RELIANCE NATURAL RESOURCES LTD,NAVI MUMBAI vs. ADDL CIT RG 7(2), MUMBAI

Per Jason P. Boaz, A.M.

These are cross appeals, by the assessee and Revenue, directed against the order of the CIT(A)-13, Mumbai dated 26.10.2010 for A.Y. 2007-08. 2. The facts of the case, briefly, are as under: - 2.1 The assessee, a company engaged in the business of providing fuel and facilitation and allied services in various forms to power plants, filed its return of income for A.Y. 2007-08 on 31.10.2007 declaring income of `28,51,21,095/-. A revised return of income was filed on 19.03.2008

2 ITA Nos. 847&1425/Mum/2011 Reliance Natural Resources Ltd. declaring income of `28,51,21,595 /-, wherein, inter alia, the claim of TDS in the revised return was reduced to `11.11 crores from the claim of `20.79 crores in the original return of income and the ‘book profits’ under section 115JB of the Income Tax Act, 1961 (in short 'the Act') was computed at `43,79,75,890/- as against `43,19,03,036/- in the original return of income. The case was taken up for scrutiny and the assessment was completed under section 143(3) of the Act vide order dated 07.12.2009, wherein the income of the assessee was determined at `71,06,72,550/- under normal provisions in view of the following additions/disallowances: - `28,58,28,246/- i) FCCB issue expenses ii) Legal and professional fees ` 49,74,139/- iii) Disallowance under section 14A of the Act ` 5,97,63,000/- iv) Non deduction of withholding tax on interest payments on FCCB ` 3,35,70,044/- 2.2 Aggrieved by the order of the assessment for A.Y. 2007-08 dated 07.12.2009, the assessee preferred an appeal before the CIT(A)-13, Mumbai. The learned CIT(A) disposed off the appeal vide the impugned order dated 26.10.2010 allowing the assessee partial relief. 3. Both Revenue and the assessee, being aggrieved by the order of the CIT(A)-13, Mumbai dated 26.10.2010 for A.Y. 2007-08 in respect of the issues held against them, have preferred appeals before the Tribunal. We now proceed to dispose off these cross appeals hereunder: - Assessee’s appeal in ITA No. 847/Mum/2011 for A.Y. 2007-08 4. In this appeal, the assessee has raised the following grounds: - “1. The learned Commissioner of Income Tax (Appeals) [hereinafter referred to as CIT(A)] erred in confirming the disallowance of Rs 7,31,115 made u/s 40(a)(i) due to non deduction of tax at source, holding that the said payment of Rs 7,31,115 made to Centre for Investment & Business Advisory, Indonesia was liable to tax in India as fee for technical service u/s 9(1)(vii) of the Income Tax Act. Your appellant submits that the payment made to the Indonesian Resident for tax due diligence services in Indonesia is not liable to tax in India under Double Tax Avoidance Agreement (DTAA) between India and Indonesia. Therefore no tax was deductible u/s 195 of the Act and no disallowance u/s 40(a)(i) ought to have been made with regards to this payment.

3 ITA Nos. 847&1425/Mum/2011 Reliance Natural Resources Ltd. 2. The learned CIT(A) erred in confirming the disallowance of Rs 49,01,024/- paid as professional fees in connection with listing of Global Depository Receipts (GDRs) holding the same as capital expenditure. Your appellant submits that the said professional fee was paid for listing of GDRs issued in connection with restructuring and reorganization of existing business and not for expansion of capital base. The expenditure ought to have been allowed as incurred wholly and exclusively for the purposes of business. 3. The Learned CIT (A) erred in directing to work out disallowance of administrative expenses u/s 14A at the rate of 6% of average weighted investment in tax free investments. Your appellant submits that as no disallowance could be made out of administrative expenses u/s 14A as Rule 8D came into force from Assessment Year 2008-09 only. Without prejudice, your appellant submits that the disallowance ought to have been nominal considering the minimal transactions of investment in Mutual Funds and passive investment in group company shares. 4. The appellant craves leave to add to, alter, amend or vary all or any of the above grounds of appeal as it may think fit.” 5. Ground No. 1 - Disallowance of expenses of `7,31,115/- under section 40(a)(ia) of the Act 5.1 In this ground, the assessee assails the impugned order of the learned CIT(A) in confirming the disallowance of `7,31,115/- under section 40(a)(ia) of the Act due to non deduction of tax at source by holding that the said payment to Centre for Investment and Business Advisory, Indonesia was exigible to tax in India as fees for technical services (FTS) under section 9(1)(vii) of the Act. It is contended that the said payment, made to the Indonesian resident for tax due diligence services in Indonesia, is not exigible to tax under the India-Indonesia DTAA and therefore since no tax was deductible under section 195 of the Act no disallowance under section 40(a)(ia) of the Act ought to have been made in respect of this payment. 5.2 The facts of the matter as emanate from the record are that in the year under consideration, the assessee had incurred legal and professional fees amounting to `3,11,10,502/- which included payment of `7,31,115/- to Centre for Instrument and Business Advisory, Indonesia for consultancy for tax due diligence in relation to coal companies in Indonesia. The

4 ITA Nos. 847&1425/Mum/2011 Reliance Natural Resources Ltd. assessee claimed the said expenditure was revenue in nature in its computation of income. The Assessing Officer (AO), however, disallowed the assessee’s claim on the ground that the said expenditure is capital in nature and also disallowed the said expenditure under section 40(a)(ia) of the Act for non-deduction of tax at source under section 195 of the Act. On appeal, the learned CIT(A) upheld the AO’s decision that the said expenses are exigible to tax in India under section 9(1)(vii) of the Act as FTS in the light of the Explanation introduced by Finance Act 2010 w.e.f. 01.06.1976. 5.3 At the outset, the learned A.R. for the assessee submitted that the AO has erroneously taken `73,115/- while making the disallowance under section 40(a)(i) of the Act for non-deduction of tax at source under section 195 of the Act and the correct figure is `7,31,115/- which has been correctly taken by the learned CIT(A) in the impugned order. The learned A.R. for the assessee submitted that the AO’s view was that the said amount was to be disallowed under section 40(a)(ia) of the Act in view of the assessee’s failure to deduct tax under section 195 of the Act. According to the learned A.R., while undisputedly the learned CIT(A) was correct in holding that this amount of `7,31,115/- paid to the Indonesian entity for tax due diligence is exigible to tax in India under section 9(1)(vii) of the Act, the learned CIT(A) has not considered the relevant provision of the India- Indonesia DTAA to see whether the said amount is exigible to tax thereunder. The learned A.R. contends that in the India-Indonesia DTAA there is no Article in respect of FTS and therefore the same payment falls within the ambit of ‘Business Profits’ in Article 7 of the DTAA. Therefore, the said payment of `7,31,115/- received by the Indonesian entity from the assessee would constitute its business income under Article 7 of the India- Indonesia DTAA and consequently, there is no requirement of deducting tax at source thereon under section 195 of the Act. In support of this proposition, the learned A.R., inter alia, placed reliance on the decision of the Authority for Advance Ruling (AAR) in the case of Tekniskil (Sendirian) Berhard vs. CIT (1996) 88 Taxman 439 (Del)/222 ITR 551.

5 ITA Nos. 847&1425/Mum/2011 Reliance Natural Resources Ltd. 5.4 Per contra, the learned D.R. for Revenue placed reliance on the fining of the learned CIT(A) in the impugned order. 5.5.1 We have heard the rival contentions of both the parties and perused and carefully considered the material on record, including the judicial pronouncement cited. It is seen that there is no dispute with the finding of the learned CIT(A) that the amount of `7,31,115/- paid by the assessee to the Indonesian entity for tax due diligence is exigible to tax in India under section 9(1)(vii) of the Act as FTS. The dispute put forth by the assessee is that since the assessee, in this regard, is entitled to the benefit of the India-Indonesia DTAA or the Act, whichever is favourable to it, the learned CIT(A) erred in not considering the DTAA, which is favourable to it, while passing the impugned order. It has been submitted that the India-Indonesia DTAA does not contain any Article in respect of FTS. In these circumstances, it is contended that the said payment for tax due diligence fees to the Indonesian entity would constitute a part of its ‘business income’ as per Article 7 thereof and therefpre there is no requirement to deduct tax at source on the said payment under section 195 of the Act. A copy of the said DTAA has also been placed on record and we have perused the same. As contended by the learned A.R. for the assessee, a perusal of the impugned order shows that the learned CIT(A), in coming to the finding he did, has not examined the India-Indonesia DTAA and adjudicated thereon while passing the impugned order which the assessee claims is favourable to it and ought to have been applied. In these circumstances, in the interest of equity and justice, we restore this issue to the file of the learned CIT(A) to examine the assessee’s claim in this regard with respect to the India-Indonesia DTAA and to allow the assessee the benefit of that which is favourable to it, i.e. the DTAA or the Act, in accordance with law and after affording the assessee adequate opportunity of being heard and to submit details/submissions in this regard. It is accordingly ordered. Consequently, ground No. 1 of the assessee’s appeal is treated as allowed for statistical purposes.

6 ITA Nos. 847&1425/Mum/2011 Reliance Natural Resources Ltd. 6. Ground No. 2 - Disallowance of Expenses incurred for GDRs - `49,01,024/- as Capital Expenditure 6.1 In this ground the assessee assails the impugned order of the learned CIT(A) in confirming the disallowance of `49,01,024/- which were paid as professional fees to Linklaters, U.K. in connection with the listing of Global Depository Receipts (GDR) by holding the same to be capital expenditure. It is submitted that the said expenditure was incurred for listing of GDRs in connection with restructuring and re-organisation of existing business, which were wholly and exclusively for the purposes of assessee’s business and not for expansion of capital base and therefore ought to have been allowed as claimed. The learned A.R. for the assessee was heard in support of the grounds raised and prayed that the assessee’s claim be allowed. 6.2 The learned D.R. placed strong reliance on the decision of the learned CIT(A) in the impugned order. 6.3.1 We have heard the rival contentions of both the parties and perused and carefully considered the material on record. The facts of the matter as emanate from the record are that the AO disallowed the legal and professional fees amounting to `49,01,024/- paid to Linklaters, U.K. in respect of services rendered for listing of GDRs as capital expenditure and also disallowed the same under section 40(a)(i) of the Act for failure to deduct tax at source thereon under section 195 of the Act. On appeal, the learned CIT(A) held that the said expenditure is capital in nature placing reliance on the decision of the Hon'ble Apex Court in the case of Brook Bond India Ltd. (225 ITR 798). 6.3.2 We find that the Hon'ble Apex Court in the case of Brook Bond India Ltd. (supra) has held that even though the increase in capital results in expansion of the capital base of the company and incidentally that would help the business of the company and may also help in profit making, the expenses incurred in that connection still retains the character of capital expenditure since the expenditure is directly related to the expensing of the capital base of the company. In that view of the matter, the aforesaid

7 ITA Nos. 847&1425/Mum/2011 Reliance Natural Resources Ltd. expenditure incurred by the assessee in the case on hand for listing of GDRs is capital expenditure and the assessee’s claim that the said expenditure be allowed under section 37(1) of the Act is not legally tenable as the share capital of the assessee has increased consequent to the issue of GDRs and the said expenditure incurred is clearly capital in nature. We, therefore, finding no infirmity in the impugned order of the learned CIT(A) uphold the finding therein that the said expenditure of `49,01,024/- paid to Linklaters, U.K. in respect of listing of GDRs is capital expenditure and the same is not allowable under section 37(1) of the Act. Consequently ground No. 2 of the assessee’s appeal is dismissed. 7. Ground No. 3 - Disallowance under section 14A r.w. Rule 8D 7.1.1 In this regard, the assessee assails the order of the learned CIT(A) as being erroneous in directing the AO to work out the disallowance under section 14A of the Act @6% of the average weighted investment in tax free securities. It is submitted that no disallowance out of administrative expenses can be made under section 14A of the Act since Rule 8D came into force only from A.Y. 2008-09. Without prejudice to the above averment that no disallowance can be made, it is submitted that if at all, the disallowance ought to have been minimal having regard to the minimal transactions of investments in mutual funds (MF) and passive investment in group company shares. 7.1.2 The learned A.R. for the assessee for the assessee submitted that the AO has passed the order giving effect to the impugned order of the learned CIT(A) vide order dated 11.04.2012 and has worked out the disallowance under Rule 8D(2)(iii) at `14,80,122/-. According to the learned A.R. for the assessee, in the year under consideration the assessee has made major investments in units of MFs, comprising 53 transactions of investments and redemptions and the earning of exempt income generally does not require the incurring of any expenditure. The investment in shares is stated to have been made mostly in earlier years. In these circumstances the learned A.R. contends that no disallowance under section 14A of the Act is called for. The learned A.R. for the assessee, inter alia, also cited the decision of the

8 ITA Nos. 847&1425/Mum/2011 Reliance Natural Resources Ltd. Coordinate Bench of this Tribunal in the case of VFC Securities Pvt. Ltd. vs. ITO in ITA No. 5523/Mum/2009 dated 27.08.2010 and M/s. Alka Securities Ltd. in ITA No. 4657/Mum/2011 dated 18.07.2012, wherein it has been held that disallowance upto the extent of 5% of the total exempt income earned by the assessee to be reasonable. 7.2 Per contra, the learned D.R. placed reliance on the finding of the learned CIT(A) in the impugned order on this issue. 73.1 We have heard the rival contentions of both the parties and perused and carefully considered the material on record; including the judicial pronouncement cited. The facts of the matter as emanate from the records are that in the courses of assessment proceedings, the AO noticed that the assessee had earned exempt income of `49,83,071/-. The AO after examination of the matter, was of the view that disallowance of expenditure in relation to earning of the above exempt income was required to be made and proceeded to disallow an amount of `513.70 lakhs under section 14A r.w. Rule 8D(2)(ii) on the ground that the assessee has utilised borrowed funds for making investment in shares and MFs. The AO also worked out the disallowance under Rule 8D(2)(iii) @0.5% of the average value of investments at `83.93 lakhs. Thus the total disallowance made by the AO under section 14A w.r. Rule 8D of the I.T. Rules amounted to `597.63 lakhs (i.e. `513.7 lakhs plus `83.93 lakhs). On appeal, the learned CIT(A) held that the assessee has no borrowings other than for FCCBs and therefore has not incurred any interest or finance cost in respect of exempt income and therefore deleted the disallowance of `513.7 lakhs made under Rule 8D(2)(ii) of the Rules. The learned CIT(A) further held that the assessee’s claim that it has not incurred any expenditure in relation to earning of exempt income is not correct and directed the AO to work out the disallowance under Rule 8(2)(iii) by taking the average monthly value of investments, which has since been worked out at `14,80,122/- vide the AO’s order dated 11.04.2012. It is in respect of the learned CIT(A)’s finding/direction in respect to the disallowance to be made under Rule 8D(2)(iii) of the Rules that the assessee is in appeal before the Tribunal.

9 ITA Nos. 847&1425/Mum/2011 Reliance Natural Resources Ltd. 7.3.2 The Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. (ITA No. 626/2010 dated 13.08.2010) has held that the provisions of section 14A of the Act r.w. Rule 8D of the Rules is not arbitrary or unreasonable, but that it can be applied if the assessee’s method is not satisfactory. It has also been held that Rule 8D is applicable from A.Y. 2008-09. For the year in question, i.e. A.Y. 2007-08, Rule 8D of the Rules is not applicable and therefore if the AO is not satisfied with the explanation put forth by the assessee that no expenditure was incurred to earn the exempt dividend income, the disallowance under section 14A of the Act is to be made on a reasonable basis. The Hon'ble Delhi High Court in the case of Maxopp Investment Ltd. & Others vs. CIT (347 ITR 162) has expressed an almost similar view. In this view of the matter, the application of Rule 8D of the Income Tax Rules, 1962 in the case on hand by the authorities below is not sustainable. 7.3.3 It is seen that the case on hand is not one where no exempt income was earned by the assessee. In such circumstances, various Coordinate Benches of this Tribunal have observed that in such cases certain percentage of exempt income can constitute the basis for a reasonable estimate for making the disallowance under section 14A of the Act for assessment years prior to A.Y. 2008-09. Such a view; that a disallowance of 5% of exempt income under section 14A of the Act was reasonable has been taken in the case of VFC Securities Pvt. Ltd. vs. ITO in ITA No.5523/ Mum/2009 dated 27.08.2010 and in DCIT vs. Alka Securities Ltd. in ITA No. 4657/Mum/2011 dated 18.07.2012 for A.Y. 2007-08 by Coordinate Benches of this Tribunal. Following the ratio of the aforesaid decisions of this Tribunal (supra), we direct the AO to instruct the disallowance under section 14A of the Act for this year to 5% of the exempt income earned by the assessee of `49,83,071/-. Consequently, ground No. 3 of the assessee’s appeal is partly allowed. 8. Ground No. 4 - This ground being general in nature, no adjudication is called for thereon. 9. In the result, the assessee’s appeal for A.Y. 2007-08 is partly allowed.

10 ITA Nos. 847&1425/Mum/2011 Reliance Natural Resources Ltd. Revenue’s appeal in ITA No. 1425/Mum/2011 for A.Y. 2007-08 10. In this appeal Revenue has raised the following grounds: - “1. On the facts and in the circumstances of the case of the CIT(A) erred in law in deleting the disallowance of expense of Rs.28,58,28,246/- on issue of Foreign Currency Bonds because they were incurred for the issue of foreign currency convertible bonds of Rs. 1304.13 crores and were thus capital in nature. 2. The CIT(A) while deleting the disallowance mention in ground No. 1 above by saying that the decision of Karnataka High Court in the case of Samsung Electronics Co. Ltd (320 ITR 209) was overruled by the supreme court where in fact the case was remanded to the High Court for fresh adjudication. 3. Without prejudice to ground Nos.1 and 2, the CIT(A) erred in law in deleting the disallowance mentioned above because in the alternative even if the expenditure was treated as revenue in nature TDS was not deducted as required u/s 195 of the Act and section 40a(ia) had to be invoked. 4. The CIT(A) erred in law in deleting the addition of Rs.17,75.67,418/- arising out of disallowance of the amount of loss of Rs. 17,75,67,418/- arising out of assignment of loan to M/s Western Alliance Power Ltd. by M/s Reliance Patalganga Power claimed as short term capital loss without appreciating the fact that this loss arise because of lesser capital amount received and not on sale of capital gains and so could not be equated to short term capital loss. 5. The appellant prays that the order of CTT(A) on the grounds be set aside and that of the AO restored . The appellant craves leave to amend or alter any ground or add a new ground that may be necessary.” 11. Grounds No. 1 to 3 - Disallowance of Expenditure on FCCB issue - `28,58,28,246/- 11.1 In these grounds, the Revenue contends that the learned CIT(A) erred in deleting the disallowance made by the AO of expenditure of `28,58,28,246/- incurred by the assessee on the issue of Foreign Currency Convertible Bonds (FCCB), since they were capital in nature. It is further contended that the learned CIT(A), while deleting the aforesaid disallowance had wrongly mentioned that the decision of the Hon'ble Karnataka High Court in the case of Samsung Electronics Ltd. (320 ITR 209) was overruled by the Hon'ble Apex Court, when actually it was remanded to the High Court for fresh adjudication. In ground No. 3

11 ITA Nos. 847&1425/Mum/2011 Reliance Natural Resources Ltd. Revenue also contends that, without prejudice to the arguments put forth in grounds 1 and 2, even if the aforesaid expenditure incurred on issue of FCCBs is held to be revenue in nature, TDS was not made thereon as required under section 195 of the Act and section 40(a)(i) had to be invoked. The learned D.R. for Revenue was heard in support of the grounds raised and placed reliance on the order of the AO on these issues, but was not able to bring material on record to controvert the findings of the learned CIT(A) on this issue. 11.2 In the year under consideration, the assessee has issued FCCBs to the tune of `1304.13 crores and for this purpose incurred expenditure of `28,58,28,246/-, which has been reduced from the share premium account in the Balance Sheet. The AO noticed that, however, in the computation of income, the assessee has claimed deduction of this amount as revenue expenditure under section 37(1) of the Act. The AO disallowed the assessee’s claim on the ground that the said expenses are capital in nature. The AO was also of the view that the assessee had not deducted tax at source on the payment of the said expenses and therefore the same is to be disallowed under section 40(a)(i) of the Act. The AO also held that out of the total expenditure of `28,58,28,246/-, an amount of `2,28,29,616/- was in respect of payments to Barclays Bank (India) were not covered by TDS certificates and hence the same was to be disallowed. On appeal, the learned CIT(A) held that the FCCBs are in the nature of debentures and unsecured loans and hence the expenditure incurred for issue of FCCBs is allowable deduction under section 37(1) of the Act. 11.3 Before us, the learned A.R. for the assessee reiterated the facts of the matter on this issue as laid out in para 11.2 of this order (supra). According to the learned A.R., FCCBs in the case on hand are issued by the assessee only as debt raising instruments and the FCCB holders never had any voting rights as the same were not converted into equity shares of the company. It is contended that in such circumstances, the FCCB’s are to be deemed to be the debentures issued by the assessee for business purposes. In support of the proposition that the said FCCBs were deemed

12 ITA Nos. 847&1425/Mum/2011 Reliance Natural Resources Ltd. as debentures and the expenses incurred in issuing the FCCBs were to be allowed as revenue expenditure under section 37(1) of the Act, the learned A.R., inter alia, placed reliance on the following judicial pronouncements: - i) Prime Focus Ltd. vs. DCIT (ITA No. 836/Mum/2011 dated 04.02.2016) ii) Mahindra & Mahindra Ltd. vs. JCIT (2010) 36 SOT 348 (Mum) iii) CIT vs. Secure Meters Ltd. (2009) 175 Taxman 567 (Raj) CIT vs. Tata Teleservices (�व�वध आवेदन) Ltd. (2014) 47 taxmann.com iv) 238 (Bom) v) CIT vs. ITC Hotels Ltd. (2011) 334 ITR 198 (Kar) vi) CIT vs. South India Corpn. (Agencies) Ltd. (2007) 290 ITR 217 (Mad) vii) CIT vs. Havells India Ltd. (2013) 352 ITR 376 (Del) viii) CIT vs. First Leasing Co. of India Ltd. (2008) 304 ITR 67 (Mad) ix) Gati Limited (ITA No. 749/Hyd/2012 dated 04.01.2013) x) Gati Limited (ITA No. 1325/Hyd/2015 dated 10.03.2016) 11.4.1 We have heard the rival contentions of both the parties and perused and carefully considered the material on record, including the judicial pronouncement cited. We find that similar issue of treatment of expenses incurred in issue of FFBs on similar facts, as in the case on hand, was dealt with by a Coordinate Bench of this Tribunal in the case of Prime Focus Ltd. in its order in ITA No. 8364/Mum/2011 dated 04.02.2016 at paras 3 to 13 thereof. The Coordinate Bench at paras 8 to 11 and 13 thereof held that the expenses incurred in connection with issue of FCCBs/raising of debts are in principle of revenue nature and constitute allowable expenditure for the assessee’s business purposes. The said finding of the Coordinate Bench is extracted hereunder: - “8. We have heard both the parties and perused the orders of the Revenue Authorities as well as the citations by the Ld Representatives of both the parties. Our adjudication on the core issue is given in the following paragraphs: 9. Assessee spent Rs. 5,82,40,318/- by way of payments to (i) fee paid to the lead managers to the issue; (ii) fees paid to the legal advisors to the issue and (iii) listing fees paid. The same was paid to those parties who contributed for the success of the issue of FCCB amounting to US $5.5 millions. In principle, the payments of this nature in our opinion falls in revenue zone. But the fact is that they'd were incurred in

13 ITA Nos. 847&1425/Mum/2011 Reliance Natural Resources Ltd. connection with issue of FCCBs. Assessee raised these Foreign Currency Bonds of Rs 1 lakh Each. Details of such expenditure is given on page 42 of the APB. In this contest, assessee paid Rs. 5.82 Crs (rounded off) to lead managers / legal advisors and listing fees. AO treated the same as „capital expenditure‟. Will such revenue expenditure when incurred in connection FCCB makes it of capital nature? We shall examine the nature of FCCBs. 10. Assessee issued the FCCBs for the purpose of Acquisition of the companies in similar lines abroad for expanding the business presence abroad. Whereas the relevant agreements and issue documents suggest that they were issued for equity purposes. It is a fact that the proceeds of the FCCBs were spent on acquiring the companies abroad. Being optionally convertible, the bond holders have the option to convert into equity. But the assessee did not issue shares to the Bond holders as they did not exercise that option. Rather, assessee refunded the Bond money with premium to the Bond Holders. Considering the fact of REFUND of entire FCC Bond money, we are of the opinion that FFCB issue exercise of the assessee amounts to one raising debt for the intended purpose and it is unconnected to the issue of shares. As such the difference between Bond and Debenture is very thin as they both are two different types of Debt Instruments. Further, we find that there is nexus between the expenditure and the purpose of the bonds of the assessee. In such case, the claim is allowable in view of the decision of the Hon'ble Apex Court in the case of Hero Cycles P Ltd (supra). Relevant para from the said judgment is extracted as under:- "Insofar as loans to the sister concern / subsidiary company are concerned, law in this behalf is recapitulated by this Court in the case of „S.A. Builders Ltd. v. Commissioner of Income Tax (Appeals) and Another‟ [2007 (288) ITR 1 (SC)]. Once it is established that thereso is nexus between the expenditure and the purpose of business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the Board of Directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. It further held that no businessman can be compelled to maximize his profit and that the income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman." 11. Legal propositions : Scope of Ld DR - Making out a new case of applicability of Section 35D: Ld DR for the revenue filed written note stating that that the claim of such expenses is to be considered within the meaning of the provisions of section 35D of the Act. In this regard, Ld AR for the assessee traced the way AO dealt with this issue and submitted that AO's case is if the said expenses constitutes Revenue or Capital within the meaning of section 37 of the Act. Applicability of the provisions of Section 35D of the Act was never the issue before either the AO or before the CIT(A). At the second appeal, Ld CIT DR cannot make a new case by invoking section 35 D of the Act even if it is correctly invokable. For this proposition, he relied on

14 ITA Nos. 847&1425/Mum/2011 Reliance Natural Resources Ltd. various binding judgment in the case of Mahendra and Mahendra Ltd (Supra). Therefore, we dismiss the Ld DR‟s argument on the issue. 12. ..... Summary 13. We have held that the expenses in question are in principle of revenue nature. It is the trite law such expenses incurred n connection with raising of debts / FCC Bonds constitute allowable expenditure of the Assessee.” 11.4.2 Following the ratio of the decision of the Coordinate Bench of this Tribunal in the case of Prime Focus Ltd. (supra), we hold that, in the facts and circumstances of the case on hand, the expenditure incurred by the assessee in connection with the issue of FCCBs was correctly held to be revenue in nature by the learned CIT(A), being expenses incurred in connection with the raising of debts and allowable expenditure under section 37(1) of the Act. 12.1 Revenue has also contended that the learned CIT(A), while deleting the disallowance of `28,52.28,246/- on account of expenditure incurred on issue of FBBCs has wrongly mentioned that the Hon'ble Apex Court had overruled the decision of the Hon'ble Karnataka High Court in the case of Samsung Electronics Co. Ltd. (320 ITR 209) whereas the issue had been remanded to the Hon'ble High Court for fresh adjudication. 12.2 We have heard both parties in this regard. The learned A.R. for the assessee filed a copy of the decision of the Hon'ble Apex Court in the case of GE India Technology Cen. )P) Ltd. vs. CIT (2010) 1993 Taxman 234 (SC) (Civil Appeal Nos. 7541-7778 of 2010 dated 09.09.2010). We have respectfully perused the said order of the Hon'ble Apex Court. The Hon'ble Apex Court, while holding that section 195 of the Act provides that an assessee has a liability to deduct tax at source only when the remittance to be made to the non-resident is a trading receipt, the whole or part of which is liable to tax in India, at para 10 thereof has reversed/set aside the judgement of the Hon'ble Karnataka High Court for de novo consideration in line with its directions. 13.1 The AO had also held at para 5 of the assessment order, that since the assessee had not deducted tax at source on the payment of

15 ITA Nos. 847&1425/Mum/2011 Reliance Natural Resources Ltd. expenditure incurred in connection with the issue of FCCBs under section 195 of the Act, the same is disallowed under section 40(a)(i) of the Act. The details of the nature of payments (i.e. arranger’s fees, legal and professional fees, L/C commission and trusteeship fees, principal agent fees, etc.), amounts paid and parties names, etc. are also mentioned at para 5 of the order of assessment. On appeal, the learned CIT(A) held that the said payments were not exigible to tax in India by placing reliance on the judicial pronouncements in the case of ITO vs. Prasad Production Ltd., Chennai (125 ITD 263) ( SB Chennai) and VAN Cord ACZ India (P) Ltd. vs CIT (Delhi HC) and therefore the question of making TDS under section 195 of the Act on the said payments did not arise. 13.2 The learned D.R. placed reliance on the decision of the AO on this issue. 13.3 The learned A.R. for the assessee reiterated the submissions put forth before the learned CIT(A). According to the learned A.R. for the assessee, the said payments are not covered within the ambit of the provisions of section 195 of the Act and therefore there was no liability cast upon the assessee to make deduction of tax at source on such payments. It is contended by the learned A.R. that this issue is covered in favour of the assessee by the following judicial pronouncements on which he placed reliance earlier before the learned CIT(A): - i) Raymond Ltd. vs DCIT (2003) 86 ITD 791 (Mum) ii) Mahindra & Mahindra (30 SOT 374) (Mum SB) iii) Intratck Testing Services India P. Ltd. (307 ITR 418) (AAR) iv) DCIT vs. Boston Consulting Group Pte Ltd. (94 ITD 31) (Mum) v) ITO vs. De Beers India Minerals P. Ltd. (297 ITR (AT) 1760 (Bangalore) 13.4 We have heard the rival contentions of both the parties and perused and carefully considered the material on record; including the judicial pronouncement cited. We find that the issue under consideration is covered by the decision of the Coordinate Bench of this Tribunal in the case of Raymond Ltd. vs. DCIT (2003) 86 ITD 791 (Mum) wherein it was held that neither management commission nor underwriting commission

16 ITA Nos. 847&1425/Mum/2011 Reliance Natural Resources Ltd. nor selling commission would amount to FTS within the meaning of the DTAA with U.K. and consequently there was no obligation on the part of the assessee-company to deduct tax under section 195 of the Act. Following the decision of the Coordinate Bench, we hold that there is no liability case on the assessee in the case on hand to withhold tax under section 195 of the Act on the said payments which, inter alia, constitute payment of legal and professional fees, L/C Commission, arranger fees, etc., incurred in connection with the issue of FCCBs and therefore no disallowance under section 40(a)(i) of the Act is called for. Consequently, grounds No. 1 to 3 of Revenue’s appeal are dismissed. 14. Ground No. 4 - disallowance of STCL of `17,75,67,418/- on Loan Assignment 14.1 In this ground Revenue contends that the learned CIT(A) erred in deleting the disallowance of loss of `17,75,67,418/- arising out of assignment of loan to M/s. Western Alliance Power Ltd., originally loaned/ advanced to M/s. Reliance Patalganga Power Ltd. by the assessee and claimed as short term capital loss (STCL) without appreciating that the STCL arose because of lesser capital amount received and not on sale of capital gains and therefore could not be equated to STCL. The learned D.R. was heard in support of the grounds raised and placed reliance on the order of the AO on this issue. 14.2 Per contra, the learned A.R. for the assessee supported the findings of the learned CIT(A) on this issue in the impugned order. The learned A.R. for the assessee further submitted that reliance was placed, inter alia, on the decision of the Coordinate Bench of this Tribunal in the case of Siemens Nixdorf Informationssysteme GmbH vs. DDIT (2016) 68 taxmann.com 113 (Mumbai-Trib), wherein the issue of allowing of STCL was considered in the context of an assessee advancing loan to its subsidiary which ran into serious financial difficulties and the assessee sold this debt to another company for less consideration and claimed the difference as STCL. The Coordinate Bench held that the loss arising thereon was to be allowed as STCL. The learned A.R. contended that since the assessee’s case was covered by the aforesaid decision of the Coordinate Bench, the order of the learned CIT(A) on this issue be upheld.

17 ITA Nos. 847&1425/Mum/2011 Reliance Natural Resources Ltd. 14.3.1 We have heard the rival contentions of both the parties and perused and carefully considered the material on record. The issue for consideration before us, as argued by both the parties, is whether or not the learned CIT(A) was justified in deleting the disallowance of STCL of `17,75,67,418/- claimed by the assessee. The facts of the matter that emanate from the record are that the assessee had advanced/loaned an amount of `17,84,67,418/- to M/s. Reliance Patalganga Power Ltd. According to the assessee due to difficulties faced, it was decided that the said advance/loan be assigned in order to recover whatever was possible and accordingly, the same was assigned to Western Power Alliance Ltd. for a consideration of `9,00,000/-. The assessee claimed a STCL on this transaction of sale of a book debt. 14.3.2 In assessment proceedings, the AO disallowed the assessee’s claim on the ground that capital expenditure is not allowable unless specifically provided for in the Act., though he accepted the fact that it is a capital loss. On appeal, the learned CIT(A) deleted the disallowance made by the AO and allowed the assessee’s claim by holding as under at paras 4.3 and 4.4 of the impugned order: - “4.3 The facts of the case has been considered. a) Loan given is an asset and the same was assigned i.e. transferred and therefore the capital gain was rightly computed. The Assessing Officer has accepted that the loss on assignment of loan is a capital loss but has disallowed the same on the ground that there is no provision for assessment under the head “short term capital gain”. The Assessing Officer’s reasoning is vague and not supported by the law. What is required to be seen is whether the loss has occurred on account of transfer of capital asset or not and if the loss is on account of transfer of capital asset, the same is assessable under the head “capital gain”. Loan given is a capital asset as the same is a property. b) Reference is invited to the definition of “capital asset” in section 2(14) of the Act. “Capital asset” has been defined in section 2(14) to mean property of any kind held by an assessee, whether or not connected with his business or profession, except those specifically excluded. The word “property” does not mean merely physical property, but also means right title or interest in it. Reliance is placed on decision of Bombay High Court in the case of Bafna Charitable Trust v CIT 203 ITR 864 holding that “it is clear

18 ITA Nos. 847&1425/Mum/2011 Reliance Natural Resources Ltd. from the above definition that for the purpose of this clause, property is a word of the widest import and signifies every possible interest which a person can hold or enjoy except those specifically excluded”. c) Reliance has been made on the following case laws to state that the loan constitute “capital asset” 1. CIT v Minor Bababhai Alias Lavkumar Kantilal 128 ITR 1 (Guj) 2. CIT v East India Charitable Trust 207 ITR 152 (Cal) 3. Madhya Pradesh Financial Corporation v CIT 132 ITR 884 (M.P.) d) Since the loan (capital asset) has been transferred/assigned to M/s. Western Alliance Power Ltd. resulting in a loss of `17,75,67,418/-. Therefore the loss on assignment of loan is allowable as Short Term Capital Loss as claimed. 4.4 This ground of appeal is allowed.” 14.3.3 Taking into consideration the facts and circumstances of the case, we are of the view that the issue for consideration, i.e. whether the learned CIT(A) is justified in allowing the assessee’s claim for STCL on assignment of loan to M/s. Western Power Alliance Ltd. is squarely covered in favour of the assessee by the decision of the Coordinate Bench of this Tribunal in the case of Nixdorf Informationssysteme GmbH (supra). At paras 6 to 12 thereof the Coordinate Bench has held as under: - “6. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 7. The first thing, which is in fact fundamental to the dispute before us, is whether or not an advance given by the assessee is a capital asset. Section 2(14) defines the ‘capital asset’ as “property of any kind held by an assessee, whether or not connected with his business or profession” except as specifically excluded in the said section. So far as business assets are concerned, I.T.A. No. 3833/Mum/2011 Assessment years: 2002- 03 Page 5 of 8 the exclusion is only for “(i) any stock- in- trade, consumable stores or raw materials held for the purposes of his business or profession”, and it is not, nor can it be, anybody’s case is that an advance is covered by the exclusion clause. The question, therefore, arises as to what are the connotations of the expression “property”. Hon’ble Bombay High Court, in the case of CWT Vs Vidur V Patel [1995] 215 ITR 30/79 Taxman 288 had an occasion to consider this question in the context of wealth tax, and this is what Their Lordships had to say:

19 ITA Nos. 847&1425/Mum/2011 Reliance Natural Resources Ltd. ‘………So far as the meaning of "property" is concerned, it is well-settled that it is a term of widest import and subject to any limitation which the context may require, it signifies every possible interest which a person can hold or enjoy. As observed by the Supreme Court in Commissioner, Hindu Religious Endowments vs. Shri Lakshmirudra Tirtha Swami of Sri Shirur Mutt [1954] SCR 1005, there is no reason why this word should not be given a liberal or wide connotation and should not be extended to those well-recognised types of interests which have the insignia or characteristic of property right.’ [Emphasis, by underlining, supplied by us] 8. It was based on this analysis that Their Lordships held that even a deposit under the Compulsory Deposit Scheme Act, 1963, is also a property. When such are the views of Hon’ble jurisdictional High Court, there is no reason for us to exclude an advance from the scope of ‘capital asset’. An advance given by the assessee is a property in the sense it is an interest which a person can hold and enjoy, and since it is a property and it is not covered by the exclusion clauses set out in Section 2(14), it is required to be treated as a ‘capital asset’. Learned counsel’s reliance on the decision of Hon’ble Gujarat High Court’s judgment, in the case of CIT Vs Minor Bababhai alias Lavkumar Kanti Lal [1981] 128 ITR 1/5 Taxman 121, we find that the loss suffered by the assessee, on account of settlement of his dues as unsecured creditor @ 45% of the amount, was allowed as a short term capital loss. Unless the amount due is treated as a capital asset, there was obviously no question of the short term capital loss. As a matter of fact, it was not even the case of the revenue, and rightly so- in our opinion, that the debt was not a capital asset. As regards learned CIT(A)’s observation to the effect that “a loan is a current asset and not a capital asset”, we may only point out that the concept of ‘current asset’ is alien to the law on taxation of capital gains, or, for that purpose, to the law on taxation of income. The expression ‘capital asset’ is a defined expression under section 2(14) and, even though it may be more appropriate to describe an advance, a debt or a recoverable amount as a ‘current asset’ from an accountant’s perspective or from any other perspective, as long as such an advance, debt or recoverable amount satisfies the requirements of Section 2(14), it will have to be treated as a ‘capital asset’ for the purposes of computation of capital gains. As regards the CIT(A)’s observations that the assessee did not have a PE in India, that the assessee was not carrying out any business in India and that the assessee was not required to file a return of income in India, we are unable to see any relevance or basis of these observations. The capital asset in this case is the money recoverable from an Indian entity which is thus essentially required to be treated as in India, and, as is the mandate of Section 9(1)(i) any income, inter alia, “through the capital asset situated in India” is deemed to accrue or arise in India. As a corollary to this taxability of income, the loss through the capital asset situated in India is also required to be taken into account. The authorities below were, in determining whether or not the amount recoverable from an Indian entity was a capital asset

20 ITA Nos. 847&1425/Mum/2011 Reliance Natural Resources Ltd. under section (14), swayed by the considerations which were not germane in this context. In view of these discussions, in our considered view, the advance, debt or recoverable amount, in whichever way one describes it, was a capital asset under section 2(14). 9. The next thing that we need to decide is whether or not there was a transfer under section 2(47) or not. Section 2 (47)(i) provides that “transfer, in relation to a capital asset, includes (i) the sale, exchange or relinquishment of the asset”. There is no dispute that the rights to recover the money from the Indian entity, which is what the capital asset is in this case, was sold to Siemens for a consideration of Euro 7,31,000. All these rights, under the arrangements with Siemens, belonged thereafter only to Siemens Limited. The sale of trade debts, or even loans, is a part of day to day trade and commerce. Learned CIT(A) has not even raised on any issues on this aspect of the matter; all that he has to say in this regard is that since an advance given by the assessee did not give rise to any capital asset, the transfer of the advance, or the right to recover the advance so given, did not result in any transfer of capital asset. As we have held it to be in the nature of capital asset, the objection raised by the CIT(A) ceases to be relevant anyway. 10. We have noted that the right to recover the money from the Indian entity, in the light of the financial difficulties that the Indian entity was traversing through, was valued at Euro 7,31,000. There is no dispute about bonafides of this valuation. As for the vague allegations about the tax evasion motive, nothing cogent has been brought on record at all. The authorities below were in error in fighting shy of the tax corollaries of a legally valid commercial transaction, without bringing on record any material to disprove its bonafides or to show that it’s a sham transaction, just because of their apprehensions about tax motives of the transaction. Just because a transaction results in a tax benefit, unless it is a sham transaction, it cannot be ignored. The fact remains that the recoverable from the Indian entity is transferred by the assessee and that it was transferred for an amount lesser than the cost at which it is acquired. There is also no dispute that if the capital loss is to be allowed, the loss has to be short term capital loss. In these circumstances, in our considered view, there is no justification in declining the short term capital loss claimed by the assessee. 11. In view of the above discussions, as also bearing in mind entirety of the case, we uphold the grievance of the assessee, and direct the Assessing Officer to allow the short term capital loss, subject to normal verifications, as claimed by the assessee. 12. In the result, the appeal is allowed.” 14.3.4 Following the decision of the Coordinate Bench of this Tribunal in the case of Siemens Nixdorf Informationssysteme GmbH (2016) 68

21 ITA Nos. 847&1425/Mum/2011 Reliance Natural Resources Ltd. taxmann.com 113 (Mumbai-Trib), we uphold the order of the learned CIT(A) in allowing the assessee’s claim for STCL on assignment of loan to M/s. Western Power Alliance Ltd. Consequently, ground No. 4 of Revenue’s appeal is dismissed. 15. Ground No. 5 - being general in nature, no adjudication is called for thereon. 16. In the result, Revenue’s appeal for A.Y. 2007-08 is dismissed and assessee’s cross appeal is partly allowed. Order pronounced in the open court on 8th July, 2016. Sd/- Sd/- (Saktijit Dey) (Jason P. Boaz) Judicial Member Accountant Member Mumbai, Dated: 8th July, 2016

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