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Income Tax Appellate Tribunal, “K” BENCH, MUMBAI
Before: SHRI RAJENDRA & SHRI SAKTIJIT DEY
आदेश / ORDER शक्तिजीि दे, न्याययक सदस्य के द्वारा / PER SAKTIJIT DEY, J.M. These cross appeals are directed against the order dated 12th November 2012, passed by the learned Commissioner (Appeals)–15, Mumbai, for assessment year 2009–10.
The assessee in total has raised nine grounds.
Grounds no.1 and 2, in assessee’s appeal corresponding to the only issue raised by the Department relates to the claim of deduction under section 80IA of the Act. While the assessee has challenged part disallowance of deduction claimed by the assessee under section 80IA, the Department is aggrieved with the relief granted by the learned Commissioner (Appeals) on the issue.
Brief facts are, the assessee a company is engaged in the business of manufacture and sale of pesticides plant growth nutrients seeds tanning material. For the assessment year under consideration, assessee filed its return of income on 29th September 2009, declaring total income of ` 91,47,89,900. Subsequently, assessee filed a revised return of income on 29th March 2011, declaring total income of ` 84,33,81,255. In the course of assessment proceedings, the Assessing Officer while examining the computation of income filed by the 3 M/s. Rallis India Ltd.
assessee noticed that the assessee had claimed deduction under section 80IA(4) for an amount of ` 87,86,871, in respect of its captive power plant at Ankleshwar. On examining Profit & Loss account pertaining to the said captive power plant it was noticed by the Assessing Officer that assessee had credited a sum of ` 3,94,50,820 as savings from captive power plant. On the aforesaid credit to the Profit & Loss account assessee has computed profit from the undertaking at ` 91,46,428 and from such profit has claimed deduction under section 80IA. On examining Form no.10CCB, filed by the assessee, the Assessing Officer noticed, at point no.27, assessee has shown an amount of ` 3,94,50,820, pertaining to the total sales of the undertaking as cost and at Point no.28, it has mentioned that no other transaction apart from transmission of power to other plant of Rallis India Ltd. Being of the view that cost saving cannot be construed as sales of the undertaking, hence, the undertaking cannot be said to have earned any income, the Assessing Officer called upon the assessee to show cause why deduction claimed under section 80IA(4) should not be disallowed. In response to the query raised by the Assessing Officer, the assessee in its reply dated 28th November 2011, objected to the proposed disallowance and contended that savings from captive power plant is only a nomenclature, as savings from captive power plant is nothing but sales revenue. Referring to section 4 M/s. Rallis India Ltd.
80IA(8), it was submitted, it provides for a situation of captive consumption. The assessee also furnished charts, daily log sheets to demonstrate the working of captive consumption of power. It was also submitted, electricity duty @ 40 paise per unit generated was taken as cost while the average rate of electricity charged by Gujarat State Electricity Board (GSEB) to the Ankleshwar, unit @ 6.17 per unit was adopted to compute sales Revenue. It was further submitted, on the basis of aforesaid rate, assessee had computed sales revenue from captive consumption of electricity at ` 3,48,43,491 and from captive consumption of by–product steam from waste heat recovery boiler was at ` 33,11,970 and by product chilled water from vapour absorption machine at ` 12,95,360. The Assessing Officer, however, did not find merit in the submissions of the assessee. He observed, intention behind enacting the provisions of section 80IA was for the purpose that no assessee can get benefit under the provisions by re–arranging its business transaction in such a manner that it produces more than ordinary profits that might be expected to arise in such eligible business. He observed, assessee has not generated any income but simply shown the profit by comparing the rates of power consumed supplied by Gujarat Government and accordingly has computed profit and claimed deduction. He observed, as cost saving cannot be construed as sales of the undertaking, it cannot be said that the 5 M/s. Rallis India Ltd. undertaking has earned any income during the year in the absence of any income, profit reflected in the Profit & Loss account is nothing but camouflaged figure to claim a fictitious deduction. Accordingly, he concluded that the assessee is not eligible to claim deduction of ` 87,86,871 under section 80IA. Being aggrieved of such disallowance, assessee preferred appeal before the first appellate authority.
The learned Commissioner (Appeals), after considering the submissions of the assessee with reference to provisions contained under section 80IA, and more particularly, sub–section (8) of section 80IA, held that the section specifically provides for a situation where any goods or services held for the purpose of eligible business are transferred to any other business carried on by the assessee. Therefore, as power generated from the eligible business was transferred for captive consumption of other businesses of the assessee it satisfies the condition of section 80IA(8). He further observed, it is not the Assessing Officer’s case that the power generation unit of the assessee is not an eligible business in terms of section 80IA. He also noted that before the Assessing Officer the assessee has made clear and categorical disclosure that revenue was generated from captive consumption and from sale to sell to an outsider. He also noted that the Assessing Officer was made aware that the amount mentioned under the caption “savings from captive
6 M/s. Rallis India Ltd. power plant” is actually the market value of the power and other by– products transferred to other business of the assessee. The learned Commissioner (Appeals) observed, considering the fact that provisions of section 80IA is undertaking specific and not assessee’s specific, assessee cannot be denied deduction under section 80IA on the reasoning of the Assessing Officer. However, as far as quantum of deduction claimed by the assessee is concerned, the learned Commissioner (Appeals) observed, as per section 80IA, where transfer of any goods or service by the eligible business to any other business carried on by the assessee is not recorded in the books of account of the eligible business at the market value of such goods or service as on the date of transfer for the purpose of deduction the profit and gain of said eligible business is required to be computed as if the transfer has been made at the market value of such goods or services as on that date. He observed, as per Explanation of section 80IA(6) brought into the statute w.e.f. 1st April 2009, market value means the price that such goods or services would fetch if they were sold by the undertaking or unit or enterprise or eligible business in the open market subject to statutory or regulatory restrictions if any. Value in relation to goods would mean the price that such goods and ordinarily fetch in the open market. He observed, in assessee’s case in the absence of any market value/price, the profit of assessee from eligible
7 M/s. Rallis India Ltd. business will have to be determined as a result of statutory or regulatory restrictions or as to what should have been the rate at which it was required to supply the goods as a result of statutory or regulatory restrictions. He observed, as the assessee has not supplied electricity to the State Electricity Board or to any other power distribution agency, deduction under section 80IA can be allowed @ 16% return on capital base as per notification under section no.251(E) dated 30th March 1992, which is used as parameter for fixation of tariff. He directed the Assessing Officer to compute deduction under section 80IA accordingly.
Learned Authorised Representative submitted, direction of the learned Commissioner (Appeals) to compute the deduction @ 16% return on capital bases is not correct as the notification relied upon by the learned Commissioner (Appeals) applies to distribution companies. He submitted, as per section 80IA(6), Explanation (i), the market value is subject to statutory or regulatory restriction only. He submitted, since the assessee is purchasing electricity from the Gujarat State Electricity Board at the cost of ` 6.17 per unit the application of such rate to the captive consumption of electricity is justified. In support of such contention, he relied upon the following decisions:–
8 M/s. Rallis India Ltd. i) CIT v/s Reliance Energy Ltd., 31 taxmann.com 63 (Bom.); & ii) Indian Petrochemical Corp. Ltd. v/s ACIT, Ahd./2009 & Ors., order dated 18.11.2015.
Learned Departmental Representative referring to the provisions of section 80IA submitted, only profit from eligible business of an undertaking can be allowed as deduction. Therefore, onus lies on the assessee to demonstrate the actual profit earned by the undertaking. He submitted in case of GSEB the cost of distribution is significant whereas in case of assessee there is hardly any cost of distribution. He submitted, the rate charged by the GSEB at 6.17 per unit is for commercial purpose, hence, the assessee is not justified in computing the cost of electricity generated by its eligible undertaking and consumed by its other business applying such rate. He, therefore, submitted, for ascertaining the actual cost of electricity generated by the assessee, the matter should be restored back to the file of the Assessing Officer.
We have considered the submissions of the parties and perused the material available on record. As far as eligibility to claim deduction under section 80IA, for the electricity generation unit at Ankleshwar is concerned, we agree with the learned Commissioner (Appeals) that keeping in view the provisions of section 80IA(8) electricity consumed
9 M/s. Rallis India Ltd. by the other business of the assessee has to be construed as sales of electricity by eligible undertaking. As rightly observed by the learned Commissioner (Appeals), the Assessing Officer has not doubted that Ankleshwar plant is otherwise eligible for deduction under section 80IA. He has denied assessee’s claim of deduction under section 80IA only for the reason that electricity generated by the Ankleshwar Unit was used for captive consumption in other businesses of the assessee. Therefore, we uphold the order of the learned Commissioner (Appeals) on the issue thereby dismissing the ground raised by the Department.
Now, coming to the issue of quantum of deduction allowable to the assessee under section 80IA, it is observed, the assessee has computed the cost of electricity generated and consumed for captive used at ` 6.17 per unit, the rate at which it purchases electricity from GSEB.
The learned Commissioner (Appeals) relying upon notification no.251(E) dated 30th March 1992, issued by the Ministry of Power, Government of India, has directed to compute deduction at 16% of the capital base. However, on a perusal of the said notification it becomes clear that the aforesaid notification is for regulating tariff for sale of electricity by generating companies. In the present case, admittedly, assessee is not an electricity generating company. Therefore, the 10 M/s. Rallis India Ltd.
notification relied upon by the learned Commissioner (Appeals) prima– facie would not be applicable to the assessee. Therefore, computation of deduction under section 80IA on the basis of 16% return on capital base as provided in the said notification, in our view, is not justified. The Hon'ble Jurisdictional High Court in Reliance Energy Ltd. (supra), while affirming the decision of the Tribunal, held that the parameter relating to 16% return on capital base is only an exercise for fixation of tariff and is only one of the many parameters taken into consideration for fixing the tariff under the old Electricity Act, 1948 and has nothing to do with the actual profits which are earned by the activity of power generation plant. The Tribunal, Mumbai Bench, in Indian Petrochemicals Corp. Ltd. (supra), relying upon the decision of the same Bench in Reliance Industries Ltd., ITA no.536/Mum./2012 dated 29th May 2015, allowed assessee’s claim of deduction under section 80IA, computed by applying the price at which industrial consumer pay for electricity purchased from the State Board distribution agencies. We have further noted, in case of Reliance Industries Ltd. (supra), the Tribunal has observed that the parameter relating to 16% of the capital base is for working out the tariff of sale to distribution agency and not for sale to end consumers and not for computing the profit and gains for the eligible business. In view of the decisions referred to above, we are of the opinion, the direction of the 11 M/s. Rallis India Ltd. learned Commissioner (Appeals) to allow deduction under section 80IA, at 16% on return of capital base is not justified. Considering the fact that assessee has computed income from electricity generated and consumed on captive basis by applying the rate at which it purchases from GSEB. The deduction claimed under section 80IA, should be allowed. We order accordingly. Assessee’s grounds are allowed and Department’s ground is dismissed.
In grounds no.3 to 5, assessee has challenged addition made on account of transfer pricing adjustment amounting to ` 20,23,348.
Brief facts are, during the assessment proceedings, the Assessing Officer on perusing the audited report in Form no.3CEB, found that in the relevant previous year, assessee had effected sale of certain products to its overseas A.E. at ` 10,58,31,4123. He further found that to bench mark the price charged the assessee has made an analysis by adopting comparable uncontrolled price (CUP) method. As the profit margin earned from the A.E. was 13.68%, as against the over all profit of 11.69% earned by the company, the price charged was found at arm’s length. The assessee also made an alternative analysis under TNMM, justifying the price charged. The Assessing Officer after examining the transfer pricing analysis, made by the assessee and submissions of the assessee held that as under CUP method
12 M/s. Rallis India Ltd. comparability norms are very stringent as to quality, quantity, date of transactions, economic geographical environment terms of contract which was not been taken into consideration by the assessee. Assessee had only compared the sale price to the third parties and A.E. He observed, out of five products sold to A.E., assessee does not have CUP for a product named LAMDA. Out of the remaining four products assessee has provided CUP details for three products. He also observed, in case of products Tebuconazola, average price is ` 900 whereas, the price charged to A.E. is ` 512=75. Thus, as per assessee’s own admission, the price charged as lowered by ` 387=25 per kg. He, therefore, held that due to aforesaid deficiency CUP cannot be considered as most appropriate method. Having held so, the Assessing Officer observed that in the given circumstances, TNMM is the most appropriate method and accordingly proposed eight companies as comparable with arithmetic mean of 13.33%. Though, assessee objected to the comparables proposed, however, the Assessing Officer rejecting the contentions of the assessee finally held that as the PLI of comparables at 13.33% is higher than the assessee’s margin of 13.24% and the variation between the margin is ` 74,11,957, which is more than 5% of sales to A.E. adjustment is required to be made. Without prejudice to the aforesaid conclusion, the Assessing Officer observed, since, as per assessee’s own admission
13 M/s. Rallis India Ltd. in the case of one product i.e., Tebuconazola assessee has incurred loss of ` 15,17,980, the arm's length price of the said product applying the entity level margin at 13.24% can be determined and accordingly worked out the adjustment at ` 20,23,348. While doing so, he observed, if the assessee gets relief before the appellate authority in respect of adjustment made to arm's length price of ` 74,11,937, then arm's length price determined in case of the product Tebuconazola by applying CUP method should be considered for adjustment. The assessee challenged the adjustment of arm's length price before the learned Commissioner (Appeals).
The learned Commissioner (Appeals), after considering the submissions of the assessee found that the assessee has sold four products to the A.E. out of which in respect of three products it has internal CUP which is faourable to the assessee as the average price charged to A.E. favourably compares to average price charged to third party. He, therefore, held that the price charged for those three products are at arm’s length. As far as 4th product i.e., Tebuconazola is concerned, the learned Commissioner (Appeals) found that no internal CUP is available as the product has only been sold to A.E. The learned Commissioner (Appeals) observed, when no internal CUP is available and given the volume of transaction entity level TNMM is found to be unacceptable, the margin has to be computed on cost plus basis. He
14 M/s. Rallis India Ltd. observed, the assessee has earned cost plus margin of 13.24% from its transaction on over all basis. He, therefore, held that the assessee must have earned such margin even in relation to international transactions of sale of Tebuconazola. Accordingly, he upheld the adjustment of ` 20,23,348, while deleting the adjustment of ` 74,11,937.
Learned Authorised Representative submitted, in respect of 97% of sales made to A.E., actual CUP is available. Therefore, there was no reason for the Assessing Officer in rejecting the CUP method adopted by the assessee for bench marking the arm's length price. He submitted, learned Commissioner (Appeals) having found the aforesaid claim of the assessee to be correct has deleted the transfer pricing adjustment of ` 74,11,937. However, he submitted, the learned Commissioner (Appeals) was not justified in upholding the adjustment of ` 20,23,348 in respect of only one product. He submitted, the transfer pricing provisions do not allow such segregation when the products are of similar nature. Referring to rule 10A(d), the learned Authorised Representative submitted, all closely linked transactions have to be clubbed together for transfer pricing purpose. He submitted, if all the products are aggregated for computing arm's length price, even applying TNMM assessee’s margin will be within +/– 5% requiring no further adjustment. In this context, he referred to the 15 M/s. Rallis India Ltd.
computation of margin under TNMM in respect of A.E. / non–A.E. transaction at Page–193 of paper book. In support of his contention that such segregation of products is not permissible, learned Authorised Representative relied upon the following decisions:– i) Godrej Sara Lee Ltd. v/s ACIT, ITA no.598/Mum./2013 dated 11.3.2015; ii) Taj Sats Air Catering Ltd. v/s ACIT, ITA no.8790/Mum./2013 dated 20.8.2013; and iii) Boskalis International v/s DDIT, ITA no.4862/Mum./2008 dated 18.7.2014.
Learned Departmental Representative relying upon the observations of the Assessing Officer and the learned Commissioner (Appeals) submitted aggregation is allowable if assessee demonstrate that assessee is inextricably linked to other similar and related transactions.
We have considered the submissions of the parties and perused the material available on record in the light of the decisions relied upon. At the outset, it needs to be observed, the transfer pricing adjustment made by the Assessing Officer at ` 74,11,937 applying TNMM was not found suitable by the learned Commissioner (Appeals) and he deleted the same. Against this finding of the learned Commissioner (Appeals), the Revenue has not preferred any appeal. Therefore, the order of the learned Commissioner (Appeals) on this 16 M/s. Rallis India Ltd.
issue has become final. In the aforesaid factual context, it needs to be examined whether arm's length price of a single product sold by the assessee can be taken up independently. Undisputedly, the assessee is a manufacturer of pesticide. During the relevant previous year, it has sold four products to its wholly owned subsidiary in Australia. It is a fact on record that assessee had aggregated the sale transaction of all four products to its A.E. for bench marking the arm's length price by applying CUP. The Assessing Officer while determining arm's length price under TNMM had also aggregated all the transaction to A.E. it is the case of the assessee that in terms of rule 10A(d), all closely related transactions have to be clubbed together for determining the arm's length price. As per definition of “transaction” under rule 10A(d) it includes a number of closely linked transaction. There is no doubt, all the products sold by the assessee to its A.E. are coming within the genus pesticides. Therefore, the international transactions relating to sale of all the products are closely linked hence, the overall margin of the international transaction with the A.E. has to be considered for the purpose of determining the arm's length price. The learned Commissioner (Appeals) is also convinced that over all margin shown by the assessee is at arm’s length. That being the case, the transfer pricing adjustment cannot be made in respect of one product sold by the assessee by applying a method of segregation. The Tribunal,
17 M/s. Rallis India Ltd.
Mumbai Bench, in Godrej Sara Lee Ltd. (supra), while dealing with identical nature of dispute relating to sale of pesticides to A.E. held as under:–
“26. There is no dispute that if the number of transactions are closely linked or continuous in nature and arising from a continuous transactions of supply or services the transactions can be classified as closely linked transaction for the purpose of transfer pricing and in terms of Rule 10A(d) of the income Tax Rules. The Aggregation and clubbing of the closely linked transaction are permitted under the Rules and it is also supported by OECD transfer pricing guidelines. Thus the concept of clubbing and aggregating the transaction is based on the premise that such transactions influenced by each other and particularly in determining the price and profit involved in the transactions then such transactions can safely be regarded as closely linked transactions. The OECD guidelines has referred a portfolio approach as business strategy consisting of tax payers bundling certain transaction for the purpose of earning an appropriate return across portfolio rather than single product. The assessee is selling various insecticide products used in the household at various strata of the society and, therefore, the products of the assessee are clearly falling under the one portfolio of same category of product and, therefore, the assessee can have a portfolio approach as a business strategy. A similar view has been taken by the Co–ordinate bench of this Tribunal in the case of Taj Sats Air Catering Ltd. v/s Additional CIT (supra). In view of the above facts and circumstances of the case as well as from the above discussion, we are of the view considered opinion that all the insecticide products sold by the assessee to its A.E. in each country shall be clubbed together for the purpose of determining the arm’s length price. Accordingly, we decide this issue in favour of the assessee. Consequently, the addition made by the Assessing Officer is deleted.”
As the aforesaid decision of the Tribunal is directly on the issue and no contrary decision has been brought to our notice by the learned Departmental Representative, respectfully following the aforesaid decision of the Tribunal, we hold that the adjustment of ` 20,23,348,
18 M/s. Rallis India Ltd. by segregating, one of the products is not proper. Accordingly, we delete the addition. Grounds no.3 to 5 are allowed.
In grounds no.6 to 9, assessee has challenged the disallowance made under section 14A r/w rule 8D.
During the assessment proceedings, the Assessing Officer while examining the return of income found that the assessee has shown dividend income of ` 1,83,59,813 as exempt from tax. He also noticed that in the computation of income the assessee has voluntarily disallowed an amount of ` 16,588 under section 14A. However, the Assessing Officer being of the view that disallowance made by the assessee is not in terms with rule 8D, called upon the assessee to explain why expenditure relating to earning of exempt income should not be disallowed as per rule 8D. As stated by the Assessing Officer, in response to the show cause notice, the assessee vide letter dated 28th November 2011, furnished a working of disallowance under section 14A r/w rule 8D at ` 70.35 lakh without prejudice to its claim that no further disallowance is to be made other than what has already been disallowed voluntarily. The Assessing Officer, however, was not convinced with the explanation of the assessee and proceeded to compute disallowance at ` 73.58 lakh in terms of rule 8D. the assessee having disallowed amount of ` 16,00,588, he disallowed the amount of 19 M/s. Rallis India Ltd.
` 73,41,412 while computing the income of the assessee. Being aggrieved of such disallowance assessee preferred appeal before the learned Commissioner (Appeals). However, the learned Commissioner (Appeals) also sustained the disallowance.
Learned Authorised Representative submitted before us, the assessee has sufficient interest free funds available with it to make the investment, hence, no disallowance of interest expenditure can be made. Further, he submitted, as against investment made of ` 127 crore, the assessee had interest free funds available with it to the tune of ` 348.67 crore. Therefore, no disallowance of interest expenditure can be made. For such proposition, he relied upon the decision of the Hon'ble Jurisdictional High Court in HDFC Bank Ltd. v/s DCIT, 383 ITR 529. He also relied upon the decision of the Tribunal, Mumbai Bench, in its own case for assessment year 2007–08 in ITA no.1319/Mum./ 2011, dated 25th May 2016. As far as administrative expenditure under rule 8D(2)(iii) is concerned, learned Authorised Representative submitted, only one employee is looking after the investment, therefore, the assessee has disallowed salary income relating to one of the employee. However, he submitted, in view of the decisions of the Tribunal in assessee’s own case for assessment year 2007–08, 2% of the dividend income can be disallowed.
20 M/s. Rallis India Ltd.
Learned Departmental Representative relied upon the observations of the Assessing Officer and the learned Commissioner (Appeals).
We have considered the submissions of the parties and perused the material available on record in the light of the decisions relied upon. It is evident, before the first appellate authority assessee had specifically taken a plea that it has own interest free fund of ` 348.67 crore to make the investment of ` 127 crore. However, the aforesaid contention of the assessee did not find favour with the learned Commissioner (Appeals). The fact that assessee was having substantial interest free funds available with it to take care of the exempt income yielding investment has not been disputed by the Departmental Authorities. Therefore, applying ratio laid down by the Hon'ble Jurisdictional High Court in HDFC Bank Ltd. v/s DCIT, [2016] 383 ITR 529 (Bom.) and CIT v/s HDFC Bank Ltd. v/s DCIT, [2014] 366 ITR 505 (Bom.), we hold that no disallowance of interest expenditure under rule 8D(2)(ii) can be made. As far as disallowance of administrative expenditure under rule 8D(2)(iii) is concerned, it is the contention of the assessee that one of the employee is looking after the investment activity. Therefore, the salary cost of the employee has already been disallowed by the assessee. We have noted, in assessment year 2007–08, the Tribunal in assessee’s own case has 21 M/s. Rallis India Ltd.
held 2% of the dividend income earned by the assessee to be a reasonable disallowance under section 14A. Applying the same principle, we direct the Assessing Officer to disallow 2% of the dividend income under section 14A. These grounds are partly allowed.
In the result, assessee’s appeal is partly allowed and Department’s appeal is dismissed. Order pronounced in the open Court on 16.12.2016