M/s. Electrosteel Casting Limited., Kolkata V. DCIT, Cental Circle - 4(4), Kolkata, Kolkata

ITA 138/KOL/2018

• Counselvise Citation: [2019] 112 COUNSELVISE.COM (IT) 6772 (ITAT-KOLKATA)
• Duration Of Justice: 1 year(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-02-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2012-2013
• Appeal Filed On: 31-01-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DR P K SRIHARI; ROBIN CHOUDHUR Y
• Assessee Lawyers: S K TULSIYAN
• Keywords: Capital asset; Depreciation; Transfer pricing; Opportunity of being heard; International transaction; Earning of tax free income; Proportionate interest; Question of law; Wholly owned subsidiary; Capital receipt; Commercial expediency; Revenue expenditure; Rule 8D; Capital Gains
• Section: 143(3); 92B; 14A; 115JB; 80IA; 144C; 144; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C, BENCH KOLKATA BEFORE SHRI S. S. GODARA, JM & DR. A. L. SAINI, AM ./I.T.A NOS.138 & 139/KOL/2018 ( [ [ / ASSESSMENT YEAR: 2012-13 & 2013-14) M/S. ELECTROSTEEL CASTINGS LTD. 19, G. K. TOWER, CAMAC STREET, KOLKATA 700 017. VS. DCIT, CENTRAL CIRCLE-4(4), KOLKATA. ./ ./PAN/GIR NO.: AAACE 4975 B (ASSESSEE) .. (REVENUE) & ./I.T.A NOS.191 & 192/KOL/2018 ( [ [ / ASSESSMENT YEAR: 2012-13 & 2013-14) DCIT, CENTRAL CIRCLE-4(4), KOLKATA. VS. M/S. ELECTROSTEEL CASTINGS LTD. 19, G. K. TOWER, CAMAC STREET, KOLKATA 700 017. ./ ./PAN/GIR NO.: AAACE 4975 B (REVENUE) .. (ASSESSEE) ASSESSEE BY : SHRI S.K. TULSIYAN, ADVOCATE REVENUE BY : DR. P. K. SRIHARI, CIT-DR & ROBIN CHOUDHURY, ADDL.CIT(DR) / DATE OF HEARING : 07/02/2019 /DATE OF PRONOUNCEMENT : 28/02/2019 / O R D E R PER SHRI S. S. GODARA: THE ASSESSEE AND REVENUE HAVE FILED THEIR INSTANT CROSS-APPEALS FOR ASSESSMENT YEARS 2012-13 & 2013-14, AGAINST THE COMMISSIONER OF INCOME TAX(A)-22, KOLKATAS SEPARATE ORDERS; BOTH DATED 23.11.2017 PASSED IN CASE NOS. I.T.A NOS.191 & 192/KOL/2018 & I.T.A NOS.138 & 139/KOL/2018 M/S. ELECTROSTEEL CASTINGS LTD. ASSESSMENT YEAR: 2012-13 & 2013-14 PAGE | 2 89/CIT(A)-22/KOL/12-13/16-17 & 90/CIT(A)-22/KOL/12-13/16-17 RESPECTIVELY INVOLVING PROCEEDINGS U/S 143(3) R.W.S. 144C OF THE INCOME TAX ACT, 1961 (IN SHORT THE ACT). HEARD BOTH THE PARTIES. CASE FILE PERUSED. 2. IT TRANSPIRES DURING THE COURSE OF HEARING THAT ALMOST ALL THE ISSUES RAISED IN THE INSTANT CROSS-APPEALS FILED AT THE BOTH TAXPAYERS AND REVENUES BEHEST ARE IDENTICAL AND INTER-CONNECTED. THE ASSESSEES SOLE GRIEVANCE IN BOTH OF ITS APPEALS IS THAT THE CIT(A) HAS ERRED IN LAW AND ON FACTS IN DIRECTING THE ASSESSING OFFICER TO RESTRICT U/S 14A R.W.R. 8D DISALLOWANCE(S) OF RS.6,01, 17,716/- AND RS.5,39,20,281/- TO RS.16,85,257/- & RS.3,64,065/- (ASSESSMENT YEAR WISE) FOR THE PURPOSE OF MAT ADJUSTMENT U/S 115JB EXPLANATION (F) OF THE ACT. THE REVENUES IDENTICAL FIRST THREE SUBSTANTIVE GROUNDS IN BOTH OF ITS APPEALS SEEK TO REVIVE THE ENTIRE SUM OF SECTION 14A DISALLOWANCE. WE THEREFORE TAKE UP THIS COMMON ISSUE IN ALL FOUR CASES TOGETHER FOR THE SAKE OF CONVENIENCE AND BREVITY. WE ADVERT TO THE ASSESSEES GROUNDS FIRST THAT THE CIT(A) OUGHT NOT TO HAVE DIRECTED THE ASSESSING OFFICER TO COMPUTE SECTION 115JB EXPLANATION (F) MAT ADJUSTMENT COMPUTATION FOR SECTION 14A R.W.R 8D DISALLOWANCE COMPONENT OF RS.16,85,257/- & RS.3,64,065/-. 3. BOTH PARTIES REITERATED THEIR RESPECTIVE PLEADINGS AGAINST AND IN SUPPORT OF THE CIT(A) DIRECTIONS UNDER CHALLENGE. WE NOTICE IN THIS BACKDROP THAT THE INSTANT ISSUE OF SECTION 14A R.W.R. 8D DISALLOWANCE FOR THE PURPOSE OF SECTION 115JB MAT COMPUTATION IS NO MORE RES INTEGRA. HONBLE BOMBAY HIGH COURTS JUDGMENT IN CIT VS. BENGAL FINANCE & INVESTMENT P LTD.; ITA NO.337 OF 2013 DATED 10.02.2015 AND THIS TRIBUNALS SPECIAL BENCH DECISION IN ACIT VS. VIREET INVESTMENTS (P) LTD. [2017] 82 TAXMAN.COM 415 (DELHI-TRIB) SETTLE THIS ISSUE IN ASSESSEES FAVOUR THAT SUCH A DISALLOWANCE IS NOT TO BE SUBJECTED TO MAT ADJUSTMENT. WE THEREFORE ACCEPT THAT ASSESSEES ARGUMENTS IN SUPPORT OF ITS SOLE SUBSTANTIVE GRIEVANCE. THE REVENUES CONTENTIONS IN SUPPORTING CIT(A)S DIRECTIONS TO THIS EFFECT STAND I.T.A NOS.191 & 192/KOL/2018 & I.T.A NOS.138 & 139/KOL/2018 M/S. ELECTROSTEEL CASTINGS LTD. ASSESSMENT YEAR: 2012-13 & 2013-14 PAGE | 3 REJECTED. THE ASSESSEE SUCCEEDS IN BOTH OF ITS APPEALS IN ITA NOS.138&139/KOL/2018. 4. NEXT COME REVENUES GRIEVANCE SEEKING TO REVIVE ENTIRE SUM U/S 14A R.W.R 8D DISALLOWANCE FIGURE OF RS.6,01, 17,716/- AND RS.5,39,20,281/-(ASSESSMENT YEAR WISE). WE REITERATE THAT BOTH ASSESSMENT YEARS BEFORE US INVOLVE IDENTICAL SET OF FACTS. WE TREAT FORMER ASSESSMENT YEAR 2012-13 AS THE LEAD ASSESSMENT YEAR THEREFORE THE CIT(A)S DETAILED DISCUSSIONS FORMING SUBJECT MATTER OF CHALLENGE OF THE INSTANT ISSUE READ AS FOLLOWS: 05. GROUNDS NO 2 TO 5 RELATE TO THE ACTION OF THE LD. AO IN MAKING A DISALLOWANCE OF RS.6,01,17,716/- BY INVOKING THE PROVISIONS OF SEC 144 OF THE INCOME TAX ACT, 1961 READ WITH RULE 8D OF THE INCOME TAX RULES, 1962. THE IMPUGNED MATTER HAS BEEN DEALT WITH BY THE LD.AO AS UNDER: FOLLOWING THE EXAMINATION OF ACCOUNTS AND MATERIAL BROUGHT ON RECORD, THE FOLLOWING ISSUES WERE FOUND TO DESERVE SPECIFIC ATTENTION. (I) EXPENDITURE IN RESPECT OF EXEMPT INCOMES THE ACQUISITION, MAINTENANCE, DISPOSAL AND ACCOUNTING OF INVESTMENTS IN SHARES / SECURITIES / MUTUAL FUND UNITS ETC., ENABLING A PERSON TO EARN TAX-EXEMPT INCOMES REQUIRE CERTAIN EFFORTS AND EXPENSE IN MATERIAL AND JOB-HOURS. SINCE THE INCOME THAT SUCH EFFORTS YIELD ARE EXEMPT FROM TAX, SUCH CORRESPONDING EXPENSES ARE NOT ALLOWABLE UNDER ANY HEAD AS SUCH, BY VIRTUE OF SEC.14A (1). THE ASSESSEE HAS SUBSTANTIAL INVESTMENTS OF THE SAID NATURE. AT THE END OF THE RELEVANT YEAR, THE TOTAL INVESTMENTS STOOD AT RS.819.44 CRORES IN SHARES, APART FROM INVESTMENTS IN UNITS OF MUTUAL FUNDS TRADED DURING THE YEAR. DURING THE YEAR, IT HAS ACTUALLY ALSO EARNED THE SUBSTANTIAL DIVIDEND INCOME OF RS.3,37,05,131/- THAT IS EXEMPT FROM TAXATION BY VIRTUE OF THE PROVISIONS OF THE I T ACT 1961. IN ITS COMPUTATION OF INCOME, THE ASSESSEE HAS COMPUTED A SUM OF RS.16,85,257/- TO BE THE EXPENDITURE INCURRED IN MAINTAINING THE SAID INVESTMENTS. THE ASSESSEE WAS ASKED TO CLARIFY THE BASIS OF SUCH A COMPUTATION, WHICH WAS PRODUCED AND THEN EXAMINED. IN THE CLARIFICATION SUBMITTED, THE ASSESSEE STATED THAT IT HAS ALLOCATED A CERTAIN UNSPECIFIED PROPORTION OF THE SALARY OF THE G.M, FINANCE AND HIS ASSISTANTS, SOME PART OF THE EXPENSES ON TELEPHONE, FAX, CONVEYANCE, ACCOUNTING CHARGES ETC. THE TAX AUDIT REPORT, HOWEVER, STATED THAT THE DISALLOWANCE WAS MADE AT A RATE OF 5% OF THE TOTAL DIVIDEND EARNED. IT IS SEEN THAT THE SAID COMPUTATION IS BASED ESSENTIALLY ON AD-HOC ESTIMATES, AND AS IN THE CASE OF MOST SUCH ESTIMATES, THE SAME IS ARBITRARY TO A GREATER OR LESSER EXTENT. HOWEVER, WHAT IS MORE RELEVANT IS TO CONSIDER WHETHER ANY ONE OR MORE EXPENSE RELATED TO THE INVESTMENT PORTFOLIO WERE OMITTED TO BE CONSIDERED AT ALL WHILE MAKING THIS COMPUTATION. THE ASSESSEE IS SEEN TO HAVE ACQUIRED AND DISPOSED OF INVESTMENTS DURING THE YEAR, AS IS EVIDENT FORM A GENERAL LOOK AT THE BALANCE SHEET, AS WELL AS FROM EXAMINATION OF THE LISTS OF INVESTMENTS PRODUCED ON REQUISITION. IT IS ALSO SEEN THAT, AS MAY BE EXPECTED, THE ASSESSEE HAS INCURRED BROKERAGE, STT, AND OTHER CHARGES INCLUDING STAMP DUTY, SERVICE TAX, TURNOVER TAX ETC., RELATED TO THE SAID ACQUISITION AND DISPOSAL OF I.T.A NOS.191 & 192/KOL/2018 & I.T.A NOS.138 & 139/KOL/2018 M/S. ELECTROSTEEL CASTINGS LTD. ASSESSMENT YEAR: 2012-13 & 2013-14 PAGE | 4 INVESTMENTS. INASMUCH AS THESE EXPENSES RELATE DIRECTLY TO THE INCOME FROM INVESTMENTS, THESE SHOULD HAVE BEEN INCLUDED IN THE ESTIMATE OF DISALLOWANCES, BUT WERE NOT INCLUDED, SECONDLY, THE ASSESSEE SPENDS A SUBSTANTIAL SUMS ON INTEREST PAID ON BORROWED FUNDS. THE ASSESSEE RELIED ON ITS SUBMISSION THAT WHEREAS ITS OWN AVAILABLE SURPLUS FUNDS WERE RS.7765.51 LAKHS, ITS TOTAL INVESTMENTS ON WHICH EXEMPT INCOME HAS BEEN EARNED DURING THE YEAR IS OF RS.7,199.01 LAKHS. THUS, IT IMPLIED, ALL ITS INVESTMENTS IN DIVIDEND BEARING INVESTMENTS WERE MADE SOLELY FORM ITS OWN FUNDS; NO BORROWED FUNDS WERE USED TO ACQUIRE SUCH INVESTMENTS, HENCE NO INTEREST PAYABLE ON BORROWED FUNDS WERE LINKED TO THE COST OF CARRYING INVESTMENTS AS SUCH. THIS CLAIM WAS CONSIDERED, BUT IS CLEARLY A FALLACIOUS GENERALIZATION. THE CAMPANY IS PRIMARILY A LEADING MANUFACTURING INDUSTRY, BUT HERE IT CLAIMS THAT ALMOST 92.7% OF ITS OWN FUNDS WERE DEVOTED TO ACQUISITION OF DIVIDEND-BEARING INVESTMENTS, LEAVING ITS BUSINESS OF RS.2000 ODD CRORES TO BE FUNDED BY BORROWING AND THE REMAINDER OF ITS FUNDS. THIS IMPROBABLE CLAIM COULD NOT BE ACCEPTED AT FACE VALUE. THE ASSESSEE WAS THEREFORE REQUESTED TO FURNISH SPECIFICS OF ALLOCATION OF BORROWED FUNDS TO SPECIFIC USES, VIZ. INVESTMENT, BUSINESS ETC. THE ASSESSEE REPLIED THAT IT 'HAD NOT TAKEN ANY SPECIFIC LOANS TO MAKE INVESTMENTS'. THIS STATEMENT, HOWEVER, DOES NOT CATEGORICALLY DENY THAT ANY DISBURSEMENT OF LOAN FUNDS MAY HAVE BEEN UTILIZED IN ACQUIRING INVESTMENTS DURING THE CURRENT YEAR. NEITHER DOES IT CATEGORICALLY STATE, OR EVEN IMPLY, THAT INVESTMENTS DURING THE CURRENT YEAR. NEITHER DOES IT CATEGORICALLY STATE, OR EVEN IMPLY THAT INVESTMENTS ACQUIRED IN THE PAST YEARS WHICH HAVE YIELDED EXEMPT INCOME IN THE CURRENT YEAR WERE NOT ACQUIRED OUT OF ANY LOAN FUND DISBURSEMENTS. AS SUCH, IN COURSE OF HEARINGS, IT WAS CLARIFIED THAT A ONE-TO-ONE CORRESPONDENCE BETWEEN RECEIPT OF LOAN FUNDS AND UTILIZATION IN SOLELY BUSINESS RELATED ISSUE WOULD NOT BE POSSIBLE FROM THE DATA AVAILABLE. THUS, IT IS SEEN THAT THE ASSESSEE (I) HAS MADE AN AD-HOC DISALLOWANCE OF RS.16,85,257/-, WITHOUT A CONCRETE SCHEME FOR ALLOCATION OF EXPENSES ATTRIBUTABLE TO EARNING OF EXEMPT INCOMES (II) HAS ACQUIRED ITS INVESTMENTS BY UTILIZING, AS POSSIBLE AND CONVENIENT, FROM OUT OF THE COMMON FUNDS WHICH INCLUDES ITS OWN AND ITS BORROWED FUNDS (III) HAS RESTRICTED ITS ESTIMATE OF DISALLOWANCE EVEN LOWER THAN THE BARE MINIMUM PROVIDED FOR IN THE FORMULA DEVISED IN RULE 8D [I.E., LESS THAN THE AMOUNT PROVIDED FOR IN RULE 8D(2)(III), BEING 0.5% OF THE AVERAGE VALUE OF INVESTMENTS IN VIEW OF THE ABOVE, I HEREBY RECORD MY DISSATISFACTION WITH THE ASSESSEE'S COMPUTATION IN TERMS OF SEC.14A(2). IN CONSEQUENCE, THE DISALLOWANCE U/S14A IS BEING RECOMPUTED IN TERMS OF RULE 8D AS FOLLOWS, SUBJECT TO THE FOLLOWING CAVEATS: (A) WHILE CONSIDERING INTEREST EXPENSES SUCH INTEREST AS ARE ACCOUNTED FOR UNDER BILL DISCOUNTING, PACKING CREDIT, AND BUYER'S CREDIT ARE NOT BEING CONSIDERED, SINCE THEY ARE SEEN TO BE SOLELY AND DIRECTLY RELATED TO BUSINESS PURPOSES. (B) WHILE CONSIDERING THE AVERAGE INVESTMENTS, INVESTMENTS IN DEBT FUNDS ARE BEING EXCLUDED, SINCE THE SAME DO NOT YIELD TAX EXEMPT INCOMES. COMPUTATION OF DISALLOWANCE U/S14A WITH RULE 8D 1. DISALLOWABLE EXPENSES MAY BE REPRESENTED BY THE FORMULA D+A X B/C + 0.5% OF B WHERE D IS THE EXPENDITURE DIRECTLY RELATED TO THE INVESTMENTS AS INCLUDIBLE IN TERMS OF CLAUSE (I) OF SUB RULE 2 OF RULE 8D A IS THE AMOUNT OF EXPENDITURE BY WAY OF INTEREST OTHER THAN THE AMOUNT OF INTEREST INCLUDED IN CLAUSE (I) OF SUB RULE 2 RULE 8D INCURRED DURING THE P.Y. B IS THE AVERAGE OF VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR. I.T.A NOS.191 & 192/KOL/2018 & I.T.A NOS.138 & 139/KOL/2018 M/S. ELECTROSTEEL CASTINGS LTD. ASSESSMENT YEAR: 2012-13 & 2013-14 PAGE | 5 C IS THE AVERAGE OF TOTAL ASSETS AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR. IN THE PARTICULAR CIRCUMSTANCES OF THE ASSESSEE'S CASE FOR THE RELEVANT PERIOD, IT IS SEEN THAT I. D IS RS. 11,63,470 CONSTITUTING OF THE EXPENSES ON BROKERAGE RS.6,27,147/-. STT RS.4,14,787/- AND OTHER CHARGES INCLUDING STAMP DUTY, SERVICE TAX, TURNOVER TAX ETC. OF RS.1,21,536/-. II. WHEREAS A IS 9,69,97,971/- (BEING INTEREST ON BORROWED FUNDS COMMONLY UTILIZED BY INVESTMENT & BUSINESS PURPOSES, AND EXCLUDING SUCH INTEREST AS INDICATED ABOVE. ) III. A) VALUE OF INVESTMENTS AT THE BEGINNING OF THE YEAR, I.E., AS ON 01.04.2011 RS.804,77,29,000/- (BOOK VALUE OF QUOTED SHARE INVESTMENT RS,798,77,16,000/- + BOOK VALUE UNQUOTED INVESTMENT IN MUTUAL FUND OF RS.600,13,000/-)[ EXCLUDING DEBT FUNDS WHICH DO NOT YIELD TAX EXEMPT INCOME] B) VALUE OF INVESTMENTS AT THE END OF THE YEAR I.E. AS ON 31.03.2012 RS.819,44,46,250/-( BOOK VALUE OF QUOTED SHARE INVESTMENT) HENCE B, REPRESENTING AVERAGE INVESTMENTS = (804,77,29,000/- + 819,44,46,250/-) / 2 = 812,10,87,625/- C= AVERAGE VALUE OF TOTAL ASSETS = 3931,94,81,000/- (3792. 54. 65. 000/ - + 407 1. 34.98. 000/ - ) / 2 = 3931,94,81,000/ - THUS D= 11,63,470 AXB/C=9,69,97,971/- X 812,10,87,625 / 3931,94,81,000 =2,00,34,065/-......2 2) ADD: 0.5% OF AVERAGE INVEST = 0.5% OF RS.812,10,87,625/- = 4,06,05,438/- .......3 TOTAL DISALLOWANCE AS PER RULE 8D (2) (1+2+3) = RS.6,18,02,973/- IN VIEW OF THE FACT THAT THE ASSESSEE HAD OFFERED A SUO MOTO DISALLOWANCE OF RS,76,85,257/- THE NET DISALLOWANCE STANDS AT RS,6,01,17,776. 06. IN RESPECT OF THIS GROUND, DURING THE COURSE OF THE APPEAL, THE APPELLANT-COMPANY / LD. A.RS FOR THE APPELLANT-COMPANY HAVE MADE THE FOLLOWING SUBMISSIONS: GROUND NOS. 2-5: DISALLOWANCE U/S 14A: RS. 6,01,17,716/- 2.1 DURING THE YEAR, THE ASSESSEE EARNED RS. 3,37,05,131/- BY WAY OF DIVIDEND THAT IS EXEMPT FROM TAXATION. IN ITS COMPUTATION OF INCOME THE ASSESSEE HAD VOLUNTARILY OFFERED A SUM OF RS. 16,85,257/- AS DISALLOWANCE U/S 14A OF THE ACT. DESPITE THE SAME, THE AO MECHANICALLY APPLIED RULE 8D AND COMPUTED DISALLOWANCE U/S 14A AT RS. 6,18,02,973/- AND ADDED A SUM OF RS. 6,01,17,716/- TO THE INCOME OF THE ASSESSEE. 2.2 WHILE APPLYING RULE 8D(I), HE CONSIDERED EXPENSES OF RS. 11,63,470/- BEING EXPENSES INCURRED ON BROKERAGE, 5TT AND OTHER CHARGES AS DIRECTLY ATTRIBUTABLE TO THE EARNING OF DIVIDEND INCOME. IN THIS REGARD IT IS SUBMITTED THAT THE EXPENSES OF RS. 11,63,470/- WERE CAPITALIZED WITH THE COST OF INVESTMENT AND WERE NOT CLAIMED IN THE RETURN BY WAY OF DEBITING THE P/L ACCOUNT (LEDGER OF CURRENT INVESTMENTS ENCLOSED). NOW SINCE THE EXPENSES WERE NOT CLAIMED IN THE RETURN, THE QUESTION OF DISALLOWANCE DOES NOT ARISE. THUS, IT IS PRAYED THAT ADDITION TO THE EXTENT OF RS. 11,63,470/- BE DELETED OUTRIGHT. 2.3. 1 W.R.T DISALLOWANCE OF RS. 2,00,34,065/- ON ACCOUNT OF INTEREST UNDER RULE 8D(II), IT IS SUBMITTED THAT THE ASSESSEE IN THE INSTANT CASE HAS SUFFICIENT OWN FUNDS TO JUSTIFY INVESTMENTS IN SHARES AND MUTUAL FUNDS, ATTENTION IN THIS REGARD IS INVITED TO THE BALANCE SHEET OF THE ASSESSEE-COMPANY AS ON 31.3.2012. A PERUSAL OF THE SAME SHOWS THAT THE ASSESSEE HAS SUFFICIENT OWN FUNDS (RS. 1,70,302.44 LAKHS) TO JUSTIFY INVESTMENT IN DIVIDEND EARNING INVESTMENTS, THUS, A PRESUMPTION MAY BE MADE THAT THE INVESTMENTS (EARNING EXEMPT I.T.A NOS.191 & 192/KOL/2018 & I.T.A NOS.138 & 139/KOL/2018 M/S. ELECTROSTEEL CASTINGS LTD. ASSESSMENT YEAR: 2012-13 & 2013-14 PAGE | 6 INCOME) WERE MADE FROM NON-INTEREST BEARING OWN FUNDS OF THE ASSESSEE AND HENCE NO DISALLOWANCE ON ACCOUNT OF INTEREST CAN BE MADE. 2.3.2 ATTENTION IN THIS REGARD IS INVITED TO THE FOLLOWING JUDGMENTS: THE BOMBAY HIGH COURT IN CASE OF CIT VS. RELIANCE UTILITIES AND POWER LTD. [313 ITR 340] THE BOMBAY HIGH COURT IN CASE OF CITVS. HDFC BANK LTD. [366 ITR 505] THE GUJARAT HIGH COURT IN CASE OF CIT VS, TORRENT POWER LTD, [363 ITR 474] ITAT (KOLKATA) IN CASE OF HINDUSTAN MOTORS LTD. (ORDER ENCLOSED) 2.3.3 FOLLOWING THE AFORESAID DECISIONS THE ITAT(KOLKATA) IN ASSESSEE'S OWN CASE (FOR AY 2008-09, 2009-10, 2010-11) AT PARA 143 HELD THAT ' WE ARE OF THE VIEW THE SUBMISSION MADE WITH REGARD TO AVAILABILITY OF OWN FUNDS IN THE LIGHT OF OVERALL FUNDS POSITION WITHOUT INSISTING ON DIRECT NEXUS BETWEEN INVESTMENTS AND OWN FUNDS WOULD BE THE RIGHT APPROACH AS HELD BY THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF RELIANCE UTILITIES AND POWER LTD. IF THE OVERALL FUNDS POSITION I.E. IF OWN FUNDS ARE SUFFICIENT TO COVER THE INVESTMENTS WHICH ARE SUBJECT TO CONSIDERATION U/S 14A OF THE ACT, THEN A PRESUMPTION HAS TO BE DRAWN THAT THE OWN FUNDS WERE USED FOR MAKING INVESTMENTS.' THUS IT IS PRAYED THAT ADDITION TO THE EXTENT OF RS.2,00,34,065/- BEING ON ACCOUNT OF INTEREST BE DELETED. 2.4.1 W.R.T DISALLOWANCE U/S 8D(III), IT IS FIRSTLY SUBMITTED THAT DISALLOWANCE U/S 14A CAN BE MADE ONLY ON THOSE INVESTMENTS WHICH YIELD TAX-EXEMPT INCOME DURING THE YEAR. THE AFORESAID CLAIM FINDS STRENGTH FROM THE FOLLOWING: THE BOMBAY HIGH COURT IN CASE OF CIT VS. DELITE ENTERPRISES THE ITAT(KOL) IN CASE OF REI AGRO LTD. VS. DCIT [144 ITD 141] (AFFIRMED BY CALCUTTA HIGH COURT) THE DELHI HIGH COURT IN CASE OF CIT VS. HOLCIM INDIA P. LTD. [272 CTR 282] THE PUNJAB & HARYANA HIGH COURT IN CASE OF CITVS. LAKHANI MARKETING INC. [272 CTR 265] ITAT(BANGALORE) IN CASE OF ALLIANCE INFRASTRUCTURE PROJECTS PVT. LTD. VS, DCIT (ORDER ENCLOSED) ITAT(CHENNAI) IN CASE OF ACIT VS. M.BASKARAN [152 ITD 844] 2.4.2 APPLYING THE ABOVE TO THE FACTS OF THE CASE, IT IS POINTED OUT THAT THE ASSESSEE DURING THE YEAR EARNED NO INCOME ON INVESTMENTS TO THE TUNE OF RS. 74,805.68102 LAKHS (DETAILS ENCLOSED AT PAGE 81) CONSIDERED BY THE AO IN THE CLOSING VALUE OF INVESTMENT. 2.5.1 FURTHER, THE AO WHILE CONSIDERING THE AVERAGE VALUE OF INVESTMENTS HAS CONSIDERED THE STRATEGIC INVESTMENTS (EG. LANCO INDUSTRIES LTD., ELECTROSTEEL STEELS LTD.) LANCO INDUSTRIES IS ENGAGED IN THE SAME LINE OF BUSINESS AS THAT OF THE ASSESSEE-COMPANY AND THE GIVEN INVESTMENTS WERE MADE TO FINANCIALLY ASSIST THE COMPANY IN STRENGTHENING ITS BUSINESS. THUS, INVESTMENT IN LANCO WAS STRATEGIC BUSINESS PURPOSES AND NOT FOR THE PURPOSES OF EARNING DIVIDEND INCOME OR CAPITAL GAINS. THUS, THE AO ERRED IN CONSIDERING INVESTMENTS IN LANCO WHILE APPLYING RULE 8D. 2.5.2 THE AFORESAID CLAIM FINDS STRENGTH FROM THE FOLLOWING: DELHI HIGH COURT IN CASE OF CIT VS. HOLCIM INDIA (P) LTD. THE ITAT (CHANDIGARH) IN CASE OF ACIT VS. SPRAY ENGINEERING DEVICES LTD. [53 SOT 70] ITAT(CHENNAI) IN CASE IF EIH ASSOCIATED HOTELS LTD, VS. DCIT ITAT(DELHI) IN CASE OF INTERGLOBE ENTERPRISES LTD. V, DCIT [40 CCH 22] I.T.A NOS.191 & 192/KOL/2018 & I.T.A NOS.138 & 139/KOL/2018 M/S. ELECTROSTEEL CASTINGS LTD. ASSESSMENT YEAR: 2012-13 & 2013-14 PAGE | 7 2.5.3 FOLLOWING THE AFORESAID DECISIONS, THE ITAT(KOLKATA) IN ASSESSEE'S OWN CASE (FOR AY 2008-09 TO 2011-12 REPORTED IN 53 ITR(TRIB) 5) AT PARA 140 HELD THAT THE STRATEGIC INVESTMENTS ARE TO BE EXCLUDED WHILE COMPUTING DISALLOWANCE U/S 14A. 2.6.1 HAVING SAID THE ABOVE, DISALLOWANCE UNDER RULE 9D(III) SHALL BE COMPUTED AS BELOW: OPENING VALUE OF INVESTMENTS (EXCLUDING STRATEGIC INVESTMENT) = RS.16,55,28,000/- CLOSING VALUE OF INVESTMENTS (EXCLUDING STRATEGIC INVESTMENT& DIVIDEND EARNING INVESTMENT) = RS.8,11,02,677/- AVERAGE VALUE OF INVESTMENT= 12,33,15,339/- 0.5% OF THE ABOVE= RS. 6,16,577/- 2.6.2 NOW SINCE A SUM OF RS.16,85,257/- WAS VOLUNTARILY DISALLOWED BY THE ASSESSEE IN ITS RETURN NO FURTHER DISALLOWANCE U/S 14A IS WARRANTED. 2.6.3 THEREFORE, IT IS SUBMITTED THAT THE ENTIRE ADDITION OF RS. 6,01,17,716/- MADE U/S 14A OF THE ACT MAY KINDLY BE DELETED. 07.DECISION: 1. I HAVE CAREFULLY EXAMINED THE CONTENTIONS OF THE LD. ARS AND PERUSED THE IMPUGNED ORDER PASSED BY THE LD. AO. FROM THE ASSESSMENT ORDER IT TRANSPIRES THAT IN THE COMPUTATION OF INCOME FILED WITH THE RETURN, THE APPELLANT HAD SUO MOTO OFFERED DISALLOWANCE OF RS.16,85,527/- UNDER SECTION 14A OF THE INCOME-TAX ACT, 1961. THE LD AO HOWEVER NOT BEING SATISFIED WITH THE MANNER IN WHICH DISALLOWANCE U/S 14A WAS COMPUTED BY THE APPELLANT-COMPANY/ INVOKED AND APPLIED RULE BD. THE DISALLOWANCE WORKED OUT BY THE LD. AO IS AS FOLLOWS: RULE 8D(2)(II) RS.2,00,34,065 / - RULE 8D(2)(III) RS.4,06,05,438 / - 2. ON GIVING DUE CONSIDERATION TO THE FACTS OF THE RELEVANT YEAR, IT IS NOTED THAT IDENTICAL ISSUE HAS BEEN ADJUDICATED BY THE HON'BLE ITAT, KOLKATA IN THE APPELLANT'S OWN CASE FOR AY 2008-09. THE RELEVANT EXTRACTS OF THE JUDGMENT IS AS FOLLOWS: [QUOTE] 140. THOUGH ELABORATE SUBMISSIONS WERE MADE BY THE LEARNED COUNSEL FOR THE ASSESSEE ON THE AFORESAID ADDITION, WE DEEM IT SUFFICIENT TO DEAL WITH THE MAJOR ISSUES RAISED BY THE ASSESSEE ON THE DISALLOWANCE UNDER SECTION 14A OF THE ACT. THE FIRST ISSUE THAT REQUIRES CONSIDERATION IS AS TO WHETHER IN COMPUTING THE DISALLOWANCE UNDER SECTION 14A OF THE ACT READ WITH RULE 8D2(II) AND (III) OF THE RULES, THE ASSESSING OFFICER WHILE ADOPTING THE AVERAGE VALUE OF INVESTMENTS HAS TO CONSIDER ONLY THOSE INVESTMENTS WHICH YIELDED DIVIDEND INCOME DURING THE PREVIOUS YEAR. ON THE ABOVE ISSUE THE HON'BLE INCOME-TAX APPELLATE TRIBUNAL, KOLKATA IN THE CASE OF REI AGRO LTD. V. DEPUTY CIT [2013] 144 ITD 141 (KOLKATA) HAS HELD THAT IT IS ONLY THE INVESTMENTS WHICH YIELDS DIVIDEND DURING THE PREVIOUS YEAR THAT HAS TO BE CONSIDERED WHILE ADOPTING THE AVERAGE VALUE OF INVESTMENTS FOR THE PURPOSE OF RULE 8D(2)(II) AND (III) OF THE RULES. THE AFORESAID VIEW OF THE TRIBUNAL HAS SINCE BEEN AFFIRMED AS CORRECT BY THE HON'BLE CALCUTTA HIGH COURT IN G. A. NO. 3581 OF 2013 IN THE APPEAL AGAINST THE ORDER OF THE TRIBUNAL IN THE CASE OF REI AGRO LTD. V. DEPUTY CIT [2013] 144 ITD 141 (KOLKATA). IT WAS POINTED OUT THAT THE ASSESSEE DURING THE YEAR EARNED I.T.A NOS.191 & 192/KOL/2018 & I.T.A NOS.138 & 139/KOL/2018 M/S. ELECTROSTEEL CASTINGS LTD. ASSESSMENT YEAR: 2012-13 & 2013-14 PAGE | 8 NO INCOME ON INVESTMENT IN NIMID, CANARA MUTUAL FUND. HENCE, THE ASSESSING OFFICER ERRED IN INCLUDING THE INVESTMENT. 141. THE SECOND ISSUE, THAT REQUIRES CONSIDERATION IS AS TO WHETHER IN COMPUTING THE DISALLOWANCE UNDER SECTION 14A OF THE ACT READ WITH RULE 8D2(II) AND (III) OF THE RULES, THE ASSESSING OFFICER WHILE ADOPTING THE AVERAGE VALUE OF INVESTMENTS HAS TO EXCLUDE THE INVESTMENTS WHICH ARE STRATEGIC INVESTMENTS. IN THIS REGARD RELIANCE WAS PLACED BY THE LEARNED COUNSEL FOR THE ASSESSEE ON THE DECISION OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF CIT V. HOLCIM INDIA P. LTD. [2014] 90 CCH 81 (DELHI) WHEREIN IT WAS HELD, INVESTMENTS MADE BY AN ASSESSEE IN THE BUSINESS OF HOLDING INVESTMENTS HAD TO BE EXCLUDED WHILE COMPUTING DISALLOWANCE UNDER SECTION 14A OF THE ACT. REFERENCE WAS ALSO MADE TO THE DECISION OF THE INCOME-TAX APPELLATE TRIBUNAL (CHANDIGARH) IN THE CASE OF ASST. CIT V. SPRAY ENGINEERING DEVICES LTD. [2013] L ITR (TRIB)-OL 168 (CHANDIGARH); [2012] 53 SOT 70 (CHANDIGARH-TRIB) WHEREIN IT WAS HELD THAT WHERE A BUSINESS STRATEGY HAD BEEN ADOPTED BY THE ASSESSEE BY WAY OF INVESTMENT IN SHARES OF SICK COMPANY IN ORDER TO TAKE OVER THE SAID COMPANY FOR WIDENING ITS OPERATION OF BUSINESS, THAT CANNOT BE HELD TO BE INVESTMENT PER SE. RELIANCE WAS ALSO PLACED ON THE DECISION OF THE INCOME-TAX APPELLATE TRIBUNAL (DELHI) IN THE CASE OF INTERGLOBE ENTERPRISES LTD. V. DEPUTY CIT [2014] 40 CCH 22 (DELHI) WHEREIN IT WAS HELD THAT WHERE THE ASSESSEE HAD MADE SIGNIFICANT INVESTMENTS IN THE SHARES OF SUBSIDIARY COMPANIES WHICH ARE DEFINITELY NOT FOR THE PURPOSE OF EARNING EXEMPT INCOME BUT BY WAY OF STRATEGIC INVESTMENT THOSE INVESTMENTS HAVE TO BE EXCLUDED FOR THE PURPOSE OF ARRIVING AT DISALLOWANCE UNDER RULE 8D(2)(III). BASED ON THE AFORESAID DECISIONS IT WAS SUBMITTED THAT NO DISALLOWANCE UNDER SECTION 14A CAN BE MADE ON INVESTMENTS MADE FOR STRATEGIC BUSINESS PURPOSES. IT WAS SUBMITTED THAT INVESTMENT BY THE ASSESSEE IN LANCO INDUSTRIES WAS ENGAGED IN THE SAME LINE OF BUSINESS AS THAT OF THE ASSESSEE AND THE GIVEN INVESTMENTS WERE MADE TO FINANCIALLY ASSIST THE COMPANY IN STRENGTHENING ITS BUSINESS, INVESTMENT IN LANCO INDUSTRIES WAS STRATEGIC BUSINESS PURPOSES AND NOT FOR THE PURPOSES OF EARNING DIVIDEND INCOME OR CAPITAL GAINS. IT WAS ALSO SUBMITTED THAT INVESTMENTS MADE BY THE ASSESSEE IN ELECTROSTEEL (FORMERLY ELECTROSTEEL INTEGRATED) WAS ALSO A STRATEGIC PURPOSE AND WAS CONSIDERED AS NOT INCLUDIBLE FOR ARRIVING AT THE AVERAGE VALUE OF INVESTMENTS BY THE ASSESSING OFFICER HIMSELF IN THE ASSESSMENT FOR THE ASSESSMENT YEARS 2008-09 TO 2010-11 BUT WAS CONSIDERED FOR DISALLOWANCE IN THE ASSESSMENT YEAR 2011-12, SHOWING CONFLICTING STAND TAKEN BY THE ASSESSING OFFICER. 142. WE HAVE CONSIDERED THE AFORESAID SUBMISSIONS OF THE LEARNED COUNSEL FOR THE ASSESSEE AND ARE OF THE VIEW THAT IN THE LIGHT OF THE DECISIONS REFERRED TO ABOVE, IN COMPUTING THE DISALLOWANCE UNDER SECTION 14A OF THE ACT READ WITH RULE 8D(2)(II) AND (III) OF THE RULES, THE ASSESSING OFFICER WHILE ADOPTING THE AVERAGE VALUE OF INVESTMENTS HAS TO CONSIDER ONLY THOSE INVESTMENTS WHICH YIELDED DIVIDEND INCOME DURING THE PREVIOUS YEAR. SIMILARLY, IN COMPUTING THE DISALLOWANCE UNDER SECTION 144 OF THE ACT READ WITH RULE 8D(2)(II) AND (III) OF THE RULES, THE ASSESSING OFFICER WHILE ADOPTING THE AVERAGE VALUE OF INVESTMENTS HAS TO EXCLUDE THE INVESTMENTS WHICH ARE STRATEGIC INVESTMENTS. 143. THE LEARNED COUNSEL FOR THE ASSESSEE FILED BEFORE US A CHART WHEREIN HE HAS GIVEN THE FIGURES WITH REGARD TO SUBMISSIONS IN PARAGRAPHS 138 AND 139 ABOVE, VIZ. INVESTMENTS OF THE ASSESSEE (RS.15,894.02 LAKHS), STRATEGIC INVESTMENTS (RS. 5990.06 LAKHS), INVESTMENTS WHICH YIELDED DIVIDEND INCOME DURING THE PREVIOUS YEAR INCLUDING STRATEGIC INVESTMENTS (RS.13,650.89 LAKHS) AND INVESTMENTS IN DIVIDEND YIELDING SHARES (EXCLUDING STRATEGIC INVESTMENTS) (RS. 7,660.83 LAKHS). 144. WITHOUT PREJUDICE TO THE ABOVE SUBMISSIONS, IT WAS ALSO SUBMITTED ON BEHALF OF THE ASSESSEE THAT THE ASSESSEE HAD SUFFICIENT OWN FUNDS IF THE OVERALL FUNDS POSITION IS TAKEN. IN THIS REGARD IT WAS SUBMITTED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT WHERE OWN FUNDS ARE SUFFICIENT TO COVER THE INVESTMENTS THAT HAVE TO BE CONSIDERED FOR THE PURPOSE OF SECTION I.T.A NOS.191 & 192/KOL/2018 & I.T.A NOS.138 & 139/KOL/2018 M/S. ELECTROSTEEL CASTINGS LTD. ASSESSMENT YEAR: 2012-13 & 2013-14 PAGE | 9 14A DISALLOWANCE, THEN A PRESUMPTION HAS TO BE DRAWN THAT THE INVESTMENTS WERE MADE OUT OF OWN FUNDS AND NOT OUT OF BORROWED FUNDS. THE ASSESSEE HAS FILED THE NECESSARY CHARTS IN THIS REGARD SHOWING OWN FUNDS AND INVESTMENTS. THE LEARNED COUNSEL FOR THE ASSESSEE HAS PLACED STRONG RELIANCE ON THE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT V. RELIANCE UTILITIES AND POWER LTD. [2009] 313 ITR 340 (BOM) WHEREIN PROPOSITION SIMILAR TO THE ONE CANVASSED BY THE ASSESSEE WAS ACCEPTED. 145. WE ARE OF THE VIEW THE SUBMISSION MADE WITH REGARD TO AVAILABILITY OF OWN FUNDS IN THE LIGHT OF OVERALL FUNDS POSITION WITHOUT INSISTING ON DIRECT NEXUS BETWEEN INVESTMENTS AND OWN FUNDS WOULD BE THE RIGHT APPROACH AS HELD BY THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT V. RELIANCE UTILITIES AND POWER LTD. [2009] 313 ITR 340 (BOM). IF THE OVERALL FUNDS POSITION I.E., IF OWN FUNDS ARE SUFFICIENT TO COVER THE INVESTMENTS WHICH ARE SUBJECT TO CONSIDERATION UNDER SECTION 14A OF THE ACT, THEN A PRESUMPTION HAS TO BE DRAWN THAT THE OWN FUNDS WERE USED FOR MAKING INVESTMENTS, WE ARE OF THE VIEW THAT IT WOULD BE JUST AND PROPER TO RESTORE THE DISALLOWANCE UNDER SECTION 14A OF THE ACT TO THE ASSESSING OFFICER FOR A FRESH CONSIDERATION IN THE LIGHT OF THE DIRECTIONS GIVEN IN PARAGRAPHS 140, 141 AND 143 OF THIS ORDER AND IN THE LIGHT OF THE FIGURES GIVEN BY FHE ASSESSEE BEFORE THE TRIBUNAL. ALL OTHER SUBMISSIONS DO NOT REQUIRE ANY ELABORATION AND WILL STAND ADDRESSED IN THE DECISIONS GIVEN ABOVE. THUS GROUND NO. 4 IS TREATED AS ALLOWED FOR STATISTICAL PURPOSE.' [ UNQUOTE] 3. IT IS NOTED THAT THE APPELLANT'S OWN FUNDS IN FORM OF CAPITAL AND RESERVES DURING THE RELEVANT YEAR WERE SUBSTANTIALLY MORE THAN THE INVESTMENTS CAPABLE OF YIELDING DIVIDEND INCOME AND THEREFORE PRESUMPTION THAT HAD TO BE APPLIED ON THE FACTS OF THE APPELLANT'S CASE IS THAT THE INVESTMENTS, YIELDING TAX FREE INCOME WERE MADE OR ACQUIRED OUT OF APPELLANT'S OWN FUNDS, FOLLOWING THE JUDGMENT OF THE HON'BLE ITAT, KOLKATA, THE LD. AO IS HEREBY DIRECTED TO DELETE THE DISALLOWANCE OF INTEREST MADE U/S 14A IN TERMS OF RULE 8D(2)(II). 4. AS REGARDS THE ISSUE OF DISALLOWANCE UNDER SECTION 14A READ WITH RULE BD(2)(III), THE HON'BLE ITAT, KOLKATA IN THE APPELLANT'S OWN CASE FOR AY 2008-09 HAD HELD THAT THE PROVISIONS OF RULE 8D(2)(III) IS REQUIRED TO BE APPLIED ONLY WITH REFERENCE TO INVESTMENTS (AFTER EXCLUDING STRATEGIC INVESTMENTS) WHICH ACTUALLY YIELDED DIVIDEND INCOME. FROM THE CALCULATIONS FURNISHED BY THE APPELLANT-COMPANY, IT IS FOUND THAT, ON THE AFORESAID LINES, THE DISALLOWANCE UNDER RULE 8D(2)(III) WORKS OUT TO RS.6,16,577/- WHICH IS LESS THAN THE SUM OF RS.16,85,527/- SUO MOTO OFFERED AND DISALLOWED BY THE APPELLANT. THE LD. AO IS THEREFORE DIRECTED TO RESTRICT THE DISALLOWANCE TO RS. 16,85,527/-. IN VIEW OF THE ABOVE AND FOR THE REASONS DISCUSSED IN THE FOREGOING THEREFORE, THE LD. AO IS DIRECTED TO RESTRICT THE DISALLOWANCE U/S 14A TO RS.16,85,527/- IN COMPUTING TOTAL INCOME AS PER THE COMPUTATIONAL PROVISIONS AS ALSO IN COMPUTING BOOK PROFIT U/S 115JB. GROUNDS NO. 2 TO 5 ARE THEREFORE ALLOWED. 5. THE REVENUES FIRST ARGUMENT RAISED BEFORE US IS THAT THE ASSESSING OFFICER HAD RIGHTLY INVOKED SECTION 14A R.W.R. 8D(I) DIRECT EXPENSES DISALLOWANCE OF RS.11,63,470/- ON BROKERAGE, SECURITY TRANSACTION TAX AND OTHER SIMILAR CHARGES. SUFFICE TO SAY, IT FAILS TO DISPUTE THE CRUCIAL FACT RECORDED IN THE CIT(A)S FINDINGS THAT THE ASSESSEE HAD CAPITALIZED THE ABOVE DIRECT EXPENDITURE THAN CLAIMING IT AS I.T.A NOS.191 & 192/KOL/2018 & I.T.A NOS.138 & 139/KOL/2018 M/S. ELECTROSTEEL CASTINGS LTD. ASSESSMENT YEAR: 2012-13 & 2013-14 PAGE | 10 REVENUE EXPENDITURE BY DEBITING THE SAME THROUGH PROFIT & LOSS ACCOUNT. WE FURTHER FIND THAT THE REVENUES INSTANT ARGUMENT CARRIES NO SUBSTANCES SINCE DIRECT EXPENSES SOUGHT TO BE DISALLOWED HAVE NOWHERE BEEN CLAIMED AT ASSESSEES BEHEST. THE REVENUES FIRST ARGUMENT FAILS THEREFORE. 6. THE REVENUES SECOND ARGUMENT SEEKS TO REVIVE SECTION 14A R.W.R. 8D(2)(II) PROPORTIONATE INTEREST DISALLOWANCE OF RS.2,00,34,065/-. THE ASSESSEES BALANCE SHEET REVEALS THAT ITS NON-INTEREST BEARING FUNDS READ FIGURES OF RS.1,70,302.44 LAKHS AS AGAINST ITS EXEMPT INCOME INVESTMENTS OF RS.15,894.02 LAKHS AND EXEMPT INCOME YIELDING INVESTMENT OF RS.13,650.89 LAKHS; RESPECTIVELY. VARIOUS JUDICIAL PRECEDENTS, I.E. CIT VS. RELIANCE UTILITIES AND POWER LTD. [313 ITR 340 (BOM)] , CIT VS. HDFC BANK LTD. [366 ITR 505 (BOM)] AND CIT VS. TORRENT POWER LTD. [363 ITR 474 (GUJ.)] HOLD THAT IMPUGNED PROPORTIONATE INTEREST EXPENSES DISALLOWANCE DOES NOT APPLY IN THE CASE OF NON-INTEREST BEARING FUNDS TURNING OUT TO BE MORE THAN EXEMPT INVESTMENTS. WE DECLINE REVENUES INSTANT SECOND ARGUMENT AS WELL. 7. THE REVENUES THIRD ARGUMENT QUA THE INSTANT ISSUE IS THAT THE CIT(A) ERRED IN LAW AND ON FACTS IN HOLDING THAT ONLY EXEMPT INCOME YIELDING INVESTMENTS HAVE TO BE TAKEN INTO CONSIDERATION WHILST COMPUTING ADMINISTRATIVE EXPENSES DISALLOWANCE U/S 14A R.W.R. 8D(2)(III). SUFFICE TO SAY, HONBLE JURISDICTIONAL HIGH COURTS DECISION IN REI AGRO LTD. CASE (SUPRA) HAS ALREADY DECIDED THE VERY SUBSTANTIAL QUESTION OF LAW IN ASSESSEES FAVOUR. WE THEREFORE REJECT THE REVENUES INSTANT THIRD ARGUMENT AS WELL. 8. THE REVENUES NEXT CONTENTION IS THAT THE CIT(A) HAVE ERRED IN LAW AND ON FACTS IN DIRECTING THE ASSESSING OFFICER TO RESTRICT U/S 14A R.W.R 8D DISALLOWANCE OF RS.16.85 LAKHS (SUPRA) FOR THE PURPOSE OF MAT COMPUTATION NLY U/S 115JB OF THE ACT. WE HAVE ALREADY DECIDED THE VERY ISSUE IN THE TAXPAYERS FAVOUR IN THE FOREGOING DISCUSSION. WE THUS DECLINE THE REVENUES INSTANT ARGUMENT AS WELL AS FIRST THREE SUBSTANTIVE GROUNDS IN BOTH OF ITS APPEALS. I.T.A NOS.191 & 192/KOL/2018 & I.T.A NOS.138 & 139/KOL/2018 M/S. ELECTROSTEEL CASTINGS LTD. ASSESSMENT YEAR: 2012-13 & 2013-14 PAGE | 11 9. THE REVENUES SECOND SUBSTANTIVE IDENTICAL GRIEVANCE IN BOTH OF ITS APPEALS PLEADS THAT CIT(A) HAS ERRED IN LAW AND ON FACTS IN HOLDING THAT THE TAXPAYERS SALES TAX, SUBSIDY AND INDUSTRIAL PROMOTION ASSISTANCE ARE CAPITAL RECEIPTS NOT CHARGEABLE TO TAX THEREBY DELETING EXCESS DEPRECIATION DISALLOWANCE INVOLVING CORRESPONDING FIGURES OF RS.3,16,92,148/- AND RS.3,98,44,668/-; RESPECTIVELY. THE CIT(A)S DETAILED DISCUSSION QUA THE INSTANT ISSUE IN FORMER ASSESSMENT YEAR FOLLOWED MUTATIS MUTANDIS IN LATTER ASSESSMENT YEAR READS AS UNDER: 08. GROUNDS NUMBERING 6 TO 10 EMANATE FROM THE ACTION OF THE LD. A.O IN MAKING A DISALLOWANCE OF RS.3,16,92,148/- BY DISALLOWING A PORTION OF THE CLAIM OF DEPRECIATION, HOLDING THE SAME TO BE EXCESSIVE. THE IMPUGNED MATTER HAS BEEN DEALT WITH BY THE LD.AO AS UNDER: II) DISALLOWANCE OF EXCESS CLAIM OF DEPRECIATION THE ASSESSEE COMPANY RECEIVES OR IS LIABLE TO RECEIVE SUBSIDY IN THE NATURE OF SALES TAX REMISSION OF RS.28,70,361/- AND INDUSTRIAL PROMOTION ASSISTANCE OF RS.14,49,68,866/-. THE ASSESSEE HAS TREATED THE SAME TO BE CAPITAL SUBSIDIES, FOLLOWING THE DECISION OF THE JURISDICTIONAL HIGH COURT AT CALCUTTA, IN THE CASE OF RASOI LTD. IN PURSUANCE OF JUDICIAL DISCIPLINE, AND FOLLOWING THE TREATMENT MADE IN EARLIER YEARS, THE SAID AMOUNTS ARE BEING TREATED AS CAPITAL SUBSIDIES. HOWEVER, THE ASSESSEE WAS SEEN NOT TO HAVE REDUCED THE SUBSIDY RECEIVED, BEING CAPITAL SUBSIDIES, WHILE DETERMINING THE ACTUAL COSTS OF THE ASSETS OR BLOCKS OF ASSETS, AND THUS THIS HAS RESULTED IN CLAIMING EXCESS DEPRECIATION DURING THE A.Y.2012-13. THIS, OF COURSE, IS A RECURRENT ISSUE IN THE CASE OF THE ASSESSEE. IT IS SEEN THAT IN THE A.YS 2003-04 TO 2009-10 THE SUBSIDY IS RECEIVED BY THE ASSESSEE COMPANY WAS CLAIMED AS CAPITAL SUBSIDY BUT THE SAME WAS NOT REDUCED FORM THE COST OF ASSET BECAUSE OF WHICH EXCESS DEDUCTION WAS CLAIMED IN THESE YEARS AS WELL AS IN SUCCEEDING YEAR 2010-11 DUE TO THE RESULTING CASCADING EFFECT. WHILE ISSUING THE FINAL ORDERS BY WAY OF GIVING EFFECT TO THE ORDER OF DRP FOR THE SAID YEARS, A CHART HAD BEEN PREPARED TO SHOW EXCESS DEPRECIATION CLAIMED IN A.Y.2003-04 TO 2009-10, A CONSOLIDATED TABLE IS GIVEN IN ANNEXURE-A TO SHOW THE EXCESS CLAIM OF DEPRECIATION TO BE DISALLOWED, TAKING INTO CONSIDERATION THE CASCADING EFFECT OF EXCESS DEPRECIATION CLAIMED UP TO A.Y.2009-10 FROM 2003-04; AND WHILE GIVING EFFECT TO THE ORDER OF THE DRP FOR A.Y.2010-11, A TABLE IS GIVEN IN ANNEXURE-B TO SHOW THE EXCESS CLAIM OF DEPRECIATION BY REDUCING THE SUBSIDY RECEIVED AS CAPITAL RECEIPT FROM ALL THE BLOCKS ON PRO-RATA BASIS. SIMILARLY FOR A.Y. 2012-13 A TABLE HAS BEEN PREPARED AND IS BEING ATTACHED AS ANNEXURE- C TO SHOW THE EXCESS CLAIM OF DEPRECIATION BY REDUCING THE SUBSIDY RECEIVED AS CAPITAL RECEIPT FROM ALL THE BLOCKS ON PRO-RATA BASIS. ACCORDINGLY EXCESS CLAIM OF DEPRECIATION OF RS.3,16,92,748/- IS BEING DISALLOWED. 09. IN RESPECT OF THIS GROUND, DURING THE COURSE OF THE APPEAL , THE APPELLANT-COMPANY/ LD. A.RS FOR THE APPELLANT-COMPANY HAVE MADE THE FOLLOWING SUBMISSIONS: GROUNDS NO. 6-10: DISALLOWANCE OF DEPRECIATION: RS.3,16,92,148/- I.T.A NOS.191 & 192/KOL/2018 & I.T.A NOS.138 & 139/KOL/2018 M/S. ELECTROSTEEL CASTINGS LTD. ASSESSMENT YEAR: 2012-13 & 2013-14 PAGE | 12 3.1 THE AO IN HIS ORDER HAS CONTENDED THAT SALES TAX REMISSION AND INDUSTRIAL PROMOTION ASSISTANCE RECEIVED BY THE ASSESSEE, BEING CAPITAL IN NATURE SHOULD BE REDUCED FROM THE COST OF CAPITAL ASSET. SINCE THE SAME WAS NOT DONE BY THE ASSESSEE, THE AO DISALLOWED A PORTION OF DEPRECIATION CLAIMED (RS.3,16,92,148/-) HOLDING THE SAME TO BE EXCESSIVE. 3.2.1 ATTENTION IN THIS REGARD IS INVITED TO THE PROVISIONS OF SECTION 43(1) RELEVANT EXTRACTS OF WHICH ARE PRODUCED BELOW FOR YOUR READY REFERENCE: '(1) 'ACTUAL COST' MEANS THE ACTUAL COST OF THE ASSETS TO THE ASSESSEE REDUCED BY THAT PORTION OF THE COST THEREOF, IF ANY, AS HAS BEEN MET DIRECTLY OR INDIRECTLY BY ANY OTHER PERSON OR AUTHORITY: EXPLANATION 10.- WHERE A PORTION OF THE COST OF AN ASSET ACQUIRED BY THE ASSESSEE HAS BEEN MET DIRECTLY OR INDIRECTLY BY THE CENTRAL GOVERNMENT OR A STATE GOVERNMENT OR ANY AUTHORITY ESTABLISHED UNDER ANY LAW OR BY ANY OTHER PERSON, IN THE FORM OF A SUBSIDY OR GRANT OR REIMBURSEMENT (BY WHATEVER NAME CALLED), THEN, SO MUCH OF THE COST AS IS RELATABLE TO SUCH SUBSIDY OR GRANT OF REIMBURSEMENT SHALL NOT BE INCLUDED IN THE ACTUAL COST OF THE ASSET TO THE ASSESSEE I PROVIDED THAT WHERE SUCH SUBSIDY OR GRANT OR REIMBURSEMENT IS OF SUCH NATURE THAT IT CANNOT BE DIRECTLY RELATABLE TO THE ASSET ACQUIRED, SO MUCH OF THE AMOUNT WHICH BEARS TO THE TOTAL SUBSIDY OR REIMBURSEMENT OR GRANT THE SAME PROPORTION AS SUCH ASSET BEARS TO ALL THE ASSETS IN RESPECT OF OR WITH REFERENCE TO WHICH THE SUBSIDY OR GRANT OR REIMBURSEMENT IS SO RECEIVED, SHALL NOT BE INCLUDED IN THE ACTUAL COST OF THE ASSET TO THE ASSESSEE.' 3.2.2 FROM A PLAIN READING OF THE ABOVE IT IS CLEAR THAT A SUBSIDY RECEIVED FROM THE GOVERNMENT MAY BE REDUCED FROM THE ACTUAL COST ONLY IF THE SUBSIDY IS GIVEN TO DIRECTLY OR INDIRECTLY MEET THE COST OF THE ASSET. HOWEVER, IN THE INSTANT CASE, THE SCHEME NOWHERE SPECIFIES THAT THE SUBSIDY IS TO BE USED FOR THE PURPOSE OF ACQUISITION OF FIXED ASSETS. THE SUBSIDY IS PROVIDED TO EXTEND FINANCIAL ASSISTANCE TO ENTREPRENEURS IN SETTING UP NEW UNITS/EXPANDING EXISTING UNITS IN THE BACKWARD AREAS. 3.3.1 THE CASE OF THE ASSESSEE IS ALSO COVERED BY THE DECISION OF ITAT(KOLKATA) IN THE FOLLOWING CASES: ITAT(KOLKATA) IN CASE OF BIRLA CORPORATION LTD.[69 SOT 2171 ITAT(KOLKATA) IN CASE OF DCIT VS RASOI LTD. (ITA N0.1398/KOL/2011)(AFFIRMED BY THE CALCUTTA HIGH COURT) 3.3.2 FOLLOWING THE AFORESAID DECISIONS, THE ITAT(KOLKATA) IN THE ASSESSEE'S OWN CASE (FOR AYS 2003- 04 TO 2011-12) AT PARA 68 ALLOWED THE CLAIM OF DEPRECIATION IN FULL, I.E. WITHOUT REDUCING THE AMOUNT OF SUBSIDY FROM THE COST OF CAPITAL ASSETS. IN LIGHT OF THE ABOVE, SINCE THE ISSUE IS COVERED BY THE DECISION OF THE ITAT IN ITS OWN CASE, IT IS PRAYED THAT ADDITION OF RS. 3,16,92,148/- MADE ON ACCOUNT OF EXCESS CLAIM OF DEPRECIATION BE DELETED. 10. DECISION: 1. I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS PUT FORTH BY THE LD. ARS OF THE APPELLANT AND THE OBSERVATIONS MADE BY THE LD. AO IN THE IMPUGNED ORDER, I FIND THAT THIS ISSUE HAS ALREADY BEEN DECIDED BY HON'BLE ITAT, KOLKATA IN APPELLANT'S OWN CASE IN I.T. (SS) NO. 47 TO 60/KOL/2014, 313 AND 256/KOL/2015, 66 AND 124/KOL/2016 DATED 25.11.2016 WHEREIN IT WAS HELD AS FOLLOWS: I.T.A NOS.191 & 192/KOL/2018 & I.T.A NOS.138 & 139/KOL/2018 M/S. ELECTROSTEEL CASTINGS LTD. ASSESSMENT YEAR: 2012-13 & 2013-14 PAGE | 13 [QUOTE] 66. AS FAR AS GROUND NO. 5 RAISED BY THE REVENUE IS CONCERNED, WE ARE OF THE VIEW THAT THE ACTION OF THE ASSESSING OFFICER WAS NOT JUSTIFIED IN LAW. PROVISIONS OF SECTION 43(1) AND EXPLANATION 10 OF THE ACT, WHICH ARE RELEVANT FOR THE PRESENT ISSUE READS THUS: '(1) 'ACTUAL COST' MEANS THE ACTUAL COST OF THE ASSETS TO THE ASSESSEE, REDUCED BY THAT PORTION OF THE COST THEREOF, IF ANY, AS HAS BEEN MET DIRECTLY OR INDIRECTLY BY ANY OTHER PERSON OR AUTHORITY : EXPLANATION 11.-WHERE A PORTION OF THE COST OF AN ASSET ACQUIRED BY THE ASSESSEE HAS BEEN MET DIRECTLY OR INDIRECTLY BY THE CENTRAL GOVERNMENT OR A STATE GOVERNMENT OR ANY AUTHORITY ESTABLISHED UNDER ANY LAW OR BY ANY OTHER PERSON, IN THE FORM OF A SUBSIDY OR GRANT OR REIMBURSEMENT (BY WHATEVER NAME CALLED), THEN, SO MUCH OF THE COST AS IS RELATABLE TO SUCH SUBSIDY OR GRANT OR REIMBURSEMENT SHALL NOT BE INCLUDED IN THE ACTUAL COST OF THE ASSET TO THE ASSESSEE; PROVIDED THAT WHERE SUCH SUBSIDY OR GRANT OR REIMBURSEMENT IS OF SUCH NATURE THAT IT CANNOT BE DIRECTLY RELATABLE TO THE ASSET ACQUIRED, SO MUCH OF THE AMOUNT WHICH BEARS TO THE TOTAL SUBSIDY OR REIMBURSEMENT OR GRANT THE SAME PROPORTION AS SUCH ASSET BEARS TO ALL THE ASSETS IN RESPECT OF OR WITH REFERENCE TO WHICH THE SUBSIDY OR GRANT OR REIMBURSEMENT IS SO RECEIVED, SHALL NOT BE INCLUDED IN THE ACTUAL COST OF THE ASSET TO THE ASSESSEE. ' 67. FROM A PLAIN READING OF THE ABOVE IT IS CLEAR THAT A SUBSIDY RECEIVED FROM THE GOVERNMENT MAY BE REDUCED FROM THE ACTUAL COST ONLY IF THE SUBSIDY IS GIVEN TO DIRECTLY OR INDIRECTLY MEET THE COST OF THE ASSET. HOWEVER, IN THE INSTANT CASE, THE SCHEME NOWHERE SPECIFIES THAT THE SUBSIDY IS TO BE USED FOR THE PURPOSE OF ACQUISITION OF FIXED ASSETS. THE SUBSIDY IS PROVIDED TO EXTEND FINANCIAL ASSISTANCE TO ENTREPRENEURS IN SETTING UP NEW UNITS/EXPANDING EXISTING UNITS IN THE BACKWARD AREAS. THERE APPEARS NO RESTRICTION IMPOSED ON THE ASSESSEE TO UTILISE THE SUBSIDY FOR ACQUISITION OF FIXED ASSETS ONLY. THE ASSESSEE IS AT A LIBERTY TO UTILISE THE FUNDS IN ANY MANNER IT LIKES. MERELY BECAUSE THE AMOUNT OF SUBSIDY IS SUBJECT TO A MAXIMUM OF A SPECIFIED PERCENTAGE OF GROSS VALUE OF FIXED ASSETS AS ON THE FIRST DATE OF COMMERCIAL PRODUCTION/GROSS VALUE OF THE ADDITIONAL FIXED ASSETS AS ON THE FIRST DATE OF COMMERCIAL PRODUCTION DOES NOT MEAN THAT THE SUBSIDY WAS GIVEN TO FINANCE THE ACQUISITION OF FIXED ASSETS ONLY. UNDER THE GIVEN CIRCUMSTANCES, THE AMOUNT OF SUBSIDY, IS NOT DEDUCTIBLE FROM THE ACTUAL OF THE COST UNDER SECTION 43(1) READ WITH EXPLANATION 10 OF THE ACT. 68. THE HON'BLE SUPREME COURT IN THE CASE OF CIT V. P. J. CHEMICALS LTD. [1994] 210 ITR 830 (SC) HAS HELD THAT THE EXPRESSION 'ACTUAL COST' NEEDS TO BE INTERPRETED LIBERALLY. THE SUBSIDY OF THE NATURE WE ARE CONCERNED WITH, DOES NOT PARTAKE OF THE INCIDENTS WHICH ATTRACT THE CONDITIONS FOR THEIR DEDUCTIBILITY FROM 'ACTUAL COST'. THE GOVERNMENT SUBSIDY, IT IS NOT UNREASONABLE TO SAY, IS AN INCENTIVE NOT FOR THE SPECIFIC PURPOSE OF MEETING A PORTION OF THE COST OF THE ASSETS, THOUGH QUANTIFIED AS OR GEARED TO A PERCENTAGE OF SUCH COST. IF THAT BE SO, IT DOES NOT PARTAKE OF THE CHARACTER OF A PAYMENT INTENDED EITHER DIRECTLY OR INDIRECTLY TO MEET THE 'ACTUAL COST'. IN THE INSTANT CASE TOO, THE SCHEME APPLICABLE TO THE ASSESSEE'S CASE NOWHERE SPECIFIES THAT THE SUBSIDY WAS TO BE UTILIZED FOR ACQUISITION OF FIXED ASSETS. THE SCHEME WAS BROUGHT ABOUT TO ENCOURAGE AND INDUCE THE ENTREPRENEURS TO MOVE TO BACKWARD AREAS AND ESTABLISH INDUSTRIES THERE SO THAT THE REGION MAY DEVELOP IN PROMOTING THE WELFARE OF THE PEOPLE LIVING IN THAT REGION. THUS, IN THE ABSENCE OF ANY SPECIFICATION (IN THE SCHEME) AS TO THE UTILIZATION OF THE SUBSIDY FOR THE PURPOSE OF ACQUIRING DEPRECIABLE FIXED ASSETS, THE SAID SUBSIDY CANNOT BE REDUCED FROM I.T.A NOS.191 & 192/KOL/2018 & I.T.A NOS.138 & 139/KOL/2018 M/S. ELECTROSTEEL CASTINGS LTD. ASSESSMENT YEAR: 2012-13 & 2013-14 PAGE | 14 THE ACTUAL COST OF THE FIXED ASSETS UNDER SECTION 43(1) READ WITH EXPLANATION 10. FOLLOWING THE AFORESAID DECISION OF THE SUPREME COURT IN THE CASE OF CIT V. P. J. CHEMICALS LTD., THE INCOME-TAX APPELLATE TRIBUNAL (KOLKATA) IN CASE OF BIRLA CORPORATION LTD. V. DEPUTY CIT [2015] 69 SOT 217 (KOLKATA) HELD : 'ACCORDING TO US, THE ASSESSEE HAS RIGHTLY NOT REDUCED THE AMOUNT OF SUBSIDY RECEIVED FROM THE ACTUAL COST/WRITTEN DOWN VALUE OF THE FIXED ASSETS WHILE CLAIMING, DEPRECIATION. IT IS ALSO A FACT THAT REVENUE DURING SCRUTINY ASSESSMENTS OF THE ASSESSEE FOR THE ASSESSMENT YEARS 2002-03 TO 2006-07 ADDED THE SUBSIDY AMOUNT AS REVENUE RECEIPT BUT TRIBUNAL HAS CONSIDERED THE RECEIPT AS 'CAPITAL', ACCEPTING THE CONTENTION OF THE ASSESSEE. EVEN THE HON'BLE SUPREME COURT IN THE CASE OF CIT V. P. I CHEMICALS LTD. [1994] 210 ITR 830 (SC) HAS CONSIDERED THIS ISSUE AND HELD THAT WHERE GOVERNMENT SUBSIDY IS INTENDED AS AN INCENTIVE TO ENCOURAGE ENTREPRENEURS TO MOVE TO BACKWARD AREAS AND ESTABLISH INDUSTRIES, THE SPECIFIED PERCENTAGE OF THE FIXED CAPITAL COST, WHICH IS THE BASIS FOR DETERMINING THE SUBSIDY, BEING ONLY A MEASURE ADOPTED UNDER THE SCHEME TO QUANTIFY THE FINANCIAL AID, IS NOT A PAYMENT, DIRECTLY OR INDIRECTLY, TO MEET ANY PORTION OF THE ACTUAL COST. THEREFORE, THE SAID AMOUNT OF SUBSIDY CANNOT BE DEDUCTED FROM THE ACTUAL COST UNDER SECTION 43(1) FOR THE PURPOSE ALLOWING DEPRECIATION.' IN LIGHT OF THE ABOVE DECISIONS, WE HOLD THAT THE AMOUNT OF RS. 55,79,540 DISALLOWED ON GROUND OF EXCESS DEPRECIATION CLAIM, SHOULD BE ALLOWED. THUS GROUND NO.5 RAISED BY THE REVENUE IS DISMISSED.' IS SQUARELY COVERED IN FAVOUR OF THE APPELLANT-COMPANY BY ITS OWN JUDGMENT HAVE ALSO PERUSED THE INDUSTRIAL SCHEME IN TERMS OF WHICH THE APPELLANT-COMPANY RECEIVED SUBSIDY BY WAY OF SALES TAX REMISSION FROM THE STATE GOVERNMENT. IT IS NOTED THAT BOTH THE PARTIES AGREE THAT THE SUBSIDY OF RS.14,78,39,227/- RECEIVED BY WAY OF SALES TAX REMISSION IS IN THE NATURE OF A CAPITAL RECEIPT. ACCORDING TO THE LD. AO THEREFORE SUCH CAPITAL SUBSIDY WAS REQUIRED TO BE REDUCED FROM THE ACTUAL COST OF CAPITAL ASSET IN TERMS OF EXPLANATION 10 TO SECTION 43(1) OF THE ACT. THE LD. AO ACCORDINGLY RE-COMPUTED THE WDV OF THE BLOCK OF PLANT & MACHINERY& DEPRECIATION THEREON, AFTER REDUCING THE CAPITAL SUBSIDY, AND THEREFORE DISALLOWED THE CLAIM OF EXCESS DEPRECIATION CLAIMED TO THE EXTENT OF RS.3,16,92,148/-. IN THE ORAL & WRITTEN SUBMISSIONS, THE LD. ARS VEHEMENTLY ARGUED AGAINST SUCH ACTION OF THE LD. AO. [UNQUOTE] 2. RESPECTFULLY FOLLOWING THE DECISION OF THE HON'BLE ITAT, KOLKATA IN APPELLANT'S OWN CASE, THE LD. AO'S ACTION OF ADJUSTING THE CAPITAL SUBSIDY OF RS.14,78,39,227/- FROM THE 'ACTUAL COST' OF ASSETS UNDER EXPLANATION 10 TO SECTION 43(1) IS HELD TO BE UNJUSTIFIED IN LAW. ACCORDINGLY THE DISALLOWANCE OF EXCESS CLAIM OF DEPRECIATION TO THE EXTENT OF RS.3,16,92,148/- IS DIRECTED TO BE DELETED. GROUND NOS.6 TO 10 ARE THEREFORE ALLOWED. 10. IT HAS COME ON RECORD QUA THE ASSESSEE ALREADY SUCCEEDED IN THE INSTANT TWIN ASPECTS BEFORE THE TRIBUNAL IN ASSESSMENT YEARS 2003-04 TO 2011-12. THE REVENUE IS VERY VERY FAIR IN NOT POINTING OUT ANY DISTINCTION ON LEGAL AS WELL AS FACTUAL ASPECTS IN ALL THESE ASSESSMENT YEARS. WE THEREFORE ADOPT JUDICIAL I.T.A NOS.191 & 192/KOL/2018 & I.T.A NOS.138 & 139/KOL/2018 M/S. ELECTROSTEEL CASTINGS LTD. ASSESSMENT YEAR: 2012-13 & 2013-14 PAGE | 15 CONSISTENCY TO CONFIRM THE CIT(A)S STAND DELETING THE IMPUGNED DISALLOWANCES/ADDITIONS. 11. REVENUES NEXT GRIEVANCE SEEKS TO REVIVE TRANSFER PRICING ADJUSTMENT OF RS.1,83,45,330/- MADE BY THE ASSESSING OFFICER AND TRANSFER PRICING OFFICER BASED ON THE ARMS LENGTH INTEREST RATE ARRIVED @14.11%. IT PLEADS THAT THE CIT(A) HAS ERRED IN LAW AND ON FACTS BY NOT FOLLOWING THE METHOD OF DETERMINING THE COST OF FUNDS PLUS CREDIT SEPARATELY AS THE MOST APPROPRIATE METHOD DETERMINED ON THE BASIS OF COMPARABLES IN CONTROLLED PRICE (CUP) METHOD. THE CIT(A)S DETAILED DISCUSSION TO THIS EFFECT READS AS UNDER: 12. IN RESPECT OF THIS GROUND , DURING THE COURSE OF THE APPEAL , THE APPELLANT-COMPANY/ LD. ARS FOR THE APPELLANT-COMPANY HAVE MADE THE FOLLOWING SUBMISSIONS: GROUNDS NO.17,13,14: INTEREST ON LOAN ADVANCED TO AE: RS. 1,83,45,330/- 4.1.1 W.R.T THE ABOVE, ATTENTION OF YOUR GOODSELF IS INVITED TO THE RELEVANT FACTS OF THE CASE. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURE AND EXPORT OF DUCTILE IRON PIPE. IN ORDER TO EXPAND THE MARKET FOR ITS PRODUCT, SUBSIDIARIES WERE INCORPORATED TO MARKET ASSESSEE'S PRODUCT ABROAD. THE AES ARE MAINLY ENGAGED IN THE TRADING AND MARKETING OF DUCTILE IRON PIPES. 4.1.2 THE ASSESSEE HAD ADVANCED INTEREST FREE LOANS TO ELECTROSTEEL, ALGERIAAND THE SAID TRANSACTION WAS REFERRED TO THE TPO U/S 92CA FOR DETERMINATION OF THE ARMS LENGTH PRICE (ALP). 4.1.3 BASED ON THE ALP SO COMPUTED, THE AO COMPUTED ARM'S LENGTH INTEREST RATE BY FOLLOWING CUP METHOD AS 6.61% (COST OF FUNDS IN HANDS OF ASSESSEE) PLUS 7.5% (CREDIT SPREAD) BASED ON CREDITWORTHINESS OF THE AE. IN DOING SO, HE ASSIGNED A CREDIT RATING OF 'C' TO THE AE. ACCORDINGLY, AN UPWARD ADJUSTMENT OF RS.1,83,45,330/- WAS MADE. AGGRIEVED BY THE SAID ACTION OF THE AO, THE ASSESSEE IS IN APPEAL BEFORE YOUR GOODSELF. 4.2.1 WITH REGARD TO THE ABOVE, IT IS REITERATED THAT FHE ASSESSEE IS ENGAGED IN MANUFACTURING AND EXPORT OF DUCTILE IRON PIPES AND IT WAS HIGHLY DEPENDENT ON ITS AE-LOAN DEBTOR FOR MARKETING OF ITS PRODUCT IN THEIR COUNTRY. THUS, THE INTEREST-FREE LOAN EXTENDED BY THE ASSESSEE TO THE AES TO ASSIST IT FINANCIALLY WAS A PART OF ITS MARKETING STRATEGY AND THE SAME WAS BASED ON GROUNDS OF COMMERCIAL EXPEDIENCY. THE SOLE PURPOSE BEHIND THE EXISTENCE OF SUCH AE WAS MARKETING OF THE ASSESSEE'S PRODUCTS. THE AE MAINLY CATERED TO THE ASSESSEE AND THE MAJORITY OF SALES (APPROXIMATELY 90%) EFFECTED BY THE AE WERE OF PRODUCTS PURCHASED FROM THE ASSESSEE. THE AE MADE ONLY EMERGENCY PURCHASES ABROAD AND WAS INCORPORATED MERELY TO MARKET THE ASSESSEE'S PRODUCTS. GIVEN SUCH ECONOMIC INTERDEPENDENCE ON THE AE NO ADJUSTMENT UNDER THE TRANSFER PRICING PROVISIONS IN CHAPTER X WAS REQUIRED. 4.2.2 THE AFORESAID CLAIM FINDS STRENGTH FROM THE FOLLOWING JUDGMENTS: ITAT(DELHI) IN CASE OF KOHINOOR FOODS LTD. VS. ACIT[67 SOT 108] I.T.A NOS.191 & 192/KOL/2018 & I.T.A NOS.138 & 139/KOL/2018 M/S. ELECTROSTEEL CASTINGS LTD. ASSESSMENT YEAR: 2012-13 & 2013-14 PAGE | 16 DELHI HIGH COURT IN CASE OF CIT VS. COTTON NATURALS (I) PVT. LTD. [276 CTR 475] ITAT (AHMEDABAD) IN CASE OF MICRO LINKS LTD.[157 TTJ 289] ITAT(DELHI) IN CASE OF KNORR BREMSE INDIA PVT. LTD. [56 SOT 349] 4.3.1 WITHOUT PREJUDICE TO THE ABOVE, IF AT ALL WE CONSIDER THE LOAN TRANSACTION TO BE AN 'INTERNATIONAL TRANSACTION', EVEN THEN THE ALP OF 14.41% ARRIVED AT BY THE AO IS ARBITRARY AND HENCE CANNOT BE ADOPTED. THE AO IN COMPUTING THE ALP HAS CONSIDERED THE AVERAGE COST OF BORROWED FUNDS TO THE ASSESSEE DOMESTIC INTEREST RATES AND ADDED A SPREAD OF 750 BASIS POINTS TO THE SAME. 4.3.2 IN THIS REGARD, IT IS POINTED OUT THAT THE LOAN WAS MADE IN FOREIGN CURRENCY AND HENCE DOMESTIC LENDING RATES CANNOT BE USED AS A BASE FOR CALCULATING ALP (AS DONE BY THE AO). THE SAID VIEW FINDS STRENGTH FROM THE FOLLOWING JUDGMENTS, WHEREIN IT HAS BEEN HELD THAT IF THE LOAN IS MADE IN FOREIGN CURRENCY THEN LIBOR (NOT DOMESTIC LENDING RATES) SHOULD BE USED AS A BENCHMARK: DELHI HIGH COURT IN CASE OF CIT VS. COTTON NATURALS (I) PVT. LTD. [276 CTR 475] THE CHENNAI BENCH OF TRIBUNAL IN CASE OF SIVA INDUSTRIES & HOLDINGS LTD. VS. ACIT [145 TTJ(CHENNAI) 497] MUMBAI TRIBUNAL IN CASE OF TATA AUTOCOMP SYSTEM VS. ACIT [149 TTJ 233] [AFFIRMED BY THE HON'BLE BOMBAY HIGH COURT] IN LIGHT OF THE ABOVE, THE LD. AO WAS CLEARLY NOT JUSTIFIED IN ARRIVING AT ARM'S LENGTH INTEREST RATE BY TAKING THE COST OF FUNDS TO THE ASSESSEE, WHICH IS A DOMESTIC RATE, AS A BASE RATE. 4.4.1 NEXT, IT IS CONTENDED THAT COMPUTATION OF SPREAD OF 750BP BY THE AO IS ARBITRARY AND HAS NO BASIS WHATSOEVER. THE SAME WAS ARRIVED AT BY ASSIGNING CREDIT RATING OF 'C' TO THE AE (WHICH WAS NOT RATED BY ANY RATING AGENCY). HOWEVER, THE INCOME TAX ACT READ WITH TRANSFER PRICING RULES PRESCRIBED FOR COMPUTATION OF ARM'S LENGTH PRICE DOES NOT AUTHORIZE THE AO TO ASSIGN CREDIT RATING TO CORPORATE AES. THEREFORE, HIS ACT IS ARBITRARY AND NOT AS PER LAW. 4.4.2 ATTENTION IN THIS REGARD IS INVITED TO THE JUDGMENT OF ITAT(DELHI) IN CASE OF KOHINOOR FOODS LTD. VS. ACIT (ORDER ENCLOSED). 4.5 LASTLY, THE ITAT(KOLKATA) IN ASSESSEE'S OWN CASE FOR AYS 2003-04 TO 2011-12 (CITED ABOVE) HELD LIEOR TO BE THE ARM'S LENGTH INTEREST RATE (PARA 79). THUS, UPWARD ADJUSTMENT, IF ANY, MAY BE COMPUTED IN ACCORDANCE WITH UBOR. HENCE IT IS PRAYED THAT THE AO BE DIRECTED ACCORDINGLY. 13. DECISION: 1. I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF THE APPELLANT-COMPANY IN THE LIGHT OF THE ADJUSTMENTS MADE BY THE LD. TPO/ AO. IN GROUND NO. 11 TO 14 RAISED IN THE APPELLANT; THE QUESTION TO BE DECIDED IS THE DETERMINATION OF THE ALP OF THE LOANS / ADVANCES GIVEN BY THE APPELLANT TO ITS AE, ELECTROSTEEL ALGERIA. I.T.A NOS.191 & 192/KOL/2018 & I.T.A NOS.138 & 139/KOL/2018 M/S. ELECTROSTEEL CASTINGS LTD. ASSESSMENT YEAR: 2012-13 & 2013-14 PAGE | 17 2. BEFORE THE LD. TPO, THE APPELLANT CONTENDED THAT THE SUM ADVANCED TO THE AE WAS FOR STRATEGIC PURPOSES AND HENCE IN THE NATURE OF SHAREHOLDER-ACTIVITY. THE APPELLANT-COMPANY THEREFORE CLAIMED THAT THE ADVANCE TO AE COULD NOT BE EQUATED WITH A 'LOAN' AND HENCE NO BENCHMARKING EXERCISE WAS REQUIRED TO BE CARRIED OUT BY IT IN THIS REGARD. ON EXAMINATION OF THE TRANSFER PRICING ORDER, IT IS NOTED THAT THE LD. TPO WAS NOT IN AGREEMENT WITH THE CONTENTION PUT FORTH BY THE APPELLANT. THE LD. TPO OBSERVED THAT THE INTEREST RATE ON THE LOANS ADVANCED TO THE AES SHOULD BE PRICED AT THE COST OF FUNDS IN THE HANDS OF THE APPELLANT AND APPROPRIATE ADJUSTMENT SHOULD BE MADE FOR THE CREDIT RISK BEING BORNE BY THE APPELLANT, HAVING REGARD TO THE BORROWER'S INDEPENDENT CREDIT RATING. THE LD. TPO ACCORDINGLY COMPUTED THE ALP INTEREST RATE AT 14.47% IN RESPECT OF THE LOANS ADVANCED. THE LD. TPO THEREFORE PROPOSED UPWARD ADJUSTMENT OF RS.1,83,45,330/-WITH REFERENCE TO THE LOANS/ADVANCES GIVEN BY THE APPELLANT TO ITS AES. 3. IN THE APPELLATE PROCEEDINGS, THE LD. AR.S OF THE APPELLANT REITERATED THE SUBMISSIONS WHICH WERE MADE BEFORE THE LD. TPO AND CONTENDED THAT THE ADVANCES GIVEN TO AE WAS IN THE NATURE OF SHAREHOLDER ACTIVITY AND THEREFORE IT COULD NOT BE EQUATED WITH A 'LOAN' OR A FINANCING ARRANGEMENT. ALTERNATIVELY THE LD. AR CONTENDED THAT THE TPO ERRED IN DETERMINING THE ALP INTEREST RATE ON SUCH ADVANCE AT 14.41%. THE LD. ARS OF THE APPELLANT SUBMITTED THAT THE LOANS GIVEN TO AE SHOULD BE BENCHMARKED AT THEN RELEVANT CURRENCY DENOMINATED LIBOR RATE, FOR WHICH IT PLACED RELIANCE ON SEVERAL JUDGMENTS INCLUDING THE JURISDICTIONAL ITAT, KOLKATA IN ITS OWN CASE FOR AYS 2003-04 TO 2011-12. 4. THE HON'BLE ITAT, KOLKATA IN THE APPELLANT'S OWN CASE IN I.T. (SS) NO. 47 TO 60/KOL/2OL4, 313 AND 256/KOL/2015, 66 AND 124/KOL/2016 DATED 25.11.2016 FOR AY 2003- 04 TO 2011-12 HAS HELD AS FOLLOWS: [QUOTE] '71. AS WE HAVE ALREADY SEEN THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURE AND EXPORT OF DUCTILE IRON PIPE. THE ASSESSEE ENJOYED A LEADERSHIP POSITION IN THE DOMESTIC MARKET. HOWEVER, THE PROSPECTS OF FURTHER GROWTH WERE LIMITED DUE TO LIMITED DOMESTIC DEMAND. THUS IN ORDER TO EXPAND THE MARKET FOR ITS PRODUCT, ELECTROSTEEL EUROPE SA WAS INCORPORATED AND WAS AN ASSOCIATED ENTERPRISE (AE) OF THE ASSESSEE. ITS PURPOSE WAS TO MARKET ASSESSEE'S PRODUCT ABROAD. THE ASSOCIATED ENTERPRISE IS MAINLY ENGAGED IN THE TRADING AND MARKETING OF DUCTILE IRON PIPES. IN THE EARLIER YEARS, THE ASSESSEE HAD ADVANCED INTEREST-FREE LOANS TO ITS ASSOCIATED ENTERPRISE NAMELY ELECTROSTEEL EUROPE SA. THE SAID TRANSACTION WAS AN INTERNATIONAL TRANSACTION CARRIED OUT BY THE ASSESSEE WITH ITS ASSOCIATED ENTERPRISE AND THE ARM'S LENGTH PRICE (ALP) OF SUCH TRANSACTION HAS TO BE DETERMINED IN TERMS OF SECTION 92 OF THE ACT. THE ASSESSING OFFICER THEREFORE, REFERRED TO THE TRANSFER PRICING OFFICER (TPO) UNDER SECTION 92CA FOR DETERMINATION OF THE ARM'S LENGTH PRICE (ALP). 72. THE TRANSFER PRICING OFFICER PROPOSED TO BENCHMARK THE INTEREST-FREE LOAN TRANSACTION BY TAKING INTO ACCOUNT THE COST OF FUNDS IN THE HANDS OF THE ASSESSEE (BASE RATE OF 8 PER CENT WAS ADOPTED ON THE REASONING THAT THIS WOULD BE THE COST OF BORROWING IN INDIA BY THE ASSESSEE) + VALUATION OF THE RISK BASED ON THE CREDIT RATING OF THE ASSOCIATED ENTERPRISE (7 PER CENT. WAS ADDED TO THE BASE RATE ON THE REASONING THAT SINCE THE CREDIT RATING OF THE ASSOCIATED ENTERPRISE WOULD BE 'CC+' OR 'CC'), IT WAS THE PLEA OF THE ASSESSEE THAT SUCH HIGH RATE OF INTEREST IS UNWARRANTED CONSIDERING THAT THE ASSOCIATED ENTERPRISE IS LOCATED IN A JURISDICTION WHEREIN THE PREVAILING BANK INTEREST RATES ARE LOW. IT WAS ALSO THE PLEA OF THE ASSESSEE THAT CREDIT RATING OF THE ASSOCIATED ENTERPRISE AS ADOPTED BY THE TRANSFER PRICING OFFICER WAS IRRELEVANT. BASED ON THE ARM'S LENGTH PRICE SO COMPUTED, THE TRANSFER PRICING OFFICER COMPUTED ARM'S LENGTH INTEREST RATE BY FOLLOWING CUP METHOD AS 8 PER CENT. (COST OF FUNDS IN HANDS OF ASSESSEE) PLUS 7 PER CENT. (CREDIT SPREAD) BASED ON CREDITWORTHINESS OF THE ASSOCIATED ENTERPRISE. IN DOING I.T.A NOS.191 & 192/KOL/2018 & I.T.A NOS.138 & 139/KOL/2018 M/S. ELECTROSTEEL CASTINGS LTD. ASSESSMENT YEAR: 2012-13 & 2013-14 PAGE | 18 SO, HE ASSIGNED A CREDIT RATING OF 'CC+' OR 'C' TO THE ASSOCIATED ENTERPRISE. THE DISPUTE RESOLUTION PANEL DIRECTED THE TRANSFER PRICING OFFICER TO COMPUTE THE UPWARD ADJUSTMENT BY APPLYING AN ARM'S LENGTH INTEREST RATE OF 11 PER CENT., I.E. 8 PER CENT. PLUS 3 PER CENT. (CREDIT SPREAD). AGGRIEVED BY THE SAID DIRECTION OF THE DISPUTE RESOLUTION PANEL, THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL RAISING GROUND NO. 4 AND THE REVENUE IS IN APPEAL BEFORE THE TRIBUNAL RAISING GROUND NOS. 6 TO 9. 73. THE FIRST AND FOREMOST SUBMISSION OF THE LEARNED COUNSEL FOR THE ASSESSEE WAS THAT THE TRANSACTION OF GIVING LOAN BY THE ASSESSEE TO ITS ASSOCIATED ENTERPRISE CANNOT BE REGARDED AS AN INTERNATIONAL TRANSACTION AT ALL. AT THE TIME OF HEARING THE BENCH EXPRESSED THE VIEW THAT THIS ISSUE IS NO LONGER RES INTEGRA AND HAS BEEN CONCLUDED BY A CECISTON OF THE SPECIAL BENCH IN THE CASE OF INSTRUMENTARIURRI CORPORATION LTD., FINLAND V. ASST. DIT, INTERNATIONAL TAXATION [2016] 49 ITR (TRIB) 589 (KOLKATA) [SB] ; [2016] 160 ITD 1 (SB) (KOL). THE SPECIAL BENCH HAD TO CONSIDER THE FOLLOWING QUESTION (PAGE 599) : 'WHETHER, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, AN ARM'S LENGTH PRICE (ALP) ADJUSTMENT, OF RS. 3,88,37,190 FOR THE ASSESSMENT YEAR 2003-04 AND RS. 5,18,95,560 FOR THE ASSESSMENT YEAR 2004-06, WAS REQUIRED TO BE MADE, IN RESPECT OF INTEREST-FREE LOAN GRANTED BY THE ASSESSEE, A NON-RESIDENT COMPANY TO ITS WHOLLY OWNED SUBSIDIARY IN INDIA?' THE SPECIAL BENCH HELD THAT COMMERCIAL EXPEDIENCY OF A LOAN TO A SUBSIDIARY WAS WHOLLY IRRELEVANT IN ASCERTAINING THE ARM'S LENGTH INTEREST ON A LOAN WHICH IS AN INTERNATIONAL TRANSACTION BETWEEN ASSOCIATED ENTERPRISES. THE LOAN WOULD THUS BE COVERED BY SECTION 92 OF THE ACT WHICH MANDATED INCOME FROM SUCH TRANSACTION TO BE COMPUTED ON THE BASIS OF ARM'S LENGTH PRICE. IN VIEW OF THE AFORESAID DECISION OF THE SPECIAL BENCH, WE ARE OF THE VIEW THAT THERE IS NO MERIT IN THE ARGUMENT ADVANCED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE PROVISIONS OF SECTION 92 OF THE ACT IS NOT APPLICABLE TO TRANSACTION OF GIVING INTEREST-FREE LOAN TO ASSOCIATED ENTERPRISE. 74. THE NEXT ARGUMENT OF THE LEARNED COUNSEL FOR THE ASSESSEE WAS THAT EVEN IF ONE CONSIDERS THE LOAN TRANSACTION TO BE AN 'INTERNATIONAL TRANSACTION', EVEN THEN THE ARM'S LENGTH PRICE OF 11 PER CENT ARRIVED AT BY THE DISPUTE RESOLUTION PANEL WAS ARBITRARY AND HENCE CANNOT BE ADOPTED. THE REVENUE FOR ITS PART HAS IN ITS APPEAL CONTENDED THAT THE RATE ADOPTED BY THE TRANSFER PRICING OFFICER SHOULD BE RESTORED. THE TRANSFER PRICING OFFICER IN COMPUTING THE ARM'S LENGTH PRICE HAS CONSIDERED THE AVERAGE COST OF BORROWED FUNDS TO THE ASSESSEE/DOMESTIC INTEREST RATES (I.E., THE RATE AT WHICH BANKS IN INDIA LEND FOR BUSINESS) AND ADDED A SPREAD OF 300 BASIS POINTS TO THE SAME AS ADDITIONAL INTEREST RATE TO COVER THE RISK TO A LENDER OWING TO THE CREDITWORTHINESS OF THE BORROWER. IN THIS REGARD, IT WAS POINTED OUT THAT THE LOAN WAS MADE IN EUROS I.E., FOREIGN CURRENCY AND HENCE DOMESTIC LENDING RATES CANNOT BE USED AS A BASE FOR CALCULATING ARM'S LENGTH PRICE (AS DONE BY THE TRANSFER PRICING OFFICER). ACCORDING TO THE LEARNED COUNSEL FOR THE ASSESSEE/ THE SAID VIEW FINDS STRENGTH FROM THE FOLLOWING JUDGMENTS WHEREIN IT HAS BEEN HELD THAT IF THE LOAN IS MADE IN FOREIGN CURRENCY THEN LIBOR (NOT DOMESTIC LENDING RATES) SHOULD BE USED AS A BENCHMARK. ..... 76. IN VIEW OF THE AFORESAID DECISIONS, WE ARE OF THE VIEW THAT INSTEAD OF THE BASE RATE OF 8 PER CENT, (BASED ON LENDING RATES OF BANKS IN INDIA, FOR COMMERCIAL BORROWING), IT WOULD BE APPROPRIATE TO APPLY LIBOR RATE (AND NOT DOMESTIC LENDING RATE). WE DIRECT ACCORDINGLY. 77. THE NEXT ASPECT TO BE CONSIDERED IS AS TO WHETHER ANY PERCENTAGE HAS TO BE ADDED OVER AND ABOVE THE LIBOR RATE ON ACCOUNT OF CREDIT RATING OF THE ASSOCIATED ENTERPRISE. THE ASSESSING OFFICER ADDED LIBOR + 7 PER CENT. THE BASIS FOR SUCH ADDITION IS THAT ANY I.T.A NOS.191 & 192/KOL/2018 & I.T.A NOS.138 & 139/KOL/2018 M/S. ELECTROSTEEL CASTINGS LTD. ASSESSMENT YEAR: 2012-13 & 2013-14 PAGE | 19 LENDER WOULD CONSIDER THE CREDIT RATING OF THE BORROWER BEFORE LENDING AND THEREFORE, THE ASSESSEE WHEN IT LENDS TO ITS ASSOCIATED ENTERPRISE SHOULD ALSO CONSIDER SUCH RISK BASED ON THE CREDIT RATING OF THE ASSOCIATED ENTERPRISE. THE RISK SO ASSUMED SHOULD ALSO BE CONSIDERED AND THE RATE OF INTEREST THAT WOULD HAVE BEEN CHARGED BY UNRELATED PARTIES DETERMINED TO ARRIVE AT THE ARM'S LENGTH PRICE RATE OF INTEREST. THE DISPUTE RESOLUTION PANEL HELD THAT COMPUTATION OF PERCENTAGE OF INTEREST TO BE ADDED FOR CREDIT RATING OF THE ASSOCIATED ENTERPRISE AS DONE BY THE TRANSFER PRICING OFFICER WAS ARBITRARY AND HAS NO BASIS WHATSOEVER. THE SAME WAS ARRIVED AT BY ASSIGNING CREDIT RATING OF 'CC+' OR 'C' TO THE ASSOCIATED ENTERPRISE (WHICH WAS NOT RATED BY ANY RATING AGENCY). THE DISPUTE RESOLUTION PANEL FOUND THAT IN DOING SO THE TRANSFER PRICING OFFICER RELIED UPON A BOOKLET 'CORPORATE RATING CRITERIA' ISSUED BY THE STANDARD AND POOR'S IN 2006. THE BOOKLET PRESCRIBES CREDIT RATINGS BASED ON VARIOUS RATIOS LIKE EBIT INTEREST COVERAGE, RETURN ON CAPITAL ETC. AND ALSO CREDIT RATINGS BASED ON SIZE OF THE CORPORATE. HOWEVER, THE INCOME-TAX ACT READ WITH TRANSFER PRICING RULES PRESCRIBED FOR COMPUTATION OF ARM'S LENGTH PRICE DOES NOT AUTHORISE THE ASSESSING OFFICER TO ASSIGN CREDIT RATING TO CORPORATE ASSOCIATED ENTERPRISES. THEREFORE, THE DISPUTE RESOLUTION PANEL HELD THAT THE ACTION OF THE TRANSFER PRICING OFFICER WAS ARBITRARY AND NOT AS PER LAW, THE DISPUTE RESOLUTION PANEL HOWEVER APPLIED THE CENTRAL BOARD OF DIRECT TAXES'S SAFE HARBOUR RULES IN THE CASE OF LENDING BETWEEN ASSOCIATED ENTERPRISES WHEREIN THE CENTRAL BOARD OF DIRECT TAXES HAD OPINED THAT ADDITION OF ADDITIONAL 3 PER CENT. ON ACCOUNT OF CREDIT RATING AND RISK OF THE BORROWER ASSOCIATED ENTERPRISE SHOULD BE ADDED TO THE BASE RATE OF INTEREST CHARGED ON LOANS. 78. IN THE CASE OF KOHINOOR FOODS LTD. V. ASST. CIT [2014] 40 CCH 611 (DELHI-TRIB.), THE FACT WERE THAT THE TRANSFER PRICING OFFICER HAD COMPUTED ARM'S LENGTH INTEREST RATE AT 13.49 PER CENT BY RELYING UPON DATA OBTAINED FROM CRISIL. THE TRIBUNAL ACCORDINGLY HELD THAT : 'WE HAVE NO ISSUE OF THE TRANSFER PRICING OFFICER APPLYING THE CUP METHOD. BUT THE PROBLEM ARISES WHEN IN THE NAME OF APPLYING CUP METHOD A WHOLLY INAPPLICABLE COMPARABLE MODEL APPLIED WHICH LEADS TO DISTORTED RESULTS. IN OUR CONSIDERED VIEW, A SIGNIFICANT SECTOR OF MULTI-NATIONAL CORPORATE SET UP INVOLVES CREATION OF SUBSIDIARIES AND ASSOCIATE ENTERPRISES FOR ADVANCEMENT OF THEIR OVERSEAS BUSINESS. THEY HELP THEM IN TERMS OF FINANCE BY OFFERING SOFT LOANS AND SUBSIDIARY LOANS ; THEY ARE PRIMARY FOCUSED TO SPREAD THE BUSINESS OF THE PRINCIPAL UNIT. IT WOULD HAVE BEEN VERY REASONABLE, JUDICIOUS AND APPROPRIATE ON THE PART OF THE TRANSFER PRICING OFFICER TO HAVE LOOKED INTO SUCH TYPE OF TRANSACTIONS AND APPLYING IT AS UNCONTROLLED TRANSACTIONS. IN OUR VIEW, RE-COURSING STRAIGHTAWAY TO CRISIL, WHICH DEALS IN HARDCORE INSTITUTIONAL FINANCE TRANSACTIONS THAT TOO WITH CLEAR COMMERCIAL OBJECT OF EARNING OUT OF LOANS BEREFT ON OTHER CONSIDERATIONS, IS WHOLLY INAPPLICABLE. THERE IS NO DISPUTE ON THE ISSUE THAT THE REAL INCOME THEORY HAS NO APPLICATION TO A FICTIONAL WORKING AS PROVIDED BY SECTION 92 BUT THIS BEING PART OF THE INCOME-TAX ACT, THE VALID CONSIDERATION FOR PROPERLY ASSESSING A TRANSACTION CANNOT BE GIVEN A GO BY. EVERY FICTION, HAS LIMITS TO ITS APPLICATION. IN VIEW THEREOF, WE HOLD THAT THE RATE OF 13.49 PER CENT. APPLIED SOLELY RELYING UPON A THIRD PARTY OPINION BY APPLYING ON UNCONTROLLED SET OF TRANS ACTION IS FACTUALLY NOT CORRECT AND CANNOT BE ACCEPTED.' 79. THE FACTS OF THE AFORESAID CASE ARE IDENTICAL TO THAT IN CASE OF ASSESSEE. THUS, FOLLOWING THE DECISION OF THE HON'BLE TRIBUNAL, IT IS CLEAR THAT ACTION OF THE TRANSFER PRICING OFFICER IN USING DATA ISSUED BY STANDARD AND POOR IS CLEARLY BAD IN LAW. CONSEQUENTLY THE ADDITION OF INTEREST RATE ON ACCOUNT OF BORROWER RISK IN ADDITION TO THE LIBOR RATE WAS NOT JUSTIFIED. WE ARE ALSO OF THE VIEW THAT THE SAFE HARBOUR RULES REFERRED TO IN THE ORDER OF THE DISPUTE RESOLUTION PANEL IS NOT APPLICABLE, TO THE DISPUTES BEFORE THE DISPUTE RESOLUTION PANEL AND THEREFORE, CANNOT BE APPLIED IN THE PRESENT CASE. WE HOLD ACCORDINGLY. I.T.A NOS.191 & 192/KOL/2018 & I.T.A NOS.138 & 139/KOL/2018 M/S. ELECTROSTEEL CASTINGS LTD. ASSESSMENT YEAR: 2012-13 & 2013-14 PAGE | 20 80. IN THE LIGHT OF THE DISCUSSION ABOVE, WE DISMISS GROUND NOS.6 TO 9 OF THE GROUNDS OF APPEAL OF THE REVENUE, AND DISMISS GROUND NO. 2(B) AND (C) AND (G) RAISED BY THE ASSESSEE AND PARTLY ALLOW GROUND NO. 2(A), (D), (E) AND (F) RAISED BY THE ASSESSEE. 5. IN VIEW OF THE ABOVE AND RESPECTFULLY FOLLOWING THE JUDGMENTS OF THE HON'BLE ITAT, KOLKATA IN APPELLANT'S OWN CASE, I HOLD THAT THE ALP DETERMINED BY THE TPO IN HIS ORDER U/S 92CA(3) WAS WHOLLY INAPPROPRIATE AND EXCESSIVE. I FURTHER HOLD THAT THE MOST APPROPRIATE METHOD TO BE ADOPTED IN THE FACTS AND CIRCUMSTANCES OF THE APPELLANT'S CASE WAS TO BENCHMARK THE LOAN AT THE RELEVANT CURRENCY DENOMINATED BENCHMARK LIBOR RATE, PREVAILING IN THE RELEVANT YEAR. THE LD. AO/TPO IS THUS DIRECTED TO COMPUTE THE ALP OF LOAN AS EXPLAINED IN THE FOREGOING, GROUNDS NO. 11 TO 14 ARE THEREFORE PARTLY ALLOWED. 12. WE NOTICE HEREIN AS WELL THAT THE CIT(A) HAS PRECISELY FOLLOWED THE TRIBUNALS EARLIER YEARS ORDER IN THE ASSESSEES CASES ITSELF DIRECTING THE AUTHORITIES TO BENCHMARK ASSESSEES INTERNATIONAL TRANSACTIONS IN THE NATURE OF LOANS GIVEN TO ITS OVERSEAS ASSOCIATE ENTERPRISES (AES) AT THE RELEVANCY CURRENCY BENCHMARK LIBOR RATE PREVAILING IN THE RELEVANT PREVIOUS YEAR(S). LEARNED COORDINATE BENCHS DETAILED DISCUSSION HELD THAT THE IMPUGNED INTERNATIONAL TRANSACTIONS OF LOANS IN THE CASE OF AES HAVE TO BE BENCHMARKED IN THE RESPECTIVE FOREIGN CURRENCY LIBOR RATES THAN THE DOMESTIC MARKET CREDIT RATINGS. WE MAKE IT CLEAR THAT THE REVENUES PLEADINGS BEFORE US IN ITS CORRESPONDING GROUNDS NOS.6 TO 9 HAVE NOWHERE DRAWN ANY DISTINCTION ON FACTS IN ALL THE ASSESSMENT YEARS. WE ACCORDINGLY ADOPT JUDICIAL CONSISTENCY MUTATIS MUTANDIS IN THE IMPUGNED ASSESSMENT YEARS TO DECLINE INSTANT SUBSTANTIVE GROUNDS. 13. NEXT COME THE REVENUES SUBSTANTIVE GROUND NOS.1 TO 13 IN ASSESSMENT YEAR 2012-13 & 6 TO 8 IN ASSESSMENT YEAR 2013-14 SEEKING TO REVIVE TRANSFER PRICING ADJUSTMENTS OF RS.5,32,43,578/- AND RS.4,71,72,325/- IN RESPECT OF INTERNATIONAL TRANSACTION REGARDING CORPORATE GUARANTEES TO ITS OVERSEAS AES. THE CIT(A)S IDENTICAL DISCUSSION REVEALS THAT HE HAS FOLLOWED THIS TRIBUNALS ORDER(S) IN ASSESSMENT YEARS 2003-04 TO 2011-12 (SUPRA) IN DIRECTING THE TPO TO REDUCE THE IMPUGNED CORPORATE GUARANTEE COMMISSION @3% TO 0.5% AS UNDER: 14. GROUND NUMBERING 11 TO 17 RELATE TO THE ACTION OF THE LD.AO/TPO IN MAKING AN ADJUSTMENT OF RS.513243,578/- ON ACCOUNT OF GUARANTEE TRANSACTIONS. THE IMPUGNED MATTER HAS BEEN DEALT WITH BY THE LD. AO/TPO AS DISCUSSED SUPRA. I.T.A NOS.191 & 192/KOL/2018 & I.T.A NOS.138 & 139/KOL/2018 M/S. ELECTROSTEEL CASTINGS LTD. ASSESSMENT YEAR: 2012-13 & 2013-14 PAGE | 21 15. IN RESPECT OF THIS GROUND, DURING THE COURSE OF THE APPEAL, THE APPELLANT-COMPANY/ LD. A.RS FOR THE APPELLANT-COMPANY HAVE MADE THE FOLLOWING SUBMISSIONS: GROUNDS NO.17,12,13,15,16 & 17 : GUARANTEE TRANSACTION WITH THE AE: RS.5,32,43,578/- 5.1.1 W.R.T THE ABOVE, ATTENTION OF YOUR GOODSELF IS INVITED TO THE RELEVANT FACTS OF THE CASE. THE ASSESSEE DURING THE YEAR HAD EXTENDED GUARANTEES IN FAVOUR OF THE AES (ELECTROSTEEL ALGERIA SPA, ETECTROSTEEL EUROPE SA, ELECTROSTEET UK & SINGARDO INTERNATIONAL PTE LIMITED IN RESPECT OF WORKING CAPITAL LOANS DISBURSED BY THE BANKS. SINCE NO FEE WAS CHARGED FOR THE SAME, THE LD AO PROPOSED TO COMPUTE AN ARM'S LENGTH GUARANTEE COMMISSION @3% AND ADD THE SAME TO THE INCOME OF THE ASSESSEE. AGGRIEVED THE ASSESSEE IS IN APPEAL BEFORE YOUR GOODSELF. 5.1.2 W.R.T THE ABOVE, IT IS REITERATED THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURE AND EXPORT OF DUCTITE LRON PIPE. IN ORDER TO EXPAND THE MARKET FOR ITS PRODUCT, THE AES WERE INCORPORATED TO MARKET ASSESSEE'S PRODUCT ABROAD. THE AE IS MAINLY ENGAGED IN THE TRADING AND MARKETING OF DUCTILE IRON PIPES. EVEN THE PROVISION OF GUARANTEE IN FAVOR OF THE AES WAS TO FURTHER ITS OBJECTIVE OF EXPANDING ITS MARKET TO DIFFERENT COUNTRIES ACROSS THE WORLD. THUS, THE ASSESSEE HAD PROVIDED THE GUARANTEE TO SERVE ITS OWN PURPOSE AND ANY BENEFIT (IF AT ALL WE ASSUME THAT BENEFITS ACCRUED) TO THE AES WAS ONLY INCIDENTAL TO ITS MARKET-EXPANSION STRATEGY. 5.1.3 APPROXIMATELY 95% OF THE SALES OF THE AES REPRESENTED PURCHASES FROM THE ASSESSEE. THE GIVEN FACT PROVES THAT THE AES WERE MAINLY CATERING TO THE MARKETING NEEDS OF THE ASSESSEE WHICH WAS THE SOLE PURPOSE OF THEIR EXISTENCE. GIVEN SUCH ECONOMIC INTERDEPENDENCE ON THE AE NO ADJUSTMENT UNDER THE TRANSFER PRICING PROVISIONS IN CHAPTER X WAS REQUIRED. 5.1.4 THE AFORESAID CLAIM FINDS STRENGTH FROM THE FOLLOWING JUDGMENTS: ITAT(DELHI) IN CASE OF KOHINOOR FOODS LTD. VS. ACIT[67 SOT 108] DELHI HIGH COURT IN CASE OF CIT VS. COTTON NATURALS (I) PVT. LTD, [276 CTR 475] ITAT (AHMEDABAD) IN CASE OF MICRO LINKS LTD. [157 TTJ 289] ITAT(DELHI) IN CASE OF KNORR BREMSE INDIA PVT. LTD, [56 SOT 349] 5.2.1 WITHOUT PREJUDICE TO THE ABOVE, IF FOR THE SAKE OF ARGUMENT WE ACCEPT THAT SERVICES WERE RENDERED BY THE ASSESSEE-COMPANY, EVEN THEN THE IMPUGNED GUARANTEE TRANSACTION DOES NOT CONSTITUTE AN INTERNATIONAL TRANSACTION WITHIN THE MEANING OF SECTION 92B OF INCOME TAX ACT, 1961. IN THIS CONNECTION, IT IS SUBMITTED THAT NO COST WAS INCURRED BY THE ASSESSEE-COMPANY TO PROVIDE SUCH GUARANTEE TO THE AE. THUS, THE SAID CORPORATE GUARANTEE DID NOT HAVE A BEARING ON THE PROFITS, INCOME, LOSSES OR ASSETS OF THE ASSESSEE COMPANY (READ SECTION 92B PRODUCED ABOVE). 5.2.2 THE AFORESAID CLAIM FINDS STRENGTH FROM THE FOLLOWING JUDGMENTS: ITAT(DELHI) IN CASE OF BHARTI AIRTEL LTD. VS. ADDITIONAL CIT [39 CCH 415] ITAT(MUMBAI) IN CASE OF VIDEOCON INDUSTRIES LTD. VS. ADDL. CIT [43 CCH 113] ITAT(CHENNAI) IN CASE OF REDINGTON (INDIA) LTD. VS. ACIT [41 ITR (TRIB) 646] ITAT(AHMEDABAD) IN CASE OF MICRO INK LTD. VS. ADDL. CIT [157 ITD 132] THE MUMBAI TRIBUNAL IN CASE OF MARICO LTD. VS. ACIT [47 CCH 117] I.T.A NOS.191 & 192/KOL/2018 & I.T.A NOS.138 & 139/KOL/2018 M/S. ELECTROSTEEL CASTINGS LTD. ASSESSMENT YEAR: 2012-13 & 2013-14 PAGE | 22 5.3.1 COMING TO THE METHODOLOGY ADOPTED BY THE TPO TO COMPUTE THE ALP OF THE IMPUGNED GUARANTEE TRANSACTION, IT IS OBSERVED THAT THE SAME IS ARBITRARY AND HAS NO BASIS WHATSOEVER. 5.3.2 FIRSTLY, HE PRESUMED THE AE TO HAVE A LOWER CREDIT RATING AND ACCORDINGLY ESTIMATED ITS RATING TO BE 'CC' OR 'C' (IN STANDARD & POOR'S RATING). THE CREDIT RATING ASSIGNED TO AE BY THE TPO HAS NO BASIS AND NEITHER IS HE AUTHORIZED TO ASSIGN ANY SUCH RATING UNDER THE ACT. THE TPO HAS NO TECHNICAL QUALIFICATION TO ASSIGN ANY RATING TO AE NOR HAS HE EVEN SPECIFIED ANY CONCRETE BASIS OR FORMULA TO ASSIGN SUCH CREDIT RATING. THEREFORE, HIS ACT IS ARBITRARY AND NOT AS PER LAW. 5.3.3 FURTHER, RELYING ON A REPORT BY THE UNCTAD SECRETARIAT HE COMPUTED THE INTEREST RATE DIFFERENTIAL TO BE 6%, I.E HE HELD THAT AE SAVED 6% ON ITS BORROWING COST BY VIRTUE OF THE GUARANTEE TRANSACTION AND FURTHER ATTRIBUTED 50% OF THE BENEFITS TO THE ASSESSEE COMPANY I.E 3% BY WAY OF GUARANTEE COMMISSION. 5.3.4 THE REPORT RELIED UPON BY THE TPO MERELY DISCUSSES THE IMPACT OF BASEL 2, (RECOMMENDATIONS ON BANKING LAWS AND REGULATIONS ISSUED BY THE BASEL COMMITTEE ON BANKING SUPERVISION) ON COMMODITY FINANCING IN DEVELOPING COUNTRIES. THE INTEREST RATES QUOTED IN THE REPORT ARE MERE PROJECTIONS WHICH ARE APPLICABLE TO DEVELOPING NATIONS. 5.3.5 COMING TO THE ASSESSEE'S CASE, THE AES ARE COMPANIES IN DEVELOPED ECONOMIES (NOT DEVELOPING NATIONS) AND MOREOVER PROJECTED INTEREST RATES CANNOT BE USED AS COMPARABLES. HENCE, THE TPO GROSSLY ERRED IN RELYING UPON THE UNCTAD SECRETARIAT. 5.3.6 THUS, IT IS OF IMPORTANCE TO NOTE THAT THE TPO HAS BROUGHT NO COMPARABLE TRANSACTION ON RECORD TO COMPUTE THE ALP. AS ALREADY DISCUSSED ABOVE, EVEN THE ASSUMPTION AND DATA RELIED ON BY THE TPO WERE FACTUALLY INCORRECT AND DID NOT EVEN APPLY TO THE FACTS OF THE PRESENT CASE SINCE THE AE ARE LOCATED IN A DEVELOPED NATIONS AND NOT DEVELOPING NATIONS. HENCE, THE ENTIRE ADDITION HAS BEEN MADE ARBITRARILY AND NOT IN CONSONANCE WITH THE TRANSFER PRICING PROVISIONS UNDER THE ACT. 5.4 LASTLY, ITAT (KOLKATA) IN CASE OF TEGA INDUSTRIES LTD, VS. DCIT [ITA NO. 7972/KOL/2012] HELD THAT GUARANTEE EXTENDED BY THE ASSESSEE WAS MERELY A SHAREHOLDER ACTIVITY UNDERTAKEN TO FURTHER THE ASSESSEE'S BUSINESS. THE TRIBUNAL DELETED THE ADDITION MADE ON ACCOUNT OF GUARANTEE COMMISSION IN FULL. IN THE INSTANT CASE, THE CORPORATE GUARANTEE WAS NOT EXTENDED WITH A VIEW TO EARN COMMISSION BUT TO PROTECT THE INTEREST OF THE ASSESSEE. THUS, FOLLOWING THE DECISION OF KOLKATA TRIBUNAL THE ALP OF GUARANTEE TRANSACTION IS NIL. THUS, NO ADJUSTMENT ON ACCOUNT OF GUARANTEE COMMISSION IS WARRANTED. ACCORDINGLY, IT IS PRAYED THAT ADDITION OF RS.5,32,43,578/- BE DELETED. 16. DECISION: I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF THE APPELLANT-COMPANY IN THE LIGHT OF THE ADJUSTMENTS MADE BY THE LD, TPO/ AO. BEFORE THE LD. TPO, THE APPELLANT CONTENDED THAT THE ISSUANCE OF CORPORATE GUARANTEE WAS NOT AN 'INTERNATIONAL TRANSACTION' AND THEREFORE NO BENCHMARKING EXERCISE WAS REQUIRED TO BE CARRIED OUT BY IT IN THIS REGARD. ON EXAMINATION OF THE TRANSFER PRICING ORDER, IT IS NOTED THAT THE LD. TPO WAS NOT IN AGREEMENT WITH THE CONTENTION PUT FORTH BY THE APPELLANT. THE LD. TPO COMPUTED THE ALP CG FEE RATE AT 3% IN RESPECT OF THE CORPORATE GUARANTEES ISSUED BY THE APPELLANT. THE LD. TPO THEREFORE PROPOSED UPWARD ADJUSTMENT OF RS.5,32,43,578/-. I.T.A NOS.191 & 192/KOL/2018 & I.T.A NOS.138 & 139/KOL/2018 M/S. ELECTROSTEEL CASTINGS LTD. ASSESSMENT YEAR: 2012-13 & 2013-14 PAGE | 23 IN THE APPELLATE PROCEEDINGS, THE LD. ARS OF THE APPELLANT REITERATED THE SUBMISSIONS WHICH WERE MADE BEFORE THE LD. TPO AND CONTENDED THAT THE CORPORATE GUARANTEE WAS NOT THE NATURE OF 'INTERNATIONAL TRANSACTION' AND THEREFORE PROVISIONS OF CHAPTER X WERE NOT APPLICABLE IN THIS REGARD. ALTERNATIVELY THE LD. ARS CONTENDED THAT THE TPO ERRED IN DETERMINING THE ALP CG FEE AT 3%. THE LD. ARS OF THE APPELLANT SUBMITTED THAT THE CORPORATE GUARANTEES SHOULD BE BENCHMARKED AT 0.5%, FOR WHICH IT PLACED RELIANCE ON SEVERAL JUDGMENTS INCLUDING THE JURISDICTIONAL ITAT, KOLKATA IN ITS OWN CASE FOR AYS 2003- 04 TO 2011-12. 3. THE HON'BLE ITAT, KOLKATA IN THE APPELLANT'S OWN CASE IN I.T. (SS) NO. 47 TO 60/KOL/2014, 313 AND 256/KOL/2015, 66 AND 124/KOL/2016 DATED 25.11.2016 FOR AY 2003- 04 TO 2011-12 HAS HELD AS FOLLOWS: [QUOTE] '83. THE FIRST AND FOREMOST SUBMISSION OF THE LEARNED COUNSEL FOR THE ASSESSEE WAS THAT THE TRANSACTION OF GIVING GUARANTEE ON A LOAN AVAILED OF BY THE ASSOCIATED ENTERPRISE CANNOT BE REGARDED AS AN INTERNATIONAL TRANSACTION AT ALL, AT THE TIME OF HEARING, THE BENCH EXPRESSED THE VIEW THAT THIS ISSUE IS NO LONGER RES INTEGRA AND HAS BEEN CONCLUDED BY A DECISION OF THE SPECIAL BENCH IN THE CASE OF INSTRUMENTARIUM CORPORATION LTD., FINLAND V. ASST, DIT, INTERNATIONAL TAXATION [2016] 49 ITR (TRIB) 589 (KOLKATA) [SB] ; [2016] 160 ITD 1 (SB) (KOL). FOLLOWING THE PRINCIPLE LAID DOWN IN THE AFORESAID DECISION, WE ARE OF THE VIEW THAT THE PLEA OF THE ASSESSEE IN THIS REGARD CANNOT BE SUSTAINED. THE CASES CITED IN SUPPORT OF HIS CONTENTION ALSO DO NOT REQUIRE ANY CONSIDERATION AS THE DECISION OF THE SPECIAL BENCH WAS RENDERED MUCH AFTER THOSE DECISIONS. 84. AS FAR AS THE RATE OF 2 PER CENT. OF THE LOAN FOR WHICH THE ASSESSEE STOOD AS GUARANTOR BEING ADDED TO THE TOTAL INCOME AS ADJUSTMENT TO THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION OF FURNISHING GUARANTEE IS CONCERNED, THE LEARNED AUTHORIZED REPRESENTATIVE HAS SUBMITTED THAT THE ARM'S LENGTH GUARANTEE CHARGES MAY BE TAKEN AT 0.40 PER CENT WHICH WAS THE PERCENTAGE OF COMMISSION CHARGED BY THE BANK FROM THE ASSESSEE FOR FURNISHING IDENTICAL GUARANTEE AS WAS FURNISHED BY THE ASSESSEE FOR A LOAN TRANSACTION BY BANKS TO ITS ASSOCIATED ENTERPRISE. IN THIS REGARD OUR ATTENTION WAS DRAWN TO THE FACT THAT IDBI BANK HAS CHARGED A COMMISSION OF 0.40 PER CENT. PER ANNUM AS GUARANTEE COMMISSION FOR SIMILAR FACILITY EXTENDED TO THE ASSESSEE AND THAT SHOULD BE TAKEN AS A COMPARABLE CASE. OUR ATTENTION WAS DRAWN TO PAGE 120 OF THE PAPER BOOK II FILED BY THE ASSESSEE IN THE APPEAL FOR THE ASSESSMENT YEAR 2011-12. 84(A).ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS RELIED UPON THE ORDERS OF THE AUTHORITIES BELOW AND SUBMITTED THAT THE ASSESSEE HAS UNDERTAKEN THE RISK BY PROVIDING THE GUARANTEE FOR THE LOAN OBTAINED BY THE ASSOCIATED ENTERPRISE FROM THE BANK. THEREFORE, THE DIFFERENTIAL RATE ADOPTED BY THE TRANSFER PRICING OFFICER IS JUSTIFIED, 84(B). HAVING CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS RELEVANT MATERIAL ON RECORD, WE AGREE WITH THE PLEA OF THE LEARNED AUTHORISED REPRESENTATIVE THAT THE ARM'S LENGTH GUARANTEE COMMISSION ADOPTED AT 2 PER CENT BY THE DISPUTE RESOLUTION PANEL CANNOT BE SUSTAINED. VARIOUS BENCHES OF THE TRIBUNAL IN THE FOLLOWING DECISIONS HAVE CONSIDERED 0.5 PER CENT AS APPROPRIATE ADJUSTMENT IN FACTS IDENTICAL TO THE CASE OF THE ASSESSEE: (1) EVEREST KANTO CYLINDER LTD. V. ASST. CIT (LTU) (ITA NO.7073/MUM/2012), DATED SEPTEMBER 25, 2014 ; (2) EVEREST KANTO CYLINDER LTD. V. DEPUTY CIT (LTU) (ITA. NO. 542/MUM/2012 DATED NOVEMBER 23, 2012) (MUMBAI-TRIBUNAL) ; I.T.A NOS.191 & 192/KOL/2018 & I.T.A NOS.138 & 139/KOL/2018 M/S. ELECTROSTEEL CASTINGS LTD. ASSESSMENT YEAR: 2012-13 & 2013-14 PAGE | 24 (3) GLENMARK PHARMACEUTICALS LTD. V. ADDL. CIT (ITA NO, 5031/M/2012) DATED NOVEMBER 13, 2013) (MUMBAI-TRIBUNAL) ; (4) GODREJ HOUSEHOLD PRODUCTS LTD. V. ADDL. CIT (ITA NO. 7369/M/2010) (MUMBAI- TRIBUNAL), DATED NOVEMBER 22, 2013); AND (5) ASST. CIT V. NIMBUS COMMUNICATIONS LTD. [2014] 30 ITR (TRIB) 349 (MUM) (ITA NO. 3664/M/2010) (MUMBAI-TRIBUNAL), DATED JUNE 12, 2011). 84(C). IN THE CASE OF EVEREST KANTO CYLINDER LTD. (SUPRA), THE TRIBUNAL WHILE CONSIDERING AN IDENTICAL ISSUE HAS HELD IN PARA 9 AS UNDER : '9. NOW, COMING TO THE MERIT OF THE ADDITION SO MADE, WE FOUND THAT THE ISSUE HAS ALREADY BEEN DECIDED BY THE TRIBUNAL IN IMMEDIATELY PRECEDING YEAR IN THE ASSESSEE'S OWN CASE, WHEREIN CHARGING OF 0.5 PER CENT GUARANTEE COMMISSION FROM ASSOCIATED ENTERPRISE WAS HELD TO BE QUITE NEAR TO 0.5 PER CENT., WHERE THE ASSESSEE HAS PAID INDEPENDENTLY TO THE ICICI BANK AND CHARGING OF GUARANTEE COMMISSION AT 0.5 PER CENT. FROM ITS ASSOCIATED ENTERPRISE WAS HELD TO BE AT ARM'S LENGTH. THE PRECISE OBSERVATIONS OF THE BENCH FOR THE ASSESSMENT YEAR 2007-08 ARE AS UNDER: 'THE UNIVERSAL APPLICATION OF RATE OF 3 PER CENT FOR GUARANTEE COMMISSION CANNOT BE UPHELD IN EVERY CASE AS IT IS LARGELY DEPENDENT UPON THE TERMS AND CONDITIONS, ON WHICH LOAN HAS BEEN GIVEN, RISK UNDERTAKEN, RELATIONSHIP BETWEEN THE BANK AND THE CLIENT, ECONOMIC AND BUSINESS INTEREST ARE SOME OF THE MAJOR FACTORS WHICH HAS TO BE TAKEN INTO CONSIDERATION.... IN THIS CASE, THE ASSESSEE HAS ITSELF CHARGED 0.5 PER CENT GUARANTEE COMMISSION FROM ITS ASSOCIATED ENTERPRISE, THEREFORE, IT IS, NOT A CASE OF NOT CHARGING OF ANY KIND OF COMMISSION FROM ITS ASSOCIATED ENTERPRISE. THE ONLY POINT WHICH HAS TO BE SEEN IN THIS CASE IS WHETHER THE SAME IS AT ARM'S LENGTH PRICE OR NOT. WE HAVE ALREADY COME TO A CONCLUSION IN THE FOREGOING PARAS THAT THE RATE OF 3 PER CENT BY TAKING EXTERNAL COMPARABLE BY THE TRANSFER PRICING OFFICER, CANNOT BE SUSTAINED IN FACTS OF THE PRESENT CASE. WE ALSO FIND THAT IN AN INDEPENDENT TRANSACTION, THE ASSESSEE HAS PAID 0.6 PER CENT GUARANTEE COMMISSION TO ICICI BANK INDIA FOR ITS CREDIT ARRANGEMENT. THIS COULD BE A VERY GOOD PARAMETER AND A COMPARABLE FOR TAKING IT AS INTERNAL CUP AND COMPARING THE SAME WITH THE TRANSACTION WITH THE ASSOCIATED ENTERPRISE. THE CHARGING OF 0.5 PER CENT GUARANTEE COMMISSION FROM THE ASSOCIATED ENTERPRISE IS QUITE NEAR TO 0.6 PER CENT., WHERE THE ASSESSEE HAS PAID INDEPENDENTLY B THE ICICI BANK AND CHARGING OF GUARANTEE COMMISSION AT THE RATE OF 0.5 PER CENT FROM ITS ASSOCIATED ENTERPRISE CAN BE SAID TO BE AT ARMS LENGTH. THE DIFFERENCE OF 0.1 PER CENT CAN BE IGNORED AS THE RATE OF INTEREST ON WHICH ICICI BANK, BAHRAIN BRANCH HAS GIVEN LOAN TO ASSOCIATED ENTERPRISE (I.E. SUBSIDIARY COMPANY) IS AT 5.5 PER CENT, WHEREAS THE ASSESSEE IS PAYING INTEREST RATE OF MORE THAN 10 PER CENT ON ITS LOAN TAKEN WITH ICICI BANK OF INDIA. THUS, SUCH A MINOR DIFFERENCE CAN BE ON ACCOUNT OF DIFFERENTIAL RATE OF INTEREST. THUS, ON THESE FACTS, WE DO NOT FIND ANY REASON TO UPHOLD ANY KIND OF UPWARD ADJUSTMENT IN ARM'S LENGTH PRICE IN RELATION TO CHARGING OF GUARANTEE COMMISSION. AS THE FACTS AND CIRCUMSTANCES OF THE CASE DURING THE YEAR UNDER CONSIDERATION ARE PARIMATERIA, RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL IN THE ASSESSEE'S OWN CASE WE DIRECT THE ASSESSING OFFICER TO COMPUTE ARM'S LENGTH PRICE OF TRANSACTION AS PER THE DIRECTION GIVEN BY THE TRIBUNAL IN THE ABOVE ORDER FOR THE ASSESSMENT YEAR 2007- 08. 84(D). EVEN THE ASSESSEE HAS PAID 0,40 PER CENT. AS GUARANTEE COMMISSION TO A BANK FOR SIMILAR SERVICES. THE SAFE HARBOUR RULES PRESCRIBING 2 PER CENT. AS THE GUARANTEE COMMISSION IS NOT RELEVANT AS THOSE RULES ARE RELEVANT ONLY TO AN ELIGIBLE ASSESSEE WHO OPTS TO BE GOVERNED BY THOSE RULES. ACCORDINGLY, FOLLOWING THE DECISIONS OF THE TRIBUNAL REFERRED TO ABOVE, WE DIRECT THE ASSESSING OFFICER/TPO TO ADOPT THE 0.5 PER CENT. AS GUARANTEE COMMISSION CHARGES IN RESPECT OF THE GUARANTEE PROVIDED BY THE ASSESSEE FOR I.T.A NOS.191 & 192/KOL/2018 & I.T.A NOS.138 & 139/KOL/2018 M/S. ELECTROSTEEL CASTINGS LTD. ASSESSMENT YEAR: 2012-13 & 2013-14 PAGE | 25 OBTAINING THE LOAN BY THE ASSOCIATED ENTERPRISE. GROUND NO. 3 RAISED BY THE ASSESSEE IS ACCORDINGLY PARTLY ALLOWED.' [ UNQUOTE] 4. IN VIEW OF THE ABOVE AND RESPECTFULLY FOLLOWING THE JUDGMENTS OF THE HON'BLE ITAT, KOLKATA IN APPELLANT'S OWN CASE, I HOLD THAT THE ALP DETERMINED BY THE TPO IN HIS ORDER U/S 92CA(3) WAS EXCESSIVE AND THE MOST APPROPRIATE CG FEE RATE IN THE FACTS & CIRCUMSTANCES OF THE APPELLANT'S CASE IS 0.5%. THE LD. AO/TPO IS THUS DIRECTED TO COMPUTE THE ALP OF CORPORATE G;-'TEES AT 0.5%. THESE GROUNDS ARE THEREFORE PARTLY ALLOWED. 14. IT IS SUFFICIENTLY CLEAR BY NOW THAT THE ASSESSEES VERY ARGUMENTS HAVE BEEN PARTLY ACCEPTED THROUGH FOR BENCHMARKING CORPORATE GUARANTEE TRANSACTION IS ISSUED @ 0.5% COMMISSION. WE THEREFORE ADOPT JUDICIAL CONSISTENCY QUA THE INSTANT ISSUE AS WELL TO DECLINE TO REVENUES CORRESPONDING SUBSTANTIVE GROUND IN BOTH OF ITS APPEALS. ITS FORMER APPEAL ITA NO.191/KOL/2018 FAILS ACCORDINGLY. 15. WE CONTINUE TO STAY IN REVENUES LATTER APPEAL ITA NO.192/KOL/2018 FOR ASSESSMENT YEAR 2013-14. ITS LAST SUBSTANTIVE GROUND SEEKS TO REVIVE TRANSFER ADJUSTMENT OF RS.1,92,23,674/- RELATING TO SPECIFIED DOMESTIC TRANSACTIONS WITH RESPECT TO TRANSFER OF POWER FROM ELIGIBLE UNITS TO MANUFACTURING UNITS. WE NOTICE HEREIN AS WELL THAT THE VERY ISSUE HAD ARISEN IN PRECEDING ASSESSMENT YEARS 2003-04 TO 2011-12. LEARNED COORDINATE BENCH(SUPRA) DECIDED THAT SAME IN ASSESSEES FAVOUR. THE CIT(A) HAS TAKEN NOTE THEREOF IN HIS DETAILED DISCUSSIONS AS FOLLOWS: 14. GROUND NUMBERING 12, 17, 18, 19, & 20 RELATE TO THE ACTION OF THE LD.AO / TPO IN MAKING ADJUSTMENTS ON ACCOUNT OF SPECIFIED DOMESTIC TRANSACTIONS BY AN AMOUNT OF RS.1,92,23T674/-. THE IMPUGNED MATTER HAS BEEN DEALT WITH BY THE LD.AO IN THE TP ORDER PLACED SUPRA. 15. IN RESPECT OF THIS GROUND, DURING THE COURSE OF THE APPEAL, THE APPELLANT- COMPANY /LD. A.RS FOR THE APPELLANT-COMPANY HAVE MADE THE FOLLOWING SUBMISSIONS: GROUND NOS. 12, 17, 18, 19, 20: SPECIFIED DOMESTIC TRANSACTION: RS. 1,92,23,674/- 5.1 THE ASSESSEE-COMPANY HAS A POWER UNIT THE OUTPUT OF WHICH IS CAPTIVELY CONSUMED BY ITS MANUFACTURING UNITS. DURING THE YEAR, THE MANUFACTURING UNITS OF THE ASSESSEE HAD PURCHASED POWER FROM STATE ELECTRICITY BOARD. HENCE, THE GIVEN TRANSACTION WAS TAKEN AS A COMPARABLE UNCONTROLLED TRANSACTION AGAINST WHICH THE SPECIFIED DOMESTIC TRANSACTION' WAS BENCHMARKED AND THE PURCHASE PRICE IN THE COMPARABLE TRANSACTION WAS TAKEN TO BE THE ARM'S LENGTH PRICE. I.T.A NOS.191 & 192/KOL/2018 & I.T.A NOS.138 & 139/KOL/2018 M/S. ELECTROSTEEL CASTINGS LTD. ASSESSMENT YEAR: 2012-13 & 2013-14 PAGE | 26 5.2 RELIANCE IN THIS REGARD WAS PLACED ON THE JUDGMENT OF CALCUTTA HIGH COURT IN CASE OF KANORIA CHEMICALS & INDUSTRIES LIMITED [ITA NO. 58 OF 2073] & GRAPHITE INDIA WHEREIN PURCHASE PRICE FROM THE BOARD WAS HELD TO BE THE ARM'S LENGTH PRICE. THE SAID TRANSACTION OF SALE OF POWER WAS REFERRED TO THE TPO FOR COMPUTATION OF THE ARM'S LENGTH PRICE. 5.3 WHILE ARRIVING AT THE ALP, THE TPO RELIED UPON THE JUDGMENT OF THE CALCUTTA HIGH COURT IN CASE OF ITC LTD. WHEREIN SALE PRICE OF POWER MADE TO DISTRIBUTION LICENSEES WAS CONSIDERED AS THE MARKET VALUE AS OPPOSED TO PRICE CHARGED BY THE BOARD FROM THE CONSUMERS (I.E. RATE ADOPTED BY THE ASSESSEE). 5.4 RELYING ON THE SALE DATA OF POWER BY INDEPENDENT CAPTIVE POWER PLANTS TO THE DISTRIBUTION LICENSEES THE TPO ARRIVED AT AN AVERAGE RATE OF RS. 3.23/UNIT. IN DOING SO, HE CONSIDERED THE RATE OF RS. 2.53/UNIT I.E. THE RATE AT WHICH THE POWER WAS SOLD TO THE BOARD. HOWEVER, THE GIVEN RATE WAS AGAIN ADDED TO THE RATE OF RS. 3.23/UNIT TO ARRIVE AT AN EVEN LOWER RATE OF 2.88/UNIT. SUCH AN ACTION OF THE TPO REFLECTS HIS PREJUDICED MIND WHICH IS CLEARLY BAD IN LAW. 6.1 W.R.T THE ABOVE, IT IS PERTINENT TO NOTE HERE THAT JUDGMENT OF CALCUTTA HIGH COURT HAS BEEN RENDERED ON DISTINGUISHABLE FACTS. IN THE CASE BEFORE THE HIGH COURT THE ELIGIBLE UNIT WAS SITUATED IN THE STATE OF ANDHRA PRADESH. THE STATE HAD IMPOSED RESTRICTIONS ON SALE OF POWER TO OUTSIDERS/THIRD PARTIES. THE POWER UNITS THUS COULD HAVE SOLD POWER TO ONLY DISTRIBUTION LICENSEES/POWER GENERATORS. UNDER SUCH CIRCUMSTANCES, THE HON'BLE CALCUTTA HIGH COURT HELD THAT IN VIEW OF SUCH RESTRICTION, THE PRICE AS APPLICABLE TO SALE TO DISTRIBUTION COMPANIES SHALL APPLY. 6.2 HOWEVER, IN THE STATE OF WEST BENGAL NO SUCH RESTRICTIONS ARE IMPOSED ON THE POWER UNITS (SEPARATE NOTE REFERRING TO VARIOUS SECTIONS OF ELECTRICITY ACT, 2003 & WBERC REGULATIONS, 2007). THE POWER GENERATORS ARE FREE TO TRADE IN POWER ON THE EXCHANGE OR SELL THE EXCESS POWER TO THIRD PARTIES. UNDER THE GIVEN CIRCUMSTANCES THE RATIO OF JUDGMENT OF CALCUTTA HIGH COURT IN ITC LTD. SHALL NOT APPLY TO THE CASE OF THE ASSESSEE. 6.3 WHILE ANALYZING THE JUDGMENT OF THE APEX COURT IN CASE OF THIRUAROORAN SUGARS LTD. VS CIT THE HIGH COURT OBSERVED THAT 'THE SUGARCANE GROWN AT HOME WOULD BE DEEMED TO HAVE BEEN SOLD TO THE SUGAR MILL AT THE SAME RATE AT WHICH THE SUGARCANE WAS PURCHASED BY THE SUGAR MILL. THAT OBVIOUSLY IS CORRECT BECAUSE IF THE SUGARCANE GROWN AT HOME HAD NOT BEEN SOLD TO THE SUGAR MILL OF THE ASSESSEE ITSELF, THE SUGARCANE WOULD HAVE BEEN SOLD IN THE OPEN MARKET. THE RATE OF SALE IN THE OPEN MARKET WOULD BE THE SAME AT WHICH SUGARCANE WAS PURCHASED BY THE SUGAR MILL OF THE ASSESSEE.' APPLYING THE ABOVE, IT MAY BE SAID THAT THE RATE AT WHICH THE ASSESSEE (A CONSUMER OF POWER) PURCHASES POWER FROM WBSEB MAY BE TAKEN TO BE THE MARKET VALUE FOR DETERMINING THE SALE PRICE FOR THE POWER GENERATED BY THE UNIT. THUS, THE COMPUTATION OF ELIGIBLE PROFITS SHOULD BE DONE WITH REFERENCE TO THE RATE AT WHICH POWER WAS PURCHASED BY THE ASSESSEE FROM THE STATE ELECTRICITY BOARD. 6.4.1 ATTENTION OF YOUR GOODSELF IS ALSO INVITED TO THE DECISION OF ITAT(KOLKATA) IN ITS OWN CASE FOR AY 2006-07 TO 2011-12 WHEREIN THE BENCH DISMISSED THE PLEA OF DEPARTMENT TO APPLY THE SALE PRICE APPLICABLE TO DISTRIBUTION LICENSEES BY FOLLOWING THE DECISION OF CALCUTTA HIGH COURT IN CASE OF ITC LTD. AT PARA 49 OF THE ORDER IT WAS OBSERVED THAT 'IT IS CLEAR FROM THE RIVAL CONTENTIONS THAT DETERMINATION PRICE AT WHICH POWER GENERATED CAN BE SOLD IS SUBJECT TO STATUTORY CONTROL UNDER THE PROVISIONS OF SECTION 61 & 62 OF THE ELECTRICITY ACT, 2003. THE HON'BLE CALCUTTA HIGH COURT IN ITS DECISION RENDERED IN THE CASE OF ITC LTD. HAS SPECIFICALLY OBSERVED THAT IN THE CASE BEFORE IT ELECTRICITY GENERATED BY THE ASSESSEE COULD NOT BE SOLD TO ANYONE OTHER THAN A DISTRIBUTION COMPANY OR A COMPANY WHICH IS I.T.A NOS.191 & 192/KOL/2018 & I.T.A NOS.138 & 139/KOL/2018 M/S. ELECTROSTEEL CASTINGS LTD. ASSESSMENT YEAR: 2012-13 & 2013-14 PAGE | 27 ENGAGED BOTH IN GENERATION AND DISTRIBUTION. NO ARGUMENTS WERE ADVANCED BEFORE THE HON'BLE HIGH COURT NOR DID IT DEAL WITH APPLICABILITY OF THE PROVISO TO SECTION 80-IA(8) OF THE ACT. SECTION 80-IA(8) LAYS DOWN THAT WHEN ARTICLE OR THING MANUFACTURED IS USED BY THE ASSESSEE HIMSELF FOR OWN CONSUMPTION THE PROFIT OF THE UNDERTAKING MANUFACTURING SUCH ARTICLE OR THING HAS TO BE BASED ON THE MARKET VALUE IN PREFERENCE TO THE PRICE AS RECORDED BY THE ASSESSEE IN HIS BOOKS. MARKET VALUE FOR THE SAID PURPOSE HAS BEEN DEFINED TO MEAN THE PRICE THAT SUCH GOODS OR SERVICES WOULD ORDINARILY FETCH IN THE OPEN MARKET. WHEN PRICE OF POWER IS SUBJECT TO STATUTORY CONTROLS ONE CANNOT ASCERTAIN THE PRICE SUCH GOODS OR SERVICES WOULD ORDINARILY FETCH IN THE OPEN MARKET BECAUSE IN SUCH CIRCUMSTANCES IT CANNOT BE SAID THAT THERE IS AN OPEN MARKET FOR THE GOODS OR SERVICES. THERE ARE EXCEPTIONAL DIFFICULTIES IN COMPUTING THE PROFITS AND GAINS OF THE ELIGIBLE BUSINESS BY APPLYING THE MAIN PROVISIONS OF SECTION 80-IA(8) AND THEREFORE THE PROVISO TO SECTION 80-IA(8) WOULD APPLY AND THE ASSESSING OFFICER MAY COMPUTE SUCH PROFITS AND GAINS ON SUCH REASONABLE BASIS AS HE MAY DEEM FIT. THE INTERESTS OF JUSTICE WOULD BE MET BY SETTING ASIDE THE ORDER OF THE ASSESSING OFFICER ON THE ISSUE AND DIRECTING THE ASSESSING OFFICER TO DETERMINE THE PROFITS AND GAINS OF THE UNDERTAKING GENERATING POWER ON A REASONABLE BASIS AFTER AFFORDING THE ASSESSEE OPPORTUNITY OF BEING HEARD.' 6.4.2 FOLLOWING THE ABOVE IT IS CLEAR THAT THE TPO CLEARLY ERRED IN APPLYING THE RATIO LAID OUT BY CALCUTTA HIGH COURT IN CASE OF ITC LTD. AND APPLYING THE RATE OF SALE OF POWER TO DISTRIBUTION LICENSEES. 6.4.3 COMING TO A MARKET PRICE APPLICABLE TO THE ASSESSEE'S CASE, ATTENTION OF YOUR GOODSELF IS INVITED TO THE TARIFF ORDERS ISSUED BY WEST BENGAL ELECTRICITY COMMISSION FOR FY 2012- 13. A PERUSAL OF THE SAME TOGETHER WITH THE BILLS ISSUED BY THE STATE ELECTRICITY BOARD ON THE ASSESSEE SHOWS THAT CHARGES RECOVERED FROM THE ASSESSEE ARE AT PAR/LOWER THAN RATES PRESCRIBED IN THE TARIFF ORDER. FURTHER CERTAIN FIXED CHARGES LIKE CONTRACT DEMAND CHARGES, ELECTRICITY DUTY ETC. WERE RECOVERED FROM THE ASSESSEE BY THE BOARD WHICH HAVE BEEN ADDED TO THE ENERGY CHARGES PER UNIT TO ARRIVE AT THE ARM'S LENGTH PRICE/EFFECTIVE RATE PER UNIT WHICH IN TURN HAS BEEN USED TO COMPUTE DEDUCTION U/S 80-IA. 6.4.4 NOW SINCE THE AFORESAID PURCHASE TRANSACTION WITH THE BOARD CONSTITUTES A COMPARABLE TRANSACTION WHEREIN THE ENERGY RATE PER UNIT IS AT PAR/LOWER THAN RATES NOTIFIED IN TARIFF ORDER, THERE APPEARS NO REASON TO DISTURB THE QUANTUM DEDUCTION CLAIMED BY THE ASSESSEE. THUS IT IS PRAYED THAT THE ADDITION MADE BY THE AO BE DELETED. 16. DECISION: 1. I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF THE APPELLANT-COMPANY IN THE LIGHT OF THE ADJUSTMENTS MADE BY THE LD. TPO/ AO. THE APPELLANT-COMPANY OPERATES A CAPTIVE POWER PLANT ('CPP') AND THE POWER GENERATED THEREIN IS CONSUMED BY THE APPELLANT-COMPANY ITSELF. FOR THE PURPOSES OF COMPUTING PROFITS OF THE CAPTIVE POWER UNIT, ELIGIBLE FOR DEDUCTION UNDER SECTION 80IA, THE APPELLANT-COMPANY HAS ADOPTED THE TARIFF RATES AT WHICH IT PURCHASED ELECTRICITY IN THE STATE OF WEST BENGAL TO BE 'OPEN MARKET VALUE' IN TERMS OF SECTION 80IA(8) OF THE INCOME-TAX ACT, 1961. IN THE TRANSFER PRICING PROCEEDINGS, THE APPELLANT EXPLAINED THAT IT HAD APPLIED THE INTERNAL COMPARABLE UNCONTROLLED PRICE METHOD. IT WAS SUBMITTED THAT THE PRICE/RATE AT WHICH THE APPELLANT-COMPANY PURCHASED THE ELECTRICITY WAS THE MOST APPROPRIATE COMPARABLE RATE TO BENCHMARK THE RATE AT WHICH THE CPP HAD TRANSFERRED POWER TO THE APPELLANT-COMPANY. THE LD. TPO/AO WERE HOWEVER NOT AGREEABLE WITH THE EXPLANATION & DETAILS PUT FORTH BY THE APPELLANT. ACCORDING TO LD. TPO/AO THE INTERNAL CUP ADOPTED BY THE APPELLANT-COMPANY WAS NOT THE MOST APPROPRIATE METHOD. INSTEAD THE LD. TPO/AO WAS OF THE VIEW THAT THE PRICE AT WHICH ELECTRICITY BOARD SOLD POWER TO DISTRIBUTION LICENSEES WAS A BETTER PARAMETER TO BENCHMARK THE SPECIFIED DOMESTIC TRANSACTION; I.E. TRANSFER OF POWER BY CPP UNIT TO OTHER NON-ELIGIBLE UNITS OF THE I.T.A NOS.191 & 192/KOL/2018 & I.T.A NOS.138 & 139/KOL/2018 M/S. ELECTROSTEEL CASTINGS LTD. ASSESSMENT YEAR: 2012-13 & 2013-14 PAGE | 28 APPELLANT-COMPANY. THIS MANNER & METHODOLOGY ADOPTED BY THE LD. TPO/AO WAS FOLLOWING THE PRINCIPLES LAID DOWN IN JUDGMENT OF THE HON'BLE CALCUTTA HIGH COURT IN THE CASE OF ITC LTD (SUPRA ). THE LD. TPO/AO THEREFORE COMPUTED ALP AT RS.2.88/UNIT. 2. IN THE APPELLATE PROCEEDINGS, THE LD. ARS OF THE APPELLANT REITERATED THE SUBMISSIONS MADE BEFORE THE LD. TPO/AO. THE LD. ARS POINTED OUT THE INFIRMITIES AND DEFICIENCIES IN THE MANNER AND METHODOLOGY ADOPTED BY THE LD. TPO/AO TO BENCHMARK THE IMPUGNED TRANSACTION. THE LD. ARS OF THE APPELLANT PLACED RELIANCE ON THE DECISION RENDERED BY THE HON'BLE ITAT, KOLKATA IN THEIR OWN CASE FOR AYS 2003-04 TO 2011-12 , WHEREIN THE HON'BLE ITAT HAD DISTINGUISHED THE JUDGMENT OF THE CALCUTTA HIGH COURT IN THE CASE OF ITC LTD (SUPRA) . THE TRIBUNAL HELD THAT THIS JUDGMENT WAS NOT APPLICABLE TO THE APPELLANT'S CASE. RELYING ON THE DECISION OF THE APEX COURT IN CASE OF THIRUAROORAN SUGARS LTD. VS. CIT(SUPRA ); THE ARS OF THE APPELLANT-COMPANY THEREFORE CONTENDED THAT OPEN MARKET VALUE OF POWER TRANSFERRED BY CPP TO OTHER NON-ELIGIBLE UNITS WOULD BE THE SAME AT WHICH POWER WAS PURCHASED BY SUCH NON-ELIGIBLE UNITS. 3. THE HON'BLE ITAT, KOLKATA IN THE APPELLANT'S OWN CASE IN I.T. (SS) NO.47 TO 60/KOL/2014, 313 AND 256/KOL/2015, 66 AND 124/KOL/2016 25.11.2015 FOR AY 2003-04 TO 2011-12 HAS HELD AS FOLLOWS: 46. WE HAVE GIVEN A VERY CAREFUL CONSIDERATION TO THE RIVAL SUBMISSIONS. WE HAVE ALREADY SEEN THAT THE ASSESSEE MANUFACTURES DI SPUN PIPES, D) FITTINGS, ETC., AT ITS FACTORY AT KHARDAH (WEST BENGAL) CI SPUN PIPES AT ITS FACTORY- AT ELAVUR (TAMIL NADU) AND LOW ASH METALLURGICAL COKE AT ITS FACTORY AT HALDIA (WEST BENGAL). AT KHARDAH AND HALDIA FACTORY THE ASSESSEE ALSO HAS ITS OWN POWER PLANT GENERATING ELECTRICITY FROM HEAT EMITTED .FROM BLAST FURNACES IN THE PROCESS OF MANUFACTURING OF DI PIPES AT KHARDAH, WHERE POWER GENERATED IS ENTIRELY CONSUMED FOR OWN USE (I.E., CAPTIVE CONSUMPTION), AND SPONGE IRON PLANT AND COKE OVEN PLANT AT HALDIA WHERE THE POWER GENERATED IS CONSUMED FOR OWN USE (CAPTIVE CONSUMPTION AND SURPLUS POWER GENERATED IS SOLD TO THE WEST BENGAL STATE ELECTRICITY BOARD (WBSEB), IT IS NOT IN DISPUTE THAT THE ASSESSEE IS ENTITLED TO CLAIM DEDUCTION UNDER SECTION 80-IA OF THE ACT ON THE PROFITS DERIVED BY THE ASSESSEE FROM GENERATION OF POWER, SINCE THE POWER GENERATED IS CONSUMED BY THE ASSESSEE FOR OWN USE AND NOT SOLD TO A THIRD PARTY, SECTION 80-IA(8) OF THE ACT PRESCRIBES A METHOD OF DETERMINATION OF PROFITS DERIVED BY THE UNDERTAKING GENERATING POWER. IN SUCH CASES/ THE PROFITS AND GAINS OF SUCH ELIGIBLE BUSINESS HAS TO BE COMPUTED AS IF THE TRANSFER HAD BEEN MADE AT THE MARKET VALUE OF SUCH GOODS OR SERVICES AS ON THE RELEVANT DATE. 'MARKET VALUE' HAS BEEN DEFINED IN THE EXPLANATION TO SECTION 80-IA(B) OF THE ACT AS THE 'THE PRICE THAT SUCH GOODS OR SERVICES WOULD ORDINARILY FETCH IN THE OPEN MARKET'. IN INDIA THE BUSINESS OF GENERATION OF ELECTRICITY AND ITS DISTRIBUTION IS GOVERNED BY THE INDIAN ELECTRICITY ACT, 2003. THE ELECTRICAL POWER SYSTEM MAINLY CONSISTS OF GENERATION, TRANSMISSION AND DISTRIBUTION. FOR GENERATION OF ELECTRICAL POWER THERE ARE MANY PUBLIC SECTOR UNDERTAKINGS AND PRIVATE OWNED GENERATING STATIONS (GS). THE ELECTRICAL TRANSMISSION SYSTEM IS MAINLY CARRIED OUT BY CENTRAL GOVERNMENT BODY PGCIL (POWER GRID CORPORATION OF INDIA LIMITED). TO FACILITATE THIS PROCESS, INDIA IS DIVIDED INTO 5 REGIONS : NORTHERN, SOUTHERN, EASTERN, WESTERN AND NORTH EASTERN REGION. FURTHER WITHIN EVERY STATE WE HAVE A SLDC (STATE LOAD DISPATCH CENTRE). THE DISTRIBUTION SYSTEM IS CARRIED OUT BY MANY DISTRIBUTION COMPANIES (DISCOMS) AND SEBS (STATE ELECTRICITY BOARD). THERE ARE TWO TARIFF SYSTEMS, ONE FOR THE CONSUMER WHICH THEY PAY TO THE DISCOMS AND THE OTHER ONE IS FOR THE DISCOMS WHICH THEY PAY TO THE GENERATING STATIONS. THE RATE AT WHICH ELECTRICITY CAN BE SUPPLIED TO A CONSUMER BY THE DISTRIBUTION LICENSEE AND THE RATE AT WHICH THE GENERATING COMPANIES CAN SELL ELECTRICITY TO THE DISTRIBUTION LICENSEE ARE GOVERNED RESPECTIVELY BY SECTIONS 61 AND 62 OF THE ELECTRICITY ACT, 2003. THERE IS TARIFF REGULATORY COMMISSION WHICH FIXES BOTH THE RATES FOR SALE AND PURCHASE OF ELECTRICITY BY THE DISTRIBUTION LICENSEE. THERE IS THUS AN IN-BUILT I.T.A NOS.191 & 192/KOL/2018 & I.T.A NOS.138 & 139/KOL/2018 M/S. ELECTROSTEEL CASTINGS LTD. ASSESSMENT YEAR: 2012-13 & 2013-14 PAGE | 29 MECHANISM TO ENSURE PERMISSIBLE PROFIT BOTH TO THE GENERATING COMPANIES AND THE DISTRIBUTION LICENSEES. 47. THE HON'BLE CALCUTTA HIGH COURT IN THE CASE ITC LTD. (SUPRA) HAD TO DEAL WITH SIMILAR ISSUE OF OWN CONSUMPTION OF POWER GENERATED BY AN ASSESSEE ENGAGED IN THE BUSINESS OF PAPER MANUFACTURE. THE QUESTION THAT WAS EXAMINED BY THE HON'BLE COURT WAS AS TO WHAT WOULD BE MARKET VALUE FOR THE PURPOSE OF COMPUTATION OF DEDUCTION UNDER SECTION 80-IA OF THE ACT IN THE CONTEXT OF SECTION 80-IA(8) OF THE ACT. THE HON'BLE CALCUTTA HIGH COURT HELD DEDUCTION UNDER SECTION 80-IA HAD TO BE COMPUTED IN SUCH CIRCUMSTANCES NOT ON THE BASIS OF RATES CHARGEABLE BY DISTRIBUTION LICENSEE FROM CONSUMER AND THAT THE SAME CAN BE CLAIMED ONLY ON THE BASIS OF RATES FIXED BY TARIFF REGULATION COMMISSION FOR SALE OF ELECTRICITY BY GENERATING COMPANIES TO DISTRIBUTION LICENSEES. 48. THE SUBMISSION OF THE LEARNED COUNSEL FOR THE ASSESSEE WAS THAT THE DECISION OF THE HON'BLE CALCUTTA HIGH COURT IS NOT APPLICABLE TO THE CASE OF THE ASSESSEE AS IN THE CASE BEFORE THE HON'BLE CALCUTTA HIGH COURT, THE UNDERTAKING THAT GENERATED POWER WAS SITUATED IN THE STATE OF ANDHRA PRADESH WHERE ELECTRICITY GENERATED COULD NOT BE SOLD TO ANYONE OTHER THAN A DISTRIBUTION COMPANY OR A COMPANY WHICH IS ENGAGED BOTH IN GENERATION AND DISTRIBUTION. IN THIS REGARD AN ORDER OF THE ANDHRA PRADESH ELECTRICITY REGULATORY COMMISSION, HYDERABAD IN O. P, NO, 1075/2000, DATED JUNE 20,2001 WAS FILED BEFORE US, THE SAID ORDER DEALS WITH GENERATION OF NON-CONVENTIONAL ENERGY AND IT LAYS DOWN IN PARAGRAPH 25 OF ITS ORDER THAT THIRD PARTY SALES OF POWER GENERATED BY NON-CONVENTIONAL MEANS CANNOT BE MADE. IN PARAGRAPH 28 POWER GENERATED BY SUCH GENERATORS HAVE TO BE SOLD IN PUBLIC INTEREST ONLY TO APTRANSCO AT RATES SPECIFIED IN THE SAID PARAGRAPH, OUR ATTENTION WAS DRAWN TO PARAGRAPH 4 OF THE WEST BENGAL ELECTRICITY REGULATORY COMMISSION (OPEN ACCESS) REGULATIONS, 2007, WHICH LAYS DOWN THAT A LICENSEE OR A GENERATING COMPANY OR A CAPTIVE GENERATING PLANT OR A CONSUMER OR ANY PERSON ENGAGED IN THE BUSINESS OF SUPPLYING ELECTRICITY TO THE PUBLIC UNDER THE ACT (ELECTRICITY ACT, 2003) SHALL BE ELIGIBLE FOR OPEN ACCESS TO THE INTRA-STATE TRANSMISSION LINES OR ASSOCIATED FACILITIES OF THE STU OR ANY TRANSMISSION LICENSEE ON PAYMENT OF CHARGES, AS MAY BE SPECIFIED BY THE COMMISSION, FOR USING THE TRANSMISSION SYSTEM OF THE TRANSMISSION LICENSEE. IT WAS SUBMITTED THAT POWER GENERATORS IN WEST BENGAL ARE FREE TO TRADE IN POWER ON EXCHANGE OR SELL EXCESS POWER TO THIRD PARTIES. THEREFORE, THE JUDGMENT OF THE HON'BLE CALCUTTA HIGH COURT IN THE CASE OF ITC LTD. (SUPRA) WILL NOT APPLY TO THE CASE OF THE ASSESSEE. [ UNQUOTE] 4. IN VIEW OF THE ABOVE AND THE JUDGMENT OF THE HON'BLE ITAT, KOLKATA IN APPELLANT'S OWN CASE, I THEREFORE HOLD THAT THE ALP DETERMINED BY THE LD. TPO IN HIS ORDER U/S 92CA(3) IN TERMS OF THE PRINCIPLES LAID DOWN BY THE HON'BLE CALCUTTA HIGH COURT IN THE CASE OF ITC LTD. (SUPRA) WAS UNJUSTIFIED. FOLLOWING THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF THIRUAROORAN SUGARS LTD. VS. CIT (SUPRA) ; I AM OF THE CONSIDERED VIEW THAT THE TARIFF RATES AT WHICH THE NON-ELIGIBLE UNITS PROCURED POWER FROM ELECTRICITY BOARD WAS THE MOST APPROPRIATE AND INTERNAL COMPARABLE RATE TO BENCHMARK THE TRANSFER OF POWER BY APPELLANT'S CPP TO OTHER NON-ELIGIBLE UNITS. THE BENCHMARKING EXERCISE CONDUCTED BY THE APPELLANT IS FOUND TO THE APPROPRIATE AND REASONABLE AND HENCE NO FURTHER TRANSFER PRICING ADJUSTMENT IS WARRANTED ON THIS COUNT. THE LD. AO/TPO ERRED IN MAKING THE DOWNWARD ADJUSTMENT WITH RESPECT TO ELIGIBLE PROFITS U/S 80IA BY RS.1,92,23,674/- AND THE SAME IS HEREBY DIRECTED TO BE DELETED. THESE GROUNDS ARE THEREFORE ALLOWED. 16. WE ADOPT LEARNED COORDINATE BENCHS DISCUSSION MUTATIS MUTANDIS TO UPHOLD THE CIT(A)S FINDINGS DELETING THE IMPUGNED TRANSFER PRICING ADJUSTMENTS I.T.A NOS.191 & 192/KOL/2018 & I.T.A NOS.138 & 139/KOL/2018 M/S. ELECTROSTEEL CASTINGS LTD. ASSESSMENT YEAR: 2012-13 & 2013-14 PAGE | 30 PERTAINING TO SPECIFIED DOMESTIC TRANSACTIONS IN THE ABSENCE OF ANY DISTINCTION ON FACTS OR LAW PIN-POINTED AT REVENUES BEHEST. IT FAILS IN BOTH OF ITS CROSS-APPEALS ITA NO.191 & 192/KOL/2018. 17. THE ASSESSEES APPEALS IN ITA NO.138 & 139/KOL/2018 ARE ALLOWED AND REVENUES CROSS-APPEALS ITA NO.191 & 192/KOL/2018 ARE DISMISSED. ORDER IS PRONOUNCED IN THE OPEN COURT ON 28.02.2019. SD/- ( A. L. SAINI ) SD/- (S. S. GODARA) ACCOUNTANT MEMBER JUDICIAL MEMBER /KOLKATA; / DATE: 28/02/2019 (RS, SR.PS) / COPY OF THE ORDER FORWARDED TO : TRUE COPY BY ORDER ASSISTANT REGISTRAR, I.T.A.T, KOLKATA BENCHES, KOLKATA . 1. THE ASSESSEE - M/S. ELECTROSTEEL CASTINGS LTD. 2. THE REVENUE- DCIT, CENTRAL CIRCLE - 4(4), KOLKATA. 3. ( ) / THE CIT(A), 4. / CIT 5. , , / DR, ITAT, KOLKATA 6. [ / GUARD FILE.