(1) from any consideration received from foreign projects as defined therein, the same income would not qualify for deduction under any other provisions of the Act. He submitted that identical type of restrictions are placed in sec. 80HHBA(4), 80HHD(7) (the phrase “shall not qualify” is used). The provisions of sec. 80IC(5), 80ID(4), 80IE(4), 80HHE(5) and sec. 35AD(3) contains similar prohibition and the phrase used there in is “no deduction shall be allowed in relation to”. The provisions of sec. 10BA(6) uses the phrase “in respect of” to make similar prohibition.

On the contrary, the Ld D.R strongly supported the order passed by Ld CIT(A). He submitted that the assessee has adopted two different parameters to compute the deduction u/s 10AA and sec. 80IB(9) of the Act. Since the entire amount of profit earned by SEZ unit has been considered to computing deduction u/s 10AA of the Act, the Ld D.R contended that the assessee is not eligible for deduction u/s 80IB(9) of the Act for the same amount of profit.

We have heard rival contentions and perused the record. The dispute between the parties revolve around sec. 80A(4) and sec.80IA(9) of the Act. For the sake of convenience, we extract below both the provisions:- “80A(4) Notwithstanding anything to the contrary contained in section 10A or section 10AA or section 10B or section 10BA or in any provisions of this Chapter under the heading "C-Deductions in respect of certain incomes", where, in the case of an assessee, any amount of profits and gains of an undertaking or unit or enterprise or eligible business is claimed and allowed as a deduction under any of those provisions for any assessment year, deduction in respect of, and to the extent of, such profits and gains shall not be allowed under any other provisions of this Act for such assessment year and shall in no case exceed the profits and gains of such undertaking or unit or enterprise or eligible business, as the case may be.”

The ld CIT(A) has referred to the decision rendered by Hon’ble Delhi High Court in the case of TEI Technologies P Ltd (supra). Following observations made by Hon’ble High Court, which has been extracted by Ld CIT(A) at page 84 of his order, in fact, support our view:-

The decision rendered by Hon’ble Karnataka High Court in the case of Sasken Communication Technologies Ltd (supra) is with regard to the deduction claimed u/s 10A/10AA and u/s 80HHE of the Act. Both these deductions are related to income derived on export of computer software. The question that was considered was - whether the “export turnover” considered for deduction u/s 10A/10AA can be included in the total turnover for computing deduction u/s 80HHE of the Act. However the facts of the present case is different. The decision rendered by Hon’ble Delhi High Court in the case of Reviera Home Furnishings (supra), relied upon by Ld CIT(A), also deal with claim for deduction under two different Section of the Act for “same income”. The decision rendered by Hon’ble Delhi High Court in the case of KEI Industries Ltd (supra) proceeds on the view that the deductions provided u/s

The assessee has relied upon the decision rendered by Hon’ble Bombay High Court in the case of Associated Capsules (P) Ltd (supra). The High Court was concerned with the eligibility of the assessee to claim deduction u/s 80IA and 80HHC of the Act. The provisions of sec. 80IA(9) provided that where any amount of profits and gains of an undertaking is claimed and allowed under sec. 80IA(1) for any assessment year, deduction to the extent of such profits and gains shall not be allowed under any other provisions of Chapter VIA and shall in no case exceed the profits and gains of such eligible business or undertaking. The Hon’ble Bombay High Court held that the provisions of sec. 80IA(9) affects only allowability of deduction and not computation of deduction. This decision rendered by Hon’ble Bombay High Court supports the case of the assessee that sec. 80A(4) and sec. 80IA(9) restricts only allowability of deduction and not “computation of deduction”.

The ld CIT(A) has expressed the view that the assessee has adopted two different parameters for computing deductions u/s 10AA and u/s 80IB(9) of the Act. We have noticed earlier that, during the year under consideration, the assessee earned profit of Rs.5036.35 crores from this unit. As per the formula prescribed in sec.10AA of the Act, the deduction allowable u/s 10AA on the above said profit worked out to Rs.4379.13 crores. Against the profit of Rs.5036.35 crores and the deduction actually allowed u/s 10AA of the Act was Rs.4379.13 crores. The difference between the two figures was Rs.657.22 crores. The assessee claimed deduction of Rs.421.39 crores u/s 80IB(9) of the Act, which was over and above the amount of Rs.4379.13 crores claimed u/s

In view of the foregoing discussions, we are of the view that the assessee shall be eligible to claim deduction u/s 80IB(9) of the Act in respect of profits “not allowed as deduction u/s 10AA” of the Act. Accordingly we set aside the view taken by Ld CIT(A) and AO on this issue.

The next issue urged by the assessee in Ground no.5 relates to the disallowance of depreciation claimed u/s 32 of the Act on the “intangible assets” pertaining to KG-DWN-98/3 (also referred as “KG-D6 unit). This is related to the following grounds urged by the Revenue:- a. Ground no.6:- On the facts and in the circumstances of the case and in law, the ld CIT(A) erred in deleting the disallowing of Rs.2042.69 crores incurred by the assessee on aborted blocks of other contract areas under Production Sharing Contracts other than KGD.

The assessee is engaged in exploring and production of mineral oil in “Krishna-Godavari basin” (KG basin). The assessee started commercial production of petroleum products on 01-05-2009. Hence the first year of commercial production is 01.05.2009 to 31.3.2010 relevant to AY 2010-11. However, in that year, the assessee incurred loss. During the year under consideration, i.e., in AY 2011-12, the assessee achieved sales of Rs.14,739.44 crores and profit of Rs.5,695.45 crores. The assessee claimed deduction u/s 80IB(9) of the Act to the extent of Rs.2,385.23 crores.

There is no dispute between the parties that the assessee is eligible for deduction u/s 80IB(9) of the Act. The dispute is with regard to the quantum of deduction. As against the claim of Rs. 2,385.23 crores, the AO allowed deduction u/s 80IB(9) of the Act only to the extent of Rs.510.72 crores only. The adjustments made by the assessing officer to the net profit declared by the assessee are:- (a) disallowance of depreciation claimed on “intangible assets” created by the assessee by accumulating the expenses.

The facts relating to the above said three issues are stated in brief. The assessee was awarded 31 contract areas in KG basin under separate

The Income tax Act contains special provision for deductions in the case of business for prospecting, etc., for mineral oil in section 42 of the Act. The provisions of sec. 42(1) of the Act reads as under:- “Special provision for deductions in the case of business for prospecting, etc., for mineral oil

The Article 17 of the PSC deals with the computation of profits and gains for the purposes of Income tax and it is named as “Taxes, Royalties, Rentals, Duties etc.”. Clause 17(2) of the PSC has allowed the benefits of sec.42(1) of the Act and it reads as under:- “17.2 Pursuant to the provisions of section 42 of the Income tax Act, 1961, the allowances specified herein shall apply in computing income tax payable by a Company on its profits and gains from business of Petroleum operations in lieu of (and not in addition to) corresponding allowances provided for under the heading “Profits and Gains of Business or Profession” in the Income tax Act, 1961. Any other allowance, which are not specified herein, shall be treated in accordance with the provisions of Income tax Act, 1961.

After considering the provisions of sec. 42(1) of the Act and the articles/clauses of PSC, the AO held that, in paragraph 15.14 of the assessment order, the deduction in respect of prospecting etc., of mineral oils is allowable as under:- (a) All revenue and capital expenses on Exploration Operations:- They are allowable fully.

The AO further noticed that the clause 17.2.4 of PSC has provided alternative manner of deduction at the option of the assessee and the same reads as under:- “17.2.4 For any or accumulated expenditures incurred in respect of Exploration Operations and drilling operation prior to the date of commercial production, Company(ies) shall have option to amortize such expenditures over a period of ten (10) years from the date of first commercial production.”

With the back ground of various provisions discussed above under the Income tax Act and the Production Sharing Contract, the AO analysed the methodology adopted by the assessee to claim deduction. The AO noticed that the assessee has followed following accounting practice:-(paragraph 15.16.1 of assessment order) “In respect of each Block allocated, the assessee company continues to incur expenditure over a period of several years and continue to capitalise such expenses at the end of each financial year and,

However the AO noticed that (a) the assessee has continued to claim deduction of expenses incurred in respect of unsuccessful exploration u/s 42(1)(a) of the Act, even after commencement of commercial production. The AO considered it to be in gross violation to the mandatory provisions of Clause 17.2.2 of PSC agreement signed in respect of undertaking, viz., KG-DWN-98/3.

We have noticed earlier that the AO had held that the expenses relating to unsuccessful exploration in contract areas covered by other contracts also should be deducted from the aggregate value of Petroleum allocable to the Company from any field(s) in the Contract area. Accordingly the AO held that the deduction of expenses relating to unsuccessful exploration (also known as “Aborted blocks”) claimed by the assessee u/s 42(1)(a) is not correct. The AO also held that the accumulation of expenses relating to successful exploration under the head “Intangible assets” is also not correct. Accordingly, the AO proceeded to recast the “Profit and Loss Account” of KG basin undertakings in accordance with the view taken by him, which is discussed by us in paragraph 88 (supra) for both the financial years relevant to AY 2010-11 and 2011-12. In this process, (a) the AO disallowed the depreciation claimed by the assessee on “Intangible assets” discussed above.

The AO analysed the break-up of Sales revenue generated by the assessee from various products, which is given below:- Natural Gas - 11,728.99 crores Crude oil - 2,817.15 crores Condensate - 193.30 crores ----------------- Total - 14,739.44 crores ===========

The AO took the view that the underlying intent of the Government is that the term “Mineral Oil” should not include natural gas. Further the natural gas was included in the definition of mineral oil subsequently for those new participants who are prospecting mineral oil under VIII round of bidding for award of exploration contracts. The assessee had placed reliance on the decision rendered by Ahmedabad bench of Tribunal in the case of NIKO Resources Limited vs. DCIT (22 DTR 225), wherein it was held that mineral oil would include natural gas also. The AO, however, refused to follow the same by observing that the Income tax Department has not accepted the decision rendered by the Tribunal by filing appeal before the High Court by the revenue.

Accordingly, the AO took the view that the assessee is not entitled for deduction u/s 80IB(9) of the Act in respect of profit arising from sale of “natural gas”. He took the view that the “Crude oil” alone falls under the definition of “mineral oil” used in sec.80IB(9) of the Act. Accordingly the AO held that the profit relating to sale of crude oil alone is entitled for deduction u/s 80IB(9) of the Act. Since the crude oil constituted 19.11% of the total turnover, the AO computed the profit arising on sale of crude oil (mineral oil) @ 19.11% of the total profit from the undertaking, i.e., 19.11% of Rs.2672.16 crores, which worked out to Rs.510.72 crores. Accordingly, he restricted the deduction u/s 80IB(9) of the Act to Rs.510.72 crores.

In the appellate proceedings, the Ld CIT(A) confirmed the disallowance of depreciation claimed on “Intangible assets”. Hence the assessee is contesting the said decision of Ld CIT(A).

The ld A.R submitted that the assessee has followed the accounting practice of accumulating the costs incurred till the date of commercial production as “Intangible asset”, since the “Participating right” acquired by the assessee from Government of India in the oil field is “Commercial right” eligible for depreciation. The Ld A.R submitted that the AO has allowed depreciation in AY 2010-11 and hence the AO should not have taken different view on this

On the contrary, the Ld D.R submitted that the assessee has followed accounting practice contrary to the methodology prescribed under Production Sharing Contract. The Ld D.R submitted that the assessment order passed in AY 2010-11 has since been revised by Ld Pr. CIT u/s 263 of the Act. He submitted that the AO has rightly computed the deduction as provided in Production Sharing Contract. Accordingly he submitted that the order passed by Ld CIT(A) on this issue does not call for any interference.

We heard the parties on this issue and perused the record. We notice that the assessee is required to account for and claim expenses as provided in Production Sharing Contract, as per the provisions of sec. 42 of the Act. The PSC does not envisage accumulation of expenses and account as “Intangible Assets”. In that case, there is no scope for allowing depreciation on the intangible assets, which is not permitted under PSC. Hence the Ld CIT(A) has taken the view that the assessee’s accounting practice is not in accordance with the method prescribed in PSC and the AO was justified in disregarding the same and in disallowing the depreciation claimed on the Intangible assets. We have earlier examined the reasoning given by the assessing officer for disallowing the claim of depreciation. Before us, the assessee could not show how the method of accounting of accumulating expenses under the head “Intangible Assets” followed by the assessee is permitted under the provisions of the Act read with the PSC. The only contention of the assessee is that the AO has allowed depreciation in AY 2010-11 on intangible assets. However, the Ld D.R has submitted that the assessment order passed for AY 2010-11 has since been revised by Ld Pr. CIT us 263 of the Act. In any case, the principle of Res-judicata shall not apply to the income tax proceedings. Since the

We would like to prefer to dispose of the Ground No.6 and 7 urged by the Revenue at this stage, as the facts relating to those grounds have been discussed in the preceding paragraphs. In Ground no.6, the revenue is challenging the decision of Ld CIT(A) in holding that the expenses relating to aborted blocks need not be reduced from the profit from sale of mineral oils for computing deduction u/s 80IB(9) of the Act, since the deduction is allowable for each “undertaking”.

We have noticed earlier that the AO has taken the view that, after the commencement of commercial production, all the expenses relating to Aborted blocks (unsuccessful blocks) should be reduced from the profit arising from sale of mineral oil taken from successful block. Accordingly, the AO reduced a sum of Rs.2042.69 crores from the profit from sale of mineral oil obtained from successful block (here KG-DWN-98/3) for the purpose of allowing deduction u/s 80IB(9) of the Act. For this purpose, the AO placed reliance on the clause/article 17.2.2 of PSC, which provided that “...to deduct all its unsuccessful Exploration Costs in contract areas covered by other contracts from the aggregate value of Petroleum allocable to the Company from any field(s) in the Contract area (i.e., KG- DWN-98/3 in this case)”

The submissions made by the assessee before Ld CIT(A), as discussed by Ld CIT(A), are extracted below:-

The Ld D.R submitted that the “Production Sharing Contract” shall override the provisions of Income tax Act in terms of sec.42 of the Act. This is so held by Hon’ble Supreme Court in the case of Enron Oil & Gas India Ltd (2008)(305 ITR 75). He submitted that the Article/clause 17.2.2 of the PSC provided for deduction of expenses relating to Abortive blocks against the profit from sale of mineral oil. Accordingly he submitted that the AO has rightly deducted Rs.2042.69 crores relating to Abortive blocks from the profit in order compute the deduction u/s 80IB(9) of the Act.

The Ld A.R, on the contrary, submitted that the clause/article 17.2.2 of PSC provides the manner of computation of profit at entity level and hence the expenses relating to aborted blocks are required to be reduced from the profit from sale of mineral oil while computing profit at entity level. However clause/article 17.2.5 of PSC has also stated that “all other provisions of Income tax Act will apply”. He submitted that, by virtue of sec.80IB(13) of the

We have heard rival contentions on this issue. We have noticed earlier that the Ld CIT(A) has decided this issue in favour of the assessee by holding that each contract is a separate undertaking and hence the expenses relating to aborted blocks of different contracts cannot be reduced from the profit from sale of mineral oil obtained from another contract. The operative portion of Ld CIT(A) on this issue are extracted below:-

We notice that the article/clause 17.2.2 of PSC allows deduction of expenses relating to aborted blocks against the profit arising from other blocks. In our view, the assessee was right in contending that the article/clause 17.2.2 was concerned with the computation of income at entity level in terms of sec.42 of the Act. The article/clause 17.2.5 of PSC states that

The next issue urged by the revenue in ground no.7 is relating to the decision of the AO in restricting the deduction u/s 80IB(9) of the Act to the proportionate profit relating to sale of Crude oil. We noticed earlier that the AO did not allow deduction on the profit arising on sale of Natural gas and condensate by holding that the “natural gas” shall not fall under the category of “Mineral Oil” for allowing deduction u/s 80IB(9) of the Act. The Ld CIT(A), however, held that the mineral oil shall include “natural gas” also and accordingly directed the AO. The revenue is aggrieved by the said decision of Ld CIT(A).

We heard the parties on this issue and perused the record. We notice that the question as to whether “natural gas” shall fall under “mineral oil” or not was examined by the Ahmedabad bench of ITAT in the case of “NIKO Resources Ltd vs. DCIT (22 DTR 225) and it has been held that the natural gas shall fall under “mineral oil” in terms of sec. 80IB(9) of the Act. The said decision of Tribunal has since been affirmed by Hon’nle Gujarat High Court in the same case reported in 374 ITR 369.

The AO had taken support of sub-clause (iv) inserted in sec. 80IB(9) by Finance (No2) Act, 2009 w.e.f. 1.4.2010, whereby the commercial production of natural gas in blocks licensed under the VIII round of bidding award was made eligible for deduction u/s 80IB(9) of the Act. Since the impugned license was allotted to the assessee prior to VIII round, the AO held that the deduction u/s 80IB(9) shall not be available for natural gas. The AO had also taken support of speech made by the Hon’ble Finance Minister in 2008, wherein he has stated that the impugned issue shall be decided by the Courts for allotments made in the rounds earlier to round VIII. However, the Hon’ble Gujarat High Court has held that the insertion of sub-clause (iv) in sec. 80IB(9) does not mitigate against meaning attributed to the expression “mineral oil” by the Hon’ble Apex Court in the case of Association of Natural Gas & Ors. Vs. Union of India & Ors (2004)(4 SCC 489), wherein it was noticed that Entry 53 of List I does not refer to Natural Gas separately. The Ld CIT(A) has further noticed that the Hon’ble Gujarat High Court has also rejected the contention raised by the Department that petroleum products and natural gas have been made part of “mineral oil” only through inclusive provisions contained in sections 42, 44BB and 293A and its conspicuous absence in section 80-IB(9) has to be inferred that the natural gas and condensate should not be included in “mineral oil” for the purpose of sec. 80IB(9) of the Act. Accordingly the ld CIT(A) has held that the deduction shall be available on the profit arising from sale of natural gas and condensate also u/s 80IB(9) of the Act.

Since identical issue has been decided by Hon’ble Gujarat High Court in favour of the assessee in the case of NIKO Resources Ltd (which holds 10% share in the block) and since the Ld CIT(A) has followed the same, we do not find any infirmity in the order passed by Ld CIT(A) on this issue.

We shall now revert to appeal of the assessee. The ground no.6 relates to legal grounds urged on reference being made to TPO. Identical legal grounds were urged in AY 2010-11 also and the assessee, in its written submissions,

The next ground urged by the assessee in Ground no.7 relates to the TP adjustment made on the interest chargeable in respect of loan advanced to REP DMCC at Libor plus 325 basis points. Identical adjustments were made in AY 2010-11 also. We noticed that the co-ordinate benches in the earlier years have taken a consistent view and sustained addition to the extent of LIBOR rate plus 150 bps. Accordingly we modified the order passed by Ld CIT(A) on this issue in AY 2010-11 and directed the AO/TPO to compute interest by applying rate of LIBOR rate plus 150 bps for the outstanding period of loan. Accordingly, following the said order, we modify the order passed by Ld CIT(A) on this issue and direct the AO/TPO to compute interest by applying rate of LIBOR rate plus 150 bps for outstanding period of loan.

The Ground no.8 relates to the TP adjustment made on Guarantee given by the assessee on behalf of foreign AEs. The revenue is also contesting the decision of ld CIT(A) rendered on this issue in ground no.13. The assessee’s contention is that the Guarantees so given do not fall under the category of International Transactions. In the alternative, it is submitted that the assessee has charged @ 0.30% p.a. (upto 31.12.2010) and @ 0.38% p.a. (from 01.01.2011) for short term guarantees and @ 1.80% for long term guarantees on the basis of internal CUP. It was prayed that the same may be upheld.

Identical issue was considered in AY 2010-11. As in AY 2010-11, the TPO had made adjustments by taking Guarantee commission @ 3% (quote received from SBI being 1.75% + adhoc mark up of 1.25%). The Ld CIT(A), by following the order passed by the Tribunal in the assessee’s own case in the earlier year (ITA No.885/Mum/2009 dated 13-09-2013) directed the AO to charge Guarantee Commission @ 0.38% for short term Guarantees and @ 1.80% for long term Guarantees. In AY 2010-11 also, we have upheld the view taken by Ld CIT(A) on identical issue. In the instant year, i.e., in AY 2011-12,

The assessee has raised an additional ground challenging the decision of Ld CIT(A) in directing the AO to adopt the disallowance computed u/s 14A of the Act for making addition u/s 115JB of the Act. Identical issue was considered by us in AY 2010-11 in the earlier paragraphs and we have held as under:- “In view of the decision rendered by the Special bench in the case of Vireet Investments P Ltd (supra), the tax authorities are not justified in applying the provisions of sec.14A r.w.r 8D for computing disallowance for the requirement of clause (f) of Explanation 1 to sec.115JB(2). The Special Bench has held that the addition for the purpose of clause (f), referred above, should be computed without having resort to sec.14A r.w.r. 8D of the I.T Rules. Accordingly we set aside the order passed by Ld CIT(A) with regard to the addition made for the purpose of sec. 115JB of the Act and direct the AO to compute the disallowance for the purpose of clause (f) of Explanation 1 to sec. 115JB(2) without having resort to sec.14A r.w.r 8D of the I T Rules.”

The next additional ground urged by the assessee relates to the exclusion of Sales tax incentive from Net Profit for the purpose of computing book profit u/s 115JB of the Act, as the same has been held to be capital in nature. Identical issue was considered by us in AY 2010-11 and we have held that the Sales tax incentive is a Capital receipt and the same is required to be excluded from the net profit for the purpose of computing book profit u/s 115JB of the Act. Following the same, we direct the AO to exclude the sales tax incentive from net profit (as the same is held to be capital in nature) for the purpose of computing book profit u/s 115JB of the Act.

We shall now take up the appeal filed by the revenue. The issue urged by the revenue in Ground No.1 relates to the decision of Ld CIT(A) in holding

The next issue urged by the revenue in Ground no.2 relates to the computation of deduction u/s 80IA of the Act. This is identical to Ground No.3 urged by the revenue in AY 2010-11. The assessee computed the profit from captive power plants by adopting the price charged by the State power distribution Agency for supply of electricity to the industrial consumers. The AO, however, computed the profit by adopting rate of return of 16% on the capital base, as per the parameters prescribed by the Regulatory authorities. In AY 2010-11, we have upheld the view taken by Ld CIT(A) that the assessee was justified in adopting the rate charged by State power distribution Agency for the purpose of determining the profit from power plant for the purpose of computing deduction u/s 80IA of the Act. We have held so by following the decision rendered by co-ordinate benches in the earlier years. Accordingly, following the orders passed for AY 2010-11 and earlier years by the Tribunal, we uphold the order passed by Ld CIT(A) on this issue.

The next issue urged by the revenue in Ground no.3 relates to the computation of disallowance u/s 14A of the Act, wherein the Ld CIT(A) has

The next issue urged by the revenue in Ground no.4 relates to the direction given by Ld CIT(A) to consider only those investments, which have yielded dividend for the purposes of making addition u/s 115JB of the Act. This is identical with ground no.5 urged by the revenue in AY 2010-11. While adjudicating the additional ground urged by the assessee on the addition made u/s 115JB of the Act, we have held that the provisions of sec. 14A r.w.r 8D cannot be applied for computing the addition required to be made under clause (f) of Explanation 1 to sec. 115JB of the Act. In this regard, we have followed the decision rendered by the Special bench of Tribunal in the case of Vireet Investments P Ltd (supra). Accordingly the decision rendered by Ld CIT(A) was reversed on this issue and the matter was restored to the file of the AO. Accordingly this issue is restored to the file of the AO.

The next issue urged by the revenue in Ground No.5 relates to the deduction principal component of lease allowed by Ld CIT(A). This issue is identical to Ground no.6 urged by the revenue in AY 2010-11. The co-ordinate bench has considered an identical issue in the assessee’s own case in AY 2007-08 to 2009-10 (supra) and noticed that the decision in ITA No.1426/Ahd/2009 was rendered in the case of Indian Petrochemicals Corp. Ltd, which has since been merged with the assessee. Accordingly, by following the decision rendered in earlier years, the co-ordinate bench has confirmed the relief granted by Ld CIT(A) on this issue. Since there is no change in facts relating to this addition and since the Ld CIT(A) has followed the decision

We have already adjudicated Ground no.6 and Ground no.7 urged by the revenue in earlier paragraphs (paragraphs 101 to 112).

The next issue urged in Ground no.8 relates to T.P adjustment of Rs.10.18 crores made on sale of equipment & material and provision of support services to M/s REP DMCC. The facts relating to this issue, the assessee’s contentions and the decision taken by Ld CIT(A) are extracted below, for the sake of convenience:- “60. During the year under proceedings, the TPO observed that the Assessee assessee had undertaken the following transaction with the AE during FY 2010-11.