M/S RELIANCE INDUSTRIES LIMITED, MUMBAI V. DCIT- 3(4) , MUMBAI

CO 137/MUM/2022

AI Insights

The case involves cross appeals by Reliance Industries Ltd. and the revenue concerning the assessment years 2017-18 and 2018-19. The primary issues revolved around the disallowance of deductions under various sections of the Income Tax Act, including Section 35(2AB) related to scientific research expenses, and adjustments made under transfer pricing provisions concerning international transactions. The Tribunal examined the legal and factual basis of these issues, considering previous rulings and the specific provisions of the Income Tax Act. The Tribunal's decision involved a detailed analysis of the comparables used for benchmarking and the appropriateness of the methods applied for determining the Arms Length Price.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 131966 (ITAT-MUMBAI)
• Duration Of Justice: 11 month(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 17-10-2023
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: J
• Next Hearing Date: 05-10-2023
• Assessment Year: 2018-2019
• Appeal Filed On: 17-11-2022
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: Not Found
• Assessee Lawyers: Not Found
• Keywords: Sale consideration of property below Jantri Value; Capital asset; Business income; Depreciation; Transfer pricing; Compulsory Acquisition of immovable property; Opportunity of being heard; Principle of natural justice; International transaction; Earning of tax free income; Right to appeal; Capital receipt; Rule 8D; Set aside; Ineligible deduction; Capital Gains; CHAPTER IV
• Section: 32; 37; 92C; 50C; 10AA; 14A; 115JB; 80IB; 37(1); 80G; 80IA; 80HH; 72; 13

Judgement Text

THE INCOME TAX APPELLATE TRIBUNAL “J” Bench, Mumbai Before Shri B.R. Baskaran (AM) & Shri Pavan Kumar Gadale (JM) I.T.A. No. 2587 & 2588/Mum/2022 (Assessment Year : 2017-18 & 2018-19) DCIT-3(4) 29 th floor, Centre-1 World Trade Centre Cuffe Parade Mumbai-400 005. Vs. M/s. Reliance Industries Ltd. 3 rd Floor, Maker Chambers IV, 222, Nariman Point Mumbai-400 021. (Appellant) (Respondent) I.T.A. No. 2318 & 2317/Mum/2022 (Assessment Year : 2017-18 & 2018-19) & C.O. No. 137/Mum/2022 (Arising out of ITA No.2588/M/2022) (Assessment Year : 2018-19) M/s. Reliance Industries Ltd. 3 rd Floor, Maker Chambers IV, 222, Nariman Point Mumbai-400 021. Vs. DCIT-3(4) 29 th floor, Centre-1 World Trade Centre Cuffe Parade Mumbai-400 005. (Appellant) (Respondent) PAN No.AAACR5055K Assessee by Shri Madhur Agrawal, Ms. Moksha Mehta & Shri Nimesh Vora Department by Shri Krishna Kumar Mishra Date of Hearing 06.10.2023 Date of Pronouncement 18.10.2023 O R D E R Per B.R.Baskaran (AM) :- The cross appeals filed by the assessee and Revenue relate to AY 2017-18 and 2018-19. The assessee has filed cross objection in A.Y. 2018-19. All are directed against the orders passed by Ld CIT(A)-57, Mumbai. Since certain issues urged in these appeals are common in nature, all these appeals were Reliance Industries Ltd. AY 2017-18 & 2018-19 2 heard together and they are being disposed of by this common order, for the sake of convenience. 2. The assessee company is engaged in the business of manufacture and sale of petrochemical products; Polyester, Fibers Intermediate, textiles. It is also engaged in exploration of oil and gas; generation and distribution of power, Operation of jetties and related infrastructure, Retail marketing of Petroleum products, Fabrication and investment activities. Since the assessee had entered into international transactions with its Associated Enterprises (AEs), the AO referred the matter of determination of Arms length Price of the international transactions to the Transfer Pricing Officer (TPO) in both the years under consideration. After the receipt of order of TPO, the AO passed draft assessment order and the assessee chose not to file its objection to the Dispute Resolution Panel. Hence the AO passed the final assessment order making various additions to the returned income in both the years. The assessee filed appeals before Ld CIT(A) and they were allowed in part by Ld CIT(A) in both the years. Hence both the parties have filed appeals before the Tribunal. APPEALS OF THE ASSESSEE:- 3. We shall now take up the appeals filed by the assessee for AY 2017-18 and 2018-19. The grounds of appeal urged by the assessee in both the years read as under:- (i) ITA No. 2318/Mum/2022 2017-18 : Assessee’s appeal :- On being aggrieved by the order dated 25 July, 2022 (received on 01 August, 20 passed by the learned Commissioner of Income-tax (Appeals)-57, Mumbai (herein a referred to as the learned CIT(A)] under section 250(6) of the Income-tax Act, 1961 Act), the present appeal is being preferred on the following grounds which, it is prayed, may be considered without prejudice to one another. On the facts and in the circumstances of the case and in law, the learned CIT(A) : Reliance Industries Ltd. AY 2017-18 & 2018-19 3 Disallowance of weighted deduction u/s 35(2AB) on the basis of Form 3CL 1. Erred in confirming the disallowance of weighted deduction u/s 35(2AB) of the Act, amounting to Rs 8,37,74,190/-, on the basis of Form 3CL issued by Department of Scientific and Industrial Research (DSIR) with respect to the appellant's for R&D expenses. 2. Failed to appreciate that once R&D facility was approved by DSIR in No. 3CM, then the expenses incurred by the appellant ought to be allowed learned AO under section 35(2AB) of the Act. Disallowance of Depreciation on goods (steel) purchased 3. Erred in confirming the disallowance of depreciation of Rs 2,37,478/- opening WDV of capitalized value of goods purchased from P.K. Agarwal concerns viz (Durga Iron & Steel Ltd. and Surajbhan Rajkumar Pvt. Ltd. in AY 2003-04. The appellant submits that the cost of part of the goods purchased from the above parties were capitalised as plant and machinery in Assessment year 2003-04 and were used during the year under consideration and hence, depreciation u/s 32 of the Act, thereon, is allowable consequentially. Disallowance u/s 14A read with Rule 8D of the Income-tax Rules 1962 4. Erred in directing the learned AO to compute the disallowance under section 14A of the Act, by invoking the provisions of Rule 8D of the Income tax Rules 1962 (the Rules') while computing income under normal provisions of the Act, without recording any objective satisfaction for rejection of the disallowance computed by the appellant under section 14A of the Act. 5. Erred in directing the learned AO to recompute the disallowance u/s 14A being higher of 1% of average value of investments which have yielded exempt income during the year or the expenses disallowed by the appellant. 6. Without prejudice to the above, the learned AO should be directed to restrict disallowance u/s 14A of the Act to the extent of total expenses of the investment division/unit [based on findings of a study undertaken by an Independent professional Chartered Accountant firm M/s. Ernst & Young LLP (EY)], which a be further apportioned on the basis of the investment giving rise to exempt income to the total investments of the appellant. The appellant submits that the aforesaid study undertaken by EY validates the fact that the suo-moto disallowance made by the appellant is just and proper a further disallowance is warranted. 7. Erred in directing the AO to compute the disallowance under clause (f) of Exp 1 to section 115JB(2) i.e. expenditure relating to exempt income, when no disallowance ought to have been made while computing book profit Reliance Industries Ltd. AY 2017-18 & 2018-19 4 u/s 115JB the Act, relying on Tribunal decision in appellant's own case for AY 2009-10 vide corrigendum order dated 02.04.2008 Addition of interest on Income Tax Refund while computing Book Profits u/s 115JB 8. Erred in confirming the action of the learned AO of adding interest on income tax refund of Rs 181,17,790/- to the book profit of the appellant u/s 115JB of the Act. The appellant submits that since the interest on income tax refund was not credited to profit and loss account as per the accounting policy consistently followed by the appellant, the learned CIT(A) erred in confirming the action of the learned AO in making adjustment to the book profit, which is not enumerated in clause (a) to (k) of Explanation 1 to section 115JB of the Act. Long term capital gain on Sale/Compulsory acquisition of land 9. Erred in not considering the net long term capital gains on sale/compulsory acquisition of land amounting to Rs. 57,77,671/- as exempt from tax as p Section 96 of The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and settlement Act, 2013 and relying on CB circular No 36/2016 dated 15.10.2016. Short grant of foreign tax credit 10. Erred in confirming the action of the learned AO of not granting credit of foreign paid to the tune of Rs. 3,23,310/-. Reference to the Transfer Pricing Officer (TPO) under section 92C of the Act. 11. Erred in confirming the action of the learned AO in making reference of the Appellant's case to the TPO, without applying his mind and without recording his satisfaction, thereby making the entire process of referring the matter to the TPC as invalid; 12. Erred in confirming the action of the learned AO in not stating reasons to show that any of the conditions mentioned in clauses (a) to (d) of Section 92C(3) of the Ad were satisfied before making an adjustment to the total income of the Appellant. 13. Erred in confirming the action of the learned AO in not demonstrating the motive the Appellant to shift profits outside of India by manipulating the prices charged in its international transactions, either at the stage of invoking or initiating the assessment or at the stage of framing the assessment. Interest chargeable on share application money refunded by the Associated Enterprise (AE) Reliance Industries Middle-East DMCC Reliance Industries Ltd. AY 2017-18 & 2018-19 5 14. Erred in determining the arm's length price (ALP) of interest chargeable in respect of share application money refunded by the AE by adopting fixed rate from Bloomberg database. 15. Erred in re-characterizing the transaction as being in the nature of loan financing on which interest is chargeable without appreciating that the amounts were refunded within 101 days due to business considerations. 16. Failed to appreciate that the provision of Chapter X of the Act are not applicable to the transaction of share application money paid for subscription of preference shares being equity in nature. 17. Erred in upholding functionally dissimilar companies selected by the TPO as comparables, in arriving at the ALP of the interest chargeable in respect of share application money refunded by the AE. 18. Erred in upholding the rate of interest determined by the TPO by adopting Libor based spreads, and then in applying the float to fixed swap. 19. Erred in not directing to benchmark the interest basis the comparable furnished by the Appellant for benchmarking interest on loan if share application money is recharacterized into loan. Each of the above Grounds of Appeal are without prejudice to each other. The Appellant craves leave to add, amend, delete, rectify, substitute, modify otherwise, all or any of the aforesaid grounds or add a new ground(s) at any time be or during the hearing of the above appeal. (ii) ITA No. 2317/Mum/2022 - AY 2018-19 - Assessee’s appeal :- On being aggrieved by the order dated 25 July, 2022 (received on 01 August, 20 passed by the learned Commissioner of Income-tax (Appeals)-57, Mumbai [herein a referred to as the learned CIT(A)] under section 250(6) of the Income-tax Act, 1961 Act), the present appeal is being preferred on the following grounds which, it is prayed, may be considered without prejudice to one another. On the facts and in the circumstances of the case and in law, the learned CIT(A) : Disallowance of weighted deduction u/s 35(2AB) on the basis of Form 3CL 1. Erred in confirming the disallowance of weighted deduction u/s 35(2AB) of the Act, amounting to Rs 10,30,80,708/-, on the basis of Form 3CL issued by Department of Scientific and Industrial Research (DSIR) with respect to the appellant's for R&D expenses. Reliance Industries Ltd. AY 2017-18 & 2018-19 6 2. Failed to appreciate that once R&D facility was approved by DSIR in No. 3CM, then the expenses incurred by the appellant ought to be allowed learned AO under section 35(2AB) of the Act. Disallowance of Depreciation on goods (steel) purchased 3. Erred in confirming the disallowance of depreciation of Rs 2,37,478/- opening WDV of capitalized value of goods purchased from P.K. Agarwal concerns viz (Durga Iron & Steel Ltd. and Surajbhan Rajkumar Pvt. L AY 2003-04. The appellant submits that the cost of part of the goods purchased from the above parties were capitalised as plant and machinery in Assessment year 2003-04 and were used during the year under consideration and hence, depreciation u/s 32 of the Act, thereon, is allowable consequentially. Disallowance u/s 14A read with Rule 8D of the Income-tax Rules 1962 4. Erred in directing the learned AO to compute the disallowance under section 14A of the Act, by invoking the provisions of Rule 8D of the Income tax Rules 1962 (the Rules') while computing income under normal provisions of the Act, without recording any objective satisfaction for rejection of the disallowance computed by the appellant under section 14A of the Act. 5. Erred in directing the learned AO to recompute the disallowance u/s 14A being higher of 1% of average value of investments which have yielded exempt income during the year or the expenses disallowed by the appellant. 6. Without prejudice to the above, the learned AO should be directed to restrict disallowance u/s 14A of the Act to the extent of total expenses of the investment division/unit [based on findings of a study undertaken by an Independent professional Chartered Accountant firm M/s. Ernst & Young LLP (EY)], which a be further apportioned on the basis of the investment giving rise to exempt income to the total investments of the appellant. The appellant submits that the aforesaid study undertaken by EY validates the fact that the suo-moto disallowance made by the appellant is just and proper a further disallowance is warranted. 7. Erred in directing the AO to compute the disallowance under clause (f) of Exp 1 to section 115JB(2) i.e. expenditure relating to exempt income, when no disallowance ought to have been made while computing book profit u/s 11 the Act, relying on Tribunal decision in appellant's own case for AY 2009-1-10 vide corrigendum order dated 02.04.2008 Addition of interest on Income Tax Refund while computing Book Profits u/s 115JB Reliance Industries Ltd. AY 2017-18 & 2018-19 7 8. Erred in confirming the action of the learned AO of adding interest on income tax refund of Rs 246 16,62,026/- to the book profit of the appellant u/s. 115JB of the Act. The appellant submits that since the interest on income tax refund was not credited to profit and loss account as per the accounting policy consistently followed by the appellant, the learned CIT(A) erred in confirming the action of the learned AO in making adjustment to the book profit, which is not enumerated in clause (a) to (k) of Explanation 1 to section 115JB of the Act. Long term capital gain on Sale/Compulsory acquisition of land 9. Erred in not considering the net long term capital gains on sale/compulsory acquisition of land amounting to Rs 23,97,71,157/- as exempt from tax as p Section 96 of The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and settlement Act, 2013 and relying on CB circular No 36/2016 dated 15.10.2016 Short grant of foreign tax credit 10. Erred in confirming the action of the learned AO of not granting credit of foreign paid to the tune of Rs. 5,47,217/-. Each of the above Grounds of Appeal are without prejudice to each other. The Appellant craves leave to add, amend, delete, rectify, substitute, modify otherwise, all or any of the aforesaid grounds or add a new ground(s) at any time be or during the hearing of the above appeal. 4. We notice the assessee has raised common issues in both the years and hence they are first adjudicated together, for the sake of convenience. 5. Ground No. 1 & 2 raised by the assessee in both the years relate to disallowance of deduction of Scientific Research Expenses claimed under section 35(2AB) on the basis of Form 3CL. The assessee had claimed deduction of Rs.8.37 crores and Rs.10.31 crores respectively in AY 2017-18 and 2018-19 towards scientific research expenses u/s 35(2AB) of the Act. The AO, however, disallowed the claim on the reasoning that the DSIR has not approved the above said expenditure in Form No.3CL. The Ld CIT(A) also confirmed the same holding that the approval of expenses by DSIR has been made compulsory after the amendment carried out in Rule 6(7A) of Income tax Rules w.e.f. 01.07.2016. Reliance Industries Ltd. AY 2017-18 & 2018-19 8 5.1 The submission of the assessee is that the provisions of sec. 35(2AB) of the Act provides for approval of scientific research facility only by DSIR, i.e., Sec. 35(2AB) does not state that the expenses should also be approved by DSIR. It is the only the Income tax Rules which provide for approval of expenses by DSIR. However, enabling provision for such a procedure has not been made in section 35(2AB) of the Act. Accordingly, it was contended that. since the amendment has been made in Rule 6(7A)(b)(ii) without incorporating enabling provision in the provisions of sec.35(2AB) of the Act, the Rules cannot override the Act. Accordingly it was submitted that the amendment made in Rule 6(7A)(b)(ii) of the Rules should not be taken into consideration. It was further submitted that that DSIR has not given any reason as to why it did not certify the scientific research expenses and the assessee was not given an opportunity of hearing by DSIR. Further, there is no right of appeal against the unilateral decision taken by DSIR. Accordingly, it was contended that there is violation of principles of natural justice and on this count also, the report of DSIR on scientific research expenses should be ignored. The assessee further submitted that the report in Form 3CL is required to be furnished by DSIR directly to PCIT or CCIT. Accordingly, it was contended that the non- approval of the scientific research expenses is not relevant for disallowing deduction u/s 35(2AB) of the Act claimed by the assessee. Accordingly it was contended that the claim of the assessee made u/s 35(2AB) of the Act should be allowed. 5.2 We heard Ld D.R on this issue and perused the record. We notice that the provisions of Rule 6(7A) have been amended w.e.f. 1.7.2016 to enable DSIR to certify Scientific Research Expenses. It is the contention of the assessee that the provisions of sec.35(2AB) of the Act empowers DSIR to approve the Scientific Research facility only and it does not empower certification of scientific research expenditure. Accordingly it was contended that the amendment made in the Income tax Rules without making enabling provision Reliance Industries Ltd. AY 2017-18 & 2018-19 9 in the provisions of sec. 35(2AB) of the Act will not bind the assessee as well as the AO. Accordingly, it was submitted that the disallowance made by AO/CIT(A) is not justified. 5.3 However, we notice that Sec. 35(2AB)(3) has been amended w.e.f 1.4.2016 and the amended provision reads as under:- “352AB(3):- No company shall be entitled for deduction under clause (1) unless it enters into an agreement with the prescribed authority for co- operation in such research and development facility and fulfils such conditions with regard to maintenance of accounts and audit thereof and furnishing of reports in such manner as may be prescribed.” The words in bold letters have been inserted w.e.f. 1.4.2016. We notice that, as per sub. (3) of sec. 35(2AB), the assessee is required to furnish reports in such manner as may be prescribed. Accordingly, on a combined reading of sec. 35(2AB)(3) read with rule 6(7A), we are of the view that the reports mentioned therein would also cover the report to be furnished by DSIR, even though the said reports are forwarded directly to the Commissioner of Income tax. In our view, the amendment made in sub. Sec. (3) may be considered as enabling provision which triggered inserting of Rule 6(7A), which was amended enabling DSIR to quantify the expenditure incurred. 5.4 The assessee submitted that there is violation of Principles of Natural Justice when certifying the quantum of expenditure. Further, it is the submission that no right of appeal has been provided to challenge the report given by DSIR. However, we notice that the provisions of sec.35(2AB)(3) of the Act, which reads as under, makes a provision for making representation before the prescribed authority, if any question arises u/s 35 of the Act as to whether and if so, to what extent any activity constitutes or constituted scientific research:- 35(3) If any question arises under this section as to whether, and if so, to what extent, any activity constitutes or constituted, or any asset is or was being used for, scientific research, the Board shall refer the question to— Reliance Industries Ltd. AY 2017-18 & 2018-19 10 (a) the Central Government, when such question relates to any activity under clause (ii) and (iii) of sub-section (1), and its decision shall be final; (b) the prescribed authority , when such question relates to any activity other than the activity specified in clause (a), whose decision shall be final.” We notice that the above said provisions of sec.35(3) provides for making a representation to the prescribed authority. In the instant case, the question is about quantifying the expenditure, i.e., whether the expenses incurred in the in-house scientific research facility is would fall under the category of “scientific research expenses” or not as specified in sec.35(2AB) of the Act. Since the DSIR has not certified part of the expenses incurred by the assessee and since it did not furnish any reason for doing so, we are of the view that there is violation of principle of natural justice. Unless the prescribed authority furnishes the reason for not certifying the reasons, it will not be possible for us to adjudicate this issue. Accordingly, we restore this issue to the file of the AO in both the years with the direction to both the assessee as well as the AO to take appropriate action to ascertain the reasons for non-certification. After ascertaining the same, the AO may examine this issue afresh and take appropriate decision in accordance with law, after affording adequate opportunity of being heard to the assessee. 6. Ground No. 3 raised by the assessee in both the years relates to disallowance of depreciation made in respect of capital asset purchased from certain entities. 6.1 At the outset, the Ld. Counsel of the assessee fairly accepted that this issue is covered against the assessee by the earlier orders of the Tribunal. The facts are that the assessee had capitalized steel purchased by it from P K Agarwal in the year relevant to AY 2003-04. The AO had held that those purchases are not genuine in nature and accordingly disallowed the Reliance Industries Ltd. AY 2017-18 & 2018-19 11 depreciation claimed thereon. Consequent thereto, the AO has been disallowing the proportionate amount of depreciation relatable to the above said purchases in all the subsequent years. We notice that the said disallowance has since been confirmed by the co-ordinate benches of Tribunal in the earlier years. Accordingly, we do not find any infirmity in the decision of Ld CIT(A) in confirming the proportionate amount of depreciation relatable to the steel purchases claimed by the assessee in both the years under consideration. Accordingly, this ground raised by the assessee in both the years are dismissed. 7. Ground Nos. 4 to 6 raised by the assessee in both the years relate to disallowance under section 14A, r.w. Rule 8D of I T Rules. 7.1 The details relating to the disallowance made u/s 14A are tabulated below:- (Rs. In Crores) PARTICULARS A.Y 2017-18 A.Y. 2018-19 Exempt income 791.76 1171.34 Disallowed by assessee 0.77 1.14 Disallowance by AO 791.76 1171.34 Disallowance by CIT(A) Partial relief Partial relief The assessee had computed disallowance u/s 14A of the Act by allocating specific expenses to the exempt income. The AO held that he was not satisfied with the workings given by the assessee. Accordingly he computed disallowance as per Rule 8D(2). We notice that the provisions of Rule 8D has been amended and it reads as under:- “8D(1) Where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with— (a) the correctness of claim of expenditure made by the assessee ; or (b) the claim made by the assessee that no expenditure has been incurred, Reliance Industries Ltd. AY 2017-18 & 2018-19 12 in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2). (2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely:- (i) the amount of expenditure directly relating to income which does not form part of total income and (ii) an amount equal to one per cent of the annual average of the monthly average of the opening and closing balances of the value of investment, income from which does not or shall not form part of total income. Provided that the amount referred to in clause (i) and clause (ii) shall not exceed the total expenditure claimed by the assessee.” Accordingly, the AO computed the disallowance as per Rule 8D(2)(ii) @ 1% of annual average of monthly average of opening and closing balances of the value of investment, income from which does not or shall not form part of total income. The amount so computed has exceeded the exempt income in both the years and hence the AO has restricted the disallowance to the amount of exempt income in both the years. 7.2 The Ld CIT(A), however, directed the AO to re-compute the disallowance @ 1% by taking average value of those investments which have yielded exempt income during the year under consideration or the expenses disallowed by assessee, whichever is higher. The assessee is still aggrieved. 7.3 The Ld A.R submitted that the AO is entitled to resort to the provisions to Rule 8D only if he is, having regard to the accounts of the assessee, not satisfied with the correctness of the expenditure claimed by the assessee. He submitted that the assessee has computed the expenses relatable to exempt income in a meticulous manner by allocating only those expenses incurred to Reliance Industries Ltd. AY 2017-18 & 2018-19 13 earn exempt income. However, the AO did not examine the correctness of the workings so made. Instead he proceeded to apply the provisions of Rule 8D by making general observations. Accordingly, the Ld A.R submitted that the AO was not right in law in invoking provisions of Rule 8D in the absence of reaching dissatisfaction over the workings made by the assessee in an objective manner having regard to the books of accounts of the assessee. In support of these contentions, the Ld A.R placed his reliance on the decision rendered by Delhi bench of ITAT in the case of DCIT vs. Nestle India Ltd (ITA No.2020/Del/2014)(2020)(207 TTJ (Del) 369). He submitted that the assessee has raised this legal contention before Ld CIT(A) also, but the first appellate authority has not given any finding on this contention. 7.4 The ld D.R, however, submitted that the AO has clearly recorded in the assessment order that he was not satisfied with the working of disallowance made u/s 14A of the Act by the assessee. 7.5 We heard rival contentions and perused the record. A careful reading of Sec. 14A(1) extracted above would show that the AO can resort to the provisions of sec.14A(2) and Rule 8D only if he is not satisfied with— (a) the correctness of claim of expenditure made by the assessee ; or (b) the claim made by the assessee that no expenditure has been incurred, Hence arriving of satisfaction on the correctness of the claim of expenditure is sin-qua-non for resorting to the provisions of Rule 8D as held by Hon’ble jurisdictional Bombay High Court in the case of Godrej & Boyce Manufacturing Co Ltd vs. DCIT (328 ITR 81)(Bom). Even though the above said decision has been rendered by Hon’ble Bombay High Court in the context of earlier provisions of Rule 8D, in our view, the above said decision would apply to the amended provisions of sec. 14A also. Reliance Industries Ltd. AY 2017-18 & 2018-19 14 7.6 It is the submission of the assessee that it has identified the expenditure relatable to exempt income by allocating salary and administrative cost of employees working treasury department and disallowed the same u/s 14A of the Act. However, the AO rejected the same by making following observations:- “It is pertinent to mention that every activity of the assessee company has some cost and expenditure involved in it. Whether it is meeting of Board of Directors to decide investment modalities or the staff’s involvement and use of logistics to implement the decisions or accounting of such investments or payments etc carried out in relation to such investments and interest etc. Cost and expenditure are attributable to every activity in relation to these investments. It is also understood that in carrying on any activity of investment calls a lot of due diligence in selection of the fund/security and a constant monitoring to decide whether to continue such investment, switch from it to another investment. It cannot be denied that all the above activities call for men hours and expenses which are inherent and imbedded in the complete business process. It is noteworthy that senior management including directors would be involved in deciding the timing and extent of surplus funds in the business and the duration for which the funds need to be invested in mutual funds etc. Therefore, in view of the above facts and reasoning and after considering the submissions of the assessee, I am not satisfied with correctness of claim of expenditure offered to disallowance by the assessee company to earn exempt income. Therefore owing to above reasons, I arrive at the satisfaction that there are expenses relatable to the earning of exempt income by the assessee company and thereby invoke the provisions of section 14A read with Rule 8D to work out disallowance of expenditures. The calculation of expenses under section 14A read with rule 8D is as under....” 7.7 A careful perusal of the observations made by the AO would show that the AO did not refer to the workings furnished by the assessee in this regard. The above said observations made by the AO only discusses about the necessity of attributing expenses towards the investment activity, which has yielded exempt income. There cannot be any quarrel over the said principle. It is the case of the assessee that it has identified the expenses attributable to the exempt income in a scientific manner and disallowed the same. We notice Reliance Industries Ltd. AY 2017-18 & 2018-19 15 that the AO did not examine the workings furnished by the assessee before him. For arriving at the dissatisfaction over the correctness of the expenditure claimed by the assessee, it is required for the AO to examine the workings furnished by the assessee vis-à-vis the accounts, find fault therein, i.e., identify the deficiencies in the workings furnished by the assessee. There should not any dispute that the dissatisfaction contemplated in sec. 14A of the Act is “objective dissatisfaction”. Without examining the workings given by the assessee, it would not have been possible for the AO to arrive at the dissatisfaction in an objective manner. Thus, in our view, the observations made by the AO he was not satisfied with the correctness of the claim of expenditure are only general observations. Since these observations have been made by the AO without examining the workings furnished by the assessee, we are of the view that the AO has not arrived at the objective satisfaction as contemplated in sec. 14A of the Act. 7.8 In the case of DCIT vs. Nestle India Ltd (supra), the Delhi bench of ITAT has deleted the disallowance made by the AO u/s 14A of the Act on noticing that the AO did not record his dissatisfaction over the workings furnished by the assessee. The relevant observations made by the Delhi bench of ITAT are given below:- “7.1.1 However, it has further been brought to our notice that in the alternate, the assessee had submitted a computation before the Assessing Officer wherein it was submitted that the disallowance, if any, could not exceed Rs.8,34,934/- being the costs of treasury operations. However, it is seen that neither the Assessing Officer nor the Ld. CIT (A) has commented on this computation of the assessee. Thus, apparently, the satisfaction, as contemplated and laid down by the Hon'ble Delhi High Court in the case of Maxopp Investment Ltd. (supra) to be recorded by the Assessing Officer is completely absent and, therefore, in absence of the required satisfaction, such disallowance could not have been made. However, since, the Ld. AR has argued that the disallowance may be restricted to Rs.8,34,934/-, we, accordingly, restrict the disallowance to Rs.8,34,934/- and direct the AO to delete the remaining disallowance. Thus, ground No.1 of the assessee's appeal stands partly allowed." Reliance Industries Ltd. AY 2017-18 & 2018-19 16 Accordingly, we are of the view that the AO, in the facts and circumstances of the case, could not have resorted to the provisions of rule 8D for computing disallowance u/s 14A of the Act in both the years. Accordingly, we modify the order passed by Ld CIT(A) in both the years and direct the AO to accept the disallowance made by the assessee in both the years and delete the additions made by him. 8. Ground No. 7 raised by the assessee in both the years relate to the addition made under section 115JB in respect of expenses relating to exempt income. We noticed earlier that the assessing officer had computed disallowance u/s 14A of the Act equivalent to the exempt income. For the purpose of clause (f) of Explanation 1 to sec. 115JB of the Act, the AO adopted the very same amount for adding to the net profit for the purpose of computing book profit u/s 115JB of the Act. The Ld CIT(A), however, directed the AO to restrict the addition to be made under clause (f) of Explanation 1 to sec.115JB to the amount of disallowance computed by the assessee for the purposes of sec.14A of the Act. 8.1 We heard the parties on this issue and perused the record. It has been held by the Special bench of ITAT in the case of Vireet Investments P Ltd (82 taxmann.com 415) that the disallowance computed u/s 14A of the Act cannot be adopted for the purpose of making addition under clause (f) of Explanation 1 to sec.115JB of the Act, meaning thereby, the disallowance to be made for computing book profit u/s 115JB, the expenses relatable to the exempt income has to be computed on the basis of expenses claimed in the relevant Profit and Loss account. Hence the Ld CIT(A) was justified in holding that the disallowance computed u/s 14A of the Act cannot be adopted verbatim for the purpose of clause (f) of Explanation 1 to sec. 115JB of the Act. At the same time, the Ld CIT(A) was not right in law in directing the AO to restrict the addition to be made under clause (f) of Explanation 1 to sec.115JB of the Act to the amount of disallowance computed by the assessee for the purposes of Reliance Industries Ltd. AY 2017-18 & 2018-19 17 sec.14A of the Act, since the disallowance made by the assessee also u/s 14A could not have been imported in sec.115JB of the Act. Accordingly, following the decision rendered by the Special bench in the case of Vireet Investments P Ltd (supra), we set aside the above said directions given by Ld CIT(A) in both the years. We notice that the assessee itself has made addition under clause (f) of Explanation 1 to sec.115JB of the Act for the purpose of computing book profit and the same has not been examined by the AO. Accordingly, we restore this issue in both the years to the file of AO to examine the addition made by the assessee on the basis of expenses claimed in the Profit and Loss account of the assessee. 9. Ground No. 8 raised by the assessee in both the years relate to the addition of interest on income tax refund to the Net Profit while computing book profit of the assessee under section 115JB of the Act. 9.1 The AO noticed that the assessee has offered “interest on income tax refund” of Rs.1.81 crores and Rs.246.16 crores respectively in AY 2017-18 and 2018-19 while computing total income under normal provisions of the Act. The AO further noticed that the assessee did not credit above cited interest income in the Profit and Loss account of the respective years, meaning thereby, above said interest on income tax refund was not included in the Book profit computed u/s 115JB of the Act. When questioned about the same, the assessee submitted that there was no certainty with regard to the quantum of interest on income tax refund, since the assessee as well as the Revenue is in appeal on multiple issues before different appellate forums and hence the quantum of interest payable by the revenue on income tax refund would undergo a change after passing of orders by the appellate authorities, meaning thereby, there is uncertainty about the quantum of interest. It was submitted that the assessee has been following the very same accounting method in view of uncertainty of interest income and the same is in accordance with AS 9. It was further submitted that the financial accounts Reliance Industries Ltd. AY 2017-18 & 2018-19 18 prepared by the assessee following above accounting principle has since been approved by the Shareholders. Accordingly, taking support of the decision rendered by Hon’ble Supreme Court in the case of Apollo Tyres Ltd (255 ITR 273), the assessee contended that no modification to the accounts prepared as per Companies Act can be made by the AO. Further it was submitted that the provisions of sec.115JB of the Act do not provide for making addition of such item of income, which is not credited to profit and loss account. In this regard, the assessee placed its reliance on the decision rendered by Pune bench of Tribunal in the case of DCIT vs. Dune Leasing & Finance Ltd (125 TTJ 87). However, the AO did not accept the above said contentions of the assessee and accordingly added the above cited interest income in computing book profit u/s 115JB of the Act in both the years. The Ld CIT(A) also confirmed the same. 9.2 We heard the parties on this issue and perused the record. We notice that this issue has been decided in favour of the assessee by the Co-ordinate bench in AY 2016-17, vide its order dated 14-10-2022 passed in ITA No.579/Mum/2021, wherein it was held as under:- “20. We have considered the submission of both sides and perused the material available on record. During the year under consideration, the assessee has received interest of Rs. 266,45,06,765 on income tax refund which has been reduced from advance Income Tax shown under the head ‘loans and advances’. While filing the return of income, the said interest has been offered to tax under the normal provisions of the Act. Interest on income tax refund was revised to Rs. 265,38,24,122 due to orders passed subsequently and same was assessed to tax under the normal provisions of the Act. However, since the said interest was not routed through the profit and loss account, the same was not offered to tax under section 115 JB of the Act. As per the assessee since corresponding appeals, relating to the income tax refunds on which interest has been received, are pending at different forums, therefore, there is no finality as to the assessed income of the assessee. Thus, interest on income tax refund is not crystallised and accordingly the same was not credited to the profit and loss account as per the policy consistently followed by the assessee. Further, the said financial statement has been prepared as required under Companies Act. The assessee further submitted that the financial statement of the assessee has been duly scrutinised and audited by the statutory auditors and have also Reliance Industries Ltd. AY 2017-18 & 2018-19 19 been approved in the annual general meeting. The said financial statement has also been filed with ROC and other statutory authorities. 21. We find that following issue came up for consideration before the Hon’ble Supreme Court in Apollo Tyres Ltd (supra): ― “Can an the Assessing Officer while assessing a company for income- tax under section 115J of the Income-tax Act question the correctness of the profit and loss account prepared by the assessee-company and certified by the statutory auditors of the company as having been prepared in accordance with the requirements of Parts II and III of Schedule VI to the Companies Act ?” 22. While deciding the same in aforesaid decision, Hon’ble Supreme Court observed as under: ― “If the statute mandates that income prepared in accordance with the Companies Act shall be deemed income for the purpose of section 115J, then it should be that income which is acceptable to the authorities under the Companies Act. There cannot be two incomes one for the purpose of Companies Act and another for the purpose of the Income-tax Act both maintained under the same Act. If the Legislature intended the Assessing Officer to reassess the company's income, then it would have stated in section 115J that 'income of the company as accepted by the Assessing Officer'. In the absence of the same and on the language of section 115J, it will have to held that view taken by the Tribunal is correct and the High Court has erred in reversing the said view of the Tribunal. Therefore, we are of the opinion that the Assessing Officer while computing the income under section 115J has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The Assessing Officer thereafter has the limited power of making increase and reductions as provided for in the Explanation to the said section. To put it differently, the Assessing Officer does not have the jurisdiction to go behind the net profit shown in the profit and loss account except to the extent provided in the Explanation to section 115J.” 23. In view of the above, once assessee’s accounts have been maintained in accordance with Companies Act and the same have also been scrutinised and audited by the statutory auditor, in absence of any material to negate these facts, the AO has limited power under section 115 JB of the Act to make adjustment to book profit only in respect of the items provided in Explanation 1 to section 115 JB (1) of the Act. As regards the submission of learned DR that the information regarding interest on income tax refund being not included in the profit and loss account has not been disclosed by the assessee in its annual accounts and thus could not be said to be approved in the AGM or filed with the ROC and other statutory authorities, Reliance Industries Ltd. AY 2017-18 & 2018-19 20 we find that no evidence has brought on record to the effect that because of such non-disclosure the accounts of the assessee were not maintained as per the provisions of Companies Act and other relevant rules and regulations. Further, no such objection by the statutory auditor or ROC or other statutory authority has been brought to our notice. In the present case, there is no dispute on the fact that assessee has offered interest on income tax refund to tax while filing its return of income and same has also been assessed under the normal provisions of the Act. Accordingly, we find no merits in addition of interest on income tax refund for computing the book profit under section 115 JB of the Act and the AO is directed to delete the same. As a result, ground No. 5 raised in assessee’s appeal is allowed.” Consistent with the view taken by the co-ordinate bench in the assessee’s own case in AY 2016-17, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete this addition made while computing book profit u/s 115JB of the Act. 10. Ground No. 9 raised by the assessee in both the years relate to claim for exemption of long term capital gains arising on compulsory acquisition of land, as per section 96 of the Right to Fair compensation and Transparency in land Acquisition, Rehabilitation and Resettlement Act, 2013. The capital gain arising on compulsory acquisition of land was Rs.57.77 lakhs in AY 2017-18 and Rs.23.98 crores in AY 2018-19. During the course of hearing, the Ld A.R submitted that the correct amount of capital gain in AY 2017-18 is Rs.1,94,22,297/-. 10.1 This is a new claim made in both the years for the first time before the Tribunal. The assessee has moved petitions in both the years seeking admission of this additional ground, wherein it is stated that the assessee is eligible for exemption from income tax in respect of capital gains arising on transfer of land under compulsory acquisition and in this regard, the assessee has placed reliance on the decision rendered by Hon’ble jurisdictional Bombay High Court in the case of Seema Jagdish Patil vs. National Hi-Speed Rail Corporation Ltd (2022)(288 Taxman 26)(Bom). It is further submitted that this additional ground is purely legal ground and it does not require examination of Reliance Industries Ltd. AY 2017-18 & 2018-19 21 any new facts. It is further submitted, by placing reliance on the decision rendered by Hon’ble Bombay High Court in the case of Nirmala L Mehta vs. CIT (2004)(269 ITR 1) that merely because an assessee offered income for taxation, the same would not take away the right of the assessee to contend that the same would not be chargeable to tax. 10.2 We heard the parties on the above said plea of the assessee. Having regard to the submissions made by the assessee, we notice that this additional ground is purely a legal ground, which does not require examination of any new facts. Accordingly, following the decision rendered by Hon’ble Supreme Court in the case of National Thermal Power Company Ltd (1998)(229 ITR 383)(SC), we admit this additional ground. 10.3 It is the contention of the assessee that the capital gains arising in both the year on compulsory acquisition of immovable property are not liable to tax both under normal provisions of the Act and u/s 115JB of the Act for the reason that sec.96 of “Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013” overrides the provisions of Income tax Act. The Ld A.R placed his reliance on the decision rendered by Hon’ble Bombay High Court in the case of Seema Jagdish Patil vs. National High Speed Rail Corporation Ltd (2022)(288 Taxman 26) in support of his contention that the capital gains is not liable to tax under normal provisions of the Act. With regard to the claim that it is not liable to be included in book profits computed u/s 115JB of the Act, the Ld A.R contended that an item, which is not liable to tax under normal provisions of the Act, cannot be subjected to tax u/s 115JB also. In support of this contention, the Ld A.R placed his reliance on the following decisions:- (a) PCIT vs. Ankit Metal and Power Ltd (2019)(416 ITR 591)(Cal) (b) CIT vs. Metal & Chromium Plater (P) Ltd (2019)(415 ITR 123)(Mad). The Ld A.R further submitted that the co-ordinate bench of the Tribunal has held in the assessee’s own case for AY 2014-15 and 2015-16 that the Notional Reliance Industries Ltd. AY 2017-18 & 2018-19 22 Sales tax incentive (subsidy) though credited to Profit and Loss account, is not liable to tax u/s 115JB of the Act, as the same is a capital receipt. The Ld A.R submitted that the ratio of this decision shall equally apply to the Capital gains arising on compulsory acquisition of immovable property. Accordingly, the Ld A.R contended that the profit amount of Rs.2,61,87,003/- and Rs.20,62,96,158/- credit to the Profit and Loss account of the financial years relevant to AY 2017-18 and 2018-19 should be excluded from the Net profit while computing book profit u/s 115JB of the Act. 10.4 We agree with the submissions made on legal points. However, since the above said claim of the assessee has been raised for the first time before the Tribunal and since the AO did not have occasion to examine the above said claim, we are of the view that it requires verification at the end of AO in both the years. Accordingly, we restore this issue in both the years to the file of AO for examining the same in the light of contentions raised by the assessee and also accordance with law. 11. Ground No. 10 raised by the assessee in both the years relates to short grant of foreign tax credit. The AO had given short credit of Foreign tax credit to the tune of Rs.3,23,310/- in AY 2017-18 and Rs.5,47,217/- in AY 2018-19. It is stated that the AO has not given any reason for giving short credit of Foreign Tax. The Ld CIT(A) confirmed the action of AO in both the years, but accepted the alternative plea of the assessee that the above said amounts are allowable as deduction u/s 37(1) of the Act. Still not satisfied, the assessee has raised this claim before us in both the years. 11.1 It is the submission of the assessee that the foreign tax credit is available against the tax payable by the assessee, as per the decision rendered by Hon’ble Karnataka High Court in the case of Wipro Ltd vs. DCIT (382 ITR 179)(Kar.). However, we notice that the AO has not given any reasons for giving short credit. Even though the assessee had placed its reliance before Ld Reliance Industries Ltd. AY 2017-18 & 2018-19 23 CIT(A) on the decision rendered by Hon’ble Karnataka High Court in the case of Wipro Ltd (supra), yet the Ld CIT(A) has, without distinguishing the said decision, has rejected the claim of the assessee and accepted the alternative claim of the assessee. In our view, the decision rendered by Hon’ble Karnataka High Court in the case of Wipro Ltd (supra) is applicable to the facts of the present case. Accordingly, we set aside the order passed by Ld CIT(A) on the main claim of the assessee and restore the same to the file of AO for examining the above said main claim of the assessee afresh in accordance with the decision rendered by Hon’ble Karnataka High Court in the case of Wipro Ltd (surpa). 12. With the adjudication of above grounds, the appeal of the assessee filed for AY 2018-19 stands disposed of. However, in AY 2017-18, the assessee has raised certain more grounds. We shall deal with the same now. 13. Ground No. 11 to 13 raised by the assessee in A.Y. 2017-18 relates to validity of reference made to Transfer Pricing Officer. At the time of hearing, the Learned AR did not press these grounds. Accordingly these grounds are dismissed as not pressed. 14. Ground No. 14 to 19 raised by the assessee in A.Y. 2017-18 relates to ALP adjustment on share application money returned back, by re-charcterising the same as loan. The assessee had made investment in preference shares issued by its subsidiary company located in Middle East named M/s Reliance Industries Middle East DMCC (RIME), UAE. The TPO re-characterised the above said investment as Loan and made transfer pricing adjustment by imputing interest thereon. 14.1 The TPO has described the transactions as under in AY 2017-18:- “6.2.1.1 In March, 2016, the assessee remitted share application money amounting to US $ 6,71,00,000/- (Rs.444,57,10,500/-) to its AE Reliance Reliance Industries Ltd. AY 2017-18 & 2018-19 24 Industries Middle East DMCC. UAE (RIME) said to be towards compulsorily convertible preference shares (CCPS). Subsequently, it was claimed that 2,21,929 compulsorily convertible preference shares of AED 1000 each amounting to AED 22,19,29,000/- (Rs.399,56,40,285/-) were allotted to the assessee in September, 2016 with the fixed coupon rate of 5% return on investment. The excess application money amounting to US $ 67,93,000/- equivalent to Rs.45,76,26,069/- was claimed to be refunded to the assessee in July, 2016. Further, on 29/03/2017, it is stated that the assessee has redeemed (said to be cancellation by the AE) 8,87,739 compulsorily convertible Preference Shares of AED 1000/- each at the same par value as it was invested long back without any return on investment and without the fixed coupon rate income; the par value paid by RIME to assessee in this redemption is AED 88,77,39,000/-, which is equivalent to US $ 24,12,33,453/-, i.e. Rs.1565,59,30,483/-. 6.2.1.2 The Department has all along been treating this investment as loan advanced to the AE for the detailed reasons, which will be discussed in this order also later, and charging interest thereon....” 14.2 The TPO made transfer pricing adjustment of Rs.130.60 crores by charging interest on the amount invested towards Preference shares in RIME for the period the investment was outstanding as given below:- Particulars US $ Rs. In crores No. of days Coupon Rate Interest in Rs. Amount invested in FY 2009-10 (upto 29 th March 2017) 12,800,000 58.31 363 6.28 3,64,22,277 Amount invested in FY 2010-11 (upto 29 March 2017) 4,438,000 26.59 363 7.47 1,97,55,747 Amount invested in FY 2015-16 (upto 29 March 2017) 223,995,380 1504.93 363 4.84 72,43,96,957 Amount invested in FY 2015-16 (balance 390,097 shares) 106,004,620 712.20 365 4.84 34,47,05,796 Amount invested in FY 2016-17 (Share 6,793,000 45.00 91 4.40 49,37,209 Reliance Industries Ltd. AY 2017-18 & 2018-19 25 Application money refunded on 30 June 2016) Amount invested in FY 2016-17 (2,21,929 shares) 60,307,000 399.56 365 4.40 17,58,08,173 Total T P Adjustment 130,60,26,158 14.3 The Ld CIT(A), following the decision rendered by the Tribunal in the earlier years, deleted the Transfer Pricing adjustment made on Share Application money against which Preference Shares had been allotted. He noticed that the assessee has got back part of share application money to the tune of Rs.45.00 crores on 1 st July, 2016. The Ld CIT(A) further noticed that the TPO, while giving effect to the order of Ld CIT(A) for AY 2016-17 had computed interest for 90 days. Accordingly, he confirmed the transfer pricing adjustment for balance period of 11 days. 14.4 The Ld A.R submitted that the assessee has been allotted Preference shares to the tune of around 98% of the share application money. The refund received by the assessee constituted only 1.71% of total share application money. The Ld A.R further submitted that the T.P adjustment upto 90 days made in AY 2016-17 has been deleted by the ITAT. Accordingly, the Ld A.R submitted that the adjustment made for balance 11 days may also be deleted. 14.5 We heard Ld D.R on this issue and perused the record. We notice that the transfer pricing adjustment made by imputing interest on share application money has been deleted by ITAT in assessee’s own case in A.Y. 2016-17 (supra). We find that the Tribunal has decided this issue in favour of the assessee as under : 28. We have considered the rival submissions and perused the material available on record. As per the assessee, since the AE is a subsidiary of the assessee and is its vehicle for making investment in various foreign companies outside India, the subscription to the shares of RIME at par value Reliance Industries Ltd. AY 2017-18 & 2018-19 26 has been done at the arm’s length price. The details of remittance and allotment with reference to the aforesaid AE are as under: Date of remittance Amount invested in USD Amount invested in INR Date of allotment of shares 28/12/2015 10,00,00,000 6,61,24,60,000 30/03/2016 09/02/2016 23,00,00,000 15,55,89,02,000 30/03/2016 25/02/2016 3,50,000 2,31,89,250 19/09/2016 21/03/2016 6,67,50,000 4,42,25,21,250 19/09/2016 29. As per the assessee, excess share application money of Rs. 45,76,26,069 out of the remittance made on 21/03/2016 of Rs. 4,42,25,21,250, was refunded to the assessee in July 2016. It is only in respect of this part share application money, which was returned by the AE without issuance of preference shares, the learned CIT(A) has upheld the levy of interest. Since, the assessee has remitted the share application money to AE in UAE, reliance has been placed upon Master Direction No. 15/2015 – 16 dated 01/01/2016, issued by Reserve Bank of India on ‘Direct Investment by Residents in Joint Venture/Wholly-Owned Subsidiary abroad’. From the perusal of aforesaid Master Direction issued by RBI, it is evident that direct investments by residents in joint venture and wholly-owned subsidiary abroad are being allowed in terms of section 6(3)(a) of Foreign Exchange Management Act, 1999 read with Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004. As per the aforesaid Master Direction, share certificate or any other document as an evidence of investment in foreign entity is to be received by the Indian party within 6 months from the date of effective remittance. 30. In the present case, in respect of last remittance on 21/03/2016, for the year under consideration, shares were allotted on 19/09/2016 and excess share application money amounting to Rs. 45,76,26,069 was refunded to the assessee. It is not the case of the Revenue that even after issuance of shares on 19/09/2016 excess share application money was withheld by the AE and was refunded subsequently. In this case, much before the issuance of shares on 19/09/2016, in respect of remittance made on 21/03/2016, excess share application money was refunded to the assessee in July 2016. These facts are also not disputed by the Revenue. Thus, in view of the above, when the transaction of subscribing to preference shares was itself not found to be bogus or sham, we do not find any merits in findings of learned CIT(A) in upholding levy of interest on excess share application money refunded, by treating the same as loan. Therefore, we direct the AO/TPO to delete the adjustment on account of levy of interest on excess share application money refunded. As a result, grounds No. 11 – 16 raised in assessee’s appeal are allowed.” Reliance Industries Ltd. AY 2017-18 & 2018-19 27 We notice that the Tribunal has held that there is no merit in the transfer pricing adjustment made by imputing interest on share application money refunded to the assessee on the reasoning that (a) the amount was refunded before the allotment of preference shares and (b) when the transaction of subscription of preference shares itself is not found to be bogus or sham Accordingly, it was held that there is no merit in imputing interest thereon by way of transfer pricing adjustment. Since the transfer pricing adjustment made in this year is a continuation of earlier year’s action of TPO and since the earlier year’s T P adjustment has been deleted by the Tribunal, following the said decision, we direct the AO to delete the Transfer pricing adjustment that was confirmed by Ld CIT(A). APPEALS OF THE REVENUE:- 15. We shall now take up the appeals filed by the revenue for AY 2017-18 and 2018-19. Various issues urged by the revenue are summarized below:- (A) COMMON ISSUES URGED BY THE REVENUE IN BOTH THE YEARS:- a) Reduction of claim of depreciation by thrusting depreciation in earlier assessment years, when depreciation claim was optional. b) Disallowance under section 14A r.w. Rule 8D. c) Disallowance of deduction under section 10AA by adopting Gross Profit in respect of Refinery SEZ and PP SEZ for the purpose of computation of deduction. d) Disallowance of deduction claimed u/s 80G of the Act in respect of donations given under Corporate Social Responsibility. e) Disallowance under section 42(1)(b) in respect of KG-DWN-98/3 (KGD6 bloc) and Coal Bed Methane Sohagpur (CBM). Reliance Industries Ltd. AY 2017-18 & 2018-19 28 f) Disallowance of foreign tax credit u/s 90(1)(a)(ii) relating to income eligible for deduction u/s 10AA of the Act. g) Transfer pricing adjustment by imputing Interest on delayed receipts. h) Transfer pricing adjustment by recharacterising the preference shares as loan. 16. The First common issue urged by the revenue in both the years relates to the disallowance of part of depreciation claim, on account of reduction of WDV by thrusting depreciation upon the assessee in the earlier years, when the claim of depreciation in those years was optional in nature. 16.1 The facts relating to this issue are that the assessee had not claimed depreciation on certain assets till AY 2001-02; on the plea that claim of depreciation was optional in those years. The AO did not accept the above said contentions of the assessee in those years and accordingly, in the preceding years, he reduced the value of WDV of assets by the amount of depreciation that should have been allowed in those years. Since the assessee had claimed depreciation on the WDV computed by it, the AO re-computed the WDV of those assets as per the workings made by him in the earlier years. Consequent thereto, the AO reduced the opening WDV of those assets during these two years also and disallowed part of depreciation claimed by the assessee, as done by him in the earlier years. The Ld CIT(A) noticed that Tribunal had, in the earlier years, deleted such kind of depreciation disallowance made in the earlier years. Following the decisions rendered by the Tribunal in the earlier years, the Ld CIT(A) deleted the disallowance of part of depreciation made in both the years under consideration. The revenue is aggrieved. 16.2 At the outset, learned Counsel of the assessee submitted that this issue is squarely covered in favour of the assessee by decision of ITAT in assessee’s Reliance Industries Ltd. AY 2017-18 & 2018-19 29 own case in earlier orders for A.Y. 2006-2007 to 2016-17. The Ld D.R, however, supported the order of the AO. 16.3 We find that learned CIT(A) has granted relief to the assessee on this issue following earlier orders of ITAT, wherein it was held that the depreciation, which was not claimed by the assessee in the earlier years when the claim was optional in nature, cannot be thrust upon the assessee so as to reduce the WDV of assets. We notice that the disallowance of depreciation made by the AO in both the years under consideration are consequential to the stand taken by him in the earlier years, which has since been rejected by the ITAT in those years. Accordingly, following earlier orders passed by ITAT on this issue in the assessee’s own case, we uphold the order of learned CIT(A) passed on this issue. 17. The next common issue urged by the Revenue in both the years relates to relief granted in respect of disallowance made by the AO u/s 14A of the Act. We have dealt with this issue in the appeal filed by the assessee, wherein we have deleted the enhancement of disallowance made by the AO on the reasoning that the AO did not record dissatisfaction over the workings made by the Assessee. Since the entire enhancement of disallowance has been deleted, this ground of the revenue shall become infructuous. Accordingly, we dismiss this ground in both the years under consideration. 18. The next common issue urged by the revenue in both the years relates to the addition made u/s 115JB of the Act to the Net profit under clause (f) of Explanation 1 to sec.115JB of the Act, in which the Ld CIT(A) had granted relief to the assessee. It was seen that the assessee has also raised the very same issue in both the years and we have restored this issue to the file of AO for examining this issue afresh, while dealing with the appeal of the assessee. Consequent thereto, this issue urged by the revenue in both the years is Reliance Industries Ltd. AY 2017-18 & 2018-19 30 restored to the file of the AO for examining it afresh in the light of discussions made supra, while dealing with the appeal of the assessee on this issue. 19. The next common issue urged by the Revenue in both the years relate to the deduction claimed under section 10AA by computing ‘profits and gains’ of Refinery SEZ unit and PP SEZ unit as per Chapter VI-D, instead of adopting gross profit of the said units. 19.1 The assessee had claimed deduction u/s 10AA of the Act on the gross profit reasoning that the “Profits and Gains of undertaking” for the purpose of sec. 10AA of the Act should be taken as the gross profits as commercially understood and hence the AO should not resort to the provisions of Chapter IV of the Act for computing “profits of undertaking”. In support of this proposition, the assessee relied upon the decision rendered by Hon’ble Supreme Court in the case of Vijay Industries vs. CIT (2019)(412 ITR 1)(SC), wherein it was held that the deduction u/s 80HH should be allowed without deducting depreciation and investment allowance as per Income tax Act. The AO did not accept above said contentions of the assessee. The AO noticed that the decision in the above said case has been rendered by Hon’ble Supreme Court in the context of sec. 80HH of the Act for AY 1979-80 and 1980-81. Accordingly, the AO held that the above said decision would not apply to the claim made u/s 10AA of the Act. 19.2 The Ld CIT(A) noticed that an identical claim made by the assessee in AY 2013-14 and AY 2015-16 has been allowed by ITAT holding that the language used in sec. 80HH and sec. 10AA are pari materia with each other and accordingly held that the ratio of decision rendered by Hon’ble Supreme Court in the case of Vijaya Industries (supra) could be applied to the deduction claimed u/s 10AA of the Act. He further held that the Explanation introduced to sec. 10AA(1) by Finance Act, 2017 w.e.f. 1.4.2018, which provides that deduction u/s 10AA would be allowed after set off of losses u/s 70 to 72 of the Reliance Industries Ltd. AY 2017-18 & 2018-19 31 Act and Chaper VI-A deduction, does not deal with the manner of computation of qualifying amount eligible for deduction u/s 10AA of the Act. Accordingly, the Ld CIT(A) directed the AO to compute profit and gains of undertaking as interpreted by Hon’ble Supreme Court in the case of Vijay Industries (supra). 19.3 The Learned AR submitted that this issue is covered in favour of the assessee by the decision of the Tribunal in assessee’s own case in earlier assessment years. 19.4 We heard Ld D.R on this issue and perused the record. We notice that the Tribunal had adjudicated an identical issue in A.Y. 2016-17 as under : 52. We find that the coordinate bench of the Tribunal in the immediately preceding assessment years i.e. 2014–15 and 2015–16, vide order dated 08/03/2022, by following the judicial precedent in assessee’s own case, upheld the plea of the assessee in principle and directed the AO to grant the relief accordingly. Since, this is a recurring issue, therefore, we see no reason to deviate from the conclusion so reached by the coordinate bench of the Tribunal in assessee’s own case in preceding assessment years, in absence of any allegation of change in facts and law. Thus, with similar directions, the plea of the assessee is accepted in principle. Accordingly grounds No. 4 – 5 raised in Revenue’s appeal are dismissed.” Since the Ld CIT(A) has followed the co-ordinate bench’s decision in the assessee’s own case, we do not find any reason to interfere with his decision. 19.5 The Ld A.R brought to our notice certain observations made by the co- ordinate bench in the order dated 10-11-2020 passed in the assessee’s own case in ITA No.7299/Mum2017 with regard to the Explanation inserted in Sec. 10AA of the Act w.e.f. 1.4.2018. The said Explanation reads as under:- “For the removal of doubts, it is hereby declared that the amount of deduction under this section shall be allowed from the total income of the assessee computed in accordance with the provisions of this Act, before giving effect to the provisions of this section and the deduction under this section shall not exceed such total income of the assessee.” Reliance Industries Ltd. AY 2017-18 & 2018-19 32 In AY 2013-14, the ld D.R had contended before the Tribunal that the decision in the case of Vijay Industries was rendered in the context of sec. 80HH r.w.s. 80AB of the Act. He further contended that the above said Explanation (supra) inserted in sec. 10AA is pari materia with sec. 80AB of the Act. Accordingly, it was contended that the above said explanation should be applied in AY 2013-14 also. The co-ordinate bench, however, held that the above said Explanation is prospective in nature and shall be applicable from AY 2018-19 only. While holding so, the Tribunal had also expressed the view that the provisions of sec.80AB and the above said Explanation are pari materia with the above said Explanation inserted in sec. 10AA. 19.6 The Ld A.R submitted that the assessee did not contest above said observation made by the Tribunal in AY 2013-14, since it had already held that the Explanation inserted in sec. 10AA will not apply in that year, i.e., it is prospective in nature. The Ld A.R submitted that the above said observation of the Tribunal was not made in right perspective. He submitted that the provisions of sec.80AB and the Explanation inserted in sec. 10AA operate in different field and hence not pari materia. Explaining it further, the Ld A.R submitted that sec. 80AB is concerned with the “quantum of income” that is eligible for deduction under heading “C – Deduction in respect of certain income” in Chapter VIA, whereas the above said Explanation specifies “the stage” at which the deduction u/s 10AA of the Act should be allowed (i.e. from the total income) and also states that quantum of deduction should be restricted to the amount of Total income. Accordingly, the Ld A.R contended that the Explanation to sec.10AA is not applicable to the facts of the present year. 19.7 We heard Ld D.R on this issue. The provisions of sec.80AB of the Act reads as under:- Reliance Industries Ltd. AY 2017-18 & 2018-19 33 “Deductions to be made with reference to the income included in the gross total income. 80AB. Where any deduction is required to be made or allowed under any section included in this Chapter under the heading "C.—Deductions in respect of certain incomes" in respect of any income of the nature specified in that section which is included in the gross total income of the assessee, then, notwithstanding anything contained in that section, for the purpose of computing the deduction under that section, the amount of income of that nature as computed in accordance with the provisions of this Act (before making any deduction under this Chapter) shall alone be deemed to be the amount of income of that nature which is derived or received by the assessee and which is included in his gross total income.” A perusal of the above said provision would show that it states that the amount of income computed in accordance with the provisions of the Act and included in the Gross Total income is eligible for deduction. Hence, there is merit in the contentions of the assessee that sec. 80AB is concerned with the “quantum of income” that is eligible for deduction under heading “C – Deduction in respect of certain income” in Chapter VIA. The Explanation inserted in sec.10AA of the Act reads as under:- “For the removal of doubts, it is hereby declared that the amount of deduction under this section shall be allowed from the total income of the assessee computed in accordance with the provisions of this Act, before giving effect to the provisions of this section and the deduction under this section shall not exceed such total income of the assessee.” A careful perusal of the above said Explanation would show that the deduction to be allowed u/s 10AA of the Act shall be allowed from “the total income” and further the said deduction shall not exceed such total income. Hence there is merit in the contentions of the assessee that the above said Explanation specifies “the stage” at which the deduction u/s 10AA of the Act should be allowed (i.e. from the total income) and also states that quantum of deduction should be restricted to the amount of Total income. Accordingly, we agree with the contentions of the assessee that sec.80AB and Explanation inserted in sec. 10AA operate in different fields. In view of the above, the decision rendered by Ld CIT(A) on this issue does not require any interference. Reliance Industries Ltd. AY 2017-18 & 2018-19 34 20. The next common issue urged by the revenue in both the years relates to the disallowance of deduction claimed u/s 80G of the Act in respect of donations given under Corporate Social Responsibility. 20.1 The assessee had incurred expenses under “Corporate Social Responsibility” (CSR) scheme and the same was disallowed while computing business income. However, certain payments made under CSR were eligible for deduction u/s 80G of the Act. Accordingly, the assessee claimed a sum of Rs.320.14 crores and Rs.387.89 crores u/s 80G of the Act out of the above CSR expenses. The AO disallowed the same. The Ld CIT(A) allowed the claim following the decision rendered by Mumbai bench of ITAT in the case of Naik Seafoods P Ltd vs. PCIT (2021)(ITA 490/Mum/2021). 20.2 We heard the parties on this issue and perused the record. In the case of Naik Sea foods P Ltd (supra), the co-ordinate bench has followed the decision rendered by Bangalore bench of Tribunal in the case of M/s FNF India P Ltd (ITA No.1565/Bang/2019 dated 05-01-2021), which in turn followed the decision rendered in the case of Allegis Services (India) Pvt. Ltd. v. ACIT (ITA No.1693/Bang/2019) and held that the assessee is eligible for deduction u/s 80G of the Act in respect of certain payments included in CSR Expenses. The relevant discussions made by the Tribunal are extracted below:- “15. Considered the rival submissions and material placed on record, we observe from the record that Ld. Pr.CIT while examining the records of the assessment observed that the Assessing Officer has not verified the expenses claimed by the assessee and allowed by the Assessing Officer ITA NO. 490/MUM/2021 (A.Y: 2016-17) M/s. Naik Seafoods Pvt. Ltd., without making the proper verification and purchases which is 95% of the sale declared by the assessee and again Assessing Officer allowed the same without making proper verification. After considering the submissions of both the parties we observe from the record that with regard to section 80G deduction we observed that the Coordinate Bench of ITAT Bangalore Bench decided the issue of deduction u/s. 80G relating to donations which is part of Corporate Social Responsibility in the case of M/s. Reliance Industries Ltd. AY 2017-18 & 2018-19 35 FNF India Pvt. Ltd., v. ACIT ( ITA.No. 1565/Bang/2019 dated 05.01.2021). The relevant findings of the Bangalore Bench are reproduced below: - "9. After hearing both the parties, we find that similar issue came up for consideration before this Tribunal in ITA No.1693/Bang/2019 in the case of Allegis Services (India) Pvt. Ltd. v. ACIT. The Tribunal by its order dated 29.4.2020 held as under:- "10. Section 135 of Companies Act, 2013 requires companies with CSR obligations, with effect from 01/04/2014. Finance (No.2) Act, 2014 inserted new Explanation 2 to sub- section (1) of section 37, so as to clarify that for purposes of sub-section (1) of section 37, any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession. 11. This amendment will take effect from 1/04/2015 and will, accordingly, apply to assessment year 2015-16 and subsequent years. 12. Thus, CSR expenditure is to be disallowed by new Explanation 2 to section 37(1), while computing Income under the Head 'Income form Business and Profession'. Further, clarification regarding impact of Explanation 2 to section 37(1) of the Income Tax Act in Explanatory Memorandum to The Finance (No.2) Bill, 2014 is as under: "The existing provisions of section 37(1) of the Act provide that deduction for any expenditure, which is not mentioned specifically in section 30 to section 36 of the Act, shall be allowed if the same is incurred wholly and exclusively for the purposes of carrying on business or profession. As the CSR expenditure (being an application of income) is not incurred for the purposes of carrying on business, such expenditure cannot be allowed under the existing provisions of section 37 of the Income-tax Act. Therefore, in order to provide certainty on this issue, it is proposed to clarify that for the purposes of section 37(1) any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 shall not be deemed to have been incurred for the purpose of business and, hence, shall not be allowed as deduction under section 37. However, the CSR expenditure which is of the nature described in section 30 to section 36 of the Act shall be allowed deduction under those sections subject to fulfilment of conditions, if any, specified therein." 13. From the above it is clear that under Income tax Act, certain provisions explicitly state that deductions for expenditure would be allowed while computing income under the head, 'Income from Business and Profession" to those, who pursue corporate social responsibility projects under following sections. Reliance Industries Ltd. AY 2017-18 & 2018-19 36 • Section 30 provides deduction on repairs, municipal tax and insurance premiums. • Section 31, provides deduction on repairs and insurance of plant, machinery and furniture Section 32 provides for depreciation on tangible assets like building, machinery, plant, furniture and also on intangible assets like know- how, patents, trademarks, licenses. Section 33 allows development rebate on machinery, plants and ships. . Section 34 states conditions for depreciation and development rebate. • Section 35 grants deduction on expenditure for scientific research and knowledge extension in natural and applied sciences under agriculture, animal husbandry and fisheries. Payment to approved universities/research institutions or company also qualifies for deduction. In-house R&D is eligible for deduction, under this section. • Section 35CCD provides deduction for skill development projects, which constitute the flagship mission of the present Government. • Section 36 provides deduction regarding insurance premium on stock, health of employees, loans or commission for employees, interest on borrowed capital, employer contribution to provident fund, gratuity and payment of security transaction tax. Income Tax Act, under section 80G, forming part of Chapter VIA, provides for deductions for computing taxable income as under: • Section 80G(2) provides for sums expended by an assessee as donations against which deduction is available. a) Certain donations, give 100% deduction, without any qualifying limit like Prime Minister's National Relief Fund, National Defence Fund, National Illness Assistance Fund etc., specified under section 80G(1)(i) b) Donations with 50% deduction are also available under Section 80G for all those sums that do not fall under section 80G(1)(i). Under Section 80G(2) (iiihk) and (iiihl) there are specific exclusion of certain payments, that are part of CSR responsibility, not eligible for deduction u/s80G. 14. In our view, expenditure incurred under section 30 to 36 are claimed while computing income under the head, 'Income form Business and Profession", where as monies spent under section 80G are claimed while computing "Total Taxable income" in the hands of assessee. The point of claim under these provisions are different. Reliance Industries Ltd. AY 2017-18 & 2018-19 37 15. Further, intention of legislature is very clear and unambiguous, since expenditure incurred under section 30 to 36 are excluded from Explanation 2 to section 37(1) of the Act, they are specifically excluded in clarification issued. There is no restriction on an expenditure being claimed under above sections to be exempt, as long as it satisfies necessary conditions under section 30 to 36 of the Act, for computing income under the head, "Income from Business and Profession". 16. For claiming benefit under section 80G, deductions are considered at the stage of computing "Total taxable income". Even if any payments under section 80G forms part of CSR payments(keeping in mind ineligible deduction expressly provided u/s.80G), the same would already stand excluded while computing, Income under the head, "Income form Business and Profession". The effect of such disallowance would lead to increase in Business income. Thereafter benefit accruing to assessee under Chapter VIA for computing "Total Taxable Income" cannot be denied to assessee, subject to fulfillment of necessary conditions therein. 17. We therefore do not agree with arguments advanced by Ld.Sr.DR. 18. In present facts of case, Ld.AR submitted that all payments forming part of CSR does not form part of profit and loss account for computing Income under the head, "Income from Business and Profession". It has been submitted that some payments forming part of CSR were claimed as deduction under section 80G of the Act, for computing "Total taxable income", which has been disallowed by authorities below. In our view, assessee cannot be denied the benefit of claim under Chapter VI A, which is considered for computing 'Total Taxable Income". If assessee is denied this benefit, merely because such payment forms part of CSR, would lead to double disallowance, which is not the intention of Legislature. 19. On the basis of above discussion, in our view, authorities below have erred in denying claim of assessee under section 80G of the Act. We also note that authorities below have not verified nature of payments qualifying exemption under section 80G of the Act and quantum of eligibility as per section 80G(1) of the Act. 20. Under such circumstances, we are remitting the issue back to Ld.AO for verifying conditions necessary to claim deduction under section 80G of the Act. Assessee is directed to file all requisite details in order to substantiate its claim before Ld.AO. Ld.AO is then directed to grant deduction to the extent of eligibility. Accordingly grounds raised by assessee stands allowed for statistical purposes." Reliance Industries Ltd. AY 2017-18 & 2018-19 38 We notice that the decision rendered by Ld CIT(A) on this issue is consistent with the view taken by various benches of Tribunal. Accordingly, we uphold the same. 21. The next common issue relates urged by the revenue in both the years relates to disallowance made under section 42(1)(b) in respect of KG-DWN- 98/3 (KGD6 bloc) and Coal Bed Methane Sohagpur (CBM). 21.1 The assessee had entered into “Production Sharing Contracts” (PSC) with Government of India for exploration and production of mineral oil. During the year under consideration, the expenses relating to four blocks were claimed, which included expenses of Rs.748.51 crores incurred for KG-DWN- 98/3 block and Rs.949.76 crores incurred for CBM (Coal Bed Methane), Sohagpur block. The AO allowed only 10% of the above said expenses and disallowed the remaining amount of 90%. The reasoning given by the AO is that, as per PSC), the assessee has an option to exercise either Article 17.2.3 or Article 17.2.4 of PSC to compute correct profits of KGD6 and CBM units. The Ld CIT(A), however, deleted the disallowance. 21.2 We heard the parties and perused the record. Section 42 of the Income tax Act is a special provision for deductions in the case of business for prospecting etc., for mineral oil. If an agreement is entered by any person with Central Government for the association or participation (which agreement has been laid on the Table of each House) for prospecting for or extraction or production of mineral oils, there shall be made in lieu of, or in addition to, the allowances admissible under this Act, such allowances as are specified in the agreement. Further such allowances shall be computed and allowed in the manner specified in the agreement. Accordingly, the other provisions of the Act shall be deemed for this purpose to have been modified to the extent necessary to give effect to the terms of the agreement. Accordingly, the terms Reliance Industries Ltd. AY 2017-18 & 2018-19 39 of agreement shall prevail for allowing deduction of expenses specified in the agreement. 21.3 The relevant clauses of PSC relating to allowing deduction of expenses read as under:- “(i) KGD-6 BLOCK 17.2.3 All allowable expenditure incurred prior to the Year in which Commercial Production commences shall be aggregated and the assessed loss for that Year as well as the assessed loss, if any, incurred in the assessment year relevant to the Year in which Commercial Production commences, or in any subsequent assessment year, shall be carried forward to succeeding assessment years and set off as provided in the Income tax Act, 1961. 17.2.4 For any or all accumulated expenditures incurred in respect of Exploration Operations and drilling operations prior to the date of commercial production, Compani(es) shall have option to amortize such expenditures over a period of ten (10) years from the date of first Commercial Production.” (ii) CBM BLOCK:- 15.4.2 All allowable expenditure incurred prior to the Year in which Commercial Production commences shall be aggregated and the assessed loss for that Year as well as the assessed loss, if any, incurred in the assessment Year relevant to the Year in which Commercial Production commences, or in any subsequent assessment year, shall be carried forward to succeeding assessment Years and set off as provided in the Income tax Act, 1961.” Placing reliance on clause 17.2.4 of PSC of KGD-6 Block, the AO allowed 10% of expenses claimed by the assessee and accordingly disallowed 90% of expenses in both the blocks cited above. 21.4 We notice that the option to claim expenses incurred prior to the date of commercial production in ten instalments is available only in KGD-6 Block, vide clause 17.2.4 and not in CBM Block, i.e., as per PSC in CBM block, expenditure incurred prior to the commercial production shall be aggregated Reliance Industries Ltd. AY 2017-18 & 2018-19 40 and the loss so assessed as well as loss, if any, incurred in the assessment year relevant to the year in which Commercial production commences or in any subsequent assessment year shall be carried forward to succeeding assessment years for being set off as provided in the Income tax Act. Accordingly, in the absence of any clause for allowing expenses in installments in CBM block, the AO was not justified in restricting the deduction to 10% of expenses claimed by the assessee. Accordingly, we are of the view that the Ld CIT(A) was justified in directing the AO to allow entire expenses claimed in CBM block. 21.5 In respect of KGD-6 block, we notice that the Ld CIT(A) has given a categorical finding that all the expenses claimed by the assessee have been incurred post Commercial production. As per clause 17.2.4 of PSC of KGD-6 block, the option to claim expenses in installments is available to the expenses incurred prior to the date of Commercial Production. Since the impugned expenses are Post Commercial production expenses, the clause 17.2.4 of PSC will not apply. Accordingly, we are of the view that the Ld CIT(A) was justified in directing the AO to allow entire expenses claimed in KGD-6 block. 22. The next common issue agitated by the revenue in both the years relates to the disallowance of foreign tax credit u/s 90(1)(a)(ii) relating to income eligible for deduction u/s 10AA of the Act. The assessee had also raised a ground in both the years challenging the decision of Ld CIT(A) in not allowing Foreign tax credit. We noticed earlier that the first appellate authority had rejected the claim of the assessee for foreign tax credit, but allowed the amount so claimed as expenditure u/s 37(1) of the Act. The assessee had challenged the same and in the earlier paragraphs, we have restored this issue to the file of the AO with certain directions. Accordingly, we are of the view that the decision rendered will take care of the ground urged by the revenue on this issue in both the years. Reliance Industries Ltd. AY 2017-18 & 2018-19 41 23. The next common issue urged by the revenue in both the years relate to the transfer pricing adjustment by imputing Interest on delayed receipts. The assessee had benchmarked interest income on delayed receipts of sale proceeds at LIBOR plus 200 basis points. The TPO, however, adopted weighted average borrowing cost of the assessee (including long term and short term domestic and foreign borrowings) plus mark up based on Bloomberg date. Accordingly, he arrived @ 4.61% for USA, 4.36% for Singapore and 8.09% for Kenya. Accordingly, he made transfer pricing adjustment of Rs.12.97 crores. 23.1 The Ld CIT(A) noticed that the ITAT, in AY 2016-17, has upheld the ALP working of assessee adopting interest rate at LIBOR plus 200 basis points. Accordingly, he deleted the transfer pricing adjustment made by the TPO. 23.2 We heard the parties on this issue and perused the record. It was submitted by Ld A.R that the rate of interest chargeable by the assessee from its AE would depend upon the credit rating of the AE. Hence the assessee has taken AEs as tested parties and has done benchmarking on the basis of agreements entered between AEs and third parties. Accordingly, the interest charged has been benchmarked with the interest payable by the AE to the third parties in comparable circumstances adopting internal CUP. 23.3 We notice that the ALP adopted by the assessee at LIBOR plus 200 basis points has been accepted by the Tribunal in the earlier years. No distinguishing feature was pointed out by the revenue in these two years, which may compel us to take a different view. Accordingly, we uphold the view taken by Ld CIT(A) on this issue in both the years. 24. The next common issue urged by the revenue in both the years relate to the transfer pricing adjustment by re-characterising the preference shares as loan. Reliance Industries Ltd. AY 2017-18 & 2018-19 42 24.1 During the earlier financial year, the assessee had given share application money to its AE M/s Reliance Industries (Middle East) DMCC (hereinafter referred to as “RIME”). The AO characterized the same as Loan and made transfer pricing adjustment. It is stated by the revenue that the grounds raised by the revenue pertains to the facts relating to subscription of NCCCPs of another AE named M/s Reliance Global Business B V, Netherlands (RGBV). It was further stated that the assessee had already liquidated the NCCCPs of RGBV in the earlier assessment year. Accordingly, it is contended that the ground raised by the revenue is infructuous. 24.2 Be that as it may, the fact is that the ld CIT(A) partially deleted the adjustment so made and sustained the addition to the extent of the amount refunded by the above said AE. While considering the appeals filed by the assessee challenging the addition to confirmed by Ld CIT(A), we have deleted the addition so confirmed by the Ld CIT(A). With regard to the relief granted by Ld CIT(A), we notice that the Ld CIT(A) has followed the decision rendered by him in AY 2016-17, which has since been upheld by ITAT. Since the decision rendered by Ld CIT(A) on this issue in this year is identical with the view taken by the Tribunal in the earlier years, we uphold the same. 25. We shall now deal with the individual issues urged by the revenue. Following individual Issues are urged by the revenue in ITA No. 2587/Mum/2022 relating to Assessment year : 2017-18:- a) Disallowance of long term and short term capital loss on sale of Non- cumulative compulsorily convertible preference shares (NCCPS) of M/s. RGBV by recharacterising the same as loan. b) Deletion of addition under section 50C of the Act on the basis of information not shared with the appellant. c) Transfer pricing adjustment in respect of Management consultancy services (MCS), technical services and business support services (BSS) rendered to AEs. Reliance Industries Ltd. AY 2017-18 & 2018-19 43 d) Transfer pricing adjustment in respect of Guarantee commission given to the Associated Enterprise (AE). e) Transfer pricing adjustment in respect of Business support services availed from AE - RCITPL (Specified Domestic Transaction). f) Transfer Pricing adjustment for Inter-unit of transfer of power (Excess income shown by the eligible units). 26. The first individual issue urged by the revenue in AY 2017-18 relates to the disallowance of long term and short term capital loss on sale of Non- cumulative compulsorily convertible preference shares (NCCPS) of M/s. RGBV by re-characterising the same as loan. During the year under consideration, 8,24,303 non-cumulative compulsory convertible preference shares (NCCCPS) held by the assessee were cancelled and accordingly, the assessee declared short term capital loss of Rs.51,21,51,467/-. The AO noticed that the TPO had characterized the above said investment as loan in the earlier years and hence held that the loss is not allowable as deduction. The AO further noticed that a similar claim made in AY 2016-17 was disallowed. Accordingly, the AO disallowed the claim of Short term capital loss. 26.1 The Ld CIT(A) noticed that his predecessor and the ITAT had held in AY 2010-11 that the re-characterisation of investment into loan is not permissible and accordingly deleted the transfer pricing adjustment made by the TPO. 26.2 We heard the parties on this issue. The Ld A.R submitted that the issue of re-characterisationof NCCCPs as loan has been decided in favour of the assessee by the Tribunal in the assessee’s own case in AY 2010-11 to 2016-17, wherein the said re-characterisation was set aside. Accordingly, the ITAT has held in AY 2016-17 that the long term capital loss declared by the assessee on sale of NCCCPs cannot be disallowed. Accordingly, it was contended that the short term capital loss declared by the assessee in the current year should be allowed. Reliance Industries Ltd. AY 2017-18 & 2018-19 44 26.3 Since an identical issue has been decided in favour of the assessee by the Tribunal in AY 2016-17 and since the decision rendered by Ld CIT(A) on this issue is identical with the view taken by the Tribunal, we uphold the view taken by Ld CIT(A) on this issue in AY 2017-18 also. 27. The next individual issue urged by the revenue in AY 2017-18 relates to the deletion of addition made under section 50C of the Act on the basis of information not shared with the appellant. The assessee sold a property for a consideration of Rs.25.91 crores on 07.01.2016. According to the AO, the Stamp duty valuation of property was Rs.28.18 crores and accordingly, he added the difference amount of Rs.2.27 crores to the total income of the assessee u/s 50C of the Act. 27.1 The Ld CIT(A) deleted the addition on the reasoning that the said addition was made on presumptions, since no information was provided by the AO to the assessee. 27.2 It is settled principle of law that the AO is required to confront the material relied upon by him with the assessee before using the same against the assessee. In the instant case, it is the contention of the assessee that it was not aware that the stamp duty valuation was more than the sale consideration and further the AO did not confront the material with the assessee. Accordingly, we are of the view that this issue may be restored to the file of AO with the direction to confront the material that was relied upon by him. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and restore the same to the file of AO. After examining the reply given by the assessee, the AO may take appropriate decision in accordance with the law. Reliance Industries Ltd. AY 2017-18 & 2018-19 45 28. The next individual issue urged by the revenue in AY 2017-18 relates to the transfer pricing adjustment in respect of Management consultancy services (MCS), technical services and business support services (BSS) rendered to AEs. 28.1 The assessee has provided MCS, Technical Services and BSS to its AE and charged them at cost plus 10%. For this segment, the assessee selected itself as Tested party and adopted TNM method as most appropriate method. It selected 7 set of comparable companies. However, the TPO rejected 6 companies and accepted 1 company only. The TPO introduced 9 comparable companies and accordingly finalized following set of 10 comparable companies:- (1) JPS Associates P Ltd (2) ANJ Power Technologies P Ltd (3) 1 to 1 Help.Net P Ltd (4) Inmacs Management Services P Ltd (5) Retail Scan Management Services P Ltd (6) Turner & Townsend P Ltd (7) Laurent and benon Management Consultants Ltd (8) Right Management India P Ltd (9) Fleet Management Services Ltd (10) HDFC Capital Advisors Ltd. The median margin of above set of comparables was 22.55%. Accordingly, the TPO proposed transfer pricing adjustment of Rs.1,64,46,083/-. 28.2 The Ld CIT(A) finalized 9 set of comparables, which consisted of 6 comparables selected by the assessee and 3 comparable companies selected by the TPO. The details of those companies are listed below:- (A) Selected by the Assessee:- (a) Murugappa Management Services Ltd (b) MCI Management India P Ltd Reliance Industries Ltd. AY 2017-18 & 2018-19 46 (c) ICRA Management Consulting Services Ltd (d) Spectrum Business Solutions Ltd (e) Allsec Technologies Ltd (f) Right Management India P Ltd (B) Selected by TPO:- (g) Laurent and benon Management Consultants Ltd (h) Retail Scan Management Services P Ltd (i) Turner & Townsend P Ltd The average mean margin of above said companies was 7.72%, which was lower than the margin earned by the assessee. Accordingly, the Ld CIT(A) held that the international transactions of this segment is at arms length and accordingly deleted the transfer pricing adjustment of Rs.1,64,46,083/-. 28.3 The revenue is agitating inclusion/exclusion of following companies by Ld CIT(A):- (A) These companies ought not to have been Excluded:- (i) JPS Associates P Ltd (ii) ANJ Power Technologies P Ltd (iii) 1 to 1 Help.Net P Ltd (iv) Inmacs Management Services P Ltd (B) These companies ought not to have been Included:- (i) MCI Management India P Ltd (ii) ICRA Management Consulting services Ltd (iii) Spectrum Business Solutions Ltd (iv) Allsec Technologies Ltd. 28.4 The Ld A.R submitted that the Tribunal may initially adjudicate the claim of revenue (a) for inclusion of ANJ Power Technologies P Ltd, 1 to 1 Help P Ltd and Inmacs Management Services Ltd. (3 companies) Reliance Industries Ltd. AY 2017-18 & 2018-19 47 (b) for exclusion of Spectrum Business Solutions Ltd and Allsec Technologies Ltd. (2 companies) He submitted that the claim of revenue in respect of above said five companies are rejected, then the assessee will not object to claim of exclusion of two other companies (MCI Management India P Ltd and ICRA Management Consulting Services Ltd) and inclusion of M/s JPS Associates P Ltd. 28.5 We shall examine initially examine five comparables referred above:- (a) ANJ POWER TECHNOLOGIES P LTD:- The contention of the assessee is that as per website of the above said company, it is engaged in the business of manufacture of electrical equipments. Hence it is submitted that it is functionally different. We notice that the TPO has considered only turnover of this company, but did not examine as to whether it is functionally comparable. We notice that the ld CIT(A) has given categorical finding that it is not functionally comparable. No material was placed before us to contradict above said finding of Ld CIT(A). Accordingly, we are of the view that the Ld CIT(A) was justified in rejecting this company. (b) 1 to 1 Help P Ltd:- The contention of the assessee is that this company is engaged in the business of providing psychological assistance and counseling to the employees in the areas of prevention sexual harassment, lifestyle management for shift employees, healthy maternity program etc, i.e., the services are in the nature of helping employees to maintain emotional well being and good mental health. The business of the assessee, however, is in the nature of providing services to carrying on business of AEs. We notice that the TPO has simply mentioned that the business of this company is comparable with that of assessee. On the contrary, the ld CIT(A) has noticed that the functions of this company is not comparable at all with the assessee. No material was placed Reliance Industries Ltd. AY 2017-18 & 2018-19 48 before us to contradict the findings given by Ld CIT(A). In view of the above said discussions, we are of the view that this company’s functions are not comparable with that of the assessee. Accordingly, we are of the view that the Ld CIT(A) was justified in excluding this company. (c) Inmacs Management Services P Ltd:- The contention of the assessee is that this company is mainly engaged in the business of development of specialized software and its turnover was only Rs.1.34 crores. We notice that the TPO has considered the description of services provided by this company, but ignored the fact of development of specialized software. No segmental result is given. Further, the turnover of this company is Rs.1.34 crores only, where as the assessee’s turnover is Rs.13.99 crores. Hence, it fails in turnover filter of 10% also. Accordingly, we are of the view that the Ld CIT(A) was justified in excluding this company. (d) Spectrum Business Solutions Ltd:- The contention of the assessee is that this company is engaged in the business of providing market research and surveys, updating of data bases and admin support services. Accordingly, it was contended that this company is functionally comparable. It is further submitted that this company has been accepted as comparable company by the TPO in the years relevant to AY 2013- 14 to 2016-17. We notice that the TPO has rejected this company on the reasoning that it is not functionally comparable and further it fails in turnover filter. However, the description of nature of services provided by this company would show that it is functionally comparable. Further, the turnover of this company is Rs.5.53 crores, while the transaction value of the assessee company is 13.99 crores. Hence it would not fail in turnover filter of (+)/(-) 10%. Accordingly, we are of the view that the Ld CIT(A) was justified in directing the AO/TPO to include this company. Reliance Industries Ltd. AY 2017-18 & 2018-19 49 (e) Allsec Technologies Ltd:- The contention of the assessee is that this company is engaged in the business of providing lifecycle management and human resources support services. It also provides data verification, processing of orders, telemarketing, monitoring quality of calls and call centers, payroll processing etc. It is the submission of the assessee that the services provided by this company is akin to the services provided by it. Accordingly, it was contended that the TPO was not justified in rejecting the company holding that it is a BPO company providing ITes services. It was further submitted that this company has been accepted as comparable in the years relevant to AY 2012-13 to 2015-16 by the Tribunal. In AY 2016-17, the TPO has accepted this company as good comparable. It was submitted that there is no change in facts in this year also. In view of the foregoing discussions, we are of the view that the Ld CIT(A) was justified in directing the AO/TPO to include this company. 28.6 Since we have rejected the claim of the revenue in respect of above said five companies, the assessee does not have objection in inclusion/exclusion of remaining three companies, i.e., the assessee does not object to the exclusion of two other companies (MCI Management India P Ltd and ICRA Management Consulting Services Ltd) and inclusion of M/s JPS Associates P Ltd. 28.7 Accordingly, we restore this issue to the file of AO/TPO for re- determining the ALP of this international transaction in the light of discussions made supra. 29. The next individual issue contested by the revenue in AY 2017-18 relates to the transfer pricing adjustment in respect of Guarantee commission given to the Associated Enterprise (AE). 29.1 The assessee had given Corporate guarantee to its AEs for availing loans from financial institutions. The assessee followed “Yield spread approach” Reliance Industries Ltd. AY 2017-18 & 2018-19 50 method for calculating the Guarantee commission to be charged on the above said Corporate guarantee given by the assessee. Under the Yield spread approach method, the difference between interest rate on loan taken by the AE with assessee’s guarantee and without guarantee is computed. The rate differential so arrived is divided between the AE and the assessee equally. Accordingly, the assessee charged guarantee commission @ 50% of the interest rate differential. The TPO, even though accepted the yield spread method, proceeded to compute the guarantee commission by adopting Moody’s analytics “Riskcalc plus” and WRDS-Thomson-Reuters LPC Deal Scan data bases for Corporate guarantee transactions and “Loss Given Default” approach using “Riskcalc Plus” for Performance guarantee”. The TPO also allocated 60% of the rate differential to the assessee. He accordingly made the transfer pricing adjustment at Rs. 25.08 crores. 29.2 Before the learned CIT(A), the assessee made submissions pointing out the defects in the approach adopted by the TPO i.e. the TPO has failed to consider appropriate criteria for determining the credit ratings of AEs on whose behalf the guarantees were given by the assessee. The Learned CIT(A) also noticed that the assessee has been following Yield spread approach based on bank letters and further splitting the interest differential equally between the assessee and AE since A.Y. 2011-12 onwards. He noticed that this approach of the assessee has been accepted by the Tribunal in A.Y. 2011-12 to 2013-14. He also noticed that the TPO has himself accepted this method in AY 2014-15 to 2016-17, but only altered interest differential splitting from 50:50 to 60:40. However, the ITAT had maintained splitting the interest differential in the ratio of 50:50 in A.Y. 2014-15 to 2016-17. Accordingly, the learned CIT(A) accepted the yield spread approach and also splitting of interest differential in the ratio of 50:50 and thereby deleted the transfer pricing adjustment made by the Assessing Officer. Reliance Industries Ltd. AY 2017-18 & 2018-19 51 29.3 We heard the parties and perused the record. We noticed that the decision rendered by the learned CIT(A) on this issue is in line with the decision rendered by the Tribunal in A.Y. 2011-12 to 2016-17. We noticed earlier that the Tribunal has been consistently upholding the yield spread approach and also splitting of differential interest in the ratio 50:50 between the assessee and its AE. Hence, we do not find any reason to interfere with the decision rendered by the learned CIT(A) on this issue. 30 The next individual issue urged by the Revenue in A.Y. 2017-18 relates to the transfer pricing adjustment in respect of the business support services availed from its AE. This adjustment relates to “Specified domestic transactions” (SDT). The assessee has availed business support services from M/s. Reliance Corporate IT Park Ltd. (RCITPL) for its undertaking, which is eligible for deduction under section 80IB of the Act. Broad scope of services rendered consisted of - back office support for transaction processing and analysis, - maintenance of accounting in ERP system, - support of functional and technical aspects, - support by way of evaluation and recommendation of procurement contracts, - support in the matters relating to accounting, taxation, insurance and HR, administration, - system network management services, - telecommunication system operation and maintenance, - infrastructural support services, - operational or administration assistance, - maintenance of computer hardware intra net facility etc. The AE raised bill upon the assessee at cost plus mark up of 5%. For bench marking this Specified Domestic Transaction, the assessee selected is AE as Reliance Industries Ltd. AY 2017-18 & 2018-19 52 tested party and TNM method as most appropriate method. The assessee selected following three comparable companies for bench marking :- a) Empire Industries Ltd. b) ICRA Management Consulting Services Ltd. c) Spectrum Business Solution Ltd. The arithmetic mean margin of these three companies was 3.42%, which was less than the profit earned by the AE. Accordingly the assessee claimed that the payment made its AE is at arms’ length. 30.1 The TPO, however, rejected all the three companies mentioned above and selected following two companies : i) BVG India Ltd. ii) ANJ Powers Technicalities Pvt. Ltd. The arithmetic mean of above said two companies worked out to 25.69%. Accordingly, the TPO made the transfer pricing adjustment (SDT) of Rs.45.72 crores for business support services availed by the assessee from its AE. 30.2 The ld. CIT(A) rejected both the comparables selected by the TPO and accepted all the three comparables selected by the assessee. The Revenue is agitated the decision rendered by the CIT(A) in respect of all the five comparable companies mentioned in the preceding paragraph. 30.3 We have heard the parties and perused the record. We shall deal with each of the comparable companies below. a) BVG India Ltd. :- (Excluded by CIT(A)) The Learned AR submitted that the BVG India Ltd. is engaged in the business of providing facility management services, mechanised housekeeping, emergency medical services (Ambulance), emergency police services (dial 100), solid waste management, transportation, plant reallocation, attendance services and labour supply. Further this Reliance Industries Ltd. AY 2017-18 & 2018-19 53 company also undertakes work for garden development, land scaping beautification project, engineering and other contract for government and private organizations. Accordingly, learned AR submitted that this company is functionally different from functions carried on by the assessee. He further submitted that this company has been held to be not comparable functionally by the ITAT in A.Y. 2013-14 to 2016-17. He also submitted that the learned CIT(A) has rejected this company by following the decision rendered in A.Y. 2013-14 to 2016-17. On perusal of the functions performed by the AE to the assessee, which is narrated in an earlier paragraph, it can be noticed that they are in the nature of core business support services provided by the AE, i.e., many works related to day to day carrying on of the business of the assessee have been outsourced to its AE. On the contrary, the functions provided by this comparable company are in the nature of low end support services, basically maintenance of infrastructure and related services. Further, this company also provides beautification services like garden development, land scaping. It also implements engineering projects like rural electrification. Accordingly, we are of the view that functions of this company cannot be compared with the functions carried on by the AE. We also noticed that this company has been excluded by the ITAT in A.Y. 2013-14 to 2016-17. Accordingly, we hold that this company functionally not comparable with the AE. Accordingly, we are of the view that the learned CIT(A) was justified in excluding this company. b) ANJ Powers Technology Pvt. Ltd. :- (Excluded by CIT(A)) The contention of the assessee is that this company is engaged in providing management consultancy services which involved high skills and fall under the category of high end business support services. Further the turnover of the company was only Rs.1.15 crores during the Reliance Industries Ltd. AY 2017-18 & 2018-19 54 year under consideration, whereas the transaction value of the assessee was Rs. 232.04 crore. Accordingly it was submitted that this company would fail under turnover filter and also functional filter. We noticed that the learned CIT(A) has also observed that this company is engaged in diversified business activity. In any case this company is liable to be excluded on application turnover filter. Accordingly we uphold exclusion of this company by the learned CIT(A). C) Empire Industries Ltd. :- (Included by CIT(A)) The TPO has rejected this comparable company holding that it is functionally not comparable, since it is engaged in the business of manufacture of machine tools, industrial equipments, real estate and glass containers. The TPO also noted that this company was rejected by him in A.Y. 2013-14 to 2016-17. The Learned AR submitted that this company is having different segments and it has considered relevant segment, viz., “trading, business support services, consultancy and commission” for benchmarking purposes. The Learned AR further submitted that all other dissimilar business segments were not considered by the assessee. The Learned AR also submitted that this company has been accepted as comparable company by the Tribunal in A.Y. 2013-14 to 2016-17. We noticed that the learned CIT(A) has also directed for inclusion of this company on the basis of the decision rendered by the Tribunal in assessee’s own case for A.Y. 2013-14 to 2016-17. Thus we noticed that the assessee has considered relevant business segment for the purpose of benchmarking analysis. However, the TPO has missed this vitas aspect. Further this company has been accepted as comparable company by the ITAT in A.Y. 2013-14 to 2016-17. Reliance Industries Ltd. AY 2017-18 & 2018-19 55 Accordingly, we do not find any infirmity with the decision of the learned CIT(A) in including this company as comparable one. d) ICRA Management Consultancy Services :- (Included by CIT(A)) The TPO rejected this company holding that it is engaged in consulting business and hence it is not functionally comparable. This company is engaged in the business of providing research/management consulting/advisory services to its clients. According to the assessee, the services provided (functions of) by RCITPL is broadly comparable with that of the assessee company. It was also submitted that this company has been accepted as comparable by the learned CIT(A) in A.Y. 2014-15 to 2016-17. No contrary decision was shown to us by the revenue. In view of the above, we are of the view that the Ld CIT(A) was justified in including this company as comparable one. e) Spectrum Business Solutions Ltd :- The TPO has rejected this company as it failed turnover filter. Since we have applied turnover filter in respect of other comparable companies, we are of the view that the learned CIT(A) was not justified in directing for inclusion of this company. Accordingly, we set aside the order passed by the learned CIT(A) and direct for inclusion of this company. 30.4 Accordingly, this issue is restored to the file of the TPO/Assessing Officer for determining the ALP of the transaction in the light of the discussion made supra. 31 The last individual issue agitated by the revenue in AY 2017-18 relates to the Arms Length price adjustment made in respect of money realized on transfer of electricity generated by one undertaking to other undertakings. The assessee is running a captive power plant which is eligible unit for deduction under section 80IA of the Act. The said undertaking had transferred power to Reliance Industries Ltd. AY 2017-18 & 2018-19 56 other undertaking (which are not eligible for deduction u/s 80IA) @ Rs.6.80 and Rs.7.95 Per KWH. During the year under consideration, the assessee had also purchased power from an unrelated party named “Dakshin Gujarat Vij Ltd.” (DGVL) @ Rs,7.95 Per KWH. Accordingly, by following the internal CUP, the assessee benchmarked its transactions of transfer of power to other units and claimed the same to be at arms’ length. However, the AO adopted external CUP, i.e., the price charged by third party named Gujarat State Electricity Corporation, which was less than the price charged by the assessee. Accordingly, the AO made Arms length price adjustment of Rs. 63.09 crores in respect of transfer of power u/s 80IA of the Act. 31.1 The learned CIT(A) noticed that the Tribunal has accepted the internal CUP in A.Y. 2013-14 to 2015-16. Accordingly, he reversed the order of AO and deleted the addition. 31.2 We have heard the parties on this issue and perused the record. We noticed that the internal CUP adopted by the assessee has been upheld by the ITAT in assessee’s own case relating to A.Y. 2013-14 to 2016-17. The Learned AR also submitted that an identical issue arose in assessee’s own case in A.Y. 2006-07 wherein also the assessee had adopted the rate charged by the Dakshin Gujarat Vij Ltd., in order to benchmark its transactions. He submitted that the Tribunal has upheld the adoption of internal CUP and the same has since been upheld by Hon'ble Bombay High Court. 31.3 Since the Tribunal is consistently upholding the practice of adopting internal CUP in respect of transaction of sale of power to non-eligible undertaking and since the learned CIT(A) has followed the order so passed by the ITAT in earlier years, which has been upheld by Hon’ble Bombay High Court in one of the years, we uphold the order passed by the learned CIT(A) on this issue. Reliance Industries Ltd. AY 2017-18 & 2018-19 57 32. We shall now deal with individual issues urged by the revenue in ITA No. 2588/Mum/2022 relating to Assessment Year: 2018-19:- a) Transfer pricing adjustment in respect of Management Consultancy Services (MCS), technical services and Business support services (BSS) rendered to AE. b) Transfer pricing adjustment in respect of Guarantee commission given to the Associated Enterprise (AE). c) Transfer pricing adjustment in respect of Business support services availed from AE - RCITPL (Specified Domestic Transaction). 33 The first individual issue urged by the revenue in AY 2018-19 relates to Transfer pricing adjustment in respect of Management Consultancy Services (MCS), technical services and Business support services (BSS) rendered to AE. 33.1 The assessee has provided MCS, Technical Services and BSS to its AE and charged them at cost plus 10%. For this segment, the assessee selected itself as Tested party and adopted TNM method as most appropriate method. It selected 8 comparable companies. However, the TPO rejected all of them and brought in 9 comparable companies. Accordingly, the TPO made transfer pricing adjustment of Rs.65,89,399/-. 33.2 The Ld CIT(A) finalized 10 comparable companies, which consisted of 7 companies selected by the assessee and 3 companies selected by the TPO. Since the transaction was at arms length, the Ld CIT(A) deleted the addition. The revenue is aggrieved in respect of nine comparable companies, i.e., 5 companies selected by the assessee and four companies rejected by Ld CIT(A). The details of these nine companies are given below:- (A) Revenue seeks exclusion of following companies:- (i) Spectrum Business Solutions Ltd (ii) Allsec Technologies Ltd (iii) Seaworld Shipping and logistics P Ltd Reliance Industries Ltd. AY 2017-18 & 2018-19 58 (iv) MCI Management India P Ltd (v) ICRA Management Consulting Services Ltd (B) Revenue seeks Inclusion of following companies:- (i) ANJ Power Technologies P Ltd (ii) 1 to 1 Help P Ltd (iii) Inmacs Management Services P Ltd (iv) JPS Associates P Ltd The Ld A.R submitted that if the decision rendered by Ld CIT(A) is confirmed in respect of following five comparable companies, then the assessee will not have grievance in excluding/including remaining four companies:- (i) Spectrum Business Solutions Ltd (Revenue seeks exclusion) (ii) Allsec Technologies Ltd (Revenue seeks exclusion) (iii) ANJ Power Technologies P Ltd (Revenue seeks inclusion) (iv) 1 to 1 Help P Ltd (Revenue seeks inclusion) (v) Inmacs Management Services P Ltd (Revenue seeks inclusion) 33.3 We shall deal with the above said five companies first. (i) Spectrum Business Solutions Ltd (Included by CIT(A)) The contention of the assessee is that this company is engaged in the business of providing market research and surveys, updating of data bases and admin support services. Accordingly, it was contended that this company is functionally comparable. It is further submitted that this company has been accepted as comparable company by the TPO in the years relevant to AY 2013-14 to 2016-17. We notice that the TPO has rejected this company on the reasoning that it is not functionally comparable and further it fails in turnover filter. However, the description of nature of services provided by this company would show that it is functionally comparable. Further, the turnover of this company is Rs.6.75 crores, while the transaction value of the assessee company is 10.33 crores. Hence it would not fail in turnover filter of (+)/(-) 10%. Accordingly, we are of the view that the Ld CIT(A) was justified in directing the AO/TPO to include this company. Reliance Industries Ltd. AY 2017-18 & 2018-19 59 (ii) Allsec Technologies Ltd (Included by CIT(A) The contention of the assessee is that this company is engaged in the business of providing lifecycle management and human resources support services. It also provides data verification, processing of orders, telemarketing, monitoring quality of calls and call centers, payroll processing etc. It is the submission of the assessee that the services provided by this company is akin to the services provided by it. Accordingly, it was contended that the TPO was not justified in rejecting the company holding that it is a BPO company providing ITes services. It was further submitted that this company has been accepted as comparable in the years relevant to AY 2012-13 to 2015-16 by the Tribunal. In AY 2016-17, the TPO has accepted this company. It was submitted that there is no change in facts in this year also. In view of the foregoing discussions, we are of the view that the Ld CIT(A) was justified in directing the AO/TPO to include this company. (iii) ANJ Power Technologies P Ltd (Excluded by CIT(A)) The contention of the assessee is that as per website of the above said company, it is engaged in the business of manufacture of electrical equipments. Hence it is submitted that it is functionally different. It was further submitted that this company has discontinued its main business. It was submitted that the TPO has taken the view that it s functionally comparable with the assessee company, but the fact shows otherwise. We notice that the ld CIT(A) has given categorical finding that it is not functionally comparable and in this regard, he followed his decision rendered in AY 2017-18, which has been upheld by us in the preceding paragraphs. Accordingly, we are of the view that the Ld CIT(A) was justified in rejecting this company. Reliance Industries Ltd. AY 2017-18 & 2018-19 60 (iv) 1 to 1 Help P Ltd (Excluded by CIT(A)) The contention of the assessee is that this company is engaged in the business of providing psychological assistance and counseling to the employees in the areas of prevention sexual harassment, lifestyle management for shift employees, healthy maternity program etc, i.e., the services are in the nature of helping employees to maintain emotional well being and good mental health. The business of the assessee, however, is in the nature of providing services to carrying on business of AEs. We notice that the TPO has simply mentioned that the business of this company is comparable with that of assessee. On the contrary, the ld CIT(A) has noticed that the functions of this company is not comparable at all with the assessee. In view of the above said discussions, we are of the view that this company’s functions are not comparable with that of the assessee. Accordingly, we are of the view that the Ld CIT(A) was justified in excluding this company. (v) Inmacs Management Services P Ltd (Excluded by CIT(A)) The contention of the assessee is that this company is mainly engaged in the business of development of specialized software and its turnover was only Rs.1.90 crores. We notice that the TPO has considered the description of services provided by this company, but ignored the fact of development of specialized software. This company also holds inventories of Rs.1.12 crores, meaning thereby, it is also a product company. No segmental results is provided. Accordingly, we are of the view that the Ld CIT(A) was justified in excluding this company. 33.4 Since we have upheld the decision taken by Ld CIT(A) in respect of the above cited five comparable companies, the assessee does not object to allowing the grounds of revenue in respect of remaining four comparables. We order so. Reliance Industries Ltd. AY 2017-18 & 2018-19 61 33.5 Accordingly, this issue is restored to the file of the TPO/Assessing Officer for determining the ALP of the transaction in the light of the discussion made supra. 34. The next individual issue urged by the revenue in AY 2018-19 relates to transfer pricing adjustment in respect of Guarantee commission given to the Associated Enterprise (AE). 34.1 Identical issue has been examined by the assessee in the appeal of revenue relating to AY 2017-18 in the preceding paragraphs, wherein we have upheld the order passed by Ld CIT(A) on this issue. Since the facts relating to this issue are identical in this year also, following our decision rendered in AY 2017-18, we uphold the order passed by Ld CIT(A) on this issue. 35. The next individual issue urged by the revenue in AY 2018-19 relates to transfer pricing adjustment in respect of Business support services availed from its domestic AE - RCITPL (Specified Domestic Transaction). The services so availed consisted of two types, viz., (a) IT Support Services and (b) Business support services. 35.1 We shall first deal with IT support services. The assessee has availed IT support services from one of its AE named Reliance Corporate IT Park Ltd. (RCIPL) and paid a sum of Rs. 290.48 crores during the year under consideration. Since the assessee has claimed deduction under section 10AA of the Act in respect of its refinery SEZ, the above said payment fall under the category of specified domestic transaction requiring determination of arms’ length price. The AE had charged the assessee at Cost plus 10% for rendering following services :- i) Evaluation testing and posted IT related software ii) Maintaining and upgrading software iii) Internet and Intranet applicable services Reliance Industries Ltd. AY 2017-18 & 2018-19 62 The AE “RCITPL” was selected as tested party and TNNM was selected as most appropriate method. The PLI was taken as net cost plus margin. The assessee selected following three comparable companies whose three years weighted average mean margin was 4.17%. i) Altruist Customer management India Pvt. Ltd. ii) CMS Computers Ltd. iii) DCM Ltd. (Segmental) 35.2 The TPO rejected first two companies and accepted DCM Ltd. (segmental). The TPO also introduced following two companies :- i) ASA Business Services Pvt. Ltd. ii) Omega Heath Care Management Services Pvt. Ltd. Accordingly three companies were taken as final comparable companies by the TPO in respect of IT support services provided by the AE. The arithmetic mean of three companies was 13.45%. Accordingly he made the transfer pricing adjustment of Rs. 9.13 crores. 35.3 The learned CIT(A) held that the two comparable companies introduced by the TPO, viz., ASA Business Services Pvt. Ltd. and Omega Heath Care Management Services Pvt. Ltd. are not good comparables and accordingly rejected them. He further held that two comparable companies selected by the assessee, viz., Altruist Customer management India Pvt. Ltd. and CMS Computers Ltd. are good comparable companies. Aggrieved the order so passed by the learned CIT(A) the Revenue has filed the appeal in respect of two comparables of the assessee, that were accepted by the learned CIT(A). 35.4 We heard the parties and perused the record, we shall deal with the two companies which are being contested by the Revenue :- a) Altruist Customer management India Pvt. Ltd . The TPO has rejected this comparable holding that it is functionally not comparable. However, it was pointed out to learned CIT(A) that this Reliance Industries Ltd. AY 2017-18 & 2018-19 63 company is engaged in the business of providing low end IT enabled services. Accordingly, the learned CIT(A) has held that this company should not be excluded. We noticed that the TPO has not given any reason for holding that this company is not functionally comparable. On the contrary, the learned CIT(A) has noticed that this company is providing low end IT enabled services, which is comparable with the functions of the assessee company. Accordingly, we are of the view that the learned CIT(A) was justified in including this company. b) CMS Computers Ltd. The TPO has excluded this comparable holding that it is functionally not comparable. However, it was pointed out to the learned CIT(A) that this company is engaged in the business of providing low end IT enabled services. Accordingly the learned CIT(A) has held that this company should not be excluded. We noticed that the TPO has not given any reason for holding that this company is not functionally comparable. On the contrary, the learned CIT(A) has noticed that this company is providing low end IT enabled services and hence it is comparable with the assessee company. Accordingly, we are of the view that the learned CIT(A) was justified in including this company. Accordingly the final the set of comparable companies for IT support services will be : a) Altruist Customer management India Pvt. Ltd. b) CMS Computers Ltd. c) DCM Ltd. (Segmental) Accordingly, we direct the Assessing Officer/TPO to recompute the arms’ length price of the transactions by considering the above said three companies. 36 With regard to transfer pricing adjustment made in respect of business support services availed by the assessee from its domestic AE RCITPL (specified domestic transaction), as in the case of IT Support services, the Reliance Industries Ltd. AY 2017-18 & 2018-19 64 assessee selected RCITPL as tested party, TNMM method as most appropriate method and net cost plus margin as PLI for benchmarking purpose. The AE RCIPL had charged the assessee at Cost plus 5% mark up for providing support services. The assessee had selected nine comparable companies whose medium margin was at 1.30%. Accordingly, the assessee claimed that the payment made by it to its AE was at arms’ length. The TPO rejected all nine comparable companies selected by the assessee and introduced following two comparables : i) BVG India Ltd. ii) ANJ Power Technologies Ltd. The three years weighted average margin of the above said two companies was 29.07%. Accordingly the TPO made transfer pricing adjustment was Rs. 60.40 crores. 36.1 The learned CIT(A) rejected both comparable companies introduced by the TPO and accepted eight comparable companies selected by the assessee. Aggrieved, the Revenue has filed appeal before the Tribunal challenging rejection of two comparable companies and acceptance of eight comparable companies, aggregating to 10 companies. The Ld A.R submitted that if the Tribunal upholds the order of Ld CIT(A) in respect of following three comparable companies, then the assessee will not have grievance in accepting the prayer of the revenue in respect of remaining 7 companies:- (a) BVG India Ltd (b) ANJ Power Technologies P Ltd (c) Empire Industries Ltd. 36.2 We shall deal with the above said three companies first. a) BVG India Ltd. :- (Excluded by CIT(A)) Reliance Industries Ltd. AY 2017-18 & 2018-19 65 The Learned AR submitted that the BVG India Ltd. is engaged in the business of providing facility management services, mechanised housekeeping, emergency medical services (Ambulance), emergency police services (dial 100), solid waste management, transportation, plant reallocation, attendance services and labour supply. Further this company also undertakes work for garden development, land scaping beautification project, engineering and other contract for government and private organizations. There is also sale of goods during this year. Accordingly, learned AR submitted that this company is functionally different from functions carried on by the assessee. He further submitted that this company has been held to be not comparable functionally by the ITAT in A.Y. 2013-14 to 2016-17. He also submitted that the learned CIT(A) has rejected this company by following the decision rendered in A.Y. 2013-14 to 2016-17. On perusal of the functions performed by the AE to the assessee, which is narrated in an earlier paragraph, it can be noticed that they are in the nature of core business support services provided by the AE, i.e., many works related to day to day carrying on of the business of the assessee have been outsourced to its AE. On the contrary, the functions provided by this comparable company are in the nature of low end support services, basically maintenance of infrastructure and related services. Further, this company also provides beautification services like garden development, land scaping. It also implements engineering projects like rural electrification. There is sale of goods during this year. Accordingly, we are of the view that functions of this company cannot be compared with the functions carried on by the AE. We also noticed that this company has been excluded by the ITAT in A.Y. 2013-14 to 2016-17. Accordingly, we hold that this company functionally not comparable with the AE. Accordingly, we are of the view that the learned CIT(A) was justified in excluding this company. Reliance Industries Ltd. AY 2017-18 & 2018-19 66 b) ANJ Powers Technology Pvt. Ltd. :- (Excluded by CIT(A)) The contention of the assessee is that this company is engaged in providing management consultancy services which involved high skills and fall under the category of high end business support services. Further the turnover of the company was only Rs.1.15 crores during the year under consideration, whereas the transaction value of the assessee was Rs. 232.04 crore. Accordingly it was submitted that this company would fail under turnover filter and also functional filter. We noticed that the learned CIT(A) has also observed that this company is engaged in diversified business activity. In any case this company is liable to be excluded on application turnover filter. Accordingly we uphold exclusion of this company by the learned CIT(A). C) Empire Industries Ltd. :- (Included by CIT(A)) The TPO has rejected this comparable company holding that it is functionally not comparable, since it is engaged in the business of manufacture of machine tools, industrial equipments, real estate and glass containers. The TPO also noted that this company was rejected by him in A.Y. 2013-14 to 2017-18. The Learned AR submitted that this company is having different segments and it has considered relevant segment, viz., “trading, business support services, consultancy and commission” for benchmarking purposes. The Learned AR further submitted that all other dissimilar business segments were not considered by the assessee. The Learned AR also submitted that this company has been accepted as comparable company by the Tribunal in A.Y. 2013-14 to 2016-17. We noticed that the learned CIT(A) has also directed for inclusion of this company on the basis of the decision rendered by the Tribunal in assessee’s own case for A.Y. 2013-14 to 2016-17. Reliance Industries Ltd. AY 2017-18 & 2018-19 67 Thus we noticed that the assessee has considered relevant business segment for the purpose of benchmarking analysis. However, the TPO has missed this vitas aspect. Further this company has been accepted as comparable company by the ITAT in A.Y. 2013-14 to 2016-17. Accordingly, we do not find any infirmity with the decision of the learned CIT(A) in including this company as comparable one. 36.3 Since we have upheld the order passed by Ld CIT(A) in respect of above said three companies, there is no necessity to adjudicate the remaining 7 companies, as the Ld A.R submitted that they can be decided in favour of the revenue. Accordingly, this issue is restored to the file of the TPO/Assessing Officer for determining the ALP of the transaction in the light of the discussion made supra. 37. The assessee has filed Cross objections ( C.O. No. 137/Mum/2022 ) in AY 2018-19 on the following issues:- a) Disallowance of depreciation by thrusting depreciation of earlier assessment year. b) Disallowance under section 14A r.w. Rule 8D. c) Disallowance of deduction under section 10AA in respect of Refinery SEZ. d) Disallowance of deduction under section 10AA in respect of PP SEZ. e) Disallowance of deduction of Rs. 291,80,00,000/- under section 80G of the Act in respect of CSR Donations. f) Disallowance under section 42(1)(b) in respect of KG-DWN-98/3 (KGD6 block) and Coal Bed Methane Sohagpur (CBM). g) Short grant of foreign tax credit. h) Interest on delayed receipts. i) Interest chargeable on preference shares recharterised as loan. j) Business support services (BSS) and technical services. k) Guarantee commission (received) l) IT Support services (Excess deduction claimed). m) Business support services – short payment made by RIL SEZ to RCITPL. Reliance Industries Ltd. AY 2017-18 & 2018-19 68 We notice that the assessee has raised filed cross objections only to support the order passed by Ld CIT(A). All these issues have been adjudicated by us while dealing with the appeal of the revenue. Hence these issues do not require any separate adjudication. 38. In the result, both the appeals of the assessee and both the appeals of the revenue are treated as partly allowed. The cross objection filed by the assessee for AY 2018-19 is dismissed as infructuous. Order has been pronounced in the Court on 18.10.2023 Sd/- Sd/- (PAVAN KUMAR GADALE) (B.R.BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai; Dated : 18/10/2023 Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. The CIT(A) 4. CIT 5. DR, ITAT, Mumbai 6. Guard File. BY ORDER, //True Copy// (Dy./Asstt. Registrar) PS ITAT, Mumbai