ESSEL PROPACK LIMITED, MUMBAI V. DEPUTY COMMISSIONER OF INCOME TAX RANGE-6(3)(2), MUMBAI

ITA 2068/MUM/2016

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 8382 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 1 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-05-2020
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2011-2012
• Appeal Filed On: 30-03-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: V JANARADHAN
• Assessee Lawyers: SNEHAL S
• Keywords: Transfer pricing; International transaction; Earning of tax free income; Wholly owned subsidiary; Speculation loss; Rule 8D
• Section: 143(3); 92B; 14A; 36 (1) (iii); 144C; 264; 13; 22; 92CA

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL, BENCH K, MU MBAI BEFORE SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER AND SHRI PAWAN SINGH JUDICIAL MEMBER ITA NO. 2068/MUM/2016(ASSESSMENT YEAR : 2011-12) ESSEL PROPACK LIMITED, TOP FLOOR, TIMES TOWER, KAMALA CITY, SENAPATI BAPAT MARG, LOWER PAREL, MUMBAI-400013 PAN : AAACE 1568L VS DEPUTY COMMISSIONER OF INCOME TAX RANGE-6(3)(2), ROOM NO. 563, 5 TH FLOOR, AAYAKAR BHAWAN, M.K. ROAD, MUMBAI-400020. APPELLANT RESPONDEDNT APPELLANT BY SH. MADHUR AGGARWAL & MS SNEHAL ADVOCATES RESPONDENT BY SHRI V. JANARADHAN SR DR DATE OF HEARING 28 -02-2020 DATE OF PRONOUNCEMENT 27-05-2020 O R D E R PER PAWAN SINGH, JUDICIAL MEMEBR : 1. THIS APPEAL BY ASSESSEE IS DIRECTED AGAINST THE ASS ESSMENT ORDER DATED 28.01.2016 PASSED U/S 143(3) READ WITH SECTION (R. W.S.) 144C (13) OF INCOME TAX ACT (ACT), PASSED IN PURSUANCE OF DIRECT ION OF DISPUTE RESOLUTION PENAL (DRP-2) DATED 15.12.2015 FOR ASSES SMENT YEAR 2011-12. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF AP PEAL 1. TRANSFER PRICING ADJUSTMENT - GUARANTEE FEES A) THE LD. DRP/TPO/AO ERRED IN LAW AND FACTS IN MA KING ADDITION OF RS. 27,75,3347- ON ACCOUNT OF DIFFERENCE IN ARM'S LENGT H FEES FOR STAND BY LETTER OF CREDIT (SBLC) PROVIDED BY THE ASSESSEE FOR LOAN AVAILED BY AE FROM THE BANKS. THE REASONS GIVEN BY HIM FOR DOING SO ARE WR ONG, CONTRARY TO THE FACTS OF THE CASE AND AGAINST THE PROVISIONS OF LAW. ITA 2068 /MUM/2016 ESSEL PROPACK LIMITED 2 B) THE LD. DRP/TPO/AO ERRED IN LAW AND FACTS IN MA KING ADDITION OF RS. 2,09,85,206A ON ACCOUNT OF DIFFERENCE IN ARM'S LENG TH FEES ON CORPORATE GUARANTEE PROVIDED BY THE ASSESSEE FOR LOAN AVAILED BY THE AE, SECURED BY TANGIBLE ASSETS OF THE AE. THE REASONS GIVEN BY HIM FOR DOING SO ARE WRONG, CONTRARY TO THE FACTS OF THE CASE AND AGAINST THE P ROVISIONS OF LAW. C) WITHOUT PREJUDICE TO ABOVE, THE GUARANTEE COMM ISSION CHARGED BY BANK @ 0.75% TO THE ASSESSEE OUGHT TO HAVE BEEN ACCEPTED AS INTERNAL CUP FOR THE COMMISSION CHARGED BY ASSESSEE TO ITS AE @ 1 %. D) THE LD. DRP/TPO/AO ERRED IN LAW AND FACTS IN MA KING ADDITION OF RS. 96,63,002/- ON ACCOUNT OF DIFFERENCE IN ARM'S LENGT H FEES FOR CORPORATE GUARANTEE ISSUED BY THE ASSESSEE FOR LOAN AVAILED B Y AE. THE REASONS GIVEN BY HIM FOR DOING SO ARE WRONG, CONTRARY TO THE FACT S OF THE CASE AND AGAINST THE PROVISIONS OF LAW. E) THE LD. DRP/TPO/AO ERRED IN LAW AND FACTS IN MA KING ADDITION OF RS. 25,90,376/- BEING DIFFERENCE IN ARM'S LENGTH FEES F OR GUARANTEE ISSUED BY THE ASSESSEE FOR OPERATING LEASE ARRANGEMENT PROVIDED T O THE AE. THE REASONS GIVEN BY HIM FOR DOING SO ARE WRONG, CONTRARY TO TH E FACTS OF THE CASE AND AGAINST THE PROVISIONS OF LAW. F) WITHOUT PREJUDICE TO ABOVE, ISSUING A CORPORATE GUARANTEE FOR AE DOES NOT CONSTITUTE AN INTERNATIONAL TRANSACTION AS IT D OES NOT INVOLVE ANY COST TO ASSESSEE AND NOT HAVING ANY BEARING ON PROFIT, INCO ME, LOSSES OR ASSETS OF ENTERPRISE. THE ASSESSEE RELY UPON DECISION OF AHME DABAD TRIBUNAL IN CASE OF 'MICRO INK LTD VS ACIT' (ITA NO. 2873/AHD/10) AND DECISION OF DELHI TRIBUNAL IN THE CASE OF 'BHARTI AIRTEL LTD VS ACIT (43TAXMANN.COM 150). 2. DISALLOWANCE U/S 14 A - RS. 1,72,03,566/- A) THE LD. DRP/ A.O ERRED IN LAW AND FACT?; IN DIS ALLOWING RS. 1,32,85,658/- OUT OF INTEREST AND RS. 39,17.908A OUT OF EXPENSES U/S 14 A OF THE ACT. THE REASONS GIVEN BY DRP FOR DOING SO ARE WRONG, CONTRA RY TO THE FACTS OF THE CASE AND AGAINST THE PROVISIONS OF LAW. B) THE LD. DRP/A.O ERRED IN LAW AND FACTS IN DISAL LOWING INTEREST OF RS. 1,32,85,658/- U/S 14A OF THE ACT WITHOUT CONSIDERIN G THE FACT THAT ALL INVESTMENTS ARE MADE OUT OF INTERNAL ACCRUALS AND A SSESSEE HAS INTEREST FREE FUNDS AND INTERNAL ACCRUALS FAR IN EXCESS OF THESE INVESTMENTS. ITA 2068 /MUM/2016 ESSEL PROPACK LIMITED 3 C) THE LD. DRP/A.O ERRED IN LAW AND FACTS IN MAKI NG DISALLOWANCE U/S 14A OF THE ACT EVEN THOUGH INVESTMENT ARE MADE IN SUBSI DIARY/ASSOCIATE WHERE THE ASSESSEE HAS DEEP BUSINESS INTERESTS. THE REASONS G IVEN BY HER FOR DOING SO ARE WRONG, CONTRARY TO THE FACTS OF THE CASE AND AG AINST THE PROVISIONS OF LAW. D) THE LD, DRP/A.O ERRED IN LAW AND FACTS IN MAKI NG NOTIONAL ALLOCATION OF EXPENSES TO TAX FREE INCOME AND DISALLOWANCE OF RS. 39,17,908/- OUT OF EXPENSES WITHOUT PROVING NEXUS OF EXPENSES WITH TAX FREE INCOME AND WITHOUT RECORDING REASONS OF REJECTING ASSESSEE'S CLAIM THA T NO EXPENDITURE INCURRED TO EARN EXEMPT INCOME. 3. DISALLOWANCE OF INTEREST U/S 36 (1) (III) RS. 1,32 ,85,658/- A) THE LD. DRP/A.O. ERRED IN LAW AND FACTS IN DISAL LOWING RS. 1,32,85,658/- OUT OF INTEREST U/S 36(1)(III) OF THE ACT. THE REAS ONS GIVEN BY HIM FOR DOING SO ARE WRONG, CONTRARY TO THE FACTS OF THE CASE AND AG AINST THE PROVISIONS OF LAW. B) THE LD. DRP/A.O FAILED TO APPRECIATE THAT THE AS SESSEE HAD SUFFICIENT INTERNAL ACCRUALS AND INTEREST FREE FUNDS TO MAKE T HESE INVESTMENTS AND HENCE NO PART OF INTEREST CAN BE DISALLOWED U/S 14A OF TH E ACT. FOLLOWING THE DECISIONS IN THE CASE OF RELIANCE UTILITIES / HDFC OF BOMBAY HC. C) THE LD. AO FAILED TO APPRECIATE THAT ALL THE INV ESTMENTS HELD BY THE ASSESSEE ARE STRATEGIC INVESTMENTS IN SUBSIDIARIES PROMOTED BY IT TO TAKE UP ITS OWN BUSINESS IN DIFFERENT JURISDICTIONS AND NOT FOR EARNING EXEMPT INCOME. HENCE DISALLOWANCE U/S 14A IS UNWARRANTED AND MISPL ACED. D) THE LD. DRP/A.O ERRED IN LAW AND FACTS IN DISALL OWING INTEREST OF RS. 1,32,85,658/- U/S 36(1)(III) OF ACT WHICH IS ALSO D ISALLOWED U/S 14A RESULTING IN TO DOUBLE DISALLOWANCE OF SAME EXPENDITURE. 4. ADDITION ON ACCOUNT OF INCLUSION OF CENVAT CRE DIT IN VALUATION OF CLOSING STOCK - RS. 92,00,204/- A) THE LD. DRP / AO ERRED IN LAW AND FACTS IN CON FIRMING THE ADDITION OF RS. 92,00,204/- TO TOTAL INCOME BY ADDING CENVAT CR EDIT TO STOCKS. THE REASONS GIVEN BY HER FOR DOING SO ARE WRONG, CONTRA RY TO THE FACTS OF THE CASE AND AGAINST THE PROVISIONS OF LAW. B) THE LD. DRP/ AO OUGHT TO HAVE ACCEPTED THAT AS PER ACCOUNTING POLICY CONSISTENTLY FOLLOWED BY THE ASSESSEE AND GROSSING UP PURCHASES, SALES AND ITA 2068 /MUM/2016 ESSEL PROPACK LIMITED 4 STOCKS AS PROVIDED IN SECTION 145A, WORKED OUT IN F ORM 3CD, THERE WOULD BE NO IMPACT ON THE TAXABLE INCOME OF THE YEAR. C) THE LD. DRP / AO ERRED IN LAW AND FACTS IN NOT FOLLOWING THE ORDER OF HON'BLE ITAT IN A.Y. 2006-07 IN THE ASSESSEE'S OWN CASE WHEREIN THE ITAT HAS GIVEN DIRECTION TO A.O. TO MAKE ADJUSTMENTS AS PER SECTION 145A ON ACCOUNT OF CENVAT CREDIT TO THE VALUE OF PURCHASES / SALES, OPENING STOCK AND CLOSING STOCK. 5. DISALLOWANCE OF INTEREST U/S 36 (1) (III) - RS . 25,01,460/- A) THE LD. DRP / AO ERRED IN LAW AND FACTS IN DIS ALLOWING RS. 25,01,460/- OUT OF INTEREST U/S 36(1)(III) OF THE ACT IN RESPEC T OF BUSINESS ADVANCES AND OTHER RECEIVABLES FROM SUBSIDIARIES. THE REASONS GI VEN BY HIM FOR DOING SO ARE WRONG, CONTRARY TO THE FACTS OF THE CASE AND AGAINST THE PROVISIONS OF LAW. B) THE LD. DRP/ AO ERRED IN LAW AND FACTS IN NOT F OLLOWING THE ORDER OF APPELLATE AUTHORITIES IN THE ASSESSEE'S OWN CASE DE LETING SUCH DISALLOWANCE IN ASST. YEAR 2007-08 ONWARDS AND ACCEPTED BY THE DEPA RTMENT. C) THE LD. A.O IS ERRED IN LAW AND FACTS BY NOT F OLLOWING THE DIRECTIONS OF DRP TO VERIFY WHETHER SIMILAR ADDITION HAS BEEN DEL ETED IN A.Y. 2007-08. 6. SET-OFF OF BROUGHT FORWARD MTM LOSS AGAINST MT M GAIN OF RS. 3,91,97,1067- A) THE LD. DRP / A.O. ERRED IN LAW AND FACTS IN DE NYING SET OFF OF BROUGHT FORWARD (SPECULATION) MARK TO MARKET (MTM) LOSS AGAINST MTM PROFIT OF RS. 3,91,97,106/-. THE REASONS GIVEN HIM FOR DOING SO ARE WRONG AND IMPROPER. B) THE LD. DRP / A.O. ERRED IN LAW AND FACTS IN TR EATING MTM (FOREIGN EXCHANGE (FX) LOSS AS SPECULATION LOSS IN A.Y. 2008 -2009 & 2009-2010 AND MTM (FX) GAIN DURING THE YEAR AS NORMAL INCOME FOR DENYING SET OFF OF GAIN AGAINST BROUGHT FORWARD LOSS OF SAME NATURE. THE RE ASONS GIVEN BY HER FOR DOING SO ARE WRONG, CONTRARY TO THE FACTS OF THE CA SE AND AGAINST THE PROVISIONS OF LAW. C) WITHOUT PREJUDICE TO OTHER GROUNDS OF APPEAL, THE LD. DRP /A.O. OUGHT TO HAVE ALLOWED SET-OFF OF BROUGHT FORWARD MTM LOSS (F X LOSS) ON OPEN FORWARD CONTRACTS TREATED AS SPECULATION LOSS AGAIN ST MTM GAIN (FX GAIN) ON THE SAME NATURE OF TRANSACTIONS IN THE YEAR UNDER A PPEAL. THE REASONS GIVEN BY ITA 2068 /MUM/2016 ESSEL PROPACK LIMITED 5 HER FOR DOING SO ARE WRONG, CONTRARY TO THE FACTS O F THE CASE AND AGAINST THE PROVISIONS OF LAW. D) WITHOUT PREJUDICE TO ABOVE, THE LD. DRP/ AO ERR ED IN LAW AND FACTS IN NOT REVERSING / SET OFF SPECULATION LOSS BROUGHT FORWAR D WHEN THE MTM LOSS IS REVERSED AND NETTED OFF AGAINST OTHER BUSINESS LOSS IN THE SUBSEQUENT YEAR. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS A COMPANY ENGAGED IN MANUFACTURING OF MULTI LAMINATED COLLAPSIBLE AND SE AMLESS PLASTIC TUBES CATERING TO ORAL CARE, COSMETIC PERSONAL CARE , PHARMACEUTICAL, FOOD AND INDUSTRIAL SECTOR. THE ASSESSEE IS ONE OF THE ENTITY OF ESSEL GROUP HAVING ITS HEAD QUARTER IN MUMBAI. THE ASSE SSEE, WHILE FILING RETURN OF INCOME IN ITS FORM 3CEB REPORTED TRANSACT ION WITH ITS ASSOCIATED ENTERPRISES (AE) THAT ASSESSEE HAS GIVEN CORPORATE GUARANTEE TO ITS FOLLOWING ASSOCIATE ENTERPRISES:- NO. TYPE OF CORPORATE GUARANTEE PROVIDED BY THE ASSESSEE NO OF GUARANTEES CORPORATE GUARANTEE COMMISSION CHARGED BY ASSESSEE TO ITS AE 1 LOANS TO AE BACKED BY SBLCS 4 THE ASSESSEE HAS RECOVERED FROM ITS AE THE AMOUNT OF COMMISSION CHARGED BY INDIAN BANK IN RELATION TO SB LC ISSUED 2 LOANS TO AE BACKED BY TANGIBLE ASSETS OF GUARANTEE ISSUED BY THE ASSESSEE 4 OUT OF THE FOUR CASES, IN ONE CASE, THE ASSESSEE HAS CHARGED 1% COMMISSION FROM ITS AE, FOR THE THREE CASES, NO CORPORATE GUARANTEE COMMISS ION HAS BEEN CHARGED 3 LOANS TO AE BACKED BY ONLY CORPORATE GUARANTEE ISSUED BY THE ASSESSEE 3 THE ASSESSEE HAS CHARGED 1.5% COMMISSION FROM ITS AE 4 GUARANTEES FOR OPERATING LEASE ARRANGEMENT FOR ASSETS PROVIDED TO AE 3 OUT OF THE THREE CASES, IN ONE CASE, THE ASSESSEE HAS CHARGED 1% COMMISSION FROM ITS AE, FOR THE TWO CASES, , NO CORPORATE GUARANTEE COMMISS ION HAS BEEN CHARGED LOANS BACK BY STAND BY LETTER OF CREDITS (SBLCS) S.NO NAME OF BORROWER AE NAME OF THE INDIAN BANK GUARANTEE FEE CHARGED BY THE INDIAN NAME OF BANKS / FIS CURRENCY GUARANTEE AMOUNT (RS) LOAN AMOUNT AS ON 31.03.2011 SECURITY PROVIDED ITA 2068 /MUM/2016 ESSEL PROPACK LIMITED 6 BANK FROM ASSESSEE (INR) 1. LAMITUBE TECHNOLOGIES LIMITED, MAURITIUS STANDARD CHARTERED BANK, MUMBAI 1.25% STANDARD CHARTERED BANK, MAURITIUS USD 189,974,700 185,226,752 SECURED AGAINST SBLC ISSUED BY SCB MUMBAI AND IN INDIA. IT IS UNSECURED FACILITY. THERE IS NO CROSS LINKING WITH ANY OTHER SECURED FACILITY SANCTIONED BY SCB INDIA TO ESSEL PROPACK LIMITED. 2 LAQMITUBE TECHNOLOGIES LIMITED, MAURITIUS -DO- 1.25% -DO- USD 89,635,950 88,437,715 -DO- 3 -DO- -DO- 1.25% -DO- USD 88,298,100 88,437,715 -D O- 4 ESSEL PROPACK AMERICA LLC USA ING VYSYA BANK, MUMBAI 1.40% BARCLAYS BANK PLC MAURITIUS USD 222,975,000 216,285,750 SECURED AGAINST SBLC ISSUED BY ING INDIA AND FURTHER THERE IS A MORTGAGE OF LAND OWNED BY AQUALAND INDIA LIMITED. ESSEL PROPACK LIMITED HAS NOT GIVEN ANY ASSET AS SECURITY FOR THIS LOAN. LOANS BACK BY TANGIBLE ASSETS OF BORROWER AND CORPO RATE GUARANTEE ISSUED BY THE ASSESSEE SR.NO. NAME OF BORROWER AE NAME OF BANKS / FIS RATE CHARGED CURRENCY GUARANTEE AMOUNT (RS) LOAN AMOUNT AS ON 31.03.11 SECURITY PROVIDED 1 LAMITUBE TECHNOLOGIES LIMITED, MAURITIUS PUNJAB NATIONAL BANK, UK 1% USD 535,140,000 468,247,500 PLEDGE OF SHARES OF ESSEL PROPACK, UK LIMITED AND EPGL CHINA ALONG WITH FIXED ASSETS OF EP UK AND CORPORATE GUARANTEE 2 ARISTA TUBES INC USA ICICI BANK LIMITED CANADA NIL USD 512,842,500 423,652,500 CHARGE ON MOVEABLE AND IMMOVABLE PROPERTIES OF THE BORROWER AND CORPORATE GUARANTEE 3 ESSEL PROPACK POLSKA ZOO POLAND BNP PARIBAS SINGAPORE NIL USD 356,760,000 252,419,328 -DO- 4 ESSEL PROPACK POLSKA ZOO RAIFFESEN BANK POLAND NIL PLN 199,405,000 56,108,514 -DO- ITA 2068 /MUM/2016 ESSEL PROPACK LIMITED 7 LOANS BACKED BY CORPORATE GUARANTEE ISSUED BY THE A SSESSEE SR.NO. NAME OF BORROWER AE NAME OF BANKS / FIS RATE CHARGED CURRENCY GUARANTEE AMOUNT (RS) LOAN AMOUNT AS ON 31.03.11 SECURITY PROVIDED 1 LAMITUBE TECHNOLOGIES LIMITED, MAURITIUS SBI MAURITIUS 1.5% USD 222,975,000 167,231,250 CORPORATE GUARANTEE 2 LAMITUBE TECHNOLOGIES LIMITED, MAURITIUS AXIS BANK HK 1.5% USD 535,140,000 535,140,000 ESCROW ON DIVIDEND RECEIPT OF LTL MAURITIUS AND CORPORATE GUARANTEE 3 LAMITUBE TECHNOLOGIES LIMITED, CYPRUS DBS SINGAPORE 1.5% USD 557,437,500 535,140,000 ESCROW ON DIVIDEND RECEIPT OF LTCL CYPRUS AND CORPORATE GUARANTEE GUARANTEES FOR OPERATING LEASE ARRANGEMENT SR.NO. NAME OF BORROWER AE NAME OF BANKS / FIS RATE CHARGED CURRENCY GUARANTEE AMOUNT (RS) LOAN AMOUNT AS ON 31.03.11 SECURITY PROVIDED 1 ESSEL PROPACK AMERICA LLC DE LAGE LANDE FINANCIAL SERVICES 1% USD 387,976,500 50,724,262 CHARGE ON MACHINE. CORPORATE GUARANTEE FOR ADDITIONAL COMFORT 2 ARISTA TUBES INC - DO - NIL USD 379,057,500 54,829,472 - DO - 3 ARISTA TUBES LTD, UK GE CAPITAL NIL USD 160,943,355 160,943,355 -DO- 3. CONSEQUENT UPON THE REFERENCE TO THE TRANSFER PRICI NG OFFICER (TPO) UNDER SECTION (U/S) 92CA BY AO WAS MADE FOR COMPUTA TION OF ARMS LENGTH PRICE (ALP). THE TPO AFTER CONSIDERING THE E XPLANATION SUGGESTED TRANSFER PRICING ADJUSTMENT IN RESPECT OF GUARANTEE COMMISSION (S) OF RS.3,83,02,220/-. ON RECEIPT OF ORDER OF TPO DATED 27.01.2015, THE AO INCLUDED THE ADJUSTMENT ON ACCOU NT OF CORPORATE GUARANTEE COMMISSION(S). THE AO ALSO MADE DISALLOW ANCE U/S 14A R.W.R. 8D OF RS.1,72,03,566/- AND DISALLOWANCE U/S 36(1)(III) OF RS.1,32,85,658/-, ADDITION ON ACCOUNT OF CENVAT CRE DIT IN VALUATION ITA 2068 /MUM/2016 ESSEL PROPACK LIMITED 8 OF CLOSING STOCK OF RS.92,00,204/- AND FURTHER DISA LLOWANCE U/S 36(1)(III) OF RS.25,01,460/- AND DENIED THE MARKED TO MARKET LOSS OF RS.3,91,97,106/-. THE ASSESSEE EXERCISED ITS OPTIO N AND FILED OBJECTION BEFORE THE DRP. THE DRP, AFTER CONSIDERING THE SUB MISSION OF ASSESSEE GRANTED PARTIAL RELIEF ON CHARGING CORPORA TE GUARANTEE COMMISSION. HOWEVER, ALL REMAINING ADDITIONS / DIS ALLOWANCES WERE CONFIRMED. ON RECEIPT OF DIRECTION OF LD. DRP, THE AO PASSED THE FINAL ASSESSMENT ORDER UNDER SECTION 143(3) RWS 144C(13) ON 28-01-2016. AGGRIEVED BY VARIOUS ADDITIONS / DISALLOWANCES, THE ASSESSEE HAS FILED THIS APPEAL BEFORE THE TRIBUNAL. 4. WE HAVE HEARD THE SUBMISSION OF LEARNED AUTHORISED REPRESENTATIVE (LD.AR) OF THE ASSESSEE AND THE LEARNED DEPARTMENTA L REPRESENTATIVE (LD. DR) FOR THE REVENUE AND PERUSED THE MATERIAL AVAILA BLE ON RECORD. AT THE OUTSET OF HEARING, THE LD.AR OF THE ASSESSEE SU BMITS THAT GROUNDS 2, 4 & 5 ARE COVERED BY THE DECISION OF TRIBUNAL FOR E ARLIER ASSESSMENT YEARS. GROUND 6 WILL NOT ARISE IN VIEW OF EARLIER YEARS ORDERS OF TRIBUNAL. 5. AGAINST GROUND 1, THE LD. AR OF THE ASSESSEE SUBMIT S THAT THE LOWER AUTHORITIES WERE NOT JUSTIFIED IN MAKING TRANSFER P RICING ADJUSTMENT ON ACCOUNT OF VARIOUS CORPORATE GUARANTEES. THE LD AR FOR THE ASSESSEE SUBMITS THAT LAMITUBES TECHNOLOGY LIMITED MAURITIUS (LLTM), WHICH ITA 2068 /MUM/2016 ESSEL PROPACK LIMITED 9 IS WHOLLY OWNED SUBSIDIARY OF THE ASSESSEE AND ITS ASSOCIATED ENTERPRISES (AE) AS OBTAINED THE BANK LOAN OF USD 4 ,260,000/- FROM STANDARD CHARTERED BANK, MAURITIUS. THE AMOUNT OUTS TANDING AS ON 31 ST MARCH 2011 WAS USD 4,153,531 ( 18.52 CRORE). THE BANK OF ASSESSEE, STANDARD CHARTERED BANK SCB), MUMBAI ISSU ED A STAND BY LETTER OF CREDIT (SBLC) ON BEHALF OF ASSESSEES AE. THE ASSESSEES BANK SCB, MUMBAI CHARGED FEE OF 1.25% OF THE GUARAN TEE AMOUNT TO THE ASSESSEE. THE ASSESSEE HAS INTERN RECOVER THE S AME FROM ITS AE, LTLM. SIMILARLY, ESSEL PROPACK AMERICA LLC USA (EP USA), WHICH IS ALSO A WHOLLY-OWNED SUBSIDIARY OF ASSESSEE ALSO OBTAINED A BANK LOAN OF USD 5000000 FROM BARCLAYS BANK PLC, MUMBAI. THE AMOUNT OUTSTANDING AS ON 31 ST MARCH 2011 IS USD 4850000 ( 21.63 CRORE). THE BANK OF ASSESSEE, ING VYASYA BANK, MUMBAI HAS I SSUED A SBLC ON BEHALF OF THE ASSESSEES AE. THE ASSESSEES BANK ING VYASYA BANK, MUMBAI HAS CHARGED A FEE OF 1.40% OF THE GUARANTEE AMOUNT TO THE ASSESSEE. THE ASSESSEE HAS INTERN RECOVER THE SAME FROM ITS AE, EP USA. THE LEARNED AR SUBMITTED THAT IN BOTH THE ABOV E CASES, THE TPO COMPUTED THE ALP AT 2% AND HELD THAT THE ASSESSEE O UGHT TO HAVE CHARGED THE SAME TO ITS AES. THE TPO SUGGESTED TP A DJUSTMENT OF 39,17,295/-. ON OBJECTION BEFORE THE DRP, DRP DIREC TED THE AO TO CONSIDER 0.5% IN ADDITION TO THE REIMBURSEMENT OF 1 .25% AND 1.40% ITA 2068 /MUM/2016 ESSEL PROPACK LIMITED 10 ALREADY RECEIVED BY THE ASSESSEE AS THE ALP AND DIR ECTED THE TPO TO COMPUTE THE TRANSFER PRICING ADJUSTMENT ACCORDINGLY . 6. WITH REGARD TO THE LOAN TAKEN BY AE BACKED BY TANGI BLE ASSETS, THE ASSESSEE HAS CHARGED GUARANTEE COMMISSION AT 1%, WH ILE IN OTHER CASES THE ASSESSEE HAS NOT CHARGED ANY GUARANTEE COMMISSI ON. THE TPO COMPUTED THE ALP AT 2% AND HELD THAT THE ASSESSEE O UGHT TO HAVE CHARGED THE SAME TO ITS AES. THE TPO SUGGESTED THE TP ADJUSTMENT OF RS. 2,09,85,206 /-. ON OBJECTIONS BEFORE THE DRP TH E ADJUSTMENTS SUGGESTED BY TPO WAS AFFIRMED. THE OTHER LOANS TAKE N BY AES, WHICH WERE BACKED BY CORPORATE GUARANTEE OF THE ASSESSEE THAT IS LTL MAURITIUS AND LTL CYPRUS, THE ASSESSEE CHARGED GUAR ANTEE COMMISSION OF 1.5%. THE TPO SUGGESTED ALP AT 2.5% B Y TAKING VIEW THAT THE ASSESSEE OUGHT TO HAVE CHARGED THE SAME TO ITS AES. THE TPO SUGGESTED TRANSFER PRICING ADJUSTMENT OF 96,63,002/-. THIS ADJUSTMENT WAS ALSO UPHELD BY DRP. 7. THE LEARNED AR OF THE ASSESSEE FURTHER SUBMITS THAT THE ASSESSEE ALSO ENTERED INTO OPERATING LEASE FOR TAKING MACHINERY/E QUIPMENT ON LEASE. THE RENTAL PAYMENT OF SUCH LEASE IS BACKED BY CORPO RATE GUARANTEE OF THE ASSESSEE. IN CASE OF DEFAULT BY AE, THE LESSOR WILL TERMINATE THE LEASE AGREEMENT, TAKE BACK THE MACHINERY OR EQUIPME NT ON LEASE AND CAN RECOVER THE RENTAL OUTSTANDING DUES FROM THE AS SESSEE. IN CASE OF ITA 2068 /MUM/2016 ESSEL PROPACK LIMITED 11 ESSEL PROPACK USA (EP USA), THE ASSESSEE HAS CHARGE D A GUARANTEE COMMISSION OF 1%, HOWEVER, IN OTHER CASES THE ASSES SEE HAS NOT CHARGED ANY GUARANTEE COMMISSION. THE TPO COMPUTED THE ALP AT 2% THAT TOO ON THE AGGREGATE FUTURE RENTAL PAYABLES, A LTHOUGH CURRENTLY NO DUE AND HAVE HELD THAT THE ASSESSEE OUGHT TO HAVE C HARGE THE SAME TO ITS EASE. THE TPO PROCEEDED IN COMPUTING THE TRANSF ER PRICING ADJUSTMENT OF 2,09,85,206/-. THE DRP UPHELD THE ADJUSTMENTS SUGGESTED BY TPO. 8. THE LEARNED AR OF THE ASSESSEE SUBMITS THAT GIVING OF CORPORATE GUARANTEE FOR LOANS OBTAINED BY THE AES IS NOT AN INTERNATIONAL TRANSACTION, AND, HENCE, PROVISIONS OF CHAPTER X OF INCOME TAX ACT WILL NOT APPLY. IT WAS SUBMITTED THAT THE ISSUE HAS BEEN DECIDED BY TRIBUNAL IN CASE OF MARICO LTD VERSUS ACIT (70 TAXMANN.COM 2 14) (MUM) AND BOMBAY DYEING & MANUFACTURING CO LTD VERSUS DCIT (8 7 TAXMAN.COM 213) (MUM) WHEREIN IT WAS HELD THAT GIVI NG OF CORPORATE GUARANTEE DOES NOT FALL WITHIN THE PURVIEW OF INTER NATIONAL TRANSACTION AS DEFINED UNDER SECTION 92B OF THE ACT AND ACCORDI NGLY PROVISION OF TRANSFER PRICING WILL NOT APPLY. 9. HOWEVER, IN WITHOUT PREJUDICE AND ALTERNATIVE SUBMI SSION, THE LEARNED AR FOR THE ASSESSEE SUBMITS THAT THE BENCHES OF TRI BUNAL IN A NUMBER OF OTHER DECISIONS, 0.5% OF GUARANTEE AMOUNT HAS BE EN HELD TO BE IN ITA 2068 /MUM/2016 ESSEL PROPACK LIMITED 12 ARMS LENGTH COMMISSION FOR GIVING CORPORATE GUARAN TEE. IN SUPPORT OF HIS SUBMISSION THE LEARNED AR OF THE ASSESSEE RELIE D UPON THE DECISION OF BOMBAY HIGH COURT IN CIT VERSUS EVEREST KENTO CY LINDERS LTD (378 ITR 57 BOMBAY) AND ZEE ENTERTAINMENT ENTERPRIS ES LTD VERSUS ACIT (81 TAXMANN.COM 379) (MUMBAI). THE LEARNED AR OF THE ASSESSEE FINALLY PRAYED THAT IN VIEW OF THE CONSIST ENT FINDING OF VARIOUS COURTS AND BENCHES OF TRIBUNAL THAT 0.5% OF GUARANT EE AMOUNT IS THE ALP FOR GUARANTEE COMMISSION, IN CASE WHERE THE ASS ESSEE HAS CHARGED GUARANTEE COMMISSION IN EXCESS OF 0.5% NO FURTHER T RANSFER PRICING ADJUSTMENT IS WARRANTED AS THE COMMISSION CHARGED B Y ASSESSEE IS IT ARMS LENGTH PRICE. IN CASE WHERE NO GUARANTEE COMM ISSION HAD BEEN CHARGED BY THE ASSESSEE, THE ADJUSTMENT MADE BY TPO AND UPHELD BY DRP TO 2-2.5% OF THE GUARANTEE AMOUNT IS NOT WARRAN TED AND THE ADJUSTMENT TO BE RESTRICTED TO 0.5% OF THE COMMISSI ON AMOUNT. WITH REGARD TO GUARANTEE GIVEN IN RELATION TO OPERATING LEASE TAKEN BY AES , THE LEARNED AR FOR THE ASSESSEE SUBMITS THE TRANSFE R PRICING ADJUSTMENT OUGHT TO BE COMPUTED ON THE BASIS OF LEASE RENTAL O UTSTANDING LEASE AND NOT THE AGGREGATE OF FUTURE LEASE RENTAL. BECAUSE, ON DEFAULT BY THE AE WOULD NOT EXCEED THE OUTSTANDING LEASE AS THE LESSO R HAS AN OPTION TO TAKE BACK THE MACHINE OR EQUIPMENT GIVEN ON LEASE. ACCORDINGLY THERE ITA 2068 /MUM/2016 ESSEL PROPACK LIMITED 13 WAS NO JUSTIFICATION FOR CHARGING GUARANTEE COMMISS ION ON THE AGGREGATE OF ALL THE FUTURE LEASE RENTALS. 10. ON THE OTHER HAND THE LEARNED AR FOR THE REVENUE SU PPORTED THE ORDER OF TPO AND DRP. THE LEARNED DR FOR THE REVENUE SUBM ITS THAT THE DRP HAS ALREADY VERY CONSIDERATE WHILE GRANTING PAR TIAL RELIEF TO THE ASSESSEE AND THAT THE ASSESSEE IS NOT ENTITLED FOR ANY FURTHER RELIEF. 11. WE HAVE CONSIDERED THE RIVAL SUBMISSION OF THE PART IES AND HAVE GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. WE HAVE AL SO DELIBERATED ON VARIOUS CASE LAWS RELIED BY LEARNED AR OF THE ASSES SEE. IN OUR VIEW THERE IS NO DISPUTE ABOUT THE VARIOUS TYPES OF CORP ORATE GUARANTEE(S) EXTENDED BY ASSESSEE TO VARIOUS BANKS ON BEHALF OF ITS AES. THE LIMITED DISPUTE IS WITH REGARD TO THE RATE OF THE GUARANTEE COMMISSIONS ONLY. THE TPO SUGGESTED ADJUSTMENT AT DIFFERENT RATE ON V ARIOUS GUARANTEE I.E 2 TO 2.5%. THE LD. DRP GRANTED RELIEF IN RESTRI CTING THE GUARANTEE COMMISSIONS WITH REGARD TO STAND BY LETTER OF CREDI T (SBLC), BY DIRECTING THE AO/TPO TO CONSIDER 0.5% IN ADDITIONS OF REIMBURSEMENT OF 1.25% AND 1.40% WHICH IS ALREADY RECEIVED BY THE ASSESSEE. REST OF THE ADJUSTMENTS SUGGESTED BY THE TPO IS AFFIRMED BY LD. DRP. THE LD. AR FOR THE ASSESSEE HAS NOT MADE ANY SPECIFIC SUBMI SSION AGAINST AFFIRMING THE COMMISSION @ 0.5% WITH REGARDS TO SBL C, WHICH WE AFFIRMED. ITA 2068 /MUM/2016 ESSEL PROPACK LIMITED 14 12. FOR REST OF THE GUARANTEE COMMISSIONS, BEFORE US, T HE LD AR FOR THE ASSESSEE MADE TWO FOLD SUBMISSIONS; I.E. IN FIRST S ET OF SUBMISSIONS THE LD AR SUBMITS THAT EXTENDING CORPORATE GUARANTEE IS NOT AN INTERNATIONAL TRANSACTION AND THAT THE PROVISIONS O F CHAPTER X IS NOT APPLICABLE AND BUTTRESS HIS SUBMISSIONS ON THE BA SIS OF DECISION OF TRIBUNAL IN CASE OF MARICO LTD VS ACIT (SUPRA) AND BOMBAY DYING AND MANUFACTURING CO LTD (SUPRA). THIS SUBMISSION O F THE LD. AR FOR THE ASSESSEE IS NOT ACCEPTABLE TO US, AS THERE IS N UMEROUS CONTRARY DECISION OF TRIBUNAL ON THE ISSUE. OTHERWISE, THIS FACT WAS ALSO FAIRLY ACCEPTED BY LD. AR FOR THE ASSESSEE DURING HIS SUBM ISSION. HOWEVER, WE FIND MERIT IN THE ALTERNATIVE SUBMISSIONS OF THE ASSESSEE THAT HONBLE BOMBAY HIGH COURT IN CIT VS EVEREST KANTO C YLINDERS LTD (SUPRA) HELD THAT 0.5% OF GUARANTEE COMMISSIONS IS AT ARMS LENGTH PRICE. THUS, WE ACCEPT THE ALTERNATIVE SUBMISSION O F THE LD. AR FOR THE ASSESSEE AND DIRECT THE AO/TPO TO RECOMPUTE THE ADJ USTMENT ON ACCOUNT OF OTHER GUARANTEE COMMISSIONS @ 0.5% IN AD DITIONS TO THE COMMISSIONS ALREADY CHARGED BY THE ASSESSEE. WE ALS O ACCEPT THE SUBMISSION OF LEARNED AR OF THE ASSESSEE THAT GUARA NTEE COMMISSION ON THE OPERATING LEASE MUST BE COMPUTED ON THE BASI S OF LEASE RENTAL OUTSTANDING ONLY, AND NOT ON THE AGGREGATE OF ALL F UTURE LEASE RENTALS. NEEDLESS TO DIRECT THAT BEFORE FRESH COMPUTATION TH E TPO /AO SHALL ITA 2068 /MUM/2016 ESSEL PROPACK LIMITED 15 GRANT A FAIR AND PROPER HEARING TO THE ASSESSEE. T HE ASSESSEE IS ALSO DIRECTED TO PROVIDE THE NECESSARY DETAILS TO THE TP O/AO. IN THE RESULT GROUND NO. 1 OF THE APPEAL IS PARTLY ALLOWED. 13. GROUND NO. 2 RELATES TO DISALLOWANCE UNDER SECTION 14A READ WITH RULE (RWR) 8D. THE LEARNED AR OF THE ASSESSEE SUBMITS TH AT THIS GROUND OF APPEAL IS COVERED IN FAVOUR OF ASSESSEE IN ASSESSEE S OWN CASE FOR ASSESSMENT YEAR (AY) 2007-08 IN ITA NO. 1397/M/2017 , FOR A AY 2008-09 IN ITA NO 4116/M/2013. THE LEARNED AR OF TH E ASSESSEE FURTHER SUBMITS THAT DURING THE RELEVANT. THE ASSES SEE EARNED DIVIDEND INCOME ON FOREIGN SUBSIDIARIES OF 16.77 CRORE WHICH HAS BEEN OFFERED TO TAX, WHICH CAN BE SEEN FROM THE COMPUTATION OF T OTAL INCOME AND IN THE RETURN OF INCOME. THUS, THE ASSESSEE HAS NOT EA RNED ANY EXEMPT INCOME I.E. NO DIVIDEND INCOME HAS BEEN AND FROM TH E INDIAN SUBSIDIARY. ACCORDINGLY THE PROVISIONS OF SECTION 1 4A READ WITH RULE 8D IS NOT APPLICABLE IN ABSENCE OF ANY EXEMPT INCOM E. THE DIVIDEND INCOME EARNED FROM FOREIGN SUBSIDIARY HAS ALREADY B EEN OFFERED TO TAX. ON SIMILAR ISSUE THE TRIBUNAL IN ASSESSEES OWN CAS E FOR ASSESSMENT YEAR 2008-09, IN 2009-10 AND AGAIN IN AY 2010-11 DE LETED THE SIMILAR ADDITION UNDER SECTION 14A. 14. ON THE OTHER HAND THE LEARNED DR FOR THE REVENUE SU PPORTED THE ORDER OF LOWER AUTHORITIES. THE LD DR ALSO FAILED TO CONT ROVERT THE CONTENTION ITA 2068 /MUM/2016 ESSEL PROPACK LIMITED 16 OF THE LD AR FOR THE ASSESSEE THAT DURING THE RELEV ANT PERIOD THE ASSESSEE HAS NOT EARNED ANY EXEMPT INCOME. 15. WE HAVE CONSIDERED THE RIVAL SUBMISSION OF THE PART IES AND PERUSED THE ORDERS OF LOWER AUTHORITIES. WE HAVE NOTED THAT THE ASSESSING OFFICER MADE ADDITION/DISALLOWANCE UNDER SECTION 14A BY TAK ING VIEW THAT THE ASSESSEE HAS MADE HUGE INVESTMENT IN EQUITY/PREFERE NCE SHARES. THE ASSESSING OFFICER NOWHERE IDENTIFIED/RECORDED THAT ASSESSEE EARNED ANY EXEMPT INCOME DURING THE RELEVANT FINANCIAL YEAR. F URTHER, WE HAVE NOTED THAT THE DIVIDEND INCOME EARNED BY THE ASSESS EE FROM FOREIGN SUBSIDIARIES HAS BEEN OFFERED TO TAX. IT IS NOW SET TLED LAW THAT IN ABSENCE OF ANY EXEMPT INCOME NO DISALLOWANCE UNDER SECTION 14A IS ATTRACTED. SIMILAR VIEW WAS TAKEN BY TRIBUNAL IN AS SESSEES OWN CASE FOR ASSESSMENT YEAR 2008-09 IN ITA NO. 4116/MUM/201 3 DATED 11 TH SEPTEMBER 2017, IN APPEAL FOR AY 2009-10 IN ITA NO. 5312/MUM/2015 DATED 8 TH JANUARY 2018 AND AGAIN FOR 2007-08 IN ITA NO. 1397/MUMBAI/2017 DATED 28 TH SEPTEMBER 2018. CONSIDERING THE AFORESAID FACTUAL AND LEGAL DISCUSSION, WE DIRECT T HE ASSESSING OFFICER TO DELETE THE DISALLOWANCE UNDER SECTION 14A. IN THE R ESULT THIS GROUND OF APPEAL IS ALLOWED. 16. GROUND NO. 3 RELATES TO DISALLOWANCE OF INTEREST UN DER SECTION 36 (1)(III) OF RS. 1.32 CRORE. THE LEARNED AR OF THE A SSESSEE SUBMITS THAT ITA 2068 /MUM/2016 ESSEL PROPACK LIMITED 17 DRP WHILE CONFIRMING THE DISALLOWANCE UNDER SECTION 14A, FURTHER HELD THAT IN CASE, INTEREST OF 1.32 CRORE, COMPUTED BY AO AS PER RULE 8D2(II) WAS NOT DISALLOWABLE IS DISALLOWABLE UNDER SECTION 36(1)(III). THE LEARNED AR OF THE ASSESSEE SUBMITS THAT ONCE DI SALLOWANCE HAS BEEN PROPOSED UNDER SECTION 14A OF THE ACT, THERE I S NO QUESTION OF STATING THAT WITHOUT PREJUDICE, THE SAME IS DISALLO WABLE UNDER SECTION 36(1)(III) OF THE ACT. THE LEARNED AR FURTHER SUBMI TS THAT THERE IS NO QUESTION OF APPLICABILITY OF DISALLOWANCE OF INTERE ST EXPENDITURE AS THE RESERVE AND SURPLUS OF THE ASSESSEE ARE IN FAR EXCE SS OF THE INVESTMENT MADE DURING THE YEAR. 17. IN HIS WITHOUT PREJUDICE SUBMISSION THE LD AR FOR T HE ASSESSEE SUBMITS THAT SINCE THE OWN FUND OF THE ASSESSEE IS MORE THA N THE INVESTMENT MADE BY THE ASSESSEE, THEREFORE, THERE IS NO QUESTI ON OF DISALLOWANCE UNDER SECTION 36(1)(III). THE LEARNED AR FURTHER SU BMITS THAT AS ON 31 ST MARCH 2011 THE ASSESSEE HAS SHARE CAPITAL OF 31.31 CRORE AND THE RESERVE AND SURPLUS OF RS 612.88 CRORE. THUS, TOTAL INTEREST FREE FUNDS I.E. SURPLUS WERE MORE THAN RS. 644 CRORE. THE ASSE SSEE HAS MADE TOTAL INVESTMENT IN FOREIGN SUBSIDIARY OF 489 CRORE AND IN INDIAN SUBSIDIARY OF 78 CRORE ONLY. IN SUPPORT OF HIS SUBMISSION THE LE ARNED AR OF THE ASSESSEE RELIED UPON THE DECISION OF BOMB AY HIGH COURT IN CIT VERSUS RELIANCE UTILITY & POWER LTD (313 ITR 34 0 BOM), CIT ITA 2068 /MUM/2016 ESSEL PROPACK LIMITED 18 VERSUS RELIANCE INDUSTRY LTD (410 ITR 466 SC) AND HDFC BANK VERSUS DCIT (383 ITR 529 BOM).S 18. ON THE OTHER HAND THE LEARNED DR FOR THE REVENUE SU PPORTED THE ORDER OF LOWER AUTHORITIES. 19. WE HAVE CONSIDERED THE RIVAL CONTENTION OF THE PART IES AND HAVE GONE THROUGH THE ORDERS OF LOWER AUTHORITIES. WE HAVE AL SO DELIBERATED ON THE VARIOUS CASE LAWS RELIED BY LEARNED AR OF THE A SSESSEE. THE LD. DRP WHILE CONFIRMING THE INTEREST DISALLOWANCE UNDE R SECTION 14A [RULE 8D (2)(II)] HELD THAT IN ANY CASE THE INTERES T OF RS.1.32 CRORE COMPUTED BY AO IS DISALLOWABLE UNDER SECTION 36(1)( III). BEFORE US THE LD AR FOR THE ASSESSEE VEHEMENTLY SUBMITTED THAT TH E RESERVE AND SURPLUS ARE IN FAR EXCESS THAN THE INVESTMENT MADE BY THE ASSESSEE AND HENCE, NO INTEREST DISALLOWANCE EVEN UNDER SECTION 36(1)(III) IS WARRANTED IN VIEW OF THE DECISION OF BOMBAY HIGH CO URT IN RELIANCE UTILITIES AND POWER LTD (SUPRA). THE LD AR FOR TH E ASSESSEE HAD INVITED OUR ATTENTION ON THE BALANCE SHEET OF THE A SSESSEE AS ON 31.03.2010 AND ON 31.03.2011, WHICH IS AS UNDER ; SR NO. PARTICULARS AS ON 31.03.2011 ON 31.03.2010 1 SHARE CAPITAL 31,31,30,610/- 31,31,30,610/- 2 RESERVE &SURPLUS 612,88,04,018/- 579,71,79,989/- TOTAL 644,19,34,628/- 611,03,10,599/- INVESTMENTS 1 FOREIGN SUBSIDIARY 489,86,05,660/- 495,41,55,660/- ITA 2068 /MUM/2016 ESSEL PROPACK LIMITED 19 2 INDIAN SUBSIDIARY 78,73,31,638/- 77,98,31,638/- 3 TOTAL 568,59,37,298/- 573,39,87,298/- 20. CONSIDERING THE AFORESAID FACTUAL POSITION THAT THAT THE RESERVE AND SURPLUS FUNDS WITH THE ASSESSEE ARE IN FAR EXCESS T HAN THE INVESTMENT MADE FOR SUBSIDIARIES. THEREFORE, RESPECTFULLY FOLLOWIN G JUDGMENT OF HONBLE BOMBAY HIGH COURT IN THE CASE OF RELIANCE UTILITIES & POWER LTD. ( SUPRA ), IT WOULD HAVE TO BE PRESUMED THAT THE INVESTMENT MADE BY THE ASSESSEE WOULD BE OUT OF THE INTEREST-FREE FUNDS AV AILABLE WITH THE ASSESSEE. HENCE, WE DIRECT THE AO EVEN TO DELETE TH E DISALLOWANCE UNDER SECTION 36(1)(III). IN THE RESULT THIS GROUNDS OF A PPEAL IS ALLOWED. 21. GROUND NO. 4 RELATES TO ADDITION ON ACCOUNT OF CEN VAT CREDIT IN VALUATION OF CLOSING STOCK. THE LEARNED AR OF THE A SSESSEE SUBMITS THAT THE ASSESSEE FOLLOWS EXCLUSIVE METHOD OF ACCOUNTIN G WHEREIN PURCHASE, SALE, STOCK ARE RECORDED EXCLUSIVE OF INDIRECT TAXE S. HOWEVER, THE INCOME TAX ACT REQUIRES THE ASSESSEE TO FOLLOW INCLUSIVE M ETHOD OF ACCOUNTING. THE ASSESSEE SUBMITS THAT WHETHER ONE FOLLOWS INCLU SIVE METHOD OF ACCOUNTING OR EXCLUSIVE METHOD OF ACCOUNTING, IT IS TAX NEUTRAL AND THERE WOULD BE NO ADDITION TO THE TOTAL INCOME. THE ASSES SING OFFICER HOWEVER MADE ADHOCK ADJUSTMENT ONLY WITH RESPECT TO CLOSING STOCK OF THE ASSESSEE AND MADE ADDITION TO THE TOTAL INCOME OF 92,00,204/-. THE ACTION OF ASSESSING OFFICER WAS CONFIRMED BY DRP. T HE LEARNED AR OF THE ASSESSEE FURTHER SUBMITS THAT SIMILAR ADDITION WAS MADE AGAINST ASSESSEE ITA 2068 /MUM/2016 ESSEL PROPACK LIMITED 20 FOR ASSESSMENT YEAR 2007-08 AND IN AY 2008-09, ON A PPEAL BEFORE TRIBUNAL THE ADDITIONS WERE DELETED BY HOLDING THAT WHETHER THE ASSESSEE FOLLOWS INCLUSIVE METHOD OF ACCOUNTING OR EXCLUSIVE , THE SAME IS TAX NEUTRAL AND THEREFORE NO ADDITION TO THE TOTAL INCO ME SHOULD BE MADE IN THAT COUNT. 22. ON THE OTHER HAND THE LEARNED DR FOR THE REVENUE SU PPORTED THE ORDER OF LOWER AUTHORITIES . 23. WE HAVE CONSIDERED THE SUBMISSION OF BOTH THE PARTI ES AND HAVE GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. WE HAVE NO TED THAT SIMILAR ADDITION WAS MADE IN ASSESSMENT YEAR 2007-08 AND AG AIN IN 2008-09. THE APPEAL OF AY 2008-09 IN ITA NO. 4116/MUM/2013 W AS ADJUDICATED FIRST VIDE ORDER DATED 11 TH SEPTEMBER 2017, WHEREIN SIMILAR ADDITION WAS DELETED. FOLLOWING THE ORDER FOR AY 20 08-09, THE IDENTICAL ADDITION IN APPEAL FOR AY 2007-08 WERE AL SO DELETED IN ITA NO. 1397/MUM/2017 IN ORDER DATED 28 SEPTEMBER 2018 BY PASSING THE FOLLOWING ORDER. 11. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIALS ON RECORD. SIMILAR ISSUE AROSE BEFORE THE ITAT E BEN CH, MUMBAI IN ASSESSEES OWN CASE FOR AY 2008-09 IN ITA NO. 4116/MUM/2013. AT PA RA 9 OF THE SAID ORDER, THE TRIBUNAL HELD AS UNDER: 9. WE HEARD THE RIVAL SUBM ISSIONS AND GONE THROUGH THE ORDERS OF THE TAX AUTHORITIES BELOW. WE NOTED THAT PROVISIONS OF SECTION 145A WERE EFFECTIVE FROM 01.04.1999 AND APPLIES FROM A.Y . 1999-200 ONWARDS. THE SCOPE AND EFFECT OF SECTION 145A HAVE BEEN ELABORAT ED BY THE DEPARTMENTAL CIRCULAR NO. 772 DATED 23RD DECEMBER, 1998 AS UNDER : - ITA 2068 /MUM/2016 ESSEL PROPACK LIMITED 21 52.1 METHOD OF ACCOUNTING IN CERTAIN CASES:-52.1 T HE ISSUE RELATING TO WHETHER THE VALUE OF THE CLOSING STOCK OF THE INPUT S, WORK-INPROGRESS AND FINISHED GOODS MUST NECESSARILY INCLUDE THE ELEMENT FOR WHICH MODVAT CREDIT IS AVAILABLE, HAS BEEN A MATTER OF CONSIDERABLE LIT IGATION OVER THE YEARS. 52.2 CONSISTENT WITH THE OTHER PROVISIONS OF THE F INANCE (NO.2) ACT, 1998, WITH A VIEW TO PUT AN END TO THIS POINT OF LITIGATI ON AND IN ORDER TO ENSURE THAT THE VALUE OF OPENING AND CLOSING STOCK REFLECT THE CORRECT VALUE, A NEW SECTION 145A IS INSERTED. THE SECTION PROVIDES THAT THE VAL UATION OF PURCHASE, SALE AND INVENTORY SHALL BE MADE IN ACCORDANCE WITH THE METH OD OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE AND SUCH VALUATI ON SHALL BE FURTHER ADJUSTED TO INCLUDE THE AMOUNT OF ANY TAX, DUTY, CE SS OR FEE (BY WHATEVER NAME CALLED), ACTUALLY PAID OR INCURRED BY THE ASSE SSEE TO BRING THE GOODS TO THE PLACE OF ITS LOCATION AND CONDITION AS ON THE D ATE OF VALUATION. FROM THE SAID CIRCULAR IT IS APPARENT THAT THE MAIN OBJECT TO INTRODUCE SECTION 145A IS TO ENSURE THAT VALUE OF OPENING AND CLOSING STOCK REFLECT THE CORRECT VALUE SO THAT THERE IS NO UNNECESSARY LITIGATION. THE ASS ESSEE IN THE INSTANT CASE IS FOLLOWING EXCLUSIVE METHOD. IF THE AO HAD TO INCREA SE THE VALUE OF CLOSING STOCK BY TAKING INTO CONSIDERATION THE CENVAT CREDIT THEN HE HAS TO TAKE INTO CONSIDERATION ALL PURCHASES ALSO TO INCLUDE THE CENVAT CREDIT. HA D ONCE THAT INCLUDED IN THE PURCHASES ULTIMATELY THERE IS NO EFFECT ON THE PROF IT AND UNDERSTATEMENT OF THE PROFIT WOULD NOT ARISE. SIMILAR VIEW HAS BEEN TAKEN BY THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. INDO NIPPON CHEMICALS CO. LT D. 261 ITR 275. SIMILAR VIEW WAS ALSO TAKEN BY THE HON'BLE CALCUTTA HIGH COURT IN TH E CASE OF CIT VS. BERGER PAINTS INDIA LTD. 264 ITR 503. THE HON'BLE BOMBAY HIGH COU RT IN THE CASE OF CIT VS. MAHALAXMI GLASS WORKS (P) LTD. 318 ITR 116 FOLLOWIN G THE HON'BLE DELHI HIGH COURT DECISION IN THE CASE OF MAHAVIR ALLUMINIMUM L IMITED 297 ITR 77 HELD THAT TO GIVE EFFECT TO SECTION 145A IF THERE IS A CHANGE IN THE CLOSING STOCK AT THE END OF THE YEAR, THERE MUST NECESSARILY BE A CORRESPONDING ADJUSTMENT MADE IN THE OPENING STOCK OF THAT YEAR. THIS DOES NOT AMOUNT TO GIVING TOTAL BENEFIT TO THE ASSESSEE. IT WOULD BE NECESSARY TO COMPUTE THE TRUE AND CORRECT PROFIT FOR THE PURPOSE OF THE ASSESSMENT. FACTS BEING IDENTICAL, WE FOLLOW THE ABOVE ORDER OF THE COORDINATE BENCH AND ALLOW THE 2ND GROUND OF APPEAL. ITA 2068 /MUM/2016 ESSEL PROPACK LIMITED 22 24. CONSIDERING THE SIMILARITY OF FACT AND THE DECISION OF COORDINATE BENCH OF TRIBUNAL ON IDENTICAL ISSUE AND RESPECTFULLY FOL LOWING THE SAME THIS GROUND OF APPEAL IS ALLOWED. NO CONTRARY FACT OR LA W IS BROUGHT TO OUR NOTICE TO TAKE OTHER VIEW. 25. GROUND NO. 4 RELATES TO DISALLOWANCE OF INTEREST OF RS. 2501460/- UNDER SECTION 36(1)(III).THE AR OF THE ASSESSEE SUB MITS THAT ASSESSEE INCURRED EXPENDITURE ON BEHALF OF ITS SUBSIDIARY FR OM TIME TO TIME. THE TOTAL RECOVERABLE FROM THE AES AS ON 31 MARCH 2011 WAS 3,85,02,057/-. THE AO TREATED THE SAME AS INTEREST FREE ADVANCES AND ATTRIBUTED INTEREST OF RS. 2501460/- AND DISALLOWED THE SAME UNDER SECTION 36(1)(III) . ON OBJECTION BEFORE THE DRP, T HE ACTION OF ASSESSING OFFICER WAS CONFIRMED. THE LEARNED AR OF THE ASSESS EE SUBMITS THAT ON SIMILAR ISSUE THE COORDINATE BENCH OF TRIBUNAL IN A SSESSEES OWN CASE FOR AY 2009-10 AND AGAIN IN AY 2010-11DELETED THE S IMILAR DISALLOWANCE BY TAKING VIEW THAT NO LOAN HAS BEEN A DVANCED BY THE ASSESSEE TO ITS AES AND, THEREFORE, THERE IS NO QUE STION OF ANY DISALLOWANCE UNDER SECTION 36(1)(III) OF THE ACT. T HE FACTS FOR THE YEAR UNDER CONSIDERATION ARE IDENTICAL. THUS, THIS GROUN D OF APPEAL IS ALSO COVERED IN FAVOUR OF ASSESSEE AND AGAINST THE REVEN UE. ITA 2068 /MUM/2016 ESSEL PROPACK LIMITED 23 26. ON THE CONTRARY THE LEARNED DR SUPPORTED THE ORDER OF LOWER AUTHORITIES. THE LD. DR FOR THE REVENUE HAS NOT CON TROVERTED THE FACTUAL POSITION EXPLAINED BY LD AR FOR THE ASSESSEE. 27. WE HAVE CONSIDERED THE SUBMISSION ABOUT THE PARTIES AND PERUSED THE ORDER OF LOWER AUTHORITIES. WE FOUND THAT THE FACTU AL MATRIX OF THE ISSUE UNDER CONSIDERATION IS IDENTICAL TO THE GROUNDS OF APPEAL RAISED IN ASSESSEES OWN CASE FOR AY 2009- 10 IN ITA NO. 5312 /MUMBAI/2015 DATED 8 TH JANUARY 2018, WHEREIN SIMILAR DISALLOWANCE WAS DEL ETED BY TRIBUNAL BY PASSING THE FOLLOWING ORDER - 8. WITH REGARD TO DISALLOWANCE OF INTEREST EXPLAIN ED U/S.36(1)(III), THE CIT(A) HAS RECORDED THE FOLLOWING FINDINGS:- 11.1 CIT(A)'S ORDER FOR A.Y. 2008-09 VIDE ORDER DT. 22.2.2013, HAS DELETED THE ADDITION OF THE A.O. SINCE A.Y. 2003-04 ONWARDS TIL L A.Y. 2007-08 ON IDENTICAL ISSUE: SUCH ORDER OF CIT(A) HAS ALSO BEEN ACCEPTED BY THE DEPARTMENT. THEREFORE, GROUND OF APPEAL NO.4 IS ALLOWED. SINCE THE ISSUE IS THE SAME FOR THIS ASSESSMENT YEAR . 9. IT IS CLEAR FROM THE FINDINGS RECORDED BY CIT(A) THAT SIMILAR DISALLOWANCE MADE BY THE AO WAS DELETED BY CIT(A) SINCE A.Y.2003-04 TO 2 008-09 ON IDENTICAL ISSUES, HOWEVER, DEPARTMENT DID NOT FILE ANY APPEAL AND ACC EPTED ASSESSEES CONTENTION. 10. WE HAVE CONSIDERED RIVAL CONTENTIONS AND FOUND FROM RECORD THAT THE ASSESSES HAS INCURRED EXPENSES ON BEHALF OF CERTAIN FOREIGN SUBSIDIARIES AND INDIAN SUBSIDIARY AND SHOWN THEM UNDER THE HEAD ADVANCES RECOVERABLE. THE ASSESSEE HAS NOT MADE ANY NON BUSINESS ADVANCE TO THE THESE COMPANIES, BU T THESE AMOUNT REPRESENTS VARIOUS DEBITS IN THE NATURE OF SALE OF SPARES, ROY ALTY RECEIVABLE, SERVICE CHARGES AND THE EXPENSES INCURRED ON THEIR BEHALF SUCH AS TRAVE LING EXPENSES, ESTABLISHMENT EXPENSES, FINANCIAL GUARANTEES, COMMUNICATIONS EXPE NSES, ETC. THE ASSESSEE DOES NOT HAVE SYSTEM OF CHARGING INTEREST ON SUCH DEBITS OF EXPENSES INCURRED ON THEIR BEHALF. SUCH ADVANCES DID NOT ATTRACT ANY ADJUSTMEN T IN TRANSFER PRICING ORDER ALSO. HOWEVER, THE LD. AO CONSIDERED THESE DEBIT BALANCES AS ADVANCES WITHOUT INTEREST ITA 2068 /MUM/2016 ESSEL PROPACK LIMITED 24 AND DISALLOWED RS. 1,07,54,398/- OUT OF INTEREST U/ S 36(1)(III). WE DO NOT FIND ANY MERIT FOR THE DISALLOWANCE SO MADE BY THE AO. 28. WE HAVE FURTHER NOTED THAT THE COORDINATE BENCH BY FOLLOWING THE ORDER FOR AY 2009-10, ALLOWED SIMILAR RELIEF IN ITA NO. 6 42/MUM/2016 DATED 12.04.2018. AS THE LEARNED DR FOR THE REVENUE HAS N OT DISPUTED THE FACTUAL MATRIX RELATED TO THIS GROUND OF APPEAL, TH EREFORE RESPECTFULLY FOLLOWING THE DECISION OF TRIBUNAL FOR EARLIER YEAR S ON IDENTICAL SET OF FACTS, THIS GROUND OF APPEAL IS ALSO ALLOWED. NO CO NTRARY FACT OR LAW IS BROUGHT TO OUR NOTICE TO TAKE OTHER VIEW. 29. GROUND NO. 5 RELATES TO SET OFF OF BROUGHT FORW ARD MARKET TO MARKET LOSS AGAINST MARKET TO MARKET GAIN. THE LEARNED AR OF TH E ASSESSEE SUBMITS THAT ASSESSING OFFICER IN AY 2008-09 AND IN AY 201- 110 TREATED MARKET TO MARKET LOSS AS IS SPECULATIVE LOSS. AGGRIEVED BY THE ACTION OF ASSESSING OFFICER THE ASSESSEE FILED APPEAL BEFORE TRIBUNAL, WHEREIN MARKET TO MARKET LOSS OF EARLIER YEARS WAS TREATED AS BUSINESS LOSS IN AY 2008-09 AND AY 2009-10 IN ITA NO.5312/MUM/2015 AND 581/MUM/2016 RESPECTIVELY, IN THE CIRCUMSTANCES TH E PRESENT GROUNDS OF APPEAL HAVE BECOME INFRUCTUOUS. CONSIDERING THE FACT THAT THE LEARNED AR OF THE ASSESSEE HAS FAIRLY CONCEDED THAT THIS GR OUND OF APPEAL HAS BECOME INFRUCTUOUS, THEREFORE, THIS GROUND OF APPEA L IS DISMISSED BEING INFRUCTUOUS. ITA 2068 /MUM/2016 ESSEL PROPACK LIMITED 25 30. IN THE RESULT APPEAL OF THE ASSESSEE IS PARTLY ALLOWED ORDER PRONOUNCED IN THE OPEN COURT ON 27-05-2020. SD/- SD/- (SHAMIM YAHYA) (PAWAN SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DT : 27 MAY 2020 SK/- COPY TO : 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR /TRUE COPY/ BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI