, " "
IN THE INCOME TAX APPELLATE TRIBUNAL "K" BENCH, MUMBAI
BEFORE S/SHRI B.R.BASKARAN (AM) AND AMIT SHUKLA, (JM)
.., ,
./I.T.A. No.4857/Mum/2012
( / Assessment Year :2005-06)
Hindalco Industries Ltd., / The Addl. Commissioner of
3rd Floor, Century Bhavan, Vs. Income Tax, Circle 6(3),
Dr.A B Road, Worli, Room No.522, Aayakar Bhavan,
Mumbai-400030 M K Road,
Mumbai-400020
( /Appellant) .. ( / Respondent)
./I.T.A. No.4918/Mum/2012
( / Assessment Year :2005-06)
Asstt. Commissioner of / Hindalco Industries Ltd.,
rd
Income Tax- Circle 6(3), Vs. 3 Floor, Century Bhavan,
R. No.522, Aayakar Bhavan, Dr.A B Road, Worli,
M K Road, Mumbai-400030
Mumbai-400020
( /Appellant) .. ( / Respondent)
./ ./PAN/GIR No. :AAACH1201R
/ Assessee by S/Shri S E Dastur and
S M Bandi
/Rspondent by Shri G M Doss
/ Date of Hearing : 22.6.2015
/Date of Pronouncement : 16.9.2015
/ O R D E R
PER B.R. BASKARAN (AM):
These cross-appeals filed by assessee and Revenue are directed
against the order dated 30.5.2012 passed by the ld. CIT(A)-15, Mumbai
and they relate to the assessment year 2005-06.
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2. We shall take up the appeal filed by assessee first. The assessee
has urged ten grounds in this appeal. At the time of hearing, the ld.AR did
not press Ground number II relating to disallowance of interest u/s
36(1)(iii) of the Act for the reason that the assessee has been allowed
depreciation on this amount. The assessee did not press Ground number V
relating to disallowance made u/s 43B of the Act also, since the amount so
disallowed has been allowed on actual basis. The assessee also did not
press ground number VI relating to disallowance of interest paid on late
payment of TDS amount, in view of smallness of the amount. The
assessee did not press additional ground Number 1 also. Therefore all the
grounds cited above are dismissed as not pressed. Ground No. X, being
general in nature, does not require adjudication.
3. In the remaining grounds, the assessee has urged following issues:
a) Disallowance made u/s 14A of the Act.
b) Disallowance of foreign travel expenses amounting to
Rs.2,12,010/-;
c) Assessment of rental income of house property and service
charges as income from house property.
d) Disallowance of deduction of Rs.7,19,01,340/- pertaining to
IFFCO arbitration Claim;
e) Addition u/s 92CA of the Act made in respect of purchase of
Rs.6,03,07,020/- from its Associated Enterprises;
f) Addition u/s 92CA of the Act made in respect of Corporate
Guarantee fee of Rs.9,70,40,250/-
The additional ground No. 2 is related to IFFCO arbitration claim listed as
(d) above. The additional ground no.3 is related to addition made in
respect of Corporate Guarantee fee listed as (f) above.
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4. Facts of the case are stated in brief. The assessee is engaged in the
business of manufacture and sale of aluminium metal, copper metal,
precious metals, certain chemicals including DAP/NPK and is also engaged
in the generation of power, extraction of alumina, reduction of alumina
into aluminium by electrolytic process, manufacture of Aluminium semi-
fabricated products, Aluminium Foils etc.
5. The first issue relates to the disallowance made u/s 14A / 36(1)(iii)
of the Act. The AO noticed that the assessee has made investment in
shares, Tax free bonds, GOI stock and Mutual Funds (Dividend Scheme).
The AO noticed that the assessee has also borrowed funds for the purpose
of business and paid interest thereon. Hence, the AO took the view that
the assessee has used the interest bearing borrowed funds for making the
above investments. Accordingly he worked out the interest attributable to
said investments at Rs.27.93 crores and added the same to the total
income of the assessee. In the appellate proceedings, the ld. CIT(A)
enhanced the interest disallowance by 0.22 crores and accordingly held
that the interest to the extent of Rs.28.15 crores is disallowable. The AO
also disallowed a sum of Rs.10.00 lakhs towards administrative expenses
attributable to earn tax free income. The Ld CIT(A), however, enhanced
the same to Rs.11.00 crores calculated at 0.5% of the average value of
investments. It is pertinent to note that the Ld CIT(A) accepted that the
provisions of Rule 8D shall not apply to the year under consideration in
view of the decision of Honble jurisdictional Bombay High Court in the
case of Godrej & Boyce Mfg. Co. Ltd (328 ITR 81), yet he computed the
disallowance as per Rule 8D only with the reasoning that he has adopted
Rule 8D as the basis for computing the disallowance.
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6. Before us, the ld. AR submitted that the assessee has invested its
own funds only for making these investments. The ld.AR submitted that an
identical issue has come up before the Tribunal in the appeal filed by the
Department in the assessees own case for the assessment year 1993-94
to 2002-03 in the case of JCIT V/s M/s Hindalco Industries Ltd in ITA
No.3101/3102/3102/312-A/Mum/1999 (AYs 1993-94, 1994-95 and 1995-
96) and the Tribunal, vide its order dated 21.2.2006 has held that the
assessee has not used its interest bearing borrowed funds for making
investments. The Ld A.R further submitted that the ld. CIT(A) deleted the
disallowance made u/s 36(1)(iii) for the AY 2003-04 and 2004-05 for
identical reasoning and department has not filed any appeal against it.
The Ld A.R also invited our attention to page 18 of the paper book and
submitted that the cash flow statement prepared by the assessee would
show that the investments made during the year under consideration is
far excess of own funds generated during the instant year. He further
placed reliance on the decision rendered by the jurisdictional Bombay High
Court in the case of HDFC Bank Ltd (366 ITR 505) to contend that no
disallowance of interest is required when sufficient own funds are
available. He further submitted that the assessing officer has made
disallowance towards administrative expenses at a reasonable level of
Rs.10.00 lakhs. He submitted that the Ld CIT(A) was not justified in
enhancing the same to Rs.11.00 crores by following the methodology
prescribed in Rule 8D(2)(iii) without referring to the factual situation.
7. The ld. DR submitted that the availability of own funds should be
examined as on the date of making investment and not on Balance Sheet
date. He further submitted that the disallowance of administrative
expenses is tune with magnitude of investments made and dividend
received by the assessee.
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8. We heard the parties on this issue and perused the record. We find
that the similar issue had come up before the Tribunal in the assessees
own case and the Tribunal has taken the view that the assessee has not
used borrowed funds for the purpose of making investments. The
assessee has furnished a copy of its Annual report before us. A perusal of
the Balance sheet shows that the assessee had held own funds of
Rs.6857.9 and Rs.7666.5 crores respectively as on 31.3.2004 and
31.3.2005, as against investments of Rs.3377.2 and Rs.3702.1 crores
respectively on those dates. Hence, in our view, the decision rendered by
Honble Bombay High Court in the case of HDFC Bank (supra) shall apply
to the facts of the instant case. Accordingly, consistent with the view
taken by the co-ordinate bench in the assessees own case in the earlier
years, we hold that the interest disallowance made by the tax authorities is
not called for. Accordingly, we set aside the order of ld.CIT(A) in respect
of interest disallowance and direct the AO to delete the same.
9. In respect of disallowance of administrative expenses relating to
exempted income, we notice that the Ld CIT(A) has worked out the same
as per Rule 8D(iii) of IT Rules, even though he accepted the fact that Rule
8D shall not apply to the year under consideration. However, we notice
that the assessing officer has worked out the disallowance at Rs.10.00
lakhs by considering the explanations of the assessee. Since the
disallowance of administrative expenses is to be worked out on a
reasonable basis as per the decision of Honble Bombay High Court in the
case of Godrej & Boyce Mfg. Co. Ltd (supra) and since major part of
investments has been brought forward from the earlier years, in our view,
the disallowance made by AO does not call for interference. Accordingly,
we set aside the order of Ld CIT(A) on this issue and sustain the
disallowance of Rs.10.00 lakhs made by the AO.
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10. The next issue relates to the disallowance of foreign travelling
expenses of Rs.2,12,010/- on the ground that the assessee incurred these
expenses for the wife of Chairman, whole time Director and Executives
on foreign tours. In the appellate proceedings, the ld.CIT(A) confirmed the
disallowance by following his decision rendered for assessment years
2003-04 and 2004-05.
11. At the time of hearing, the ld. A.R fairly submitted that this issue has
been decided against the issue by the Tribunal in the assessees own case,
vide its order dated 11.2.2009 passed in ITA No.3209/Mum/2006 for AY-
2004-05. Therefore, respectfully following the order of the Tribunal
referred above, we confirm the order of Ld CIT(A) on this issue.
12. The next issue relates to the assessment of rental income under the
head income of house property and service charges income under the
head Income from other sources, as against the claim of the assessee that
both the receipts should be assessed as business income of the assessee.
The assessee owns a property as co-owner in Calcutta and it has given the
said premises on rent. It also received service charges from the said
premises. The assessee declared both the receipts as business income.
The AO assessed the rental receipts as Income from house property and
the service charges as income under the head income from other sources.
The Ld CIT(A) confirmed the same.
13. The Ld A.R fairly admitted that identical issue was considered by the
Tribunal in the assessees own case in ITA No.5468/Mum/2001 (AY-1997-
98) and the Tribunal, vide its order dated 6.7.2007, has held as under:
"25.....the CIT(A) confirmed the assessment of proper rental income
as income from house property and recovery of service charges as
income from other sources. The CIT(A) accordingly, directed the AO
to allow the deduction of the expenses incurred for earning the
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income from service charges as directed earlier by the Tribunal in
the assessment year 1990-91. So following the same, the CIT(A)
has sustained the assessment of rental income as income from
property and the income from service charges under the head
income from other sources" and directed the AO to grant deduction
of expenses incurred for earning from service charges. This view is
consistent to the view taken by the Tribunal for the earlier years.
This ground is rejected"
Consistent with the view taken by the co-ordinate bench of Tribunal in the
earlier years, we confirm the order of ld CIT(A). However, the AO is
directed to allow admissible deductions allowable under the respective
heads.
14. The next issue relates to the disallowance of Rs.7,19,01,340/- paid
to IFFCO as per the arbitration proceedings. The facts relating to the
issue is that the copper plant of erstwhile Indo Gulf Corporation Ltd (IGCL)
was amalgamated with the assessee w.e.f.1.4.2002. The ICGL had entered
into a MOU with the Indian Farmers Fertilizer Co-operative (IFFCO) in the
previous year 1998-99, whereby IGCL agreed to supply certain chemicals
to IFFCO. In the subsequent years, dispute arose between the ICGL and
IFFCO about lifting and supply of chemicals, i.e., IFFCO made certain
claims against IGCL for non-supply of chemicals and simultaneously IGCL
also made counter claims against IFFCO. The disputes were referred to an
Arbitrator. Pending receipt of arbitrators ward in the matters, the assessee
made a provision of Rs.7,19,01,340/- in year ending 31.3.2003 relevant to
the AY 2003-04. The claim of the assessee was disallowed both by the AO
and ld.CIT(A) in that year. The Tribunal also decided this claim against
the assessee in AY 2003-04 on the ground that the liability did not
crystallize in that year. The arbitration award was given in the month of
July, 2004, wherein two arbitrators decided the matters against the
assessee and one arbitrator decided the same in favour of the assessee.
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It is pertinent to note that the assessee did not accept the award and
hence filed appeal before Honble Delhi High Court. However, since the
arbitration award has gone against the assessee by majority view of the
arbitrators, the assessee claimed before the AO that the provision of
Rs.7.19 crores has to be allowed as deduction in AY 2005-06. The AO
rejected the said claim by holding that the dispute is not finally settled.
The Ld CIT(A) also confirmed the same.
15. The assessee has challenged the decision of Ld CIT(A) on this issue
in the original grounds of appeal and in the additional ground, the
assessee has prayed for allowing deduction of interest payable to IFFCO
up to 31.3.2005 on the arbitration award.
16. The Ld A.R submitted that the award given by the arbitrators has
crystallized during the year under consideration, since the award has been
given during the year under consideration. He further submitted that the
liability to pay the award cannot become contingent liability, even if the
assessee has challenged the arbitration award in the High Court. In this
regard, the Ld A.R placed reliance on the decision rendered by the Honble
Gujarat High Court in the case of Navijan Roller Flour and Pulse Mills Ltd
Vs. Dy. CIT reported in 315 ITR 190. He also referred to the commentary
given by Kanga & Palkhiwala in page 943 of its latest edition. On the
contrary, the Ld D.R submitted that the assessee has not accepted the
arbitration award and hence it has filed appeal challenging the same
before the Honble High Court. Accordingly he submitted that the
arbitration award cannot be considered to have been finally settled during
the year under consideration. He submitted that the Tribunal, in AY 2003-
04, has held that the claim of the assessee shall be allowable in the year in
which the dispute got finally settled.
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17. We have heard rival contentions on this issue and perused the
record. The Honble Gujarat High Court had an occasion to consider an
identical issue in the case of Navijan Roller Flour and Pulse Mills Ltd Vs.
Dy. CIT (supra). The assessee therein placed an order with an Australian
Company for import of yellow gram and it was required to open
irrevocable letter of credit. However, the assessee did not open the letter
of credit within the extended period also and in fact, repudiated the
contract through a letter. Arbitration proceedings were initiated by the
Australian company with Grain and Feed Trade Association (GAFTA).
However, the assessee objected to the jurisdiction of GAFTA. However,
GAFTA passed the award of arbitration on May 28, 1987, where under the
assessee was required to pay damages. The assessee did not accept the
award and the Board of Appeal under the GAFTA decided the matter
against the assessee. The assessee claimed deduction in AY 1988-89,
since the initial award was given on May 28, 1987. However, the revenue
took the view that the award is deductible in AY 1989-90. While resolving
this dispute, the Honble Gujarat High Court has discussed about the
proposition in this manner:-
"In mercantile system of accounting it is well settled that both
receipt and liability accrue at the earliest point of time and are not
postponed merely on the basis of an entry made or absence of an
entry. Admittedly, the assessee is following the mercantile system
of accounting. On May 28, 1987, when the Trade Association made
an award for damages for breach of contract the liability to pay such
damages had already been incurred by the assessee. Merely
because the award was challenged in appeal by the assessee cannot
be a ground for holding that the liability had not been incurred...."
In the instant case also, there is no dispute that the arbitration award was
given in the month of July, 2004 and hence the said award relate to the
assessment year under consideration. It is a fact that the assessee has
challenged the arbitration award by filing appeal before the Honble High
Court. However, the Honble Gujarat High Court has held in the above
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cited case that the liability accrues at the earliest point of time and the fact
that the award was challenged in appeal cannot be a ground for holding
that the liability had not been incurred. Accordingly by following the
Honble Gujarat High Court (referred supra), we direct the AO to allow
deduction of the arbitration award. The assessee has also raised an
additional ground praying that the interest accrued thereon up to
31.3.2005 should also be allowed. However, we prefer to restore this
matter to the file of the AO with the direction to examine the arbitration
order and take appropriate decision in accordance with the law, after
affording necessary opportunity of being heard to the assessee.
18. The next issue relates to the addition of Rs.6,03,07,020/- made u/s
92CA of the Act in respect of purchases made from the Associated
Enterprises (AE) of the assessee. The facts relating to the issue are that
the assessees subsidiary company named M/s Birla Mt. Gordon Pty Ltd,
Australia owned a mine in Australia. The assessee purchased copper
concentrates from this subsidiary company. The assessee had purchased
copper concentrates from unrelated parties also. The prices of copper
concentrates are determined on the basis of prices of Copper quoted in
London Metal Exchange (LME) less the processing charges towards
smelting, refining and margin for the seller. From the value so arrived at,
a further reduction towards Treatment charges/refining charges (TC/RC)
are allowed. The TC/RC is determined by Japanese buyers of
concentrates, normally in the beginning of the calendar year and the price
so determined is considered to be the industry average. The TC/RC
determined is further adjusted for freight differentials.
19. In its T.P. study, the assessee followed CUP method and compared
the TC/RC charges of the goods purchased from its AE with TC/RC charges
of the goods purchased from a non-AE company named M/s PT Freeport
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for the calendar year 2004. There was no difference between the two.
The AO referred the matter to the TPO. The AO has discussed the
addition proposed by the TPO in the assessment order. The AO has stated
that the TC/RC charges have been deducted in respect of purchases made
from non-AEs @ US $ 95 per MT and US $ 85.5 MT for the month of
February, 2005 and March, 2005 respectively. However, in respect of
purchases made form AEs, the same was deducted at US $ 43 per MT
only. Hence, the AO/TPO compared the prices of concentrates purchased
in the months of February, 2005 and March, 2005. The AO/TPO noticed
that the purchase price was higher by Rs.8713/- per MT and Rs.7843/- per
MT in the months of February, 2005 and March, 2005 in respect of
purchases made from AEs vis-à-vis non-AEs. The reason for higher price
was mainly due to lower rate adopted for deduction of TC/RC charges.
The AO worked out the differential price for the purchases effected in the
months of February, 2005 and March, 2005 at Rs.6.03 crores and added
the same to the total income of the assessee. The Ld CIT(A) also
confirmed the same.
20. The Ld A.R submitted that the assessee has entered into contract
for purchase of concentrates with its AE on a long term basis for the entire
life of the Mines and hence such the prices fixed on long term contracts
cannot be compared with the purchases made from Non-AEs, where no
such long term contract was there. The Ld A.R further submitted that the
TC/RC charges for non-AEs are fixed on calendar year basis, whereas the
same is fixed on financial year basis with AE. He submitted that the
Japanese smelters usually fix the TC/RC charges in the month of January,
every year. While for non-AEs, the same is given effect immediately from
the month of January itself, for AEs, the same is given effect from 1st April.
Since the TC/RC charges are given effect on calendar year basis for Non-
AEs and the same is given effect on financial year basis for AE, there
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bound to be some difference in the prices on account of TC/RC charges in
the months of January to March every year. He further submitted that it
so happened that the TC/RC charges deductible from prices paid to non-
AEs was higher during the year under consideration resulting in payment
of higher prices to the AE. He submitted that the assessee has paid lower
prices to its AE in the subsequent years due to deduction of higher TC/RC
charges vis-à-vis the payments made to non-AEs. In this regard, the Ld
A.R invited our attention to a chart placed at page 221 of the paper book.
He further submitted that the assessee has explained before the AO about
the practice consistently followed by the assessee. However, the AO has
not addressed the same. He further submitted that the Ld CIT(A) has also
appreciated the fact that the assessee is determining the rate with AE on
financial year basis by observing that the same may be alright for
administrative convenience.
21. The Ld A.R further submitted that the tax authorities have to
compare the long term contracts entered with AEs with similar kind of long
term contracts entered with non-AEs. He submitted that the assessee has
pointed out this principle at page 12 of its TP study (page 172 of paper
book). The parties also enter into "No holiday" contract with the mine
owners and the no holiday contract is also a type of long term contract
only. During the year under consideration, the assessee has entered into
a ,,no-holiday contract with two companies, but they are for purchase of
fixed quantity viz., PT Freeport and Escondida for purchase of 90000 DMT
each. Hence they cannot also be considered as comparables. He further
submitted that the TPO has taken two other comparables without calling
for explanation from the assessee.
22. The Ld A.R further submitted that the tax authorities have to first
determine about the bonafides of the long term contract entered between
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the assessee and its AE. If they are satisfied with the bonafides of the
long term contract, the price fluctuation happening in the market should
not be considered.
23. Accordingly, the Ld A.R submitted that the price paid to the AE
should be considered at Arms length only by considering the peculiar facts
prevailing in the instant case.
24. On the contrary, the Ld D.R submitted that the tax authorities are
required to determine the Arms length price of the products by comparing
the prices paid to the AE vis-à-vis the non-AE. He submitted that the Long
term contracts are entered in order to ensure regular supply of materials
and the same may not influence the price. Hence the long term contracts
are not relevant for determining the market price of products. The Ld D.R
submitted that the assessee has initially compared the TC/RC charges
deducted to the AE with a non-AE named M/s PT Freeport. He submitted
that the assessee has entered into no-holiday contract with M/s PT
Freeport. The AO has also compared the prices paid to M/s Minera
Escondida, another party with whom the assessee had entered into long
term contract only. Accordingly he submitted that the AO/TPO has
compared the price paid to the AE with internal comparables having similar
features. Accordingly he submitted that the tax authorities are justified in
making this addition.
25. We have heard rival contentions on this issue and perused the
record. It is an admitted fact that the assessee has entered into a long
term contract with its AE for procuring the copper concentrates. The
period of contract is for the life time of the mine. It is also an admitted
fact that no other comparables is having this feature and hence, on this
ground alone, the comparables adopted by the AO/TPO is liable to be
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rejected. Further, there is no difference between AE and non-AE with
regard to the methodology adopted for determining the prices of copper
concentrates, viz.,
(a) ascertain the price quoted for copper metal in LME.
(b) ascertain the TC/RC charges fixed by Japanese smelters annually
on calendar year basis.
(c) reduce the TC/RC charges from the price of copper and
(d) adjust the price so arrived at for freight differentials.
The difference in prices has occurred only due to the fact that the non-AEs
have synchronized the reduction of TC/RC charges with the Japanese
rates, i.e., they have changed the TC/RC charges on calendar year basis.
However, the AE has followed financial year basis for effecting such kind of
change, i.e., the AE has given effect to the modified TC/RC charges from
1st April of every year, even though the modified rates were announced in
the month of January itself. The effect of this practice is that the non-AEs
shall adopt new rate of TC/RC charges for January to March every year,
while the AE shall adopt old rates for that period. The natural effect of
this practice is that there is bound to be price difference between the AE
and non-AEs in these three months, mainly on account of TC/RC charges.
26. As submitted by Ld A.R that it so happened that the assessee had
to pay higher purchase price during the year under consideration for the
purchases effected in the months of February and March, due to adoption
of lower TC/RC charges applicable to immediately preceding calendar year.
However, as can be seen from the details given in page 221 of the paper
book, the difference in the rates of TC/RC charges adopted between AE
and non-AE was 98% during the year under consideration and it has come
down to 12% in the succeeding year, i.e., for calendar year 2006.
However, from calendar year 2007 onwards, the TC/RC charges have
fallen down resulting in payment of lower purchase price to AEs in the
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months of Jan to March. For example, the TC/RC charges determined in
2007 was US $ 66, but the assessee was deducting US $ 104.5 (the rate
applicable for calendar year 2006) in the months of January, 2007 to
March, 2007 as per the practice followed by it. In the subsequent years
also, the TC/RC charges has fallen down, but the AE was deducting TC/RC
charges at higher rate resulting in payment of lower purchase price to AE.
Thus, the pattern followed by the assessee and its AE shows that the same
has been consistently followed and the difference in purchase prices was
mainly on account of following a particular pattern. The same would show
the bonafides of the assessee and also the AE. Hence, we find merit in
the contentions of the assessee that the temporary price differentials due
to following a particular pattern should be ignored. Besides the above, as
noticed earlier, the comparison should be between two cases having
similar features. However, in the instant case, the assessee has entered
into a long term contract for the life time of the mines and hence the price
paid to its AE should be compared with a case having similar features.
Accordingly, in our view, the contract entered with AE cannot be compared
with other cases having only annual contracts. We have noticed earlier
that the "No holiday contract" is a variant of long term contract. T he
assessee has entered no holiday contract with two parties, but they were
for lifting fixed quantity of materials, i.e., they were not life time contracts.
Hence, they cannot also be compared.
27. Even otherwise, there is no difference in the methodology adopted
by AE and non-AE for determining the price. The difference has occurred
due to following ,,financial year basis for AE, where as the non-AEs have
followed calendar year basis. Since the assessee is following a particular
pattern for its AEs year after year, we find merits in the contentions of the
Ld A.R that the temporary price difference occurring due to fluctuations in
TC/RC charges should be ignored. These submissions brings out the exact
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reason for the price difference and in our view, the said reasons are
reasonable and need to be factored in, i.e., adjustments should be
permitted, in which case it would result that the payments made to AE was
at ALP. Further, it is not the case that the assessee was paying higher
purchase price to its AE year after year in the months of Jan to March. In
subsequent years, the assessee has gained by paying lower purchase
prices. In view of the foregoing, we are of the view that the assessee
should be considered as having paid the purchase price to its AE at ALP
only and hence there is no necessity to make adjustments. Accordingly,
we set aside the order of Ld CIT(A) on this issue and direct the AO to
delete the addition.
28. The next issue relates to addition made u/s 92CA made on account
of corporate guarantee fee, which has resulted in an addition of
Rs.9,70,40,250/-. In the additional ground no.3, the assessee is
challenging the addition on the ground that the Explanation (i)(c) to sec.
92B was inserted by Finance Act, 2012 and hence the same should not be
made applicable to the year under consideration.
29. With regard to the legal issue urged through Additional Ground, we
are of the view that there is no merit in the contentions of the assessee.
The Explanation to sec. 92B of the Act was inserted by Finance Act, 2012
w.r.e from 1.4.2002 only to "clarify" the expression "International
transaction" used in sec. 92B of the Act. It is not a case that the
expression "International transaction" is inserted for the first time with
retrospective effect. Even prior to the insertion of the Explanation,
referred above, the assessee is required to bench mark all its international
transactions and is required to justify them. Hence, in our view, the
Explanation in no way imposes any new liability with retrospective effect.
The assessee placed reliance on the decision dated 11-03-2014 rendered
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by the co-ordinate bench in the case of Bharti Airtel Ltd (ITA
No.5816/Del/2012) to support its additional ground. However, a careful
perusal of the said decision would show that the Tribunal deleted the
addition on merits and then made a passing reference with regard to the
applicability of the Explanation. In our view, the said observations are
obiter dicta only. The decision rendered by the Hyderabad bench of
Tribunal in the case of Four soft Ltd (2011)(142 TTJ (Hyd) 358), on which
also the assessee placed reliance, has been rendered prior to the insertion
of Explanation by Finance Act, 2012. Accordingly, we reject the additional
ground urged by the assessee.
30. The facts relating to guarantee fee received by the assessee are
that the assessee has given corporate guarantee to the AEs viz., M/s Birla
Mt. Gordon Pty Ltd; Birla Nifty Pty Ltd and Birla Mineral Resources Pty Ltd.
The assessee charged guarantee fee at 0.25% p.a. The AO noticed that a
US bank has charged a fee of 1.5% to 2% to the guarantee given by it.
Accordingly, the AO adopted the rate of 1.75% and accordingly computed
the guarantee commission/fee, which resulted in an addition of Rs.9.70
crores. The Ld CIT(A) also confirmed the same.
31. Before us, the Ld A.R placed reliance on the decision dated 08-05-
2015 rendered by Honble jurisdictional Bombay High Court in the case of
CIT Vs. M/s Everest Kento Cylinders Ltd (ITA No.1165 of 2013), wherein
the High Court has held that the consideration which applied for issuance
of Corporate guarantee are distinct and separate from that of bank
guarantee. Accordingly he contended that the tax authorities are not
justified in adopting the rate quoted by a bank for giving bank guarantee
to the case of the assessee.
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32. The ld D.R, on the contrary, submitted that the assessee has not
given any bench mark and hence the TPO/AO was constrained to adopt
the rate charged by the banks. Accordingly he submitted that this matter
may be restored back to the file of the AO for fresh consideration.
33. We have heard rival contentions and perused the record. We notice
that the assessee has also referred to the decision dated 25.3.2015
rendered by the co-ordinate bench in the case of Manugraph India Ltd
(ITA No.4761/Mum/2013), wherein the co-ordinate bench has determined
a rate of 0.50% for guarantee given. We further notice that the rate of
0.50% is consistently followed in many of the cases by the Tribunal. In
fact, in the case of Everest Kanto Cylinder Ltd, which was considered by
the Honble Bombay High Court, the Tribunal has determined the rate at
0.50% and the same has not been disturbed by the Honble Bombay High
Court. Accordingly, we modify the order of Ld CIT(A) on this issue and
direct the AO to compute the addition by adopting the rate of 0.50%.
34. Now we will take up the appeal filed by the Revenue, wherein
following issues are urged:-
a) Deduction allowed u/s 80IA by the CIT(A) in respect of Renu
power Unit Nos.6,7,8,9 and 10;
b) Deduction allowed u/s 80IA by ld.CIT(A) on Co-Generation
Plant -1.;
c) Deduction allowed u/s 80IA(2) to Co-Generation Plant 2 in
terms of option granted u/s 80IA(2);
d) Deduction allowed by the ld. CIT(A) u/s 80-IA applying
supplier/UPSEB market rate;
e) Deduction allowed by the ld. CIT(A) to Birla Copper Power
Plant Unit-I and II u/s 80IA of the Act;
f) Exemption u/s 10(23G) allowed by the ld.CIT(A) of gross
interest received from DHIL;
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35. The first issue relates to the eligibility of the assessee to claim
deduction u/s 80IA of the Act in respect of Renu power unit No.6, 7, 8, 9
and 10. The AO rejected the claim, but the Ld CIT(A) allowed the claim.
The ld. AR submitted that the issue urged in this ground is covered by the
following decisions of Tribunal rendered in the assessees own case for
earlier years:
A) Deduction for Unit no.6 has been confirmed by the Tribunal in
ITA No.4774/Mum/2003 relating to AY-1998-99, vide its Order
dated 6.7.2007. The relevant discussions are available in para
51 and 51.1 of the order;
B) Deduction for Unit no.7 has been confirmed by the Tribunal in
ITA No.4775/Mum/2003 relating to AY-1999-00, vide its Order
dated 6.7.2007. The relevant discussions are available in para
82 of the order;
C) Deduction for Unit no.8 has been confirmed by the Tribunal in
ITA No.4775/Mum/2003 relating to AY-1999-00, vide its Order
dated 6.7.2007. The relevant discussions are available in para
86 of the order;
D) Deduction for Unit no.9 has been confirmed by the Tribunal in
ITA No.4336/Mum/2005 relating to AY-2003-04, vide its Order
dated 28.11.2008. The relevant discussions are available in
para 7 and 7.1 of the order;
E) Deduction for Unit no.10 has been confirmed by the Tribunal
in ITA No.3852/Mum/2006 relating to AY 2004-05, vide its
Order dated 4.8.2009. The relevant discussions are available
in para 12 and 13 of the order;
The claim of the assessee for Renu power unit No.6 to 9 was allowed by
the Tribunal in AY 2004-05 (supra) also, by following earlier years orders
of the Tribunal. Since the decision rendered by Ld CIT(A) on this issue is
in accordance with the decision taken by the Tribunal, we do not find any
infirmity in his order on this issue. ,,
36. The next issue relates to eligibility of the assessee to claim
deduction u/s 80IA of the Act in respect of Co-Generation Plant-1. Both
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the parties agreed that this issue is covered in favour of the assessee by
the order of Tribunal rendered for AY 1999-2000 in the assessees own
case in ITA No.4775/Mum/2003 (referred supra). It was further submitted
that the order passed for AY 1999-2000 was followed by the Tribunal in AY
2004-05 also. Since the decision rendered by Ld CIT(A) on this issue is in
accordance with the decision taken by the Tribunal, we do not find any
infirmity in his order on this issue.
37. The next issue relates to the eligibility of the assessee to claim
deduction u/s 80IA of the Act in respect of Co-generation plant no.2. The
assessee commissioned Co-generation plant no.2 during the financial year
relevant to the assessment year 2005-06, i.e., the year under
consideration. However, the assessee did not claim deduction u/s 80IA of
the Act, since the provisions of sub-sec. (2) give an option to the assessee
to claim deduction for any ten consecutive assessment years out of fifteen
years beginning from the year in which the undertaking generates power.
Hence the assessee chose to claim deduction in the subsequent years.
The AO, however, took the view that the question of exercising option
would arise only if the assessee is eligible to claim deduction u/s 80IA of
the Act in respect of Co-generation plat no.2. In the appellate
proceedings, the Ld CIT(A), by following his order rendered in other
captive power generation units, held that the assessee is eligible to claim
deduction u/s 80IA. Accordingly he held that the assessee is entitled to
exercise the option prescribed in sec. 80IA(2) of the Act.
38. We have heard the parties on this issue. The issue relating to
eligibility of the assessee to claim deduction u/s 80IA of the Act in respect
of captive power generation units has been considered by us in the case of
Renu Power unit no.6 to 10 and Co-generation Plant I (supra) in the
preceding paragraphs. We notice that the Ld CIT(A) has followed the
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decision rendered in respect of the above said units for deciding this issue
also. Hence, we do not find any infirmity in his order on this issue. Since
he has held that the assessee is eligible to claim deduction u/s 80IA of the
Act in respect of Co-generation Plat 2, he was justified in holding that the
assessee could exercise option u/s 80IA(2) of the Act.
39. The next issue relates to the direction given by Ld CIT(A) to
compute deduction u/s 80IA by applying supplier/UPSEB market rate. It
was brought to our notice that the Tribunal, in the orders passed for
earlier years, have consistently held that the State electricity board rates
has to be taken as market value for computing deduction u/s 80IA of the
Act. Hence, we do not find any infirmity in the decision of Ld CIT(A) on
this issue.
40. The next issue relates to the eligibility of the assessee to claim
deduction u/s 80IA of the Act in respect of Birla Copper Power Plat Unit I
& II. This issue was considered by the Tribunal in AY 2003-04 in ITA
No.4336/Mum/05 in its order dated 28-11-2008 and it was decided in
favour of the assessee. It was submitted that the order of AY 2003-04
was followed in AY 2004-05. Accordingly, we are of the view that the Ld
CIT(A) was justified in allowing deduction u/s 80IA of the Act in respect of
Birla copper power plant Unit I & II.
41. The last issue relates to the claim for exemption u/s 10(23G) on the
gross amount of interest received from Dahej Harbour and Infrastructure
Limited (DHIL). The assessee claimed exemption u/s 10(23G) of the Act
on the gross interest receipts. However, the AO noticed that the assessee
is also paying interest to DHIL. Accordingly, the AO allowed exemption u/s
10(23G) of the Act on the net interest. In the appellate proceedings, the
ld. CIT(A) by following the decision of Tribunal rendered in the assessees
own case for the assessment year 2003-04 and 2004-05 held that the
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assessee is eligible to claim exemption on gross interest receipts. It was
brought to our notice that the decision rendered by the Tribunal for AY
2003-04 has since been upheld by the Honble Bombay High Court, vide its
order dated 16-08-2012 rendered in the assessees own case in ITA
No.6392 of 2010 with the following observations:-
"11. The DHIL had pad interest o the respondent in respect of the
loans advanced by the respondent to DHIL. The respondent paid
interest to DHIL in respect of the outstanding bills issued by DHIL.
There was no connection between the two transactions. The section
does not require or permit the netting of payments under two
independent contracts albeit between the same parties. That DHIL
is a wholly own subsidiary of the respondent makes no difference.
It is not contended that the transactions are colourable or that there
is any connection between them. It was not suggested that the
transactions were structured to avoid tax.
The issue raised in paragraph (i) does not raise a substantial
question of law."
42. In the year under consideration, it was not shown to us that the facts
are different than that relating to AY 2003-04. It was also not suggested
that the transactions were structured to avoid tax. Hence, we are of the
view that the decision rendered by Ld CIT(A) on this issue does not call for
any interference.
43. In the result, the appeal filed by the assessee is partly allowed and
the appeal of the revenue is dismissed.
Pronounced in the open court on 16th Sept, 2015
16th Sept, 2015
Sd sd
( / AMIT SHUKLA) (.. / B.R. BASKARAN)
/ JUDICIAL MEMBER / ACCOUNTANT MEMBER
Mumbai: 16th Sept,2015.
.../ SRL , Sr. PS
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/Copy of the Order forwarded to :
1. / The Appellant
2. / The Respondent.
3. () / The CIT(A)- concerned
4. / CIT concerned
5. , , /
DR, ITAT, Mumbai concerned
6. / Guard file.
/ BY ORDER,
True copy
(Asstt. Registrar)
, /ITAT, Mumbai
|
