ACIT, CHENNAI vs. M/S STERLITE INDUSTRIES (INDIA) LTD., CHENNAI

आदेश /O R D E R

PER N.R.S. GANESAN, JUDICIAL MEMBER:

All the appeals of the assessee and the Revenue are directed against the respective orders of the Commissioner of Income Tax (Appeals). Since common issues arise for

consideration in all these appeals, we heard these appeals together and disposing of the same by this common order.

Let’s first take assessee’s appeal in I.T.A. No.86/Mds/2008

for assessment year 2004-05.

deduction under Section 80-IB of the Income-tax Act, 1961 (in short 'the Act') for the purpose of computing eligible profit for deduction under Section 80HHC of the Act.

Section 80HHC of the Act. According to the Ld. counsel, Section

3 ITA Nos.318,319 & 86/08 ITA No.1020,1665 & 1386/Mds/10 80HHC of the Act is an independent provision, therefore, the

deduction allowed under Section 80-IB of the Act cannot be reduced

from the eligible profit computed under Section 80HHC of the Act.

Counsel for the Revenue, submitted that the CIT(Appeals), by

following the Special Bench decision of this Tribunal in ACIT v.

Rohini Garments (2007) 294 ITR (AT) 15, found that the assessee

cannot claim more than the profit computed under the provisions of

the Act. If the deduction allowed under Section 80-IB of the Act was

not reduced from the eligible profit computed under Section 80HHC

of the Act, then the deduction claimed by the assessee would

exceed the total profit. It cannot be the intention of the Parliament

to allow deduction under Section 80HHC and 80-IB of the Act more

than the profit earned by the assessee. Therefore, according to the

Ld. Sr. Standing Counsel, the CIT(Appeals) has rightly directed the

Assessing Officer to reduce the deduction allowed under Section

80-IB of the Act while computing deduction under Section 80HHC of

the Act.

perused the relevant material available on record. The judgment of

4 ITA Nos.318,319 & 86/08 ITA No.1020,1665 & 1386/Mds/10 Madras High Court in SCM Creations v. ACIT (2008) 304 ITR 319

would cover the issue. Accordingly, the orders of lower authorities

are set aside and the Assessing Officer is directed to decide the

issue in the light of the judgment of Madras High Court in SCM

Creations (supra) after giving a reasonable opportunity to the

assessee.

regard to initiation of penalty proceeding under Section 271AA and

271G of the Act.

Sr. Standing Counsel for the Revenue. From the order of the

Assessing Officer it appears that the Assessing Officer has initiated

the penalty proceedings and no order appears to have been

passed. The assessee has sought remedy by way of appeal before

the CIT(Appeals) and further appeal before this Tribunal against the

order passed by the Assessing Officer under Section 271AA and

271G of the Act. Therefore, mere initiation of proceedings by

issuing show cause notice cannot be a subject matter of appeal

before this Tribunal. Hence, the CIT(Appeals) has rightly

considered this as premature. This Tribunal do not find any reason

5 ITA Nos.318,319 & 86/08 ITA No.1020,1665 & 1386/Mds/10 to interfere with the order of the lower authority and accordingly the

same is confirmed.

stands dismissed.

319/Mds/2008 for the assessment year 2004-05, the first ground of appeal is with regard to addition of `5.50 Crores in respect of

donation made by the assessee to M/s Public & Political Awareness

Trust.

Revenue, submitted that the assessee made donation to M/s Public

& Political Awareness Trust and claimed deduction under Section

80GGB of the Act. Referring to the provisions of Section 29A of the

Representation of the People Act, 1951, the Ld. Sr. Standing

Counsel submitted that the assessee being a multinational

corporation, is not entitled to contribute to any political party. Such

a donation was also prohibited under Section 2(e) of Foreign

Contribution (Regulation) Act, 1976. Referring to the word

“contribution” in Section 293A of the Companies Act, 1956, the Ld.

6 ITA Nos.318,319 & 86/08 ITA No.1020,1665 & 1386/Mds/10 Sr. Standing Counsel submitted that it refers only direct contribution

and indirect contribution such as giving advertisement in any of the

publication by or on behalf of any political party. Therefore,

according to the Ld. Sr. Standing Counsel, the CIT(Appeals) is not

justified in allowing the claim of the assessee.

assessee, submitted that Section 80GGB of the Act clearly says

that in computing the total income, there shall be deducted any sum

contributed to any political party or electoral trust. Explanation to

Section 80GGB of the Act clarifies that the word “contribute” has the

same meaning as it is assigned to it under Section 293A of the

Companies Act, 1956. Referring to Section 293A of the Companies

Act, the Ld.counsel submitted that a company, which is not being a

Government company, may contribute not exceeding 5% of its

average net profit to any political party or to any political purpose, to

any person. The Ld.counsel further submitted that the assessee

being an Indian company has taken the Trust as medium to donate

funds for political purpose and the actual beneficiary are the political

parties and not the Trust. Therefore, according to the Ld. counsel,

the CIT(Appeals) has rightly allowed the claim of the assessee

under Section 80GGB of the Act.

7 ITA Nos.318,319 & 86/08 ITA No.1020,1665 & 1386/Mds/10

perused the relevant material available on record. We have also

carefully gone through the provisions of Section 80GGB of the Act

which reads as follows:-

“DEDUCTION IN RESPECT OF CONTRIBUTIONS GIVEN BY COMPANIES TO POLITICAL PARTIES In computing the total income of an assessee, being an Indian company, there shall be deducted any sum contributed by it, in the previous year to any political party or an electoral trust. [Provided that no deduction shall be allowed under this section in respect of any sum contributed by way of cash.] Explanation For the removal of doubts, it is hereby declared that for the purposes of this section, the word “contribute”, with its grammatical variation, has the meaning assigned to it under section 293A of the Companies Act, 1956 (1 of 1956).”

company to any political party has to be reduced from total income

for the purpose of computing taxable income. The Parliament by

Finance (No.2) Act, 2009 with effect from 01.04.2010 amended

Section 80GGB by incorporating the word “or an electoral trust”.

Therefore, with effect from 01.04.2010, if a contribution was made

to an electoral trust, that amount is eligible for deduction while

computing the taxable income. In the case before us, admittedly,

8 ITA Nos.318,319 & 86/08 ITA No.1020,1665 & 1386/Mds/10 the contribution was made to trust and not to any political party

directly. Even though Companies Act, more particularly Section

293A(2)(b), allows the companies to donate for political purpose to

any person, the Income-tax Act allows the payment made to a

political party. Therefore, the question arises for consideration is

when the assessee contributed to a trust, whether such payment

may be construed as payment made to a political party? It is to be

kept in mind that the assessment year under consideration is 2004-

Act, 2009 with effect from 01.04.2010 incorporating the word “or an

electoral trust” may not be applicable at all. Explanation to Section

80GGB of the Act says that the word “contribute” has the meaning

which was assigned to it under Section 293A of the Companies Act.

However, the contribution shall be made to political party directly

before 01.04.2010. In the case before us, admittedly, the

contribution was made to Public and Political Awareness Trust and

not to any political party. Hence, this Tribunal is of the considered

opinion that the contribution made by the assessee to the extent of `5.50 Crores to Public & Political Awareness Trust for the

assessment year 2004-05 cannot be claimed as deduction under

Section 80GGB of the Act. In other words, the Income-tax Act,

9 ITA Nos.318,319 & 86/08 ITA No.1020,1665 & 1386/Mds/10 being a special enactment for computing the taxable income, it will

override other enactments including the Companies Act. Therefore,

the CIT(Appeals) is not justified in allowing the claim of the

assessee.

High Court in Cheran Engineering Corporation Ltd. v. CIT (1999)

238 ITR 892. In that case, the contribution was made by the

employer to the welfare of the employees. Therefore, the Madras

High Court held that it has to be allowed under Section 37 of the

Act. In the case before us, it is not the contribution made by the

assessee to the welfare of the employees. It was made to a trust

for creating political awareness, therefore, the judgment of Madras

High Court in Cheran Engineering Corporation Ltd. (supra) may not

be applicable at all. Hence, we are unable to uphold the order of

the lower authority. Accordingly, the same is set aside and the disallowance made by the Assessing Officer to the extent of `5.50

Crores is restored.

10 ITA Nos.318,319 & 86/08 ITA No.1020,1665 & 1386/Mds/10 16. Shri M. Swaminathan, Ld. Sr.Standing Counsel for the

Revenue, submitted that the assessee changed its method of

accounting in respect of copper concentrate purchases from mark to

market to take into effect the increase in the liability of the assessee

which was ascertained. According to the Ld. Sr. Standing Counsel,

change of accounting method is not compulsory. The assessee

should have accounted for increase in purchase price at the time of

finalization of accounts on 31.03.2004. By increasing the purchase

price, according to the Ld. Sr. Standing Counsel, the assessee is

making an attempt to reduce the profit, therefore, the CIT(Appeals)

is not correct in allowing the claim of the assessee.

assessee, submitted that in fact, the assessee changed the method

of accounting from mark to market. It is for the assessee to change

the method of accounting with regard to policy of the company. The

Assessing Officer cannot comment on the policy of the company

unless and until the method of accounting adopted by the assessee

does not disclose the correct profit of the assessee. Even though

the purchase price was increased by changing the method of

accounting from mark to market, the assessee was uniformly

following the method to subsequent years. Therefore, according to

11 ITA Nos.318,319 & 86/08 ITA No.1020,1665 & 1386/Mds/10 the Ld. counsel, it cannot be said that the assessee was making an

attempt to reduce the profit by shifting the accounting policy. As

rightly observed by the CIT(Appeals), the method of accounting

have been followed consistently, hence, the CIT(Appeals) has

rightly deleted the addition.

perused the relevant material available on record. As rightly

submitted by the Ld.counsel for the assessee, a company can adopt

any one of the methods permissible for computing the profit. Once

the assessee changed its method of accounting and consistently

followed the same in subsequent years, the Department cannot

doubt the method of accounting followed by the assessee. In the

initial years, there may be fluctuation in the profit of the assessee

due to increase in purchase price by changing the method of

accounting. However, when the assessee was consistently

following the same, there will be revenue neutral, hence there

cannot be loss to the Revenue. Therefore, this Tribunal is of the

considered opinion that the CIT(Appeals) has rightly allowed the

claim of the assessee under the provisions of Section 145A of the

Act. This Tribunal do not find any reason to interfere with the order

of the lower authority and accordingly the same is confirmed.

12 ITA Nos.318,319 & 86/08 ITA No.1020,1665 & 1386/Mds/10

assessee’s case.

Revenue, submitted that consequent to the block assessment, the Assessing Officer made an addition of `14,58,83,105/-. However,

the CIT(Appeals) found that in the block assessment, the addition made by the Assessing Officer to the extent of `14,00,86,150/- was

deleted. Due to exchange fluctuation, the addition made in

pursuance of block assessment, was also deleted by the CIT(Appeals) to the extent of `57,96,955/-. According to the Ld.

D.R., the addition made by the Assessing Officer in the block

assessment is with regard to undisclosed income. The present

assessment is under Section 143(3) of the Act. Therefore,

according to Ld. Sr. Standing Counsel, the order of the

CIT(Appeals) for the block assessment cannot be a reason for

deleting the addition made in the regular assessment.

According to the Ld. counsel, the addition made in the block

13 ITA Nos.318,319 & 86/08 ITA No.1020,1665 & 1386/Mds/10 assessment was deleted, therefore, consequently, there cannot be

any addition in the regular assessment.

perused the relevant material available on record. The addition

made in the block assessment is in respect of the undisclosed

income. The addition made in the present case is in the

assessment made under Section 143(3) of the Act. Under the

scheme of Income-tax Act, there can be simultaneous assessment

one for regular assessment and another for block period.

Therefore, as rightly submitted by the Ld. Sr. Standing Counsel for

the Revenue, the block assessment made by the Assessing Officer

was separate and distinct. However, it needs to be verified whether

the same income which formed part of undisclosed income for the

block period has been added once again in the regular assessment.

For the purpose of verification, this Tribunal is of the considered

opinion that the matter needs to be re-examined. Accordingly, the

orders of the lower authorities are set aside and the entire issue with regard to addition of `14,58,83,105/- is remitted back to the file

of the Assessing Officer. The Assessing Officer shall re-examine

the issue and bring on record whether any income which formed

14 ITA Nos.318,319 & 86/08 ITA No.1020,1665 & 1386/Mds/10 part of undisclosed income in the block assessment was included in

this assessment. The Assessing Officer shall delete the income

which formed part of undisclosed income for the block period. With

the above observation the matter is remitted back to the file of the

Assessing Officer.

Revenue, submitted that FCC Bond holders had the option to

convert the bonds into shares. Therefore, the decision of Delhi

Bench of this Tribunal in DCIT v. Ranbaxy Laboratories Ltd. (88 ITD

283) applicable to the facts of the case. Ld. Sr. Standing Counsel

further submitted that the assessee has also changed its method of

accounting in relation to expenses incurred for issue of FCC Bonds.

The expenses spread over for seven years. Therefore, the claim of the assessee to the extent of ` 4.44 Crores cannot be allowed.

assessee, submitted that the assessee claimed expenses for issue

of FCC Bonds under Section 37 of the Act. The expenses for issue

15 ITA Nos.318,319 & 86/08 ITA No.1020,1665 & 1386/Mds/10 of FCC Bonds may not fall under Section 35D of the Act. According

to the Ld. counsel, Section 37 and Section 35D of the Act are

enabling provisions and not mutually exclusive. Referring to the

judgment of Apex Court in India Cements Ltd. v. CIT (1966) 60 ITR

52, the Ld.counsel submitted that where a company was in the

business, incurred expenditure on issue of debentures, such an

expenditure has to be allowed while computing the total income of

the assessee. As held by Apex Court in India Cements Ltd. (supra),

such an expenditure need not be amortized against the profit over

the period. Therefore, the CIT(Appeals) by following the judgment

of Apex Court and Accounting Standard AS 26, allowed the claim of

the assessee.

perused the relevant material available on record. It is not in

dispute that the assessee-company is already in business,

therefore, the expenses for issue of debentures need not be

amortised under Section 35D of the Act and it has to be allowed

under Section 37 of the Act. The CIT(Appeals), in fact, has placed

his reliance in India Cements Ltd. (supra). Therefore, this Tribunal

do not find any reason to interfere with the order of the lower

authority and accordingly the same is confirmed.

16 ITA Nos.318,319 & 86/08 ITA No.1020,1665 & 1386/Mds/10

advanced to wholly owned subsidiary company.

Revenue, submitted that the assessee advanced money to

subsidiary company outside the country. In fact, the loan was

borrowed in India and advanced it to its wholly owned subsidiary

companies outside India. According to the Ld. Sr. Standing

Counsel, by diverting the borrowed funds outside India, the

assessee is diverting the taxable profit outside the jurisdiction.

Referring to the assessment order, the Ld. Sr. Standing Counsel

submitted that the Transfer Pricing Officer originally suggested to make adjustment to the extent of `13,64,01,948/-. However, on the

representation made by the assessee, an adjustment was made to the extent of `2,13,80,690/-. According to Ld. Sr. Standing

Counsel, the advance was made to Monte Cello BV. Since the loan

was advanced to foreign company, according to Ld. Sr. Standing

Counsel, the interest claimed by the cannot be allowed.

17 ITA Nos.318,319 & 86/08 ITA No.1020,1665 & 1386/Mds/10

assessee, submitted that the assessee borrowed loan for business

purpose and the same was advanced to two companies from whom

the assessee was purchasing copper ore, which is raw material for

the assessee. Therefore, there was a business expediency as held

by Apex Court in S.A. Builders Ltd. v. CIT (288 ITR 1). Referring to

the advance made to Monte Cello BV, the Ld.counsel submitted that

the advance was made for earlier assessment year and not in the

current year. Therefore, the observation made by the TPO is not

correct. Since no advance was made during the year under

consideration, according to the Ld. counsel, the disallowance made

by the Assessing Officer cannot be justified, accordingly, the

CIT(Appeals) has rightly deleted the addition.

perused the relevant material available on record. The assessee, in

fact, advanced money to two companies which are outside India.

The assessee claimed that two companies are engaged in

excavation of copper ore and the assessee was purchasing copper

concentrate from those companies. The question arises for

consideration is when the assessee advanced money to the

18 ITA Nos.318,319 & 86/08 ITA No.1020,1665 & 1386/Mds/10 companies outside India, whether the interest on the borrowed

funds can be allowed while computing the taxable income? The

assessee claims that due to business expediency, the advance was

made. The Revenue contends that since money was borrowed in

India and paid interest, the profit in India was considerably reduced,

since the profit of the assessee was shifted to outside the

jurisdiction. The CIT(Appeals) by placing reliance on the judgment

of Apex Court in S.A.Builders Ltd. (supra), allowed the claim of the

assessee. The fact that the advance was made to foreign countries

and shifting of profit to other nation was not examined by the

CIT(Appeals). Therefore, this Tribunal is of the considered opinion

that the matter needs to be reconsidered. Accordingly, the orders of

the lower authorities are set aside and the transfer pricing

adjustment made by the Assessing Officer is remitted back to his

file. The Assessing Officer shall re-examine the matter and refer

the same to TPO for reconsideration. The Transfer Pricing Officer

shall examine the matter afresh and find out whether any advance

was made to foreign company during the current year and whether

such advance would amount to shifting of profit to other nation.

Thereafter the Assessing Officer shall decide the issue afresh in

19 ITA Nos.318,319 & 86/08 ITA No.1020,1665 & 1386/Mds/10 accordance with law after giving a reasonable opportunity to the

assessee.

towards management consultancy fees. The Transfer Pricing

Officer found that the details of specific services provided by the

assessee are not available. The assessee assumed margin of 15%

on the cost and computed the arm's length price. The Transfer

Pricing Officer found that the method of computation of arm's length

price by the assessee was not correct. According to the Ld. Sr.

Standing Counsel, in terms of property, plant and equipment used,

the value of the asset is almost eight times that of the comparable

company. The inventory of four times that of the comparable

company was not taken into consideration by the TPO and the

Assessing Officer. According to Ld. Sr. Standing Counsel,

considering the proportion of the comparable companies, business

size, the value of the asset, it was reasonable to conclude that the

assessee has not availed any service from the so-called Associate

20 ITA Nos.318,319 & 86/08 ITA No.1020,1665 & 1386/Mds/10 Enterprise. However, the CIT(Appeals) found that the Transfer

Pricing Officer arbitrarily estimated the management services fee at `8.70 Crores as against `4.35 Crores received by the assessee.

Accordingly, the CIT(Appeals) directed the Assessing Officer to delete the addition of `4.35 Crores.

assessee, submitted that the Transfer Pricing Officer found that the

details of the services said to be provided by the assessee were not

provided. However, this is not correct. The assessee has produced

a copy of the agreement before the Transfer Pricing Officer as well

as the Assessing Officer. It is also not correct to claim that the

details of experts made available to the assessee were not provided

to the Transfer Pricing Officer. The Transfer Pricing Officer himself

referred the names of the persons who had been engaged by the

assessee for providing expert service. Referring to the evidences

for expenses, the Ld.counsel submitted that the assessee-company

is a very big company having factory at multiple locations in the

globe, the evidences were made available before the TPO and the

Assessing Officer. The details of the evidences, which were made

available before the TPO and the Assessing Officer were produced

21 ITA Nos.318,319 & 86/08 ITA No.1020,1665 & 1386/Mds/10 before the CIT(Appeals) and this Tribunal as well. Hence, the

CIT(Appeals) found that the Transfer Pricing Officer arbitrarily estimated the management service fees at `8.70 Crores as against

`4.35 Crores actually received by the assessee. Therefore, the

CIT(Appeals) has rightly deleted the addition made by the

Assessing Officer.

perused the relevant material available on record. The assessee- company claims to have received management service fee of `4.35

Crores each from CMT and TCM. However, it appears the

assessee could not provide the details of specific services provided

to those entities. The assessee claims that the details were made

available before the TPO and they are available before the

CIT(Appeals) and before this Tribunal. It is not in dispute that the

assessee-company assumed a profit of 15% on the revenue in the

form of management service fee. The assessee further claimed

before the CIT(Appeals) that the TPO arbitrarily estimated the fee at `8.70 Crores instead of `4.35 Crores. The assessee appears to

have adopted cost plus method for computing arm's length price in

respect of management consultancy charges. From the tabular

22 ITA Nos.318,319 & 86/08 ITA No.1020,1665 & 1386/Mds/10 column available at page 69 of the order of the CIT(Appeals), it

appears the business size of CMT is almost twice that of TCM.

Moreover, in terms of property, plant, equipment, value of the asset,

CMT is almost eight times bigger than that of TCM. Therefore, the

Transfer Pricing Officer assumed that the assessee-company

should have received double the amount towards management

consultancy fee from TCM and CMT.

of Income-tax Rules, 1962. For the purpose of determining the

most appropriate method, the Transfer Pricing Officer has to identify

the nature and class of international transaction. Apart from that,

the degree of comparability between international transaction and

uncontrolled transaction between the enterprises entered into such

transaction has to be identified. In the case before us, the Transfer

Pricing Officer has not compared the third party comparable cases.

Moreover, it is not known the actual services rendered by the

assessee to CMT and TCM. Unless and until the services rendered

by the assessee are brought on record, the business size of CMT

and TCM cannot determine the comparability of services rendered

and consideration received by the assessee. Therefore, this

Tribunal is of the considered opinion that it is obligatory on the part

23 ITA Nos.318,319 & 86/08 ITA No.1020,1665 & 1386/Mds/10 of the Transfer Pricing Officer to bring on record the exact nature of

services rendered by the assessee and thereafter has to compare

the transaction with other companies in the international transaction

with uncontrolled transaction. Since such an exercise was not

done, this Tribunal is of the considered opinion that the matter

needs to be re-examined by the Assessing Officer after referring the

matter to the Transfer Pricing Officer once again. Accordingly, the

orders of the lower authorities are set aside and the entire issue is

remitted back to the file of the Assessing Officer. The Assessing

Officer shall refer the matter to TPO once again and determine the

arm's length price in respect of services rendered by the assessee

in the light of finding and conclusion that may be reached by the

Transfer Pricing Officer.

paid to M/s Twin Star Holdings Ltd., Mauritius.

lakhs towards economic cost of funds paid to M/s Twin Star

Holdings Ltd., Mauritius. Referring to the order of the Transfer

24 ITA Nos.318,319 & 86/08 ITA No.1020,1665 & 1386/Mds/10 Pricing Officer, the Ld. Sr. Standing Counsel submitted that the

payment made to M/s Twin Star Holdings Ltd. is not exclusively for

business of the assessee. Referring to the order of the

CIT(Appeals), the Ld. Sr. Standing Counsel submitted that it is not known how the payment of `30.50 lakhs made to M/s Twin Star

Holdings Ltd., Mauritius benefited the assessee-company.

Referring to the observation made by the CIT(Appeals), the Ld. Sr.

Standing Counsel submitted that the CIT(Appeals) made

generalized remarks that the assessee’s market capitalization has

gone up substantially after listing of holding company in the UK

Stock Exchange, therefore, the CIT(Appeals) is not justified in

allowing the claim of the assessee.

assessee, submitted that the assessee has produced details of

consultancy services provided by M/s Twin Star Holdings Ltd.,

Mauritius along with copy of agreement before the Assessing

Officer as well as the Transfer Pricing Officer. The assessee has

also explained the nature of consultancy charges paid. However,

the Transfer Pricing Officer ignoring the explanation offered by the

assessee, arbitrarily decided and observed that M/s Twin Star

25 ITA Nos.318,319 & 86/08 ITA No.1020,1665 & 1386/Mds/10 Holdings Ltd. lacked resource for providing management

consultancy to the assessee-company, thereafter determined

economic cost of funds paid to M/s Twin Star Holdings Ltd. According to the Ld. counsel, the payment of `30.50 lakhs to M/s

Twin Star Holdings Ltd. was made out of commercial expediency

and the assessee-company greatly benefited out of the payment

since the holding company was listed in UK Stock Exchanges.

perused the relevant material available on record. Admittedly, the

assessee has paid management consultancy fees to M/s Twin Star

Holdings Ltd., Mauritius. From the material available on record, it

appears that M/s Twin Star Holdings Ltd. principally holds

investments. It is not known what kind of services / consultancy

was provided to the assessee-company by M/s Twin Star Holdings

Ltd., Mauritius. The assessee claims that it obtained a great advantage in the payment of `30.50 lakhs. It also claimed by the

assessee before the CIT(Appeals) that the market capitalization of

the assessee substantially raised after listing of holding company in

UK Stock Exchanges. The main contention of the Revenue

appears to be that M/s Twin Star Holdings Ltd. has no resource to

26 ITA Nos.318,319 & 86/08 ITA No.1020,1665 & 1386/Mds/10 provide management consultancy services. This claim of Revenue

was not considered by the CIT(Appeals). So, what kind of

management consultancy or services were provided by M/s Twin

Star Holdings Ltd. has to be brought on record. Since the actual

service rendered by M/s Twin Star Holdings Ltd. was not brought on

record by the CIT(Appeals), this Tribunal is of the considered

opinion that the matter needs to be re-examined. Accordingly, the

orders of the lower authorities are set aside and the entire issue is

remitted back to the file of the Assessing Officer. The Assessing

Officer shall refer the matter to the TPO once again and TPO shall

examined the actual service rendered by M/s Twin Star Holdings

Ltd. to the assessee and thereafter determine the arm's length price

after giving a reasonable opportunity to the assessee.

under Section 14A of the Act on the ground that the investment

made by the assessee in Balco cannot be equated with ordinary

investment of the ordinary shareholder. According to the Ld. Sr.

27 ITA Nos.318,319 & 86/08 ITA No.1020,1665 & 1386/Mds/10 Standing Counsel, the assessee is engaged in the business of

manufacturing non-ferrous metals, namely, copper, zinc and

aluminium. The assessee made investment in Balco in the year 2001 to the extent of `553.17 Crores out of which `551.92 Crores

was out of borrowed funds. Since `69.92 Crores was outstanding in

the assessment year 2004-05, the Assessing Officer disallowed the proportionate interest of `1.68 Crores. Therefore, according to Ld.

Sr. Standing Counsel, the CIT(Appeals) is not justified in deleting

the addition made by the Assessing Officer.

assessee, submitted that admittedly the assessee is engaged in the

business of manufacturing of copper, zinc and aluminium. The

investment made by the assessee in Balco was part of its business

expansion all over the world. The investment made by the

assessee in Balco cannot be equated with ordinary investment

made by ordinary shareholder to earn capital gain or exempted

income. The investment was made by the assessee in order to

diversification in the non-ferrous metal sector. Therefore, the

interest, if any, paid by the assessee has to be allowed under

Section 36(1)(iii) of the Act. Since the investment was made in the

28 ITA Nos.318,319 & 86/08 ITA No.1020,1665 & 1386/Mds/10 course of business, there cannot be any disallowance towards

interest on borrowed funds. The Ld.counsel further submitted that

the income earned from the investment in Balco is business income.

The investment made in Balco was for running business of the

assessee in a profitable manner. Therefore, according to the Ld.

counsel, the disallowance made by the Assessing Officer was

rightly deleted by the CIT(Appeals).

perused the relevant material available on record. It is not in

dispute that that the assessee is engaged in the business of

manufacturing copper, zinc and aluminium. The assessee claims

that the investment in Balco was for business purpose. Admittedly, out of total investment of `553.17 Crores, `551.92 Crores was out

of borrowed funds. The question arises for consideration is whether

the investment made in Balco is for business purpose or not? The

relationship between the assessee and Balco is not known. How

the investment made in Balco benefits the assessee is also not

known. The relationship between the assessee and Balco was not

brought on record by the Transfer Pricing Officer as well as the

CIT(Appeals). Therefore, this Tribunal is unable to uphold the order

29 ITA Nos.318,319 & 86/08 ITA No.1020,1665 & 1386/Mds/10 of the lower authority. However, since the nature of transaction and

the relationship was not brought on record, the matter needs to be

re-examined by the Assessing Officer. Accordingly, the orders of

the lower authorities are set aside and the entire issue with regard

to disallowance made under Section 14A of the Act is remitted back

to the file of the Assessing Officer. The Assessing Officer shall re-

examine the matter afresh and bring on record the purpose for

which the investment was made in Balco and the relationship

between the assessee and Balco and thereafter decide the issue

afresh, in accordance with law, after giving a reasonable opportunity

to the assessee.

deduction made by the assessee under Section 80-IA of the Act.

Revenue, submitted that the assessee claimed deduction under

Sections 80-IA, 80-IB and 80HHC of the Act. Referring to Section

80-IA(9) of the Act, the Ld. Sr. Standing Counsel submitted that the

CIT(Appeals) directed the Assessing Officer to reduce deduction

allowed under Section 80-IA of the Act while computing deduction

under Section 80HHC of the Act.

30 ITA Nos.318,319 & 86/08 ITA No.1020,1665 & 1386/Mds/10

assessee, submitted that the deduction allowed under Section 80-IA

of the Act shall be reduced while computing relief under Section

80HHC of the Act. The Ld.counsel placed his reliance on the

judgment of Madras High Court in SCM Creations v. ACIT.

perused the relevant material available on record. As rightly

submitted by the Ld. Counsel for the assessee, the issue was

considered by the Madras High Court in SCM Creations (supra).

The Madras High Court by following the judgment of Madhya

Pradesh High Court in J.P. Tobacco Products Pvt. Ltd. v. CIT

(1998) 229 ITR 123 and the judgments of various High Courts,

found that the deduction allowed under Section 80-IA of the Act

need not be reduced while computing relief under Section 80HHC of

the Act. In view of this judgment of Madras High Court, this Tribunal

do not find any reason to interfere with the order of the lower

authority and accordingly the same is confirmed.

for assessment year 2004-05, the only issue arises for

31 ITA Nos.318,319 & 86/08 ITA No.1020,1665 & 1386/Mds/10 consideration is with regard to levy of penalty under Section 271G

of the Act.

Revenue, submitted that the assessee has failed to furnish the

information in respect of international transaction under Section

92D(3) of the Act. Referring to Section 92D(3) of the Act, the Ld.

Sr. Standing Counsel submitted that every person who enters into

international transaction shall keep and maintain such information

and document as prescribed. Referring to Rule 10D of Income-tax

Rules, 1962, the Ld. Sr. Standing Counsel submitted that Rule 10D

provides for details of information and documents to be kept and

maintained under Section 92D of the Act. Admittedly, the assessee

has not produced the bills and vouchers and the required

information as provided in Rule 10D(3)(g) of Income-tax Rules,

1962. Therefore, according to the Ld. Sr. Standing Counsel, the

CIT(Appeals) is not justified in deleting the penalty under Section

271G of the Act.

1,43,58,919/- under Section 271G of the Act. The penalty was, in

32 ITA Nos.318,319 & 86/08 ITA No.1020,1665 & 1386/Mds/10 fact, levied for non-production of information regarding the

expenses incurred for providing management consultancy service to

CMT and TCM. Referring to the order of the CIT(Appeals), the

Ld.counsel submitted that the allegation of the Revenue is that the

assessee furnished only extracts of information instead of

documentary evidence required by the Transfer Pricing Officer

under Rule 8D(d) of Income-tax Rules, 1962. The addition made by

the Assessing Officer was deleted by the CIT(Appeals). Therefore,

it cannot be said that the assessee has not produced necessary

details of information and documents as required for international

transaction. The Ld.counsel further submitted that it is not the case

of the Transfer Pricing Officer that the required information and

document were not produced before him. According to the Ld.

counsel, the detailed information supported by documentary

evidence regarding the ownership, international transaction, copies

of balance sheet, copies of comparable transactions, etc were

submitted before the Transfer Pricing Officer. The Assessing

Officer has simply initiated the penalty proceeding under Section

271G of the Act without indicating the document which was not

produced by the assessee. According to the Ld. counsel, the

assessee’s accounts were duly audited by the statutory auditor as

33 ITA Nos.318,319 & 86/08 ITA No.1020,1665 & 1386/Mds/10 well as internal auditors. The audited accounts were also published

in the annual report. The apportionment of expenditure was on the

basis as done in the last year. Therefore, the CIT(Appeals) has

rightly deleted the penalty levied by the Assessing Officer.

perused the relevant material available on record. The main reason

on which the penalty was deleted was that the CIT(Appeals) deleted

the adjustment made by the Transfer Pricing Officer in respect of

management consultancy service said to be provided by the

assessee to TCM and CMT. While considering the appeal of the

Revenue in respect of the quantum addition, this Tribunal remitted

back the matter to the file of the Assessing Officer for

reconsideration with a direction to bring on record the actual

services said to be rendered by the assessee to CMT and TCM.

CIT(Appeals). The Assessing Officer referring to the observation

made by the Transfer Pricing Officer, more particularly page 27 of

his order, found that the assessee has failed to furnish information

and documents regarding the expenses said to be incurred by

providing management consultancy services to CMT and TCM. To

34 ITA Nos.318,319 & 86/08 ITA No.1020,1665 & 1386/Mds/10 ascertain the nature of service rendered by the assessee to CMT

and TCM, the matter was remitted back to the file of the Assessing

Officer, this Tribunal is of the considered opinion that the penalty

levied by the Assessing Officer under Section 271G of the Act also

needs to be reconsidered. Accordingly, the orders of the lower

authorities are set aside and the issue of penalty levied under

Section 271G of the Act is remitted back to the file of the Assessing

Officer. The Assessing Officer shall re-examine the matter afresh

and bring on record the actual service rendered by the assessee to

CMT and TCM and, thereafter decide the issue afresh after bringing

on record the failure of the assessee to provide the exact

information and documents which are required to be produced for

international transaction and, thereafter decide the issue in

accordance with law, after giving a reasonable opportunity to the

assessee.

1020/Mds/2010 for assessment year 2005-06, the first issue arises

for consideration is deduction claimed by the assessee under

Section 80-IA of the Act.

35 ITA Nos.318,319 & 86/08 ITA No.1020,1665 & 1386/Mds/10 53. Shri M. Swaminathan, Ld. Sr. Standing Counsel for the

Revenue, submitted that the CIT(Appeals) ought to have followed

the decision of Chennai Bench in Chettinadu Cement Corporation

Ltd. v. ACIT in I.T.A. No.1029/Mds/2005 dated 05.01.2007.

According to the Ld. Sr. Standing Counsel, when the assessee used

the power generator for captive consumption, deduction under

Section 80-IA of the Act cannot be allowed. Therefore, according to

the Ld. Sr. Standing Counsel, the CIT(Appeals) is not justified in

allowing the claim of the assessee.

assessee, submitted that in fact, this Tribunal in Mohan Breweries &

Distilleries Ltd. v. ACIT (2009) 311 ITR (AT) 346, found that the

captive power plant set up for distillery unit is eligible for deduction

under Section 80-IA of the Act. Moreover, in the assessee's own

case, this Tribunal for the earlier assessment year found that the

assessee is eligible for deduction when the power generated used

for captive consumption. The Mumbai Bench of this Tribunal has

also taken a similar view allowing the identical claim of the

assessee. It is not the case of the Revenue that any of the

condition prescribed for allowing deduction under Section 80-IA of

the Act was not complied with. Merely because the power was

36 ITA Nos.318,319 & 86/08 ITA No.1020,1665 & 1386/Mds/10 utilised for captive consumption that cannot be a reason for

disallowing the claim of the assessee. Therefore, according to the

Ld. counsel, the CIT(Appeals) has rightly allowed the claim of the

assessee.

perused the relevant material available on record. It is not in

dispute that the assessee has used the power for captive

consumption and claimed deduction under Section 80-IA of the Act.

This Tribunal in Mohan Breweries & Distilleries Ltd. (supra)

examined this issue elaborately and found that even though the

power was generated for captive consumption, the assessee was

eligible for deduction under Section 80-IA of the Act. A similar view

was taken by Mumbai Bench of this Tribunal as well. Therefore,

this Tribunal is of the considered opinion that the CIT(Appeals) has

rightly allowed the claim of the assessee. Hence, this Tribunal do

not find any reason to interfere with the order of the lower authority

and accordingly the same is confirmed.

Relief Fund of Rajiv Gandhi Relief and National Welfare Trust.

37 ITA Nos.318,319 & 86/08 ITA No.1020,1665 & 1386/Mds/10 57. Shri M. Swaminathan, Ld. Sr. Standing Counsel for the

Revenue, submitted that the payment made by the assessee to

Tsunami Relief Fund is not for business purpose. Under Section 37

of the Act, the expenditure incurred by the assessee for running the

business alone is eligible for deduction. Donation to Tsunami Relief

Fund and a trust cannot be construed as an expenditure for earning

the income of the assessee. Therefore, the CIT(Appeals) is not

justified in allowing the claim of the assessee.

assessee, submitted that in fact, the assessee claimed deduction to the extent of `1,75,58,500/- under Section 80G of the Act. The

Assessing Officer restricted the claim to the extent of `1,73,250/-

since the donation made to Rajiv Gandhi Relief and National

Welfare Trust was eligible for deduction only for 50% as against

100% claimed by the assessee. However, the CIT(Appeals)

allowed the claim of the assessee under Section 37 of the Act.

since it is not a business expenditure, according to the Ld. counsel,

the CIT(Appeals) has rightly allowed the claim of the assessee.

perused the relevant material available on record. The assessee

38 ITA Nos.318,319 & 86/08 ITA No.1020,1665 & 1386/Mds/10 donated `1 Crore to Rajiv Gandhi Relief and National Welfare Trust.

The amount was donated towards corporate social responsibility.

Therefore, the expenditure incurred by the assessee has to be

allowed under Section 37 of the Act. The Madras High Court in CIT

v. Velumanickam Lodge (2009) 317 ITR 338 has considered a

similar issue. The assessee before the Madras High Court, a civil

contractor, constructed a hockey stadium in the Collectorate

complex at Ramanathapuram. The assessee claimed the

expenditure for constructing the hockey stadium as revenue

expenditure. The Madras High Court after considering its earlier

judgment in Cholan Roadways Corporation Ltd. v. CIT (1999) 235

ITR 473, found that the contribution made towards Flag Day Fund

and Chief Minister’s Rehabilitation Fund are deductible as they are

not in contravention of any law. The Madras High Court further

found that the expenditure incurred by the assessee towards

construction of hockey stadium was for promotion of its business,

hence it was allowed as revenue expenditure.

In this case before us also the donation of ` 1 Crore was 60.

made to Rajiv Gandhi Relief and National Welfare Trust with an

intention to give relief to the people who are affected by Tsunami.

39 ITA Nos.318,319 & 86/08 ITA No.1020,1665 & 1386/Mds/10 The payment made by the assessee is not in contravention of any

law. It is for the welfare of the people. It is common knowledge that

the State of Tamil Nadu was very badly affected due to Tsunami

and several lakhs of people were made homeless. The assessee is

doing business in the State of Tamil Nadu, more particularly in the

district of Tuticorin, therefore, there is an obligation on the part of

the assessee to give donation to the rehabilitation work so that the

assessee can carry on its business activity in a peaceful

atmosphere. Therefore, even though technically speaking, the

donation is not for earning any business income, it would definitely

mitigate the difficulties suffered by the local people who are affected

by Tsunami. Therefore, as found by the Madras High Court in

Cholan Roadways Corporation Ltd. (supra) and Velumanickam

Lodge (supra), the CIT(Appeals) has rightly allowed the claim of the

assessee. This Tribunal do not find any reason to interfere with the

order of the lower authority and accordingly the same is confirmed.

under Section 14A of the Act.

40 ITA Nos.318,319 & 86/08 ITA No.1020,1665 & 1386/Mds/10 lakhs which was 2% of the exempt income of `13.74 Crores. In

fact, the disallowance was made by the Assessing Officer by

following the order of this Tribunal in Sundaram Finance Ltd. The

CIT(Appeals), however, deleted the addition. No such addition was

made in the assessee's own case for the earlier assessment year. Accordingly, he restricted the same to `5 lakhs on estimate basis.

The Ld. Sr. Standing Counsel submitted that this Tribunal uniformly

estimated the disallowance under Section 14A of the Act before

introduction of Rule 8D of Income-tax Rules, 1962 at 2%.

Therefore, the CIT(Appeals) is not justified in allowing the claim of

the assessee.

assessee, also. It is not in dispute that Rule 8D is not applicable for

the year under consideration. As rightly submitted by the Ld. Sr.

Standing Counsel, this Tribunal is uniformly estimating the

expenditure at 2% before introduction of Rule 8D of Income-tax

Rules, 1962. The CIT(Appeals) without any basis has restricted the same to `5 lakhs instead of disallowing `27.48 lakhs which comes

to 2% of exempt income earned by the assessee. Therefore, this

Tribunal is unable to uphold the order of the lower authority.

41 ITA Nos.318,319 & 86/08 ITA No.1020,1665 & 1386/Mds/10 Accordingly we set aside the order of the CIT(Appeals) and restore

the order of the Assessing Officer.

accounting.

Revenue, submitted that due to change in the method of accounting, there was a loss to the extent of `10.99 Crores.

According to the Ld. Sr. Standing Counsel, there was no reason for

change in the method of accounting which was regularly followed by

the assessee for several years. Change in the method of

accounting resulted decrease in profit. The Ld. Sr. Standing

Counsel further submitted that each transaction is different and

independent from other transactions, therefore, just because the

assessee changed the method of accounting for all the transactions

that cannot be a reason for setting up of loss suffered in one unit

against the other. Therefore, according to the Ld. Sr. Standing

Counsel, the CIT(Appeals) ought to have upheld the addition of `10.99 Crores.

42 ITA Nos.318,319 & 86/08 ITA No.1020,1665 & 1386/Mds/10 66. On the contrary, Shri G. Baskar, the Ld.counsel for the

assessee, submitted that the income of the assessee has to be

computed in accordance with method of accounting regularly

followed by the assessee. The assessee can also change the

method of accounting, in case adoption of different accounting

policy was required to determine the correct taxable income. The

assessee adopted prudent accounting policy on mark to market

basis. In fact, the liability of the assessee to pay on account of

MTM copper concentrate goes up substantially in view of increase

in the prices of copper concentrate and fluctuation in foreign

currency. The increase in price was not accounted. Therefore, the

accounts of the assessee would not reflect the true and fair view as

per Accounting Standard - 1 prescribed by the Institute of Chartered

Accountants of India. In order to determine the correct taxable

income, the assessee has changed the accounting policy. In fact,

the assessee knowing fairly well that the liability to pay towards

purchase of copper concentrate has gone up substantially,

bonafidely changed the method of accounting. Therefore, the

CIT(Appeals) found that the method of accounting was changed by

the assessee in order to comply with the mandatory Accounting

Standard which requires an auditor to state the effect of change of

43 ITA Nos.318,319 & 86/08 ITA No.1020,1665 & 1386/Mds/10 method of accounting, which has material impact in the

determination of taxable profit. The assessee has to change the

method of accounting policy in order to guard himself from the

fluctuation in the line of business which is carried on by the

assessee. The business carried on by the assessee always

suffered fluctuation at various levels, therefore, the method of

accounting adopted by the assessee is bonafide which was

subsequently followed regularly. Hence, according to the

Ld.counsel, the CIT(Appeals) has rightly allowed the claim of the

assessee.

perused the relevant material available on record. It is not in

dispute that the assessee has changed its method of accounting

policy. Now the assessee claims before this Tribunal that the

method of accounting was changed as per the Accounting

Standard-I prescribed by Institute of Chartered Accountants of India.

The Accounting Standard – 1 prescribed by Institute of Chartered

Accountants of India was adopted by Central Board of Direct Taxes

under Section 145 of the Act. The assessee claims before this

Tribunal that the method of accounting, which was followed in the

earlier assessment year, was changed in order to guard itself from

44 ITA Nos.318,319 & 86/08 ITA No.1020,1665 & 1386/Mds/10 the fluctuation in the market. It is nobody’s case that the change of

method of accounting was due to malafide intention of the

assessee. When the assessee bonafidely changed the method of

accounting as per the Accounting Standard adopted under Section

145 of the Act and continues to follow the same, even though there

was loss at initial year, the same would not stand in the way of

changing the accounting policy. In other words, the loss suffered in

the first year would be set off in the subsequent year and there

would be revenue neutral. Hence, there can be no loss to the

Revenue. Therefore, this Tribunal is of the considered opinion that the CIT(Appeals) has rightly found that the addition of `10.10

Crores on account of fall in net profit due to change in the method of

accounting cannot be sustained. This Tribunal do not find any

reason to interfere with the order of the lower authority and

accordingly the same is confirmed.

and capitalization of foreign exchange fluctuation.

and the Ld.counsel for the assessee. The only contention of the

45 ITA Nos.318,319 & 86/08 ITA No.1020,1665 & 1386/Mds/10 Ld.counsel for the assessee is that in the block assessment, the

order of the Assessing Officer was set aside on the ground that it

was barred by limitation. This issue was examined by this Tribunal

in in the case of assessee in I.T.A. No.718/Mds/2011 & I.T.A.

No.1008/Mds/2011 and by order dated 23.09.2016, the very same

issue was remitted back to the file of the Assessing Officer for

reconsideration. For the reason stated in the order dated

23.09.2016 in the assessee's own case, on identical circumstances,

this issue is remitted back to the file of the Assessing Officer. The

Assessing Officer shall re-examine the issue afresh and thereafter

decide as indicated in the order of this Tribunal dated 23.09.2016.

debit of an expenditure to the extent of `4,14,832/- being the

compensation paid to a transporter on account of loss suffered by

them due to Tsunami and flood in the State of Tamil Nadu. The

only contention of the assessee was that the payment was made

during the year under consideration. The Tax Audit Report of the

46 ITA Nos.318,319 & 86/08 ITA No.1020,1665 & 1386/Mds/10 assessee clearly shows that the compensation was paid in respect

of goods transporter for earlier assessment year. Since the liability

to pay the transport charges arose for the earlier assessment year,

the compensation also has to be paid in the earlier assessment

year, therefore, this cannot be allowed during the year under

consideration.

assessee, submitted that even though the goods were transported

in the earlier assessment year, due to Tsunami and heavy flood in

the State, the transporter suffered a heavy loss, therefore, they

claimed compensation during the year under consideration. The

liability to pay compensation arose in the assessment year under

consideration, therefore, the CIT(Appeals) allowed the claim of the

assessee.

perused the relevant material available on record. It is not in

dispute that the transporters transported goods in the earlier

assessment year. The assessee now claims that there was liability

to pay compensation during the year under consideration which was

unforeseen due to Tsunami and heavy flood in the State. It is not in

47 ITA Nos.318,319 & 86/08 ITA No.1020,1665 & 1386/Mds/10 dispute that the Tax Audit Report clearly says that the goods were

transported in the earlier years, therefore, the payment to be made

relates to the earlier assessment year. It is nobody’s case that the

compensation was paid in respect of loss suffered during the year

under consideration. It is also not known how the loss was

quantified to pay compensation by the assessee. In the absence of

any material available on record regarding the quantification of

compensation and liability to pay the same, this Tribunal is of the

considered opinion that the matter needs to be reconsidered by the

Assessing Officer. Accordingly, the orders of the lower authorities

are set aside and the issue of compensation is remitted back to the

file of the Assessing Officer. The Assessing Officer shall bring on

record the liability to pay compensation by the assessee and the

year in which the liability was crystallized and thereafter decide in

accordance with law after giving a reasonable opportunity to the

assessee.

1386/Mds/2010 filed by the assessee, the first ground of the appeal

is with regard to deduction claimed by the assessee under Section

80-IB of the Act.

48 ITA Nos.318,319 & 86/08 ITA No.1020,1665 & 1386/Mds/10

49 ITA Nos.318,319 & 86/08 ITA No.1020,1665 & 1386/Mds/10 under Section 80-IB of the Act at the rate of 30%. Therefore, according to the Ld. Sr. Standing Counsel, the issue raised by the assessee becomes infructuous.

Section 40(a)(i) of the Act for non-deduction of tax at source.

50 ITA Nos.318,319 & 86/08 ITA No.1020,1665 & 1386/Mds/10 which is equivalent to `13,38,30,000/- paid to the holding company,

namely, Vedanta Resource Plc, the assessee is not required to

deduct tax at all. The management consultancy fee is not taxable in

India, therefore, the CIT(Appeals) is not justified in disallowing the

claim of the assessee.

Counsel submitted that the assessee has paid USD 3 million

towards management consultancy service and also paid USD 2

million as Representative Office fees. Both the payments were

admittedly made to Vedanta Resources Plc, a body corporate

incorporated in England and Wales. In respect of Representative

Office fees, the CIT(Appeals) himself found that the said fees is not

chargeable to tax in India. Accordingly, it was found that no TDS is

required to be made. However, in respect of management

consultancy fees, the CIT(Appeals) found that Vedanta Resources

Plc, UK company agreed to provide services. Referring to Article 13

of Double Taxation Avoidance Agreement between India and UK, it

was found that the foreign company has deputed the skilled

employees to India and the assessee-company availed their

services. Therefore, the CIT(Appeals) found that the assessee-

51 ITA Nos.318,319 & 86/08 ITA No.1020,1665 & 1386/Mds/10 company utilised the services in Indian soil. Therefore, the

transaction between the assessee and the UK company has to be

treated as technical services in terms of Section 9(1)(vii) of the Act

as well as Article 13 of Double Taxation Avoidance Agreement

between India and UK. Therefore, according to the Ld. Sr. Standing

Counsel, the CIT(Appeals) found that the assessee is liable to

deduct tax.

perused the relevant material available on record. The assessee

has paid management consultancy fees and Representative Office

fees to its holding company in UK. In respect of Representative

Office fees, the CIT(Appeals) himself found that the payment was

made for the service rendered outside India, therefore, it was not

liable for taxation in India. Accordingly, the CIT(Appeals) found that

there is no need to deduct tax.

found that the UK company rendered service in India, after deputing

their employees in India. Therefore, the CIT(Appeals) found that

the utilization of service was in India, hence the transaction has to

be construed as technical services both in terms of Article 13 of

52 ITA Nos.318,319 & 86/08 ITA No.1020,1665 & 1386/Mds/10 Double Taxation Avoidance Agreement between India and UK and

in terms of Section 9(1)(vii) of the Act. Accordingly, the

CIT(Appeals) confirmed the order of the Assessing Officer. It is not

in dispute that UK company deputed their skilled employees to India

to render services to the assessee. In fact, the assessee-company

availed services of UK company in India. Therefore, the payment

made to the assessee towards management consultancy fees is

liable to tax in India. Hence the assessee has to necessarily deduct

tax as mandated under Section 9(1)(vii) of the in respect of the

payment of management consultancy fees. Therefore, this Tribunal

do not find any reason to interfere with the order of the lower

authority and accordingly the same is confirmed.

No.1665/Mds/2010 for assessment year 2006-07, the ground of

appeal is regarding deduction claimed by the assessee under

Section 80-IA of the Act for the power plant set up by the assessee.

Revenue submitted that the assessee used the power generated for

captive consumption. Therefore, the assessee is not eligible for

deduction under Section 80-IA of the Act.

53 ITA Nos.318,319 & 86/08 ITA No.1020,1665 & 1386/Mds/10

assessee, also. This issue was examined by this Tribunal for

assessment year 2005-06 in the Revenue’s appeal at paras 52 to

55 of this order. This Tribunal found that even though the power

generated was used for captive consumption, the assessee is

eligible for deduction under Section 80-IA of the Act. In fact, this

Tribunal placed its reliance in Mohan Breweries & Distilleries Ltd.

(supra). In view of the above, this Tribunal do not find any reason to

interfere with the order of the lower authority and accordingly the

same is confirmed.

assessee under Section 80GGB of the Act.

Counsel for the Revenue and Shri G. Baskar, the Ld. counsel for

the assessee. The deduction claimed by the assessee under

Section 80GGB of the Act was examined by this Tribunal in the

earlier part of this order for assessment year 2004-05. After

referring to the amendment carried out by the Parliament by

Finance (No.2) Act, 2009 with effect from 01.04.2010, this Tribunal

found that the contribution made by the assessee was to M/s Public

54 ITA Nos.318,319 & 86/08 ITA No.1020,1665 & 1386/Mds/10 & Political Awareness Trust and not to any political party.

Accordingly, this Tribunal found that the CIT(Appeals) is not justified

in allowing the claim of the assessee. This Tribunal has also found

that the judgment of Madras High Court in Cheran Engineering

Corporation (supra) was in respect of the claim made by the

assessee under Section 37 of the Act, therefore, the said judgment

is not applicable to the facts of the case. In view of the above, the

order of the CIT(Appeals) is set aside and that of the Assessing

Officer is restored.

of the assessee under Rule 8D of the Income-tax Rules, 1962.

Counsel for the Revenue and Shri G. Baskar, the Ld. counsel for

the assessee. Admittedly, Rule 8D is not applicable for the year

under consideration. However, the expenditure incurred by the

assessee for earning exempt income cannot be allowed as

expenditure for earning taxable income. Therefore, certain

disallowance has to be made. This Tribunal consistently disallowing

the claim at the rate of 2% of the exempt income earned by the

assessee before the introduction of Rule 8D of Income-tax Rules,

55 ITA Nos.318,319 & 86/08 ITA No.1020,1665 & 1386/Mds/10 1962. Therefore, the Assessing Officer is directed to disallow 2% of

exempt income earned by the assessee for the year under

consideration.

addition on account of bogus steel purchase.

Tribunal in the earlier part of this order. Referring to the order

passed by the Assessing Officer for the block period, this Tribunal

found that the order passed by the Assessing Officer is barred by

limitation. This Tribunal had no occasion to go into the merit of the

disallowance made by the Assessing Officer. Accordingly, this

issue was remitted back to the file of the Assessing Officer. For the

sake of consistency, the order of the CIT(Appeals) is set aside and

the issue of claim of bogus steel purchase is also remitted back to

the file of the Assessing Officer. The Assessing Officer shall re-

examine the matter afresh in the light of the material available on

record and thereafter decide the issue afresh, in accordance with

law, after giving a reasonable opportunity to the assessee.

deduction claimed by the assessee under Section 80-IB of the Act.

56 ITA Nos.318,319 & 86/08 ITA No.1020,1665 & 1386/Mds/10

Revenue, submitted that the assessee claims deduction under

Section 80-IB of the Act in respect of other income of the assessee.

Referring to Section 80-IB of the Act, the Ld. Sr. Standing Counsel

submitted that Section 80-IB of the Act is applicable only in respect

of income derived from industrial undertaking. Referring to

judgment of Apex Court in Pandian Chemicals Ltd. v. CIT (262 ITR

278), the Ld. Sr. Standing Counsel submitted that the profit or gain

of the assessee must be derived from actual conduct of the

business. A mere commercial connection between income and

industrial undertaking would not be sufficient for the purpose of

allowing deduction under Section 80-IB of the Act. If the income of

the assessee is part and parcel of manufacturing activity, there is no

need for the assessee to disclose income from other sources.

Since the income was admittedly derived from other sources other

than the manufacturing process, the assessee cannot say that it

was derived from eligible industrial undertaking. Therefore,

according to the Ld. Sr. Standing Counsel, the CIT(Appeals) is not

justified in allowing the claim of the assessee.

57 ITA Nos.318,319 & 86/08 ITA No.1020,1665 & 1386/Mds/10 100. On the contrary, Shri G. Baskar, the Ld.counsel for the

assessee, submitted that the income which was shown as other

income, was from sale of raw material, unclaimed liabilities written

back, interest received from customers, interest on employee loans,

etc. These incomes are inextricably connected with business of the

assessee, therefore, it has to be construed that the same was

derived from industrial undertaking. Referring to the judgment of

Karnataka High Court in Motor Industries Company Ltd. (37 DTR

94), the Ld.counsel submitted that what was observed by Karnataka

High Court in Motor Industries Company Ltd. (supra) is equally

applicable to the claim made by the assessee under Section 80-IB

of the Act. According to the Ld. counsel, sale of scrap would form

part of total turnover of eligible business, therefore, according to the

Ld. counsel, the assessee is eligible for deduction in respect of sale

of scrap. Referring to the unclaimed liabilities written back, the

Ld.counsel submitted that at the time of creation of liabilities, the

same was not allowed as deduction and hence, written back of such

unclaimed liabilities in the books of account would form art of profits

derived from eligible business. Similarly, the exchange rate

fluctuation on sale of finished goods would also form part of the total

turnover of the assessee. Moreover, the interest received on sale

58 ITA Nos.318,319 & 86/08 ITA No.1020,1665 & 1386/Mds/10 of finished goods from customers would form part of sale price as

held by Madras High Court in CIT v. Madras Motors Ltd. (2002) 257

ITR 60. The loan given to the employees was for business activity,

therefore, the interest received on the loan from employees would

go to reduce the cost of manufacturing activity, therefore, such

interest is also eligible for deduction under Section 80-IB of the Act.

Therefore, to the extent interest received on the loan given to the

employees, the profit could be increased.

perused the relevant material available on record. The assessee

appears to have claimed deduction under Section 80-IB of the Act in

respect of foreign exchange fluctuation on sale of finished goods,

unclaimed liabilities written back, interest received from customers,

scrap sales and interest on employees loan. Though the assessee

claimed before the lower authorities that foreign exchange

fluctuation on sale of finished goods, this Tribunal is of the

considered opinion that profit on sale of finished goods, due to

fluctuation in foreign exchange, the same has to be construed as

derived from industrial undertaking. In case the profit was on the

sale of raw material, the same cannot be taken as income derived

from industrial undertaking at all. Since no details/materials are

59 ITA Nos.318,319 & 86/08 ITA No.1020,1665 & 1386/Mds/10 available before this Tribunal, it has to be first ascertained whether

profit on foreign exchange fluctuation was due to sale of finished

goods or raw material. No material is available on record to suggest

that the foreign exchange fluctuation was due to sale of finished

goods on export. Therefore, this Tribunal is of the considered

opinion that the matter needs to be verified by the Assessing

Officer.

unclaimed liabilities relate to earlier assessment year, due to

unclaimed liabilities of the earlier year, the same were written back

in the books of account and treated as income of the assessee.

This Tribunal is of the considered opinion that deduction under

Section 80-IB of the Act is only in respect of current profit. The

profit written back in the books of account as unclaimed of the

earlier year cannot be construed as profit of current year, therefore,

by including the unclaimed liabilities written back in the books of

account, the assessee cannot inflate the eligible profit for the

purpose of deduction under Section 80-IB of the Act.

known whether the interest was received on sale of finished goods

60 ITA Nos.318,319 & 86/08 ITA No.1020,1665 & 1386/Mds/10 or interest was received on any other situation. If the interest was

received on sale price for delayed payment of sale price, then as

found by Madras High Court in Madras Motors Ltd. (supra),

assessee is eligible for deduction under Section 80-IB of the Act. If

the interest was received for any other reason and not for delayed

payment of sale price, this Tribunal is of the considered opinion that

the same cannot be construed as derived from industrial

undertaking. In the absence of any material, this Tribunal is of the

considered opinion that the books of account need to be verified

and find out whether the interest was received for delayed payment

of sale price or for any other reason. Moreover, the scrape sale is

concerned, whether the assessee generated the scrape sales

during its own manufacturing activity or the scrape sale was a

separate business needs to be verified.

ascertained whether the loan given to employees was to reduce the

cost of manufacturing activity or not. In the absence of any details,

this Tribunal is of the considered opinion that the matter needs to be

verified. Accordingly, the orders of the lower authorities are set

aside and the claim of deduction under Section 80-IB of the Act is

remitted back to the file of the Assessing Officer. The Assessing

61 ITA Nos.318,319 & 86/08 ITA No.1020,1665 & 1386/Mds/10 Officer shall re-examine the matter afresh and thereafter decide the

issue after considering the judgments of Apex Court in Cambay

Electric Supply Industrial Co. Ltd. v. CIT (113 ITR 84), CIT v.

Sterling Foods (237 ITR 579) and Pandian Chemicals Ltd. v. CIT

(262 ITR 278) and thereafter, decide the issue in accordance with

law, after giving a reasonable opportunity to the assessee.

disallowance under Section 40(a)(ia) of the Act.

Revenue, submitted that the assessee has paid representative

office fees of USD 20 lakhs. Considering the need of business of

the assessee, the assessee required presence of M/s Vedanta

Resources Plc, a UK company, to represent it in London. According

to Ld. Sr. Standing Counsel, the assessee-company availed the

services of Representative Office of M/s Vedanta Resources Plc to

expand its business operation and interact with consultant.

Therefore, the payment made by the assessee is liable to tax under

Section 195 of the Act at the time of making payment.

assessee, submitted that admittedly the assessee has paid USD 20

62 ITA Nos.318,319 & 86/08 ITA No.1020,1665 & 1386/Mds/10 lakhs towards representative office fees. Referring to Article 13 of

Double Taxation Avoidance Agreement between UK and India, the

Ld.counsel submitted that representative office fees is not liable to

tax in India. Since no tax is to be levied in respect of payment made

to UK company in India, according to the Ld. counsel, the assessee

need not deduct tax, therefore, there cannot be any disallowance

under Section 40(a)(ia) of the Act.

perused the relevant material available on record. Admittedly, the

assessee-company nominated M/s Vedanta Resources Plc, a UK

company to represent it in London. The assessee-company availed

the services of M/s Vedanta Resources Plc to expand its business

operation and interact with its consultant in London. The UK

company appears to have not made available any technical

knowledge to the assessee-company. The UK company rendered

its services only in London Metal Exchange for the purpose of

expanding its business operation in London. Since no activity was

carried out in India by the foreign company, and entire advice was

made by UK company to expand the assessee’s business in UK,

namely, London Metal Exchange. Therefore, this Tribunal is of the

considered opinion that the payment made to M/s Vedanta

63 ITA Nos.318,319 & 86/08 ITA No.1020,1665 & 1386/Mds/10 Resources Plc, UK is not liable to tax in India. Accordingly, the

assessee is not liable to deduct tax under Section 195 of the Act.

Therefore, there cannot be any disallowance under Section

40(a)(ia) of the Act.

issue was considered for the assessment year 2004-05. In the

earlier part of this order, this Tribunal found that the advance was

made to companies outside India and the lower authorities have not

examined whether the advance made to the companies outside

India would amount to shifting of profit to other jurisdiction.

Accordingly, the matter was remitted back to the file of the

Assessing Officer. For the very same reason, the orders of the

lower authorities are set aside and the disallowance of notional

interest is remitted back to the file of the Assessing Officer. The

Assessing Officer shall re-examine the matter afresh and find out

whether the payment of interest on the advance made to the

companies outside the country would amount to shifting of profit to

other jurisdiction. Thereafter he shall decide the issue afresh in

accordance with law, after giving a reasonable opportunity to the

assessee.

64 ITA Nos.318,319 & 86/08 ITA No.1020,1665 & 1386/Mds/10 110. To sum up the result, Revenue’s appeals in ITA No.319/Mds/2008 is partly allowed for statistical purposes. ITA No.318/Mds/2008 is allowed for statistical purposes. ITA No.1020/Mds/2010 is partly allowed for statistical purposes. ITA No.1665/Mds/2010 is partly allowed for statistical purposes. Assessee’s appeals in ITA No.86/Mds/2008 is dismissed. ITA No.1386/Mds/2010 is dismissed.

Order pronounced on 29th March, 2017 at Chennai. sd/- sd/- (अ�ाहम पी.जॉज�) (एन.आर.एस. गणेशन) (Abraham P. George) (N.R.S. Ganesan) लेखा सद�य/Accountant Member �या�यक सद�य/Judicial Member चे�नई/Chennai, �दनांक/Dated, the 29th March, 2017.

Kri.

आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. �नधा�रती /Assessee 2. Assessing Officer 3. आयकर आयु�त (अपील)/CIT(A) – V / XI, Chennai 4. आयकर आयु�त/CIT-III, Chennai 5. �वभागीय ��त�न�ध/DR 6. गाड� फाईल/GF.