ASST CIT 5(2)(1), MUMBAI V. KEC INTERNATIONAL LTD, MUMBAI

ITA 5611/MUM/2015

• Counselvise Citation: [2019] 116 COUNSELVISE.COM (IT) 9099 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 6 month(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-07-2019
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: K
• Assessment Year: 2010-2011
• Appeal Filed On: 11-12-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SAURABH DESHPANDE
• Keywords: Depreciation; Transfer pricing; International transaction; Retrospective amendment; Wholly owned subsidiary; Bad and doubtful debts; Scheme of amalgamation; Revised return
• Section: 43B; 115JB; 37(1); 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL K , BENCH MUMBAI BEFORE SHRI C.N. PRASAD , JM & SHRI M.BALAGANESH, AM ITA NO. 5611 /MUM/201 5 ( ASSESSMENT YEAR : 2010 - 11 ) ASST. COMMISSIONER OF INCOME TAX 5(2)(1), ROOM NO.571, 5 TH FLOOR AAYAKAR BHAVAN M.K.ROAD, MUMBAI 400 020 VS. M/S. KEC INTERNATIONAL LTD. 463, CEAT MAHAL DR. ANNIE BESANT ROAD WORLI, MUMBAI 400 030 PAN/GIR NO. AACCK5599H (APPELLANT ) .. (RESPONDENT ) REVENUE BY SHRI SAURABH DESHPANDE ASSESSEE BY SHRI ANUJ KISNADWALA DATE OF HEARI NG 12 / 04 /2019 DATE OF PRONOUNCEMENT 10 / 07 /2019 / O R D E R PER M. BALAGANESH (A.M) : THIS APPEAL IN ITA NO. 5611/MUM/2015 FOR A.Y. 2010 - 11 ARISES OUT OF THE ORDER BY THE LD. COMMISSIONER OF INCOME TAX (APPEALS) - 56, MUMBAI IN APPEA L NO. CIT(A) - 56/T RF /2014 - 15/162 - F DATED 30/09/2015 (LD. CIT(A) IN SHORT) AGAINST THE ORDER OF ASSESSMENT PASSED U/S.143(3) R.W.S. 144C(13) OF THE IT ACT, 1961 OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS ACT) DATED 29/04/2014 BY THE LD. ADDL. COM MISSIONER OF INCOME TAX, RANGE - 8(2), MUMBAI (HEREINAFTER REFERRED TO AS LD. AO). ITA NO. 5611/MUM/2015 M/S. KEC INTERNATIONAL LTD., 2 2. THE GROUND NO. 1(A) TO BE DECIDED IN THIS APPEAL IS AS TO WHETHER THE LD. CIT(A) WAS JUSTIFIED IN DECIDING THAT THE PERFORMANCE GUARANTEE PROVIDED BY THE ASSESSEE TO A THI RD PARTY WAS NOT AN INTERNATIONAL TRANSACTION IN THE FACTS AND CIRCUMSTANCES OF THE CASE. THE INTER CONNECTED ISSUE INVOLVED THEREIN IS AS TO WHETHER THE LD TPO WAS JUSTIFIED IN MAKING AN ADJUSTMENT TO ARMS LENGTH PRICE (ALP) ON THE SAID ISSUANCE OF PERF ORMANCE GUARANTEE IN THE FACTS AND CIRCUMSTANCES OF THE CASE. 3. THE BRIEF FACTS OF THIS ISSUE ARE THAT THE ASSESSEE FILED ITS ORIGINAL RETURN OF INCOME FOR THE A.Y.2010 - 11 ON 15/10/2010 DECLARING TOTAL INCOME OF RS. NIL UNDER NORMAL PROVISIONS OF THE AC T AFTER CLAIMING THE SET OFF OF BROUGHT FORWARD LOSSES TO THE TUNE OF RS.191,37,75,081/ - AND BOOK PROFIT U/S.115JB OF THE ACT AT RS.273,94,82,293/ - . LATER THE ASSESSEE FILED REVISED RETURN OF INCOME ON 31/03/2012 DECLARING TOTAL INCOME AT RS. NIL UNDER NOR MAL PROVISIONS OF THE ACT AFTER CLAIMING SET OFF OF BROUGHT FORWARD LOSSES TO THE TUNE OF RS.196,30,61,287/ - AND BOOK PROFIT U/S.115 JB OF RS.273,94,82,293/ - AND COMPUTED THE TAX LIABILITY THEREON. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF D ESIGN, F ABRICATION, GALVANISING AND TESTING OF T RANSMISSION L INE TOWERS AND TELECOM TOWERS; ALL TY PES OF MASTS; E RECTION OF COMPLETE T RANSMISSION L INES & T ELECOM T OWERS, SUPPLY AND ERECTION OF SUB - STATION STRUCTURES AND O VERHEAD EQUIPMENT FOR RAILWAY ELEC TRIFICATION AND MANAGING INFRASTRUCTURE SITES FOR TELECOMMUNICATION SERVICES. DURING THE YEAR , THE ASSESSEE COMPANY ACQUIRED BUSINESS OF MANUFACTURING AND TRADING OF POWER CABLES, OPTICAL FIB RE CABLES, JELLY FILLED TELEPHONE CABLES, NETWORKING / DATACOM CA BLES, HOUSE WIRING CABLES AND TURNKEY CONTRACTORS. 3.1. KEC GLOBAL FZ LLC (HEREINAFTER REFERRED TO AS KEC GLOBAL OR AE) IS A WHOLLY OWNED SUBSIDIARY OF THE ASSESSEE COMPANY. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE PROVIDED GUARANTEES ON BEHAL F OF KEC GLOBAL TO CUSTOMERS OF KEC GLOBAL. THE DETAILS OF GUARANTEES PROVIDED BY ITA NO. 5611/MUM/2015 M/S. KEC INTERNATIONAL LTD., 3 THE ASSESSEE WERE FILED BY THE ASSESSEE BEFORE THE LD. TPO VIDE LETTER DATED 22/11/2013. THE DETAILS ARE AS UNDER: - I) PERFORMANCE GUARANTEE (INDEMNITY AGAINST L OSS ) PROVIDED TO BAHWAN ENGINEERING COMPANY LLC ON BEHALF OF AE DURING THE YEAR UNDER CONSIDERATION, BAHWAN ENGINEERING COMPANY LLC (BEC) HAD ENTERED INTO SUB - CONTRACT AGREEMENT WITH KEC GLOBAL (AE) TO CONSTRUCT 132/33 KV GRID STATION & ASSOCIATED TRANSMISSION SYSTE M IN Y 1 T 1 AREA, MUSCAT GOVERNORATE. AS A PRE - CONDITION FOR EXECUTION OF THE S UB - CONTRACT, BEC HAS REQUESTED KEC GLOBAL TO PROVIDE THE ASSESSEES INDEMNITY AGAINST ALL LIABILITIES, CLAIMS, DAMAGES OR COSTS WHICH BAHWAN ENGINEERING COMPANY LLC MAY BE SUBJECT ED TO , WHILE KEC GLOBAL (AE) IS PERFORMING THE SUB - CONTRACT WORKS. ACCORDINGLY, THE ASSESSEE HAD EXECUTED THE DEED OF INDEMNITY DATED 28/11/2009 IN FAVOUR OF BAHWAN ENGINEERING COMPANY LLC PROVIDING AN INDEMNITY AGAINST ALL LIABILITIES, CLAIMS, DEMANDS, DA MAGES OR COSTS CAUSED BY KEC GLOBALS (AES) FAILURE TO PERFORM IN ALL ITS DUTIES AND APPLICATIONS AMOUNTING TO OMANI RIYAL RS.1,69,84,500/ - (INR 198,17,46,365). 3.2. IN OTHER WORDS, THE ASSESSEE HAD GIVEN PERFORMANCE GUARANTEE TO BAHWAN ENGINEERING COMPA NY LLC ON BEHALF OF ITS AE GUARANTEEING THE PERFORMANCE OF DUTIES AND APPLICATIONS THAT WOULD BE DONE BY ITS AE AND IN THE EVENT OF ANY SUCH FAILURE OF PERFORMANCE BY THE AE, THE ASSESSEE WOULD INDEMNIFY BAHWAN ENGINEERING COMPANY LLC AGAINST ALL LIABILITI ES, CLAIMS, DEMANDS, DAMAGES ETC., SUBSEQUENT TO THE DEED OF INDEMNITY, THE ASSESSEE HAD ALSO ENTERED INTO AGREEMENT DATED 28/11/2009 WITH ITS AE STATING THAT IN THE EVENT OF INDEMNITY PROVISIONS BEING INVOKED BY BAHWAN ENGINEERING COMPANY LLC ON FAILURE O F PERFORMANCE BY THE AE, THEN THE ENTIRE SUB - CONTRACT SHALL BE ASSIGNED TO THE ASSESSEE SUBSTITUTING THEM IN PLACE OF AE AS A SUB - CONTRACTOR TO BAHWAN ENGINEERING COMPANY LLC. THE ASSESSEE WHILE PROVIDING SUCH ITA NO. 5611/MUM/2015 M/S. KEC INTERNATIONAL LTD., 4 PERFORMANCE GUARANTEE TO BEC DID NOT INCUR ANY CHARGES OR COST WHATSOEVER AND ACCORDINGLY, NO COMMISSION WAS CHARGED BY THE ASSESSEE TO ITS AE FOR PROVIDING THE SAID PERFORMANCE GUARANTEE. 3.3. THE LD. TPO SOUGHT TO TREAT THIS PERFORMANCE GUARANTEE AS AN INTERNATIONAL TRANSACTION AND RESORTED TO MAKE ADJUSTMENT TO ARMS LENGTH PRICE (ALP) THEREON FOR WHICH PURPOSE, A SHOW CAUSE NOTICE WAS ISSUED TO THE ASSESSEE. THE ASSESSEE RESPONDED THAT IN THE CASE OF ASSIGNMENT OF THE CONTRACT IN THE NAME OF THE ASSESSEE PURSUANT TO FAILURE OF THE AE TO PERFORM IT S DUTIES AND OBLIGATIONS AS A SUB - CONTRACTOR TO BAHWAN ENGINEERING COMPANY LLC, THE PAYMENTS AND AMOUNT RECEIVABLE THAT ARE DUE TO THE AE WOULD COME NATURALLY TO THE ASSESSEE COMPANY WHICH WOULD BE A LARGER BENEFIT TH A T WOULD BE DERIVED BY THE ASSESSEE TH A N CHARGING PERFORMANCE GUARANTEE COMMISSION FROM ITS AE. IT WAS ALSO SUBMITTED THAT THE ENTIRE PROFIT ON THE CONTRACT ASSIGNED BY THE BAHWAN ENGINEERING COMPANY LLC IN FAVOUR OF THE ASSESSEE WOULD AUTOMATICALLY COME TO THE ASSESSEE COMPANY AND THERE IS ABS OLUTELY NO RISK INVOLVED FOR THE ASSESSEE IN THIS TRANSACTION OF ISSUANCE OF PERFORMANCE GUARANTEE TO BAHWAN ENGINEERING COMPANY LLC ON BEHALF OF ITS AE. ACCORDINGLY, THE ASSESSEE PLEADED THAT IT WAS JUSTIFIED IN NOT CHARGING ANY COMMISSION FROM ITS AE FOR ISSUING THE SAID PERFORMANCE GUARANTEE. 3.3. THE LD. TPO HOWEVER, DID NOT AGREE TO THIS CONTENTION OF THE ASSESSEE AND STATED THAT IN CASE OF DEFAULT COMMITTED BY THE AE IN NOT PERFORMING ITS DUTIES AND OBLIGATIONS IN THE SUB - CONTRACT WORK ALLOTTED TO A E , THEN THE ASSESSEE HAD TO STEP - IN AS THE ENTIRE SUB - CONTRACT WOULD COME TO THE ASSESSEE COMPANY AND THE ASSESSEE HAS TO PUT ALL RESOURCES IN PLACE FOR EXECUTING THE CONTRACT OR AS TO FIND ANOTHER SUB - CONTRACTOR TO COMPLETE THE CONTRACT. IN SUCH CIRCUMSTA NCES, THE ASSESSEE COMPANY HAD TO TAKE THE RISK WHICH NEEDS TO BE COMPENSATED TO THE ASSESSEE BY ITS AE. ACCORDINGLY, THE LD. TPO TREATED THIS ISSUANCE OF PERFORMANCE GUARANTEE ITA NO. 5611/MUM/2015 M/S. KEC INTERNATIONAL LTD., 5 TRANSACTION AS AN INTERNATIONAL TRANSACTION AND PROCEEDED TO BENCHMARK THE SAME BY APPLYING THE BANK GUARANTEE COMMISSION. FOR THIS PURPOSE, THE LD. TPO ADOPTED THE COMPARABLE GUARANTEE COMMISSIONS CHARGED BY ALLAHABAD BANK AND HSBC BANK TO VARIOUS COMPARABLES WHICH ARE LISTED OUT IN PAGE 4 OF HIS ORDER AND ARRIVED AT THE MEAN GUARAN TEE COMMISSION PERCENTAGE THEREON AT 1.04%. THE LD. TPO APPLIED THE SAID 1.04% ON THE OUTSTANDING PERFORMANCE GUARANTEE AMOUNT OF RS.198,17,46,365/ - FOR A PERIOD OF 121 DAYS I.E. FROM 26/11/2009 TO 31/03/2010 AND MADE AN ADJUSTMENT TO ARMS LENGTH PRICE (A LP) ON OUTSTANDING PERFORMANCE GUARANTEE IN THE SUM OF RS.69,45,342/ - . 3.4. THE LD. CIT(A) HELD THAT SINCE THERE IS NO COST INVOLVED TO THE ASSESSEE IN ISSUING PERFORMANCE BANK GUARANTEE, THE SAID ISSUANCE OF PERFORMANCE BANK GUARANTEE WOULD BE OUTSIDE TH E AMBIT OF AN INTERNATIONAL TRANSACTION WITHIN THE MEANING OF SECTION 92 B (1) OF THE ACT READ WITH ITS EXPLANATION THEREOF. 4. AGGRIEVED, THE REVENUE IS IN APPEAL BEFORE US. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS. AT THE OUTSET, WE FIND THAT THE ASSESSEE HA D ONLY GIVEN PERFORMANCE GUARANTEE IN FAVOUR OF BAHWAN ENGINEERING COMPANY LLC ON BEHALF OF ITS AE NEARLY TO INDEMNIFY THE LOSSES, CLAIMS, DAMAGES , IF ANY , THAT MAY ARISE PURSUANT TO NON - PERFORMANCE OF DUTIES AND OBLIGATIONS BY THE AE IN EXECUTION OF THE C ONTRACT ALLOTTED TO THEM. ADMITTEDLY, THE ASSESSEE HAS NOT CHARGED ANY COMMISSION FROM ITS AE FOR ISSUANCE OF THIS PERFORMANCE GUARANTEE. WE FIND THAT ASSESSEE HAD ALSO PARALLELLY ENTERED INTO ANOTHER AGREEMENT WITH ITS AE WHEREIN IN THE EVENT OF AE FAILIN G IN EXECUTION OF THE CONTRACT AND THE PERFORMANCE GUARANTEE ISSUED BY THE ASSESSEE GETS INVOKED BY BAHWAN ENGINEERING COMPANY LLC, THEN THE CONTRACT WHICH IS AWARDED TO THE AE GETS ASSIGNED IN FAVOUR OF THE ASSESSEE, WHEREIN THE ASSESSEE WOULD BE OBLIGATE D TO EXECUTE THE CONTRACT ON ITS OWN BY USING ITS OWN INFRASTRUCTURE, WHICH WOULD IN TURN ITA NO. 5611/MUM/2015 M/S. KEC INTERNATIONAL LTD., 6 RESULT IN ASSESSEE DERIVING THE ENTIRE CONTRACTUAL REVENUE AND HUGE PROFITS THERE FROM . IN THESE CIRCUMSTANCES, THERE IS ABSOLUTELY NO RISK INVOLVED FOR THE ASSESSEE IN ISSUING THE PERFORMANCE GUARANTEE ON BEHALF OF ITS AE, WARRANTING CHARGING OF ANY COMMISSION TO MITIGATE THAT RISK. HENCE, WE HOLD THAT ASSESSEE WAS FULLY JUSTIFIED IN NOT CHARGING ANY COMMISSION FROM ITS AE IN THE SUBJECT MENTIONED PERFORMANCE GUARANTE E TRANSACTION. HENCE, THERE IS NO NEED TO MAKE ANY ADJUSTMENT TO ARMS LENGTH PRICE THEREOF. IN VIEW OF THIS DECISION IN THE PECULIAR FACTS AND CIRCUMSTANCES, THE ISSUE AS TO WHETHER ISSUANCE OF PERFORMANCE GUARANTEE WOULD FALL WITHIN THE AMBIT OF AN INTER NATIONAL TRANSACTION OR NOT IS LEFT OPEN AND NO DECISION IS GIVEN HEREIN. HENCE, THE VARIOUS DECISIONS QUOTED BY THE LD. COUNSEL FOR BOTH THE SIDES NEED NOT BE GONE INTO. ACCORDINGLY, THE ADDITION MADE IN THE SUM OF RS.69,45,342/ - IS HEREBY DIRECTED TO BE DELETED. ACCORDINGLY, THE GROUND NO.1(A) RAISED BY THE REVENUE ARE PARTLY ALLOWED. 5.1. THE GROUND NO S .1(B) & 2(A) RAISED BY THE REVENUE ARE WITH REGARD TO THE ACTION OF THE LD. CIT(A) DELETING THE ADJUSTMENT TO ARMS LENGTH PRIC E IN RESPECT OF PERFORMAN CE BANK GUARANTEE ISSUED TO CHANDIAN COMPANY FOR WATER & ELECTRICITY (CCWE) . 6. THE BRIEF FACTS OF THIS ISSUE ARE THAT DURING THE YEAR UNDER CONSIDERATION, BANK OF INDIA AT THE REQUEST OF THE ASSESSEE HAD PROVIDED PERFORMANCE GUARANTEE DATED 28/08/2009 TO CCWE FOR AN AMOUNT OF EURO 1003126 (INR 6,07,36,972) ON BEHALF OF AE. ACTUALLY THE SAID GUARANTEE WA S GIVEN IN THE NAME OF AL SHARIF GROUP FOR CONT. & DEV. (HOLDING) LTD , THE ENTREPRENEUR ( THROUGH AE). CC WE IS A CUSTOMER OF THE WHOLLY OWNED SUBSIDIARY OF ASSESSEE I.E. KEC GLOBAL (AE) , WHO HAD GIVEN A CONTRACT TO THE AE. HOWEVER, THE CCWE, AS A PRE - CONDITION FOR EXECUTION OF CONTRACT HAD ASKED THE AE TO PROVIDE PERFORMANCE BANK ITA NO. 5611/MUM/2015 M/S. KEC INTERNATIONAL LTD., 7 GUARANTEE. HENCE, TO FULFIL THE SAID CONDITION, THE ASSESSEE HAD PROVIDED BANK G UARANTEE TO CCWE ON BEHALF OF AE. IN RESPECT OF THE SAME, THE ASSESSEE SUBMITTED THE COPY OF GUARANTEE BEFORE THE LD. TPO. FOR THE PURPOSE OF ISSUANCE OF THIS BANK GUARANTEE, BANK OF INDIA CHARGED 0.93% AS GUARANTEE COMMISSION TO THE ASSESSEE. THE VERY SAM E GUARANTEE FEE OF 0.93% WAS RECOVERED BY THE ASSESSEE FROM ITS AE. HENCE, THERE WAS NO EXTRA COST, PROFIT OR LOSSES INCURRED OR EARNED BY THE ASSESSEE IN THESE TRANSACTIONS. 6.1. THE LD. TPO OBSERVED THAT BANK OF INDIA HAD GIVEN GUARANTEE TO THE AE BASE D UPON THE CREDIT RATING OF THE ASSESSEE. THE CREDIT RATING IN THE PRESENT CASE OF THE ASSESSEE IS A + . AS AGAINST THIS , GUARANTEE FEES CHARGED BY THE BANK FOR AN IDENTICAL CREDIT ARRANGEMENT WITH THE AE WILL DEPEND UPON THE CREDIT RATING OF THE AE. IN THI S CASE , THE AE BEING A NEWLY FLOATED ENTITY, THE CREDIT RATING IS VERY LOW. THE LD TPO OBSERVED THAT A S THE CREDIT RATING OF THE ASSESSEE IS BETTER THAN THAT OF THE AE, HENCE THE EXECUTION OF PERFORMANCE BANK GUARANTEE IN FAVOUR OF CCWE ON BEHALF OF THE A E RESULTS IN TRANSFER OF BENEFIT TO THE AE BY THE BANK. ACCORDINGLY, THE SAME REQUIRES TO BE BENCHMARKED IN ACCORDANCE WITH INDIAN TRANSFER PRICING REGULATIONS. FOR THIS PURPOSE, THE LD. TPO IDENTIFIED BANK GUARANTEES GIVEN BY ALLAHABAD BANK AND HSBC BANK WITH SIX CUSTOMERS AND ARRIVED AT THE AVERAGE GUARANTEE COMMISSION THEREON AT 1.04%. THE LD. AO MADE AN ADJUSTMENT TO THE ARMS LENGTH PRICE IN RESPECT OF THIS TRANSACTION BY APPLYING THIS AVERAGE GUARANTEE COMMISSION OF 1.04% ON THE OUTSTANDING GUARANTEE AMOUNT OF RS.6,07,36,972/ - AND FROM THAT REDUCED THE GUARANTEE FEE RECOVERED BY THE ASSESSEE FROM ITS AE AT 0.93% , AND MADE ADJUSTMENT TO THE DIFFERENTIAL SUM OF RS.39,354/ - (RS.3,72,276 - RS.3,32,722) TO THE ALP OF THE INTERNATIONAL TRANSACTION IN RESPECT O F PERFORMANCE BANK GUARANTEE. ITA NO. 5611/MUM/2015 M/S. KEC INTERNATIONAL LTD., 8 6.2. THE ASSESSEE CONTENDED BEFORE THE LD. CIT(A) THAT THE LD. TPO WHILE CONSIDERING THE RATES OF GUARANTEE COMMISSION CHARGED BY THE RESPECTIVE BANKS WITH REGARD TO THE COMPARABLE CASES, COMPLETELY IGNORED THE CREDIT RATINGS OF THE ENTITIES TO WHOM THE BANKS HAD ISSUED THE SAID GUARANTEES. ACCORDINGLY, IT WAS ARGUED THAT THE LD. TPO HAD ERRED IN ARRIVING AT COMPARABLE RATE FOR BENCHMARKING THE SAID TRANSACTION. THE ASSESSEE ALSO CONTENDED THAT THE ADOPTION OF RATE OF GUARANTE E COMMISSION IS NOTHING BUT APPLICATION OF COMPARABLE UNCONTROLLED PRICE (CUP) METHOD. AS PER R ULE 10 B (2) OF THE IT RULES, CUP METHOD COMPARES THE PRICE CHARGED FOR PROPERTY OR SERVICES TRANSFERRED IN A CONTROLLED TRANSACTION TO THE PRICE CHARGED FOR PROPE RTY OR SERVICES TRANSFERRED IN A COMPARABLE UNCONTROLLED TRANSACTION IN COMPARABLE CIRCUMSTANCES . W HERE IT IS POSSIBLE TO LOCATE COMPARABLE TRANSACTION, CU P METHOD IS THE MOST DIRECT AND RELIABLE WAY TO APPLY ARMS LENGTH PRINCIPLE . THE ASSESSEE PLEADED T HAT THE LD. TPO HAD IGNORED THE RATE OF COMMISSION OF 0.93% WHICH WAS CHARGED BY THE BANK OF INDIA TO THE ASSESSEE WHILE ISSUING GUARANTEE TO CCWE. IN THE CASE OF THE ASSESSEE, THIS RATE COULD BE CONSIDERED AS MOST DIRECT COMPARABLE UNCONTROLLED TRANSACTIO N TO BENCHMARK THE RATE OF GUARANTEE COMMISSION. FURTHER, IT WAS ARGUED THAT THE RATES ADOPTED BY THE LD. TPO COULD NOT BE ASSUMED AS COMPARABLE IN THE BUSINESS OF ANY SPECIFIC INFORMATION REGARDING THE COMPARABILITY ANALYSIS OF THE SAME. IT WAS ALSO SUBMI TTED THAT THE BANKS ASCERTAINED THE RATE OF GUARANTEE COMMISSION BASED ON THE CREDITWORTHINESS OF THE ENTITY I N WHOSE FAVOUR THE SAME IS ISSUED. THE DETERMINATION OF CREDITWORTHINESS OF AN ENTITY DEPENDS ON SEVERAL FACTORS LIKE PROFITABILITY RATIOS, CAPITA L STRUCTURES, ECONOMIES OF SCALE ETC. THE LD. TPO HAD COMPLETELY IGNORED THE CREDIT RATINGS OF THE ENTITIES TO WHOM THE BANKS HAD ISSUED THE GUARANTEES VIS - A - VIS THE CREDIT RATINGS OF THE ASSESSEE WHILE CALCULATING THE ARMS LENGTH RATE OF GUARANTEE COMMIS SION THEREBY NOT TAKING INTO ACCOUNT THE COMPARABILITY ANALYSIS OF THE COMPARABLE. THE ITA NO. 5611/MUM/2015 M/S. KEC INTERNATIONAL LTD., 9 ASSESSEE PLEADED THAT THE LD. TPO HAD CONSIDERED THE RATE CHARGED BY THE BANKER OF THE THIRD PARTIES AS ALP TO BENCH MARK THE TRANSACTION OF THE ASSESSEE WITH AE. IN THIS CASE, THE INTERNAL DIRECT COMPARABLE IS AVAILABLE WHICH IS PROPERLY COMPARABLE FOR BENCHMARKING. HENCE, THE RATE CHARGED BY THE BANK AT 0.93% IS DIRECTLY COMPARABLE IN CASE OF ISSUANCE OF GUARANTEE TO CCWE. FURTHER, THE ASSESSEE HAD ALREADY RECOVERED THE SAID RATE OF 0.93% CHARGED BY BANK OF INDIA FROM ITS AE. THIS RATE IS NOTHING BUT THE COMPARABLE UNCONTROLLED RATE OF COMMISSION IN CASE OF TRANSACTION OF ISSUANCE OF GUARANTEE. THE LD. CIT(A) ACCEPTED TO THE AFORESAID CONTENTIONS OF THE ASSESSEE AND STATE D THAT 0.93% IS THE ARMS LENGTH RATE OF COMMISSION IN THE SUBJECT MENTIONED TRANSACTION AND HENCE, NO FURTHER ADJUSTMENT NEED TO BE MADE FOR THE SAME AS THE SAID RATE OF 0.93% HAD BEEN DULY RECOVERED BY THE ASSESSEE FROM ITS AE. 7. AGGRIEVED, REVENUE IS IN APPEAL BEFORE US. 8. WE HAVE HEARD RIVAL SUBMISSIONS. THE PRIMARY FACTS STATED HEREINABOVE REMAIN UNDISPUTED AND HENCE, THE SAME ARE NOT REITERATED FOR THE SAKE OF BREVITY. WE FIND THAT THE LD. CIT(A) HAD RIGHTLY APPRECIATED THE CONTENTIONS OF THE ASSE SSEE WHICH ARE STATED HEREINABOVE AND THE SAME ARE NOT REPRODUCED HEREUNDER FOR THE SAKE OF BREVITY. IT IS WELL KNOWN IN THE FINANCIAL MARKET THAT THE BANKS ASCERTAIN THE RATE OF GUARANTEE COMMISSION FOR EACH PARTY BASED ON ITS CREDITWORTHINESS AND THE SAI D CREDITWORTHINESS WOULD DEPEND ON SEVERAL FACTORS SUCH AS PROFITABILITY RATIOS, ECONOMIES OF SCALE, NUMBER OF YEARS OF RELATIONSHIP OF THE BANK WITH THOSE CUSTOMERS, FUTURE POTENTIAL OF THAT CUSTOMER WHICH IN TURN WOULD ENLARGE THE BUSINESS OF THE BANK , TANGIBLE AND IMMOVABLE SECURITIES OFFERED BY THE CUSTOMER, IF ANY ETC., HENCE, THE RATE OF COMMISSION ISSUED BY THE BANK FOR ITS CUSTOMERS WOULD VARY FROM ONE CUSTOMER TO ANOTHER CUSTOMER AND ACCORDINGLY, THE SAME CANNOT BE USED ITA NO. 5611/MUM/2015 M/S. KEC INTERNATIONAL LTD., 10 AS A BENCHMARK FOR THE PURP OSE OF COMPARABILITY. IN THE INSTANT CASE, THE ASSESSEES CREDIT RAT ING IS A + AS GIVEN BY A REPUTED CREDIT RATING AGENCY CARE. THE RATE OF 0.93% CHARGED BY THE BANK INCLUDES THE COMMISSION RATE OF 0.25% + 0.68% FOR THE EXPORT CREDIT GUARANTEE CORPORATION (ECGC) COVER . THE CREDIT RATING OF THE AE WAS NOT DONE IN THE INSTANT CASE. IT IS NOT IN DISPUTE THAT THE SAID GUARANTEE RATE OF 0.93% WHICH IS CHARGED BY THE BANK ON THE ASSESSEE FOR ISSUING THE BANK GUARANTEE IN FAVOUR OF CCWE ON BEHALF OF ITS AE, HAD B EEN DULY RECOVERED BY THE ASSESSEE FROM ITS AE. HENCE, IT IS ONLY A CASE OF RECOVERY OF COST BY ASSESSEE WITHOUT ANY MARGIN. WE ARE INCLINED TO ACCEPT THE ARGUMENT OF THE LD. AR THAT IN THE INSTANT CASE , 0.93% OF GUARANTEE COMMISSION CHARGED BY BANK OF IND IA COULD BE CONSIDERED AS THE MOST DIRECT COMPARABLE UNCONTROLLED TRANSACTION TO BENCHMARK THE RATE OF GUARANTEE COMMISSION. IN ANY CASE, THE AVERAGE RATE ADOPTED BY THE LD. TPO AT 1.04% IS ONLY AN EXTERNAL DATA IN THE FORM OF THIRD PARTY GUARANTEES ISSUED BY THE BANK. WHEN INTERNAL COMPARABLE UNCONTROLLED PRICE IS AVAILABLE THAT SHOULD BE CONSIDERED AS THE MOST DIRECT AND RELIABLE WAY TO APPLY THE ARMS LENGTH PRINCIPLE. IN ANY CASE, THERE IS ABSOLUTELY NO LOSS TO THE ASSESSEE AND NO B EARING ON THE PROFIT S OR LOSSES AS THE ENTIRE COST OF 0.93% HAS BEEN DULY RECOVERED BY THE ASSESSEE FROM ITS AE. HENCE, THE ACTION OF THE LD. CIT(A) IN HOLDING NO FURTHER ADJUSTMENT TO ALP IS REQUIRED IN RESPECT OF THE SUBJECT MENTIONED GUARANTEE COMMISSION TRANSACTION AND CO NSEQUENTLY DIRECTING THE DELETION OF ADDITION OF RS.39,354/ - THEREOF, REQUIRES NO INTERFERENCE . A CCORDINGLY , GROUND NO.1(B) AND 2(A) RAISED BY THE REVENUE ARE DISMISSED. 8.1. GROUND NO.2(B) RAISED BY THE REVENUE IS WITH REGARD TO THE ACTION OF THE LD. CIT (A) IN HOLDING THAT THE GUARANTEE COMMISSION RECOVERED BY THE ASSESSEE AT 0.93% FROM ITS AE WAS AT ARMS LENGTH IN RESPECT OF BANK GUARANTEE GIVEN TO CCW E FOR RELEASING THE ADVANCE PAYMENT. ITA NO. 5611/MUM/2015 M/S. KEC INTERNATIONAL LTD., 11 9. THE BRIEF FACTS OF THIS ISSUE ARE THAT THE ASSESSEE COMPANY HA D GIVEN ADVANCE PAYMENT GUARANTEE TO CCWE ON BEHALF OF AE OF THE ASSESSEE FOR A TOTAL AMOUNT OF EURO 20,06,252/ - (INR 12,14,73,944). THIS GUARANTEE WAS REQUIRED BY CCWE, WHO HAS GIVEN CONTRACT TO THE AE, BEFORE GIVING ANY ADVANCE TO THE AE. IN EFFECT, THIS BANK GUARANTEE WAS ISSUED TO CCWE FOR SECURING THE ADVANCE PAYMENT FROM CCWE BY THE AE. THE ASSESSEE SUBMITTED BEFORE THE LD. TPO THAT THE BANK HAD CHARGED 0.93% AS THE GUARANTEE COMMISSION AND THERE WAS NO FORMAL GUARANTEE AGREEMENT ENT ERED IN THIS REGAR D. THE ASSESSEE STATED THAT TH E C REDIT R ATING ISSUED BY CARE IS A + AND C REDIT R ATING OF THE AE WAS NOT DONE. THE ASSESSEE PLEADED THAT NO BENCHMARKING WA S DONE BY THE ASSESSEE AS EXECUTING GUARANTEE IN FAVOUR OF A BANK ON BEHALF OF THE AE WAS NOT AN INTERN ATIONAL TRANSACTION IN THE OPINION OF THE ASSESSEE. THE ASSESSEE ALSO STATED THAT THE CORPORATE BOND RATES FOR UNITED ARAB EMIRATES (UAE) WERE NOT AVAILABLE. HOWEVER, IT CONTENDED THAT RATE OF INTEREST ON BORROWING S MADE IN THE COUNTRY IN WHICH THE AE IS S ITUATED IS QUITE LOW IN COMPARISON WITH BOND RATE PREVAILING IN INDIA . T HEREFORE, INDIAN CORPORATE BOND RATES SHOULD NOT BE APPLIED FOR BENCHMARKING. THE ASSESSEE ALSO PLEADED THAT THE BANK HAD CH ARGED THE ASSESSEE 0.93% FOR ISSUING THIS BANK GUARANTEE TO CCWE ON BEHALF OF ITS AE FOR SECURING THE ADVANCE PAYMENT FOR EXECUTING THE CONTRACT. THE ASSESSEE ALSO SUBMITTED THAT THIS GUARANTEE FEE OF 0.93% HAD BEEN DULY RECOVERED BY IT FROM ITS AE AND HENCE, THERE IS NO IMPACT O N PROFIT OR LOSS OF THE ASSESSEE. 9 .1. THE LD. TPO CONSIDERED THE ISSUANCE OF SAID GUARANTEE AS A CORPORATE GUARANTEE GIVEN BY BANK OF INDIA TO CCWE TO ENABLE THEM TO RELEASE THE ADVANCE PAYMENT TO THE AE OF THE ASSESSEE. HE OBSERVED THAT IN THE ABSENCE OF ANY CREDIT RATING OF AE AND AS THE AE IS AN OPERATING COMPANY, THE CREDIT RATING OF AE IS TAKEN AT BBB WHEREAS TH E ASSESSEE CREDIT RATING IS A + . IN AN UNCONTROLLED TRANSACTION LIKE THIS BETWEEN ITA NO. 5611/MUM/2015 M/S. KEC INTERNATIONAL LTD., 12 UNRELATED PARTIES, GUARANTEE FEE WOULD HAVE BEEN CHARGED TAKING INTO ACCOUNT CREDITWORTHINESS OF THE AE, MARGINS, SECURITY OR ANY OTHER CONSIDERATION RELEVANT FOR DECIDING THE FINANCIAL STABILITY OF THE AE. THE LD. TPO OBSERVED THAT THE GUARANTEE I NCOME WOULD HAVE ACCRUED TO THE ASSESSEE IF THE SAID AMOUNTS WERE GIVEN TO UNRELATED PARTIES IN THE SI MILAR CIRCUMSTANCES AS THAT OF ITS AES. THE LD. TPO APPLIED THE CUP METHOD FOR BENCHMARKING THIS TRANSACTION AND DETERMINED THE ARMS LENGTH PRICE THEREON AS UNDER: - (B) METHODOLOGY: APPLICATION OF THIS METHOD BEGINS BY QUANTIFYING THE BENEFIT RECEIVE D BY THE GUARANTEED ENTITY. THIS ACCOMPLISHED BY: DETERMINING THE CREDIT RATING OF THE GUARANTEED ENTITY ON A STAND - ALONE BASIS (WITHOUT REFERENCE TO THE REST OF THE MULTINATIONAL COMPANY OF WHICH IT IS A PART); DETERMINING THE, CORPORATE BOND YIELD THAT C ORRESPONDS TO THE CREDIT RATING OF THE GUARANTEED ENTITY HAD IT BEEN A STANDALONE ENTITY; DETERMINING THE CORPORATE BOND YIELD THAT CORRESPONDS TO THE GUARANTOR'S CREDIT RATING; AND ANNUALISED AVERAGE YIELD (%) RATING FINANCIAL YEAR 2009 - 10 1 - 2 YEA RS 2 - 3 YEARS 5 YEARS AAA 6.81 7.55 8 . 25 AA+ 7.2 7.98 8.71 AA 7.43 8.21 8.94 AA - 7.77 8.49 9.24 A+ 8.16 8.89 9.62 A 8.63 9.3 8 10.15 A - 9.46 10.38 11.06 B BB + 9.77 10.73 11.43 ITA NO. 5611/MUM/2015 M/S. KEC INTERNATIONAL LTD., 13 BB B 10.68 11.60 12.28 BBB - 11 . 86 12.69 13.37 COMPUTING THE DIFFERENCE OR SPREAD BETWEEN THESE TWO YIELDS. THE CUP RATE FOR GUARANTEE FEE IS ARRIVED AT AS BELOW. CREDIT RATING OF GUARANTOR (I.E. THE TAXPAYER) A YIELD OR INTEREST RATE FOR 2 - 3 YEAR UNSECURED BOND 8.89 CR EDIT RATING OF AE (AS DISCUSSED ABOVE) BBB YIELD OR INTEREST RATE FOR 5 YEAR UNSECURED BOND 11.60% P.A. BENEFIT TO AE ON ACCOUNT OF GUARANTEE GIVEN BY THE TAXPAYER PARTICULARS CCWE V:0|IFSTANDING GUARANTEE AMOUNT IN FOREIGN CURRENCY 2006252 E UROS OUTSTANDING GUARANTEE AMOUNT IN INR 12,14,73,944 NO. OF DAYS THE GUARANTEE IS OUTSTANDING DURING THE YEAR 215 ( 28.8.2009 TO 31.3.2010 ) ARMS LENGTH GUARANTEE FEE 2.71% ARMS LENGTH PRICE ON THE OUTSTANDING CORPORATE GU ARANTEE (INR) 1939090 GUARANTEE FEE CHARGED @ 0,93% FROM THE AE 6,65,444 ADJUSTMENT OH A/C OF CORPORATE GUARANTEE 1273646 9.2. ACCORDINGLY, THE LD. TPO MADE ADJUSTMENT OF RS.12,73,646/ - ON ACCOUNT OF ISSUANCE OF CORPORATE GUARANTEE. 9.3. THE ASS ESSEE PLEADED THAT THE LD. TPO HAD ADOPTED TWO DIFFERENT RATES FOR BENCHMARKING THE BANK GUARANTEES GIVEN BY THE ASSESSEE. IT MAY BE NOTED THAT THE TWO BANK GUARANTEES, ONE IS PERFORMANCE BANK ITA NO. 5611/MUM/2015 M/S. KEC INTERNATIONAL LTD., 14 GUARANTEE AND OTHER IS ADVANCE PAYMENT GUARANTEE WERE GIVEN TO CCWE ON BEHALF OF AE OF THE ASSESSEE. THE BANK HAD CHARGED THE ASSESSEE THE SAME RATE OF 0.93% FOR BOTH THE CASES AS GUARANTEE COMMISSION. THE ASSESSEE PLEADED THAT THERE IS NO MUCH DIFFERENCE WITH REGARD TO THE SAID TWO GUARANTEES AND BEING IDENTICAL IN N ATURE, THE LD. TPO HAD ADOPTED TWO DIFFERENT PRINCIPLES TO BENCHMARK THE SAID TRANSACTIONS. THE LD. CIT(A) OBSERVED THAT ADVANCE PAYMENT GUARANTEE AND ALSO THE PERFORMANCE GUARANTEE ARE IDENTICAL IN NATURE. HENCE, BOTH THE GUARANTEES BEING IDENTICAL IN NAT URE, THE ARMS LENGTH RATE OF COMMISSION IN CASE OF BOTH THE GUARANTEES SHOULD BE THE SAME. ACCORDINGLY, HE HELD THAT THE ALP OF GUARANTEE COMMISSION SHOULD BE 0.93% IN CASE OF ADVANCE PAYMENT GUARANTEE ALSO AND HELD THAT NO FURTHER ADJUSTMENT TOWARDS THAT RATE WOULD BE REQUIRED. 10. AGGRIEVED, THE REVENUE IS IN APPEAL BEFORE US. 11. WE HAVE HEARD THE RIVAL SUBMISSIONS. THE FINDINGS GIVEN HEREINABOVE IN RESPECT OF PERFORMANCE GUARANTEE TO CCWE BY US WOULD HOLD GOOD FOR THIS BANK GUARANTEE ALSO. ACCORDINGL Y, WE HOLD THAT THE FINDING OF THE LD. CIT(A) AND CONSEQUENTLY DELETION OF ADJUSTMENT ON ACCOUNT OF BANK GUARANTEE OF RS.12,73,646/ - DOES NOT CALL FOR ANY INTERFERENCE. ACCORDINGLY, THE GROUND NO.2(B) RAISED BY THE REVENUE IS DISMISSED. CORPORATE TAX ISSU ES: - 12. THE GROUND NO.3 RAISED BY THE REVENUE IS WITH REGARD TO THE ACTION OF THE LD. CIT(A) IN ALLOWING THE DEPRECIATION OF RS.65,31,55,951/ - ON THE ACTUAL COST OF ASSETS OF THE POWER TRANSMISSION BUSINESS ACQUIRED BY THE ASSESSEE. THE GROUNDS RAISED BY THE REVENUE IN THIS REGARD AS UNDER: - ITA NO. 5611/MUM/2015 M/S. KEC INTERNATIONAL LTD., 15 3(A). WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. C1T(A) WAS JUSTIFIED IN ALLOWING THE DEPRECIATION OF RS. 65,31,55,991/ - WHICH WAS CLAIMED ON THE ACTUAL COST OF ASSETS OF THE POWER TRANSMISSION BUSIN ESS ACQUIRED BY THE ASSESSEE. 3(B). WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. C1T(A) HAD FAILED TO APPRECIATE THAT THE TRANSFER OF ASSETS TO THE ASSESSEE COMPANY WAS BY WAY OF DEMERGER FALLING WITHIN THE DEFINITION GIVEN UNDER SECTION 2( 19AA) OF THE INCOME TAX ACT AND, THEREFORE, THE WRITTEN DOWN VALUE OF THE TRANSFERRED ASSETS IN THE HANDS OF THE ASSESSEE COMPANY IS THE WRITTEN DOWN VALUE OF THE SAID ASSETS PRIOR TO THE DEMERGER. 3(C). WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE, THE LD. CIT(A) OUGHT TO HAVE UPHELD THE ORDER OF THE ASSESSING OFFICER RESTRICTING THE DEPRECIATION CLAIM OF THE ASSESSEE TO RS. 41.79.82.080/ - AS AGAINST THE CLAIM OF RS. 65,31,55,991/ - MADE BY THE ASSESSEE. 12.1. GROUND NO. 4 & 5 RAISED BY THE REVENUE ARE WITH REGARD TO ACTION OF THE LD. CIT(A) IN ALLOWING THE MARK TO MARKET LOSS ARISING OF FOREIGN EXCHANGE CONTRACTS WHICH WAS OUTSTANDING AT THE END OF THE YEAR. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS IN THIS REGARD: - 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) ERRED IN HOLDING THAT THE MARK TO MARKET LOSS ARISING ON THE FOREIGN EXCHANGE CONTRACTS WHICH WERE OUTSTANDING AS AT THE YEAR END IS AN ACCRUED LOSS AND NOT A NOTIONAL LOSS. 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. C1T(A) ERRED IN HOLDING THAT THE MARK TO MARKET LOSS ARISING ON THE FOREIGN EXCHANGE CONTRACTS WHICH WERE OUTSTANDING AS AT THE YEAR END IS AN ACCRUED LOSS AND IS NOT CONTINGENT, UNASCERTAINED OR NOTIONAL IN NATURE AND, HENCE, NO ADJUSTMENT COULD BE MADE TO THE BOOK PROFIT UNDER CLAUSE (C) OF THE EXPLANATION (1) TO' SECTION 115JB(2). 12.2. AT THE OUTSET WE FIND BOTH THE PARTIES AGREED THAT TH IS ISSUE IS ALREADY COVERED BY THE DECISION OF THIS TRIBUNAL IN ASSESSEES OWN C ASE IN EARLIER YEARS. WE FIND THAT THE LD. CIT(A) HAD GRANTED RELIEF TO THE ITA NO. 5611/MUM/2015 M/S. KEC INTERNATIONAL LTD., 16 ASSESSEE BY FOLLOWING THE EARLIER ORDERS OF THIS TRIBUNAL BY OBSERVING AS UNDER: - 5.1 THE FACTS OF THE CASE AND THE OBSERVATIONS/FINDINGS OF THE A.O. ARE SUMMARIZED AS UNDER: 1. DURING THE YEAR UNDER CONSIDERATION, THE APPELLANT HAD CLAIMED DEPRECIATION OF RS. 65,31,55,991/ - IN RESPECT OF ASSETS ACQUIRED BY IT, IN A.Y. 2006 - 07, UPON ACQUISITION OF POWER TRANSMISSION BUSINESS ('PTB'), FROM KEC IN FRASTRUCTURE LIMITED (' THE TR ANSFEROR COMPANY'), PURSUANT TO COURT APPROVED SCHEME OF ARRANGEMENT ('THE SCHEME' OR 'THE ARRANGEMENT) 2. THE AO RESTRICTED THE CLAIM FOR DEPRECIATION TO RS. 41,79,82,0807 - INSTEAD OF RS. 65,31,55,9917 - , FOLLOWING THE ORDER OF THE EARLIER YEARS, W HEREIN, IT WAS ALLEGED THAT THE TRANSFER UNDER THE SCHEME WAS BY WAY OF 'DEMERGER', FALLING WITHIN THE DEFINITION GIVEN UNDER SECTION 2(19AA) OF THE ACT AND ACCORDINGLY, THE WRITTEN DOWN VALUE (WDV) OF THE TRANSFERRED ASSETS IN THE HANDS OF THE APPELLANT I S THE WDV OF THE SAID ASSETS IMMEDIATELY PRIOR TO DEMERGER. THUS, THE APPELLANT IS INTO APPEAL FOR THE AFORESAID ADDITION. 5.2 DURING THE COURSE OF APPELLATE PROCEEDINGS, DETAILED SUBMISSIONS WERE MADE AS FOLLOWS: 'IN THIS REGARD, THE APPELLANT MOST H UMBLY SUBMITS THAT: ' 1. THE ASSETS WERE ACQUIRED BY THE APPELLANT PURSUANT TO A COURT APPROVED SCHEME OF ARRANGEMENT. 2. THE COURT APPROVED SCHEME UNDER SECTION 391 TO 394 OF THE COMPANIES ACT, 1956 DID NOT SATISFY THE CONDITIONS LAID DOWN UNDER SEC TION 2(19AA) OF THE ACT. 3. UNDER THE COURT APPROVED SCHEME, THE SHARES WERE ISSUED TO THE TRANSFEROR COMPANY AND NOT TO THE SHAREHOLDERS OF THE TRANSFEROR COMPANY AS LAID DOWN BY SECTION 2(19AA) OF THE ACT. 4. FURTHER THE TRANSFER TO THE APPELLANT WAS FOR A LUMP SUM CONSIDERATION AND NO VALUES EITHER MARKET VALUE OR BOOK VALUE WERE ASCRIBED TO INDIVIDUAL ASSETS. 5. SINCE THE ASSETS WERE NOT TRANSFERRED AT BOOK VALUES, THE CONDITION FOR THE TRANSFER UNDER A SCHEME OF ARRANGEMENT TO QUALIFY AS 'DEMERGE R' WITHIN THE MEANING OF 11 SECTION 2(19AA) OF THE ACT WAS NOT SATISFIED. 6. CLEARLY, THE CONDITIONS SPECIFIED IN SECTION 2(19AA) OF THE ACT WERE NOT SATISFIED AND THEREFORE, THE ACQUISITION OF THE ASSETS WAS NOT PURSUANT TO A DEMERGER. 7. SINCE THE TR ANSACTION COULD NOT BE SAID TO BE A DEMERGER, EXPLANATION 2A AND 2B TO SECTION 43(6) OF THE ACT AND EXPLANATION 7A TO SECTION 43(1) OF THE ACT CANNOT BE INVOKED. 8. THE AO HAD IN THE ASSESSMENT ORDER OF KEC INFRASTRUCTURE LIMITED ALLEGED THE SAID TRANSACT ION IS A TRANSFER BY WAY OF SLUMP SALE AND A COMPLETELY CONTRARY VIEW CANNOT BE TAKEN IN THE APPELLANT'S CASE. ITA NO. 5611/MUM/2015 M/S. KEC INTERNATIONAL LTD., 17 THE LEARNED AO FAILED TO EXPLICATE AS TO HOW THE TRANSFER WOULD FALL WITHIN THE MEANING OF DEMERGER AS GIVEN UNDER SECTION 2(19AA) OF THE ACT AN D AS HOW ALL THE CONDITION SPECIFIED UNDER SECTION 2(19AA) OF THE ACT WERE SATISFIED. THE APPELLANT FURTHER SUBMITS THAT THE AO WITHOUT ASSIGNING ANY COGENT REASONS HAS WRONGLY CONCLUDED THAT THE COURT APPROVED SCHEME WAS A DEVICE TO REDUCE THE INCOME - TAX LIABILITY AND THEREBY WRONGLY INVOKED EXPLANATION 3 TO SECTION 43(1) OF THE ACT. THE APPELLANT HUMBLY SUBMITS THAT THE SCHEME HAD UNDERGONE DETAILED SCRUTINY BY THE HONBLE MUMBAI HIGH COURT, SEVERAL FINANCIAL INSTITUTIONS WHICH WERE PRINCIPAL SHAREHOLDER S OF THE COMPANY, ITS BANKERS, SECURED AND UNSECURED CREDITORS, THE REGISTRAR OF COMPANIES AND SEVERAL OTHER GOVERNMENTAL AND NON - GOVERNMENTAL AGENCIES. THE HONBLE HIGH COURT AND ALL THE ABOVE INSTITUTIONS/ OFFICES HAVE GRANTED THEIR PERMISSION /ACCORD IN THE REORGANIZATION OF BUSINESS ONLY AFTER CONSIDERING THE OBJECT OF THE SCHEME. IF THE SAID TRANSACTION WAS MERELY TO REDUCE INCOME TAX LIABILITY, THE ABOVE OFFICES WOULD NOT HAVE ACCORDED THEIR ASSENT TO SUCH SCHEME AS THESE PARTIES INCLUDED SEVERAL BAN KS AND GOVERNMENT DEPARTMENTS. THE APPELLANT FURTHER SUBMITS THAT THE MAIN INTENTION OF THE SCHEME WAS TO ACHIEVE A FURTHER GROWTH AND EFFICIENCY, AND TO ADDRESS THE FOLLOWING ISSUES: (A) ACHIEVE GREATER FOCUS ON BUSINESS OPERATIONS (B) UNLOCK THE VALUE O F INVESTMENTS MADE / EXTENDED TO GROUP COMPANIES (C) UNLOCK THE VALUE OF 'CORE POWER TRANSMISSION BUSINESS' (D) ADDRESS THE CONCERNS OF LENDERS AND OTHER STAKEHOLDERS BY SEPARATING CORE AND NON - CORE BUSINESSES (E) UNLOCK THE VALUE AND POTENTIAL IN SURPLUS REAL ESTATE BY THE COMPANY (F) IMPROVE DAMPENING OF RETURN RATIOS (G) IMPROVE IMPORTANT INDICATORS OF GROWTH SUCH AS RETURN ON CAPITAL EMPLOYED AND RETURN ON NET WORTH (H) IMPROVE CREDIT RATING FOR CORE BUSINESS AND CHART OUT GROWTH INITIATIVES THROUGH EX PANSION AND ACQUISITIONS. FURTHER, THE RESTRUCTURING WAS CARRIED OUT UNDER A COMPOSITE SCHEME OF ARRANGEMENT UNDER PROVISIONS OF SECTIONS 391 - 394 OF THE COMPANIES ACT , 1 956. IN ORDER TO IMPLEMENT THE SCHEME, APPROVALS/ SANCTION WERE OBTAINED AS UNDER: (A ) BOARD OF DIRECTORS; (B) SHAREHOLDERS OF THE COMPANY UNDER A COURT - CONVENED MEETING; (C) SECURED CREDITORS OF THE COMPANY UNDER A COURT - CONVENED MEETING; (D) UNSECURED CREDITORS OF THE COMPANY UNDER A COURT - CONVENED MEETING; (E) BOMBAY HIGH COURT; ITA NO. 5611/MUM/2015 M/S. KEC INTERNATIONAL LTD., 18 (J) STO CK EXCHANGES WHERE THE SHARES OF THE COMPANY ARE LISTED; (G)REGULATORY BODIES SUCH AS REGISTRAR OF COMPANIES, REGIONAL DIRECTOR AND OFFICIAL LIQUIDATOR (IN CASE OF BESPOKE FINVEST LIMITED) SINCE THE COURT APPROVED SCHEME WHICH HAS UNDERGONE DETAILED SCRUT INY BY SEVERAL GOVERNMENTAL/NON - GOVERNMENTAL AGENCIES IT CANNOT BE RENDERED AS A COLORABLE DEVICE MERELY ON THE BASIS OF CONJECTURES AND SURMISES. THE APPELLANT FURTHER SUBMITS THAT THE ISSUE RELATING TO THE ABOVE GROUND HAS BEEN DECIDED IN THE FAVOUR OF THE APPELLANT FOR ASSESSMENT YEAR 2006 - 07 BY THE HON'BLE MUMBAI TRIBUNAL VIDE ORDER DATED 04.06.2010 [2010] 41 SOT 43 (MUM.). A PHOTOCOPY OF THE SAID ORDER IS ENCLOSED IN THE PAPER BOOK. THE RELEVANT EXTRACT OF THE DECISION OF MUMBAI TR IBUNAL IS REPRODUCED HEREUNDER: - '27. THIS BRINGS US TO THE REVENUE'S APPEAL WHICH IS ON TWO ISSUES, THE FIRST BEING THE DIRECTION OF THE CLT(APPEALS) TO ALLOW DEPRECIATION AT RS, 87.76 CRORES AS AGAINST DEPRECIATION OF RS, 15.98 CRORES ALLOWED BY THE ASSESSING OFFICER AND THE SECOND BEING DELETION OF DISALLOWANCES MADE UNDER THE PVOVISO TO SECTION 40(A) AND SECTION 43B BY THE CIT (APPEALS). 28. AFTER HEARING RIVAL CONTENTIONS, WE HOLD AS FOLLOWS. 29. ON THE FIRST GROUND, THE REVENUE HAS NOT DISPUTED THE FINDINGS OF THE FI RST APPELLATE AUTHORITY THAT THE TRANSFER IN QUESTION IS A CASE OF SLUMP SALE AND NOT A CASE OF DEMERGER. THE VALUATION HAS ALSO NOT BEEN DISPUTED. UNDER THESE CIRCUMSTANCES, FOR THE REASONS NOTED IN THE ASSESSEE'S APPEAL, WE HAVE TO NECESSARILY UPHOLD THE ORDER OF THE FIRST APPELLATE AUTHORITY AND DISMISS GROUND NO, 1 OF THE REVENUE. ALSO THE ISSUE RELATING TO THE ABOVE GROUND HAS BEEN DECIDED IN THE FAVOUR OF THE APPELLANT BY THE HON'BLE CIT(A) VIDE ITS ORDERS DATED 29.10.10, 23.08.13 AND 11.07.12 FOR AS SESSMENT 'YEARS 2007 - 08 TO 2009 - 10 RESPECTIVELY. PHOTOCOPIES OF THE SAID ORDERS ARE ENCLOSED IN THE PAPER BOOK. IN VIEW OF THE ABOVE, THE APPELLANT PRAYS THAT THE AO BE DIRECTED TO ALLOW THE DEPRECIATION AS CLAIMED BY THE APPELLANT IN ITS RETURN OF INCO ME.'' 5.3 THE ISSUE STANDS COVERED BY THE DECISION OF THE HON'BLE MUMBAI TRIBUNAL IN APPELLANT'S OWN CASE FOR A.Y. 2006 - 07 AND BY THE HON'BLE CIT(A) IN APPELLANT'S OWN CASE FOR A.YS 2007 - 08 TO 2009 - 10. SUBSEQUENTLY, THIS ISSUE IS ALSO BEING UPHELD BY THE HON'BLE MUMBAI TRIBUNAL VIDE ITS ORDER FOR A.YS 2007 - 08 TO 2009 - 10. THUS, IN VIEW OF THE ABOVE THE AFORESAID GROUND IS ALLOWED. ITA NO. 5611/MUM/2015 M/S. KEC INTERNATIONAL LTD., 19 12.3. RESPECTFULLY FOLLOWING THE CO - ORDINATE BENCH DECISION OF THIS TRIBUNAL IN ASSESSEES OWN CASE SUPRA, THE GROUND RA ISED IN 3(A) , 3(B)& 3(C) RAISED BY THE REVENUE ARE DISMISSED. 12.4. WITH REGARD TO ADDITION MADE TOWARDS MARK TO MARKET LOSS OF FOREIGN EXCHANGE CONTRACTS OUTSTANDING AT THE END OF THE YEAR, BOTH THE PARTIES BEFORE US AGREED THAT THIS ISSUE IS ALSO COVERE D BY THE DECISION OF THIS TRIBUNAL IN ASSESSEES OWN CASE IN EARLIER YEAR WHICH WAS RELIED UPON BY THE LD. CIT(A) BY OBSERVING AS UNDER: - 6.2 DURING THE COURSE OF APPELLATE PROCEEDINGS, DETAILED SUBMISSIONS WERE MADE AS FOLLOWS: 'IT IS PERTINENT TO NOTE THAT THE SAID ISSUE RELATING TO THE ABOVE GROUND HAS BEEN DECIDED IN THE FAVOUR OF THE APPELLANT BY THE HON'BLE CIT(A) VIDE ORDER DATED 11.07.12 FOR ASSESSMENT YEAR 2009 - 10. THUS, THE APPELLANT PRAYS THAT THE MTM LOSSES ARISING ON ACCOUNT OF FORWARD C ONTRACTS ENTERED INTO BY THE APPELLANT BE CONSIDERED AS AN ACCRUED LOSS TO THE APPELLANT AND THEREBY ALLOWED AS DEDUCTION WHILE COMPUTING THE TAXABLE INCOME. THE RELEVANT EXTRACT OF THE CIT(A) ORDER IS REPRODUCED HEREUNDER: 'THUS, FROM THE RATIO OF THE AB OVE CITED DECISION, IT IS QUITE CLEAR THAT LOSS ACCRUING ON MARK TO MARKET VALUATION OF HEDGING CONTRACT IS AN ACCRUED LOSS.' FURTHER IN THIS REGARD, THE APPELLANT HUMBLY SUBMITS THAT THE FORWARD CONTRACT IS AN AGREEMENT BETWEEN TWO PARTIES, REQUIRING THE DELIVERY AT SOME SPECIFIED FUTURE DATE OF A SPECIFIED AMOUNT OF FOREIGN CURRENCY BY ONE OF THE PARTIES, AGAINST PAYMENT IN DOMESTIC CURRENCY TO THE OTHER PARTY, AT THE PRICE AGREED UPON IN THE CONTRACT. THE RATE OF EXCHANGE APPLICABLE TO THE FORWARD CONTR ACT IS CALLED THE FORWARD EXCHANGE RATE AND THE MARKET FOR FORWARD TRANSACTIONS IS KNOWN AS THE FORWARD MARKET. THUS, IN CASE OF A FORWARD CONTRACT, ASSESSEE ENTERS INTO A LEGALLY BINDING, ENFORCEABLE CONTRACT FOR PURCHASE OF FOREIGN CURRENCY ON A FUTURE D ATE AT THE PRE - DETERMINED RATES. THE DATE AND THE RATE OF PURCHASE OF THE FOREIGN CURRENCY ARE DECIDED AT THE TIME OF ENTERING INTO CONTRACT. THE DIFFERENCE BETWEEN THE FORWARD CONTRACT AND THE EXCHANGE RATE ON THE DATE OF ENTERING INTO THE CONTRACT HAS TO BE RECOGNIZED AS INCOME OR EXPENSES, WHICH IS ASCERTAINED AND DEFINITE, IN TERMS OF THE CONTRACT AND CANNOT BE REGARDED AS NOTIONAL OR CONTINGENT. IT IS A DEBT OWED BY THE APPELLANT, WHICH ACCRUED ON THE DATE OF ENTERING INTO THE FORWARD CONTRACT ITSELF. THE EXPENDITURE UNDER THE ACCRUAL SYSTEM OF ITA NO. 5611/MUM/2015 M/S. KEC INTERNATIONAL LTD., 20 ACCOUNTING HAD, THUS, CRYSTALLIZED ON THE DATE OF THE CONTRACT AND THEREFORE THE SAME HAS BEEN RIGHTLY CLAIMED BY THE APPELLANT. RELIANCE IN THIS REGARD IS PLACED ON THE DECISION OF HON'BLE DELHI HIGH COURT IN C IT V/S. WOODWARD GOVERNOR INDIA PVT. LTD. (294 ITR 451), WHICH HAS BEEN SUBSEQUENTLY AFFIRMED BY THE HON'BLE SUPREME COURT IN 312 ITR 254, (A COPY OF THE SAID DECISION IS ENCLOSED IN THE COMPILATION OF CASE LAWS) WHEREIN IT HAS BEEN CATEGORICALLY HELD THAT THE INCREASE IN THE LIABILITY OF THE ASSESSEE ON ACCOUNT OF THE FLUCTUATION IN THE RATE OF FOREIGN EXCHANGE REMAINING ON THE LAST DAY OF THE FINANCIAL YEAR CANNOT BE DISALLOWED BY TREATING THE SAME AS NOTIONAL OR CONTINGENT, SINCE THE LOSS ARISING TO THE ASSESSEE DUE TO SUCH INCREASE IN THE LIABILITY, ACCRUES TO THE ASSESSEE IN THAT YEAR ITSELF. THE RELEVANT EXTRACT OF THE DECISION IS REPRODUCED HEREUNDER: 'THE LIABILITY AROSE OUT OF CONTRACTS ALREADY CONCLUDED. THE LIABILITY ALREADY STOOD ACCRUED THE MIN UTE THE CONTRACT WAS ENTERED INTO. THE MERE POSTPONEMENT OF THE PAYMENT TO A DIFFERENT DATE CANNOT EXTINGUISH THE LIABILITY AND RENDER IT NOTIONAL OR CONTINGENT. EVEN IF THE LIABILITY WAS DISCHARGED AT A FUTURE DATE, IT WOULD NEVERTHELESS BE A LIABILITY WH ICH WAS CERTAIN AND NOT CONTINGENT. THE MAIN INGREDIENT OF A CONTINGENT LIABILITY WAS THAT IT DEPENDED UPON THE HAPPENING OF A CERTAIN EVENT. THE CHANGE IN THE VALUE OF FOREIGN CURRENCY IN RELATION TO INDIAN CURRENCY WAS A FAIT ACCOMPLI AND NOT A NOTIONAL ONE. THEREFORE THE INCREASE IN LIABILITY DUE TO FOREIGN EXCHANGE FLUCTUATION AS PER THE EXCHANGE RATE PREVAILING ON THE LAST DATE OF THE FINANCIAL YEAR WAS ALLOWABLE AS A DEDUCTION AND WAS NOT A NOTIONAL OR A CONTINGENT LIABILITY......THE DECISION OF THE SUPREME COURT, IN BHARAT EARTH MOVERS LTD. V. CIT [2000] 245 ITR 428/112 TAXMAN 61, SETTLED THE POSITION. THAT DECISION EXPLAINS THAT WHAT SHOULD BE CERTAIN IS THE INCURRING OF THE LIABILITY AND IT BEING ESTIMATED WITH REASONABLE CERTAINTY, EVEN IF THE EXA CT QUANTIFICATION IS NOT FEASIBLE. EVEN IF THE LIABILITY IS DISCHARGED AT A FUTURE DATE, IT WILL NEVERTHELESS BE A LIABILITY WHICH IS CERTAIN AND NOT CONTINGENT. THIS APPROACH IS CONSISTENT WITH AND INFORMED BY THE ACCOUNTING PRACTICES IN TH E MERCANTILE SY STEM, WITH FURTHER GUIDANCE FROM THE ACCOUNTING STANDARDS OF THE ICAL WHICH HAVE RECEIVED JUDICIAL ACKNOWLEDGEMENT.' FROM THE FOREGOING DECISION, IT IS A SETTLED LEGAL POSITION THAT ANY LOSS ARISING AS ON THE YEAR - END DUE TO EXCHANGE FLUCTUATION OF ANY LI ABILITY WOULD BE REGARDED AS AN ACCRUED LOSS/GAIN (AS AGAINST A CONTINGENT/NOTIONAL LOSS/GAIN) OF THAT YEAR IRRESPECTIVE OF WHETHER THE PAYMENT FOR SUCH LIABILITY IS MADE IN THE SUBSEQUENT FINANCIAL YEAR. ALSO, RELIANCE IS PLACED ON THE FOLLOWING JUDGEMEN TS WHICH RELYING ON THE DECISION OF SUPREME COURT IN THE CASE OF CIT V/S. WOODWARD GOVERNOR INDIA PVT. LTD. HAD HELD THAT THE LOSS INCURRED BY THE ASSESSEE ON ACCOUNT OF VARIATION OF THE CONTRACT ON THE LAST DATE OF THE ACCOUNTING PERIOD AND BEFORE THE DAT E OF MATURITY OF THE FORWARD CONTRACT WAS AN ALLOWABLE DEDUCTION, ITA NO. 5611/MUM/2015 M/S. KEC INTERNATIONAL LTD., 21 A. DECISION OF THE MUMBAI SPECIAL BENCH HAS IN THE CASE OF DCIT V. BANK OF BAHRAIN & KUWAIT (41 SOT290) B. DECISION OF DELHI TRIBUNAL IN THE CASE OF BECHTEL INDIA (P.) LTD V/S. CIT [201 3] 33 TAXMANN.COM 213 (DELHI - TRIB.). C. DECISION OF THE BANGALORE TRIBUNAL IN THE CASE QUALITY ENGINEERING & SOFTWARE TECHNOLOGIES (P) LTD. V/S DCIT [2014] 52 TAXMANN.COM (BANGALORE - TRIB.). D. DECISION OF SUPREME COURT IN THE CASE OF OIL & NATURAL GAS CORPN. LTD. V/S. CIT[2010]189 TAXMAN292 (SC) 'APPLYING THESE FACTORS ON THE FACTS OF THAT CASE, IT WAS HELD THAT THE 'LOSS' SUFFERED BY THE ASSESSEE, MAINTAINING ACCOUNTS REGULARLY ON MERCANTILE SYSTEM AND FOLLOWING ACCOUNTING STANDARDS PRESCRIBED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA (ICAI), ON ACCOUNT OF FLUCTUATION IN THE RATE OF FOREIGN EXCHANGE AS ON THE DATE OF BALANCE - SHEET WAS AN ITEM OF EXPENDITURE UNDER SECTION 37(1) OF THE ACT, NOTWITHSTANDING THAT THE LIABILITY HAD NOT BEEN DIS CHARGED IN THE YEAR IN WHICH THE FLUCTUATION IN THE RATE OF FOREIGN EXCHANGE OCCURRED. 11. WE ARE OF THE OPINION THAT THE RATIO OF THE SAID DECISION, WITH WHICH WE ARE .IN RESPECTFUL AGREEMENT, SQUARELY APPLIES TO THE FACTS AT - HAND AND, THEREFORE, THE LOS S CLAIMED BY THE ASSESSEE ON ACCOUNT OF FLUCTUATION IN THE RATE OF FOREIGN EXCHANGE AS ON THE DATE OF BALANCE - SHEET IS ALLOWABLE AS EXPENDITURE UNDER SECTION 37(1) OF THE ACT.' FURTHER, IT IS SUBMITTED THAT SINCE THE ACCOUNTING STANDARDS MANDATORILY REQUI RES THE APPELLANT TO PROVIDE FOR SUCH MTM LOSSES, SUCH ACCOUNTING TREATMENT NEEDS TO BE CONSIDERED EVEN FOR THE PURPOSES OF DETERMINING THE ALLOWABILITY OF DEDUCTION FOR SUCH PROVISION UNDER THE ACT. IN THE PRESENT CASE TOO, THE APPELLANT HAS BEEN ACTUALLY PROVIDING FOR SUCH MTM LOSSES IN ITS BOOKS OF ACCOUNT IN ACCORDANCE WITH THE APPLICABLE ACCOUNTING STANDARDS AND ACCORDINGLY, EVEN FOR THIS REASON, THE DEDUCTION WOULD BE ALLOWABLE TO THE APPELLANT WHILE COMPUTING ITS TAXABLE INCOME. THUS, THE APPELLANT PRAYS THAT THE MTM LOSSES ARISING ON ACCOUNT OF FORWARD CONTRACTS ENTERED INTO BY THE APPELLANT BE CONSIDERED AS AN ACCRUED LOSS TO THE APPELLANT AND THEREBY ALLOWED AS DEDUCTION WHILE COMPUTING THE TAXABLE INCOME.' 6.3 THE ISSUE STANDS COVERED BY THE DEC ISION OF THE HON'BLE CIT(A) IN APPELLANT'S OWN CASE FOR A.Y. 2009 - 10. SUBSEQUENTLY, THE ORDER OF CIT(A) ON THIS ISSUE IS ALSO BEING UPHELD BY THE HON'BLE MUMBAI TRIBUNAL VIDE ITS ORDER FOR A.Y 2009 - 10. 6.4 THUS, FROM THE ABOVE FACTS AND CASE OF THE ABOVE G ROUND AND FROM THE RATIO OF THE ABOVE CITED DECISIONS, IT IS QUITE CLEAR THAT LOSS ACCRUING ON MARK TO MARKET VALUATION OF HEDGING CONTRACT IS AN ACCRUED LOSS. IN VIEW OF THE ABOVE THE AFORESAID GROUND IS ALLOWED. ITA NO. 5611/MUM/2015 M/S. KEC INTERNATIONAL LTD., 22 12.5. RESPECTFULLY FOLLOWING THE CO - ORDI NATE BENCH DECISION OF THIS TRIBUNAL IN ASSESSEES OWN CASE SUPRA, THE GROUND RAISED IN 4 & 5 RAISED BY THE REVENUE ARE DISMISSED. 13. GROUND NO. 6 & 7 RAISED BY THE REVENUE IS WITH REGARD TO THE ACTION OF THE LD. CIT(A) DIRECTING THE LD. AO TO DELETE TH E DISALLOWANCE MADE TOWARDS PROVISION FOR DOUBTFUL DEBTS AND ADVANCES IN THE SUM OF RS.4,63,28,957/ - BOTH UNDER NORMAL PROVISIONS OF THE ACT AS WELL AS IN COMPUTATION OF BOOK PROFIT U/S.115JB OF THE ACT. 14. THE BRIEF FACTS OF THIS ISSUE ARE THAT THE LD. AO OBSERVED FROM THE PROFIT AND LOSS ACCOUNT OF THE ASSESSEE THAT ASSESSEE HAS MADE A PROVISION OF DOUBTFUL DEBTS AMOUNTING TO RS.4,42,58,139/ - AND PROVISION FOR DOUBTFUL ADVANCES OF RS.20,70,818/ - DURING THE YEAR. THESE AMOUNTS WERE REDUCED FROM THE DEBTO RS AND ADVANCES FIGURE ON THE ASSET SIDE OF THE BALANCE SHEET. THE ASSESSEE SUBMITTED THAT IT IS ELIGIBLE TO CLAIM THE DEDUCTION FOR THIS AMOUNT U/S.36(1)(VII) OF THE ACT ON THE BASIS OF DECISION OF HONBLE SUPREME COURT IN THE CASE OF VIJAYA BANK REPORTED IN 323 ITR 166. THE LD. AO HOWEVER, DISREGARDED THE CONTENTIONS OF THE ASSESSEE STATING THAT THE ASSESSEE HAS NOT COMPLIED WITH THE REQUIREMENT OF SECTION 36(2)(I)(B) OF THE ACT AND HENCE, IT IS NOT ELIGIBLE FOR DEDUCTION OF CLAIM OF BAD DEBTS IN THE INST ANT CASE. ACCORDINGLY, THE LD. AO DISALLOWED THE SAME OF RS.4,63,28,957/ - TOWARDS PROVISION FOR DOUBTFUL DEBTS AND ADVANCE BOTH UNDER NORMAL PROVISIONS OF THE ACT AS WELL AS IN THE COMPUTATION OF BOOK PROFITS U/S.115JB OF THE ACT BASED ON AMENDMENT BROUGH T IN EXPLANATION - 1 OF SECTION 115JB (2) OF THE ACT BY FINANCE ACT, 2009 WITH RETROSPECTIVE EFFECT FROM 01/04/2001. THE ASSESSEE PLEADED BEFORE THE LD. CIT(A) THAT THE DISALLOWANCE WAS MADE BY THE LD. AO ON ITA NO. 5611/MUM/2015 M/S. KEC INTERNATIONAL LTD., 23 THE UNDERSTANDING THAT ASSESSEE COMPANY HAD DEBITE D THE PROFIT AND LOSS ACCOUNT WITH THE PROVISION FOR DOUBTFUL DEBTS OF RS. 4,42,58,139/ - AND PROVISION FOR DOUBTFUL ADVANCES OF RS.20,70,818/ - . IT WAS SUBMITTED THAT THIS POSITION IS FACTUALLY INCORRECT. IT WAS PLEADED THAT THE INCREASE IN THE RESPECTIVE L EDGER ACCOUNTS DURING THE YEAR WAS DUE TO TAKE OVER OF THE ASSETS AND LIABILITIES OF RPG CABLES LTD., IN PURSUANCE OF ITS MERGER WITH THE ASSESSEE COMPANY. THE ASSESSEE ALSO STATED THAT SINCE NO SHOWCAUSE NOTICE WAS ISSUED BY THE LD. AO, IN THIS REGARD , TH E ASSESSEE COULD NOT SUBMIT ENTIRE DETAILS AND THE PICTURE BEFORE THE LD. AO AND HENCE, THE SAME WERE SUBMITTED BEFORE THE LD. CIT(A). THE ASSESSEE SUBMITTED A STATEMENT SHOWING THE MOVEMENT OF PROVISION FOR DOUBTFUL DEBTS AND ADVANCES DURING THE YEAR UNDE R CONSIDERATION TO DRIVE HOME THE POINT THAT THERE WAS NO DEBIT OF RS.4,42,58,139/ - AND RS.20,70,818/ - IN ITS P & L ACCOUNT. THE ASSESSEE ALSO DREW THE ATTENTION OF NOTES OF ACCOUNTS POINT NO. 28 IN SCHEDULE 19 AND THE STATEMENT SHOWING THE MOVEMENT OF PROV ISION FOR DOUBTFUL DEBTS AND ADVANCES DURING THE YEAR. ON DUE APPRECIATION OF THE SAME, THE LD. CIT(A) OBSERVED THAT THERE IS NO DEBIT MADE TO THE PROFIT AND LOSS ACCOUNT OF THE ASSESSEE AND HENCE, THE ENTIRE BASIS OF THE LD. AO FOR MAKING THE SAID DISALL OWANCE FAILS AND ACCORDINGLY DELETED THE SAME BOTH UNDER NORMAL PROVISIONS AS WELL AS UNDER COMPUTATION OF BOOK PROFIT U/S.115JB OF THE ACT. 15. AGGRIEVED, THE REVENUE IS IN APPEAL BEFORE US ON THE FOLLOWING GROUNDS: - 6. ON THE FACTS AND IN THE CIRCUMSTA NCES OF THE CASE, THE LD. CIT(A) ERRED IN ALLOWING DEDUCTION OF THE PROVISION FOR DOUBTFUL DEBTS OF RS. 4,42.58,139/ - AND THE PROVISION FOR DOUBTFUL ADVANCES AMOUNTING TO RS. 20,70,818/ - . 7. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. C1T( A) ERRED IN HOLDING THAT NO ADJUSTMENT COULD BE MADE TO THE BOOK PROFIT UNDER CLAUSE (I) OF THE EXPLANATION (1) TO SECTION 115JB(2) ON ACCOUNT OF THE PROVISION FOR DOUBTFUL DEBTS & ADVANCES AMOUNTING TO RS.4,63,28,957/ - . ITA NO. 5611/MUM/2015 M/S. KEC INTERNATIONAL LTD., 24 16. WE HAVE HEARD RIVAL SUBMISSIO NS AND PERUSED THE MATERIAL AVAILABLE ON RECORD INCLUDING THE PAPER BOOK OF THE ASSESSEE. WE FIND FROM THE AUDITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31/03/2010 (ENCLOSED IN PAGES 1 TO 29 OF THE PAPER BOOK), THE ASSESSEE HAD CLAIMED TOTAL EXPENDITURE UNDER THE HEAD OF OTHER EXPENSES TO THE TUNE OF RS.36,204.10. LAKHS. THE BREAK - UP OF THE SAME IS PROVIDED IN SCHEDULE 1 6 OF THE SAID FINANCIAL STATEMENTS. ON PERUSAL OF THE BREAK - UP IN SCHEDULE 16, WE FIND THAT ASSESSEE HAD ACTUALLY SHOWN THE PROVISION FOR DOUBTFUL DEBTS (NET) IN NEGATIVE FIGURE OF RS.772.22 LAKHS (WHICH IN EFFECT REPRESENTS INCOME AND NOT AN EXPENDITURE). THIS ITSELF GOES TO PROVE THAT THERE WAS NO DEBIT OF ANY DOUBTFUL DEBTS AND ADVANCES IN THE P & L ACCOUNT WARRANTING ANY DISALLOWANCE TH EREOF. WE FIND FROM THE NOTES OF ACCOUNTS IN POINT NO.28, THE DIRECTORS OF THE COMPANY AND THE AUDITORS THEREOF HAD OBSERVED AS UNDER: - PROVISION FOR DOUBTFUL DEBTS AND FOR DOUBTFUL ADVANCES AS AT THE YEAR END INCLUDE RS.442.59 LACS AND RS.20.71 LACS RESP ECTIVELY RELATING TO THE SUNDRY DEBTORS / LOANS AND ADVANCES TRANSFERRED TO THE COMPANY IN TERMS OF THE SCHEME OF AMALGAMATION REFERRED TO IN NOTE 1 ABOVE. 16.1. THE NOTE NO.1 TO THE NOTES OF ACCOUNTS EXPLAINING THE ENTIRE SCHEME OF AMALGAMATION AS REPRO DUCED IN THE AUDITED FINANCIAL STATEMENTS IN PAGE 15 OF THE PAPER BOOK IS ALSO REPRODUCED HEREINBELOW FOR THE SAKE OF CONVENIENCE: - 1 SCHEME OF AMALGAMATION: 1 . 1 . A SCHEME OF AMALGAMATION (THE SCHEME) BETWEEN RPG CABLES LIMITED (RPGCL) AND THE COMPANY AND THEIR RESPECTIVE SHAREHOLDERS UNDER SECTION 391 TO 394 OF THE COMPANIES ACT, 1956 WAS SANCTIONED BY THE HON'BLE HIGH COURT OF JUDICATURE AT BOMBAY ON 26 TFL FEBRUARY, 2010 AND AT KARNATAKA, BANGLORE ON 17* MARCH, 2010. THE SCHEME, WHICH HAS BECOME OPERATIV E FROM 31 ST MARCH, 2010 UPON FILING OF THE CERTIFIED COPIES OF THE ORDERS OF THE HON'BLE HIGH COURTS WITH THE REGISTRAR OF COMPANIES ITA NO. 5611/MUM/2015 M/S. KEC INTERNATIONAL LTD., 25 IN THE RESPECTIVE STATES, IS EFFECTIVE FROM 1 ST MARCH, 2010 (THE APPOINTED DATE). 1 . 2 . PURSUANT TO THE SCHEME, WITH EFFECT FROM THE APPOINTED DATE RPGCL (TRANSFEROR COMPANY) IS AMALGAMATED IN THE COMPANY, AS A GOING CONCERN, WITH ALL ITS ASSETS, LIABILITIES, PROPERTIES, RIGHTS, BENEFITS AND INTEREST THEREIN SUBJECT TO EXISTING CHARGES THEREON IN FAVOUR OF BANKS AND FINANCIAL INSTIT UTIONS. 1 . 3 . IN CONSIDERATION FOR THE AMALGAMATION, FOR EVERY 20 FULLY PAID - UP EQUITY SHARES OF RS. 10 EACH OF RPGCL, 1 FULLY PAID - UP EQUITY SHARE AGGREGATING 20,73,068 FULLY PAID - UP EQUITY SHARES OF RS. 10 EACH OF THE COMPANY HAVE BEEN ISSUED AND ALLOTTED ON 2 6 TH APRIL, 2010, TO THE SHAREHOLDERS OF RPGCL WHOSE NAMES APPEARED IN THE REGISTER OF MEMBERS, AS ON 19 TH APRIL, 2010, BEING THE RECORD DATE. 1 . 4 . ALL THE STAFF, WORKMEN AND EMPLOYEES OF RPGCL IN SERVICE AS ON 1 ST MARCH, 2010 HAVE BECOME STAFF, WORKMEN AND EMP LOYEES OF THE COMPANY WITHOUT ANY BREAK IN THEIR SERVICE. 1 . 5 . IN TERMS OF THE SCHEME, THE COMPANY RECORDED ALL THE ASSETS AND LIABILITIES APPEARING IN THE BOOKS OF ACCOUNT OF RPGCL AND TRANSFERRED TO AND VESTED IN THE COMPANY AT THEIR FAIR VALUES AS ON 1 ST MAR CH, 2010. FOR THIS PURPOSE THE FAIR VALUE OF FIXED ASSETS IS AS CERTIFIED BY THE INDEPENDENT VALUERS AND FOR OTHER ASSETS INCLUDING INVESTMENTS IS BASED ON THE MANAGEMENT'S ASSESSMENT OF ITS RECOVERABILITY. THE DIFFERENCE OF RS. 8,497.87 LACS BETWEEN THE F AIR VALUE OF NET ASSETS OF RPGCL TRANSFERRED TO THE COMPANY, AND THE VALUE OF EQUITY SHARES ALLOTTED BY THE COMPANY AS PER PARAGRAPH 1.3 ABOVE HAS BEEN CREDITED TO 'CAPITAL RESERVE'. 1 . 6 . THE AMALGAMATION HAS BEEN ACCOUNTED FOR UNDER THE PURCHASE METHOD AS PRES CRIBED IN ACCOUNTING STANDARD (AS - 14) - ' ACCOUNTING FOR AMALGAMATIONS'. 16.2. WE FIND FROM THE REVISED STATEMENT OF COMPUTATION OF TOTAL INCOME FILED BEFORE THE LD. AO WHICH HAS BEEN TAKEN DUE COGNIZANCE BY THE LD. AO WHILE FRAMING THE ASSESSMENT, UNDER THE CAPTION OF PROVISION FOR DOUBTFUL DEBTS THAT T HE ASSESSEE HAD REFLECTED THE FIGURE AS NIL. THIS ITSELF AGAIN GOES TO PROVE THAT THERE WAS NO DEBIT TO THE PROFIT AND LOSS ACCOUNT IN THE SUM OF RS. 4,63,28,957/ - AS ALLEGED BY THE LD. AO WHILE MAKING THE DISALLOWANCE. WE FIND FROM PAGE 31 OF THE PAPER BOOK THAT ASSESSEE HAD REDUCED THE FOLLOWING SUMS FROM THE NET PROFIT AS PER PROFIT AND LOSS ACCOUNT FOR THE PURPOSE OF DETERMINING THE PROFITS AND ACCOUNTS OF THE BUSINESS. ITA NO. 5611/MUM/2015 M/S. KEC INTERNATIONAL LTD., 26 ( I ) BAD DEBTS WRITTEN OFF OUT OF PROVISION FOR DOUBTFUL DEBTS RS. 11,26,55,000/ - ( II ) PROVISION FOR DOUBTFUL DEBTS WRITTEN BACK (SINCE THE PROVISION WAS NOT ALLOWED AS DEDUCTION IN EARLIER YEAR WHILE CREATING THE PROVISION) RS.7,72,21,516/ - 16.3. WE ALSO FIND TH AT THE SAID COMPUTATION OF TOTAL INCOME WAS DULY SUPPORTED BY DETAILED NOTES WHICH WERE ALSO FILED BEFORE THE LD. AO, WHICH IS NOT IN DISPUTE BEFORE US. THE RELEVANT NOTE NO.4 IN RESPECT OF PROVISION FOR DOUBTFUL DEBTS AND ADVANCES IS AS UNDER: - 4. PROV ISION FOR DOUBTFUL DEBTS & ADVANCES: RS. 4.63,28,957. THE COMPANY HAS MADE THE PROVISION FOR DOUBTFUL DEBTS AMOUNTING TO RS. 4,42,58,139 AND PROVISION FOR DOUBTFUL ADVANCE OF RS.20,70,818 DURING THE YEAR. THOSE AMOUNT S WERE REDUCED FROM THE DEBTORS AND LOANS ADVANCE ON THE ASSET SIDE OF THE BALANCE SHEET. IT IS, SUBMITTED THAT THE COMPANY IS ELIGIBLE TO CLAIM THE DEDUCTION FOR THIS AMOUNT UNDER SECTION 36(1)(VII) RELYING UPON THE DECISION OF THE GUJARAT HIGH COURT IN THE CASE OF VITHALDAS DHANJIBHAI BARDANWALA (130 ITR 95). SUPREME COURT DECISION IN THE CASE OF VIJAYA BANK ( 323 ITR 166). IN THE BANKS CASE IT WAS CLARIFIED BY THE SUPREME COURT THAT 'PURSUANT TO INSERTED W.E.F 1.4.89 A MERE PROVISION FOR BAD DEBT IS NOT ENTITLED TO DEDUCTION U/S 36 (1) (VII) . HOWEVER IN PRESENT CASE , BESIDES DEBITING THE PROFIT AND L OSS ACCOUNT AND CREATING A PROVISION FOR BAD AND DOUBTFUL DEBT , THE ASSESSEE CORRESPONDINGLY / SIMULTANEOUSLY OBLITERATED THE SAID PROVISION BY REDUCING THE CORRESPONDING AMOUNT FROM THE DEBTORS ACCOUNT IN THE BALANCE SHEET. CONSEQUENTLY, AT THE END OF THE YEAR THE FIGURE IN THE LOANS AND ADVANCES OR DEBTOR ON THE ASSET SIDE OF THE BALANCE SHEET WAS SHOWN NET OF THE PROVISION FOR IMPUGNED BAD DEBT. ........... THE AO'S INSI STENCE THAT THE INDIVIDUAL ACCOUNT OF THE DEBTORS SHOULD BE WRITTEN OFF WAS NOT ACCEPTABLE BECAUSE (A) IT WAS BASED ON A MERE APPREHENSION THAT THE ASSESSEE MIGHT CLAIM DEDUCTION TWICE OVER AND IT WAS OPEN TO THE AO TO CHECK WHETHER THE ASSESSEE WAS CLAIMI NG DOUBLE DEDUCTION (B) IF THE INDIVIDUAL ACCOUNT WERE CLOSED , THE DEBTORS COULD IN RECOVERY SUITS RELY ON THE BANK STATEMENT AND CONTEND THAT NO AMOUNT IS DUE AND PAYABLE TO THE ASSESSEE AND (C) THE AO WAS EMPOWERED BY SECTION 41 ( 1 ) TO TAX THE RECOVERY. ' ITA NO. 5611/MUM/2015 M/S. KEC INTERNATIONAL LTD., 27 BASED ON ABOVE OBSERVATION OF THE SUPREME COURT THE AMOUNT WRITTEN OFF AND ALSO REDUCED FROM THE DEBTORS AND LOANS ACCOUNT IN THE BALANCE SHEET ARE ALLOWABLE DEDUCTION IN COMPUTING INCOME FOR THE YEAR. 4.A) COMPUTATION OF BOOK PROFIT FOR THE PURPOSE O F SECTION 115 JB . IN VIEW OF R THE EXPLANATION INSERTED IN SECTION 36 (1) (VII) THE ASSESSEE ARE NOW REQUIRED TO DEBIT THE PROFIT AND LOSS ACCOUNT BUT ALSO SIMULTANEOUSLY REQUIRED TO REDUCE THE LOANS AND ADVANCES OR DEBTORS FROM THE ASSETS SIDE OF THE BAL ANCE SHEET TO THE EXTENT OF CORRESPONDING AMOUNT SO THAT AT THE END OF THE YEAR ADVANCES/ DEBTORS FROM THE ASSETS SIDE OF THE BALANCE SHEET SHOWN NET OF THE PROVISION FOR THE IMPUGNED BAD DEBT/ ADVANCE. THE ABOVE REQUIREMENT IS SATISFIED IN RESPECT OF RS. 4,63,28,957 WRITTEN OFF BY US DURING THE YEAR. IN THE LIGHT OF THE SUPREME COURT DECISION IN THE CASE OF VIJAYA BANK ( 323 ITR 166) THE AMOUNT WRITTEN OFF BEING ASCERTAIN LIABILITY ALLOWED IN NORMAL COMPUTATION OF INCOME. THEREFORE IN COMPUTING THE BOOK PR OFIT OF THE YEAR AS PER PROVISIONS OF SECTION 115 JB SAID AMOUNT RS. 4,63,28,957 NOT ADDED TO THE BOOK PROFIT. 4.B) DEDUCTION OF PROVISION FOR DOUBTFUL DEBT WRITTEN BACK IN COMPUTING THE BOOK PROFIT U/S 115 JB IN THE CHARTERED ACCOUNTANT CERTIFICATE IN FO RM NO.29B A DEDUCTION OF AN AMOUNT OF RS 18,98,76,516 ALLOWED. HOWEVER SAME ARE NOT CONSIDER BY THE COMPANY AS DEDUCTION IN COMPUTING THE BOOK PROFIT AS PER THE REVISED RETURN OF INCOME SUBMITTED HEREWITH. THE BOOK PROFIT AS PER RETURN AND CA CERTIFICATE D EFER TO THAT EXTENT. 16.4. WE FIND THAT THIS NOTE NO.4(A) HAD CREATED ALL THE CONFUSION WHICH IS NOT IN CONSONANCE WITH THE PROFIT AND LOSS ACCOUNT OF THE ASSESSEE (AUDITED FINANCIAL STATEMENTS) AND THE REVISED COMPUTATION OF TOTAL INCOME OF THE ASSESSEE . HOWEVER, THE NOTE NO.4(B) IS RELEVANT FOR THE COMPUTATION OF TOTAL INCOME WHICH HAS ALREADY BEEN DISCUSSED HEREINABOVE, WHICH IN ANY CASE IS NOT IN DISPUTE BEFORE US. WE FIND THAT THE LD. CIT(A) HAD CATEGORICALLY OBSERVED FROM THE LEDGERS OF PROVISION FO R DOUBTFUL DEBTS AND ADVANCES THAT THERE WAS ABSOLUTELY NO DEBIT TO THE P & L ACCOUNT IN THE SUM OF RS.4,63,28,957/ - WARRANTING ANY DISALLOWANCE THEREOF. THIS FINDING OF THE LD. CIT(A) HAS NOT BEEN CONTROVERTED BY THE LD. DR BEFORE US. HENCE, WE DO NOT FIN D ANY INFIRMITY IN THE ORDER OF CIT(A) GRANTING RELIEF TO THE ASSESSEE IN THIS REGARD. ACCORDINGLY, THE GROUND NO.6 & 7 RAISED BY THE REVENUE ARE DISMISSED. ITA NO. 5611/MUM/2015 M/S. KEC INTERNATIONAL LTD., 28 17. IN THE RESULT, APPEAL OF THE REVENUE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 10 / 07 /201 9 SD/ - ( C.N. PRASAD ) SD/ - (M.BALAGANESH) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI ; DATED 10 / 07 / 2019 KARUNA , SR.PS COPY OF THE ORDER FORWARDED TO : BY ORDER, ( ASSTT. REGISTRAR) ITAT, MUMBAI 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A), MUMBAI. 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE. //TRUE COPY//