Vedanta Ltd (Successor to Cairn India Ltd), Gurgaon V. ACIT, Circle-26(1), New Delhi

ITA 6937/DEL/2017

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 4359 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 2 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-02-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Assessment Year: 2013-2014
• Appeal Filed On: 20-11-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SANDEEP MISHRA SENIOR
• Keywords: Depreciation; Transfer pricing; International transaction; Additional depreciation; Earning of tax free income; Question of law; Commercial expediency; Revised return
• Section: 92B; 14A; 115JB; 80IB; 32(1)(iia); 32; 144; 10

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I-1 : NEW DELHI) BEFORE HONBLE VICE PRESIDENT, SHRI N.K. SAINI AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA NO.6937/DEL./2017 (ASSESSMENT YEAR : 2013--14) M/S. VEDANTA LIMITED, VS. ACIT, CIRCLE 26 (1), (SUCCESSOR TO CAIRN INDIA LTD.), NEW DELHI. DLF ATRIA BUILDING, JACARANDA MARG, N BLOCK, DLF CITY PHASE II, GURGAON - 122 002 (HARYANA). (PAN : AACCC8799D) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI AJAY VOHRA, SENIOR ADVOCATE SHRI PIYUSH CHAWLA, CA MS. POONAM AHUJA, CA REVENUE BY : SHRI SANDEEP MISHRA, SENIOR DR DATE OF HEARING : 31.01.2019 DATE OF ORDER : 12.02.2019 O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : THE APPELLANT, M/S. VEDANTA LTD. (SUCCESSOR TO CAIR N INDIA LTD.) (HEREINAFTER REFERRED TO AS THE TAXPAYER) B Y FILING THE PRESENT APPEAL SOUGHT TO SET ASIDE THE IMPUGNED ORDER DATED 31.10.2017 PASSED BY THE AO IN CONSONANCE WITH THE ORDERS PASS ED BY THE LD. DRP/TPO UNDER SECTION 143 (3) READ WITH SECTION 144 C OF THE ITA NO.6937/DEL/2017 2 INCOME-TAX ACT, 1961 (FOR SHORT THE ACT) QUA THE ASSESSMENT YEAR 2013-14 ON THE GROUNDS INTER ALIA THAT :- 1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CA SE & IN LAW, THE LD. ASSESSING OFFICER (AO) ERRED IN ASSESSING T HE TOTAL INCOME AND ADJUSTED BOOK PROFIT OF THE APPELLANT AT RS.906,05,93,504 AND RS.6850,01,87,820 AS AGAINST RS.893,36,58,194 AND RS.6667,49,45,379/- RESPECTIV ELY DECLARED BY THE APPELLANT IN THE RETURN OF INCOME. 2. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE & IN LAW, THE LD. AO/DRP GROSSLY ERRED IN MAKING DISALLOWANCE OF RS.212,15,413 UNDER SECTION 14A OF THE ACT READ WIT H RULE 8D OF THE INCOME TAX RULES, 1962 ('THE RULES'). 2.1 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CAS E & IN LAW, THE LD. AO/DRP WITHOUT ASSIGNING ANY COGENT REASON DISREGARDED ACTUAL COMPUTATION OF EXPENDITURE RELAT ED TO EXEMPT INCOME AS WELL AS THIRD PARTY INDEPENDENT QUOTATION FOR MANAGING THE EXEMPT INCOME YIELDING INVESTMENTS OF THE ASSESSEE. 2.2 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CAS E & IN LAW, THE LD. AO/DRP GROSSLY ERRED IN MAKING THE AFORESAI D DISALLOWANCE WITHOUT RECORDING THE NECESSARY SATISF ACTION AS MANDATED IN SECTION 14A(2) OF THE ACT. 3. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE & IN LAW, THE LD. AO/DRP ERRED IN ADDING BACK DISALLOWANCE OF RS.212,15,413 UNDER SECTION L4A READ WITH RULE 8D O F THE RULES IN COMPUTING BOOK PROFIT UNDER SECTION 115J8 OF THE ACT. 4. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE & IN LAW, THE LD. AO/DRP ERRED IN ALLOWING CLAIM OF ADDITIONA L DEPRECIATION AMOUNTING TO RS.17,12,04,096 UNDER SEC TION 32(1)(IIA) OF THE ACT DESPITE THE FACT THAT APPELLA NT HAD NOT CLAIMED AT ALL WHILE FILING ITS ORIGINAL RETURN OF INCOME. 4.1 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CAS E & IN LAW, THE LD. AO/DRP ERRED IN OBSERVING THAT THE CLAIM OF ADDITIONAL DEPRECIATION WAS TO BE MANDATORILY ALLOWED IN TERMS OF EXPLANATION 5 TO SECTION 32(1) OF THE ACT, WITHOUT APPRECIATING THAT ADDITIONAL DEPRECIATION BEING OPTIONAL IN NATU RE, IS NOT COVERED WITHIN THE PURVIEW OF THE SAID EXPLANATION. 5. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE & IN LAW, THE LD. AO/DRP ERRED IN HOLDING THAT THE PROFIT AND LOSS ACCOUNT PREPARED BY THE APPELLANT WAS NOT IN ACCORDANCE WIT H PART II OF ITA NO.6937/DEL/2017 3 SCHEDULE VI TO THE COMPANIES ACT, 1956 AND, THEREFO RE, THE AO HAD JURISDICTION TO RECAST THE SAME. 5.1 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CAS E & IN LAW, THE LD. AO/DRP ERRED IN ADDING BACK THE AMOUNT OF D EPLETION OF PRODUCING PROPERTIES DEBITED IN THE PROFIT AND LOSS ACCOUNT USING 'UNIT OF PRODUCTION METHOD'; INSTEAD IN ALLOWING DE PRECIATION ON PRODUCING FACILITIES @ 5.28% ON STRAIGHT LINE METHO D, THEREBY MAKING ADJUSTMENT OF RS.180,40,27,029 TO THE BOOK P ROFIT UNDER SECTION 115JB OF THE ACT. 6. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE & IN LAW, THE LD. AO/TPO/DRP ERRED IN NOT APPRECIATING THAT T HE TRANSACTIONS OF REIMBURSEMENT OF RS.2,00,40,842, MA NPOWER, GENERAL AND ADMINISTRATIVE ('MGA') COST OFRS.237,09 ,69,90 1 AND PARENT COMPANY OVERHEADS ('PCO') COST OF RS.3,54,53 ,085 ARE NOT IN THE NATURE OF INTERNATIONAL TRANSACTION UNDE R SECTION 928(1) OF THE ACT AND HENCE OUTSIDE PURVIEW OF TRAN SFER PRICING PROVISIONS. 6.1 THAT ON FACTS AND CIRCUMSTANCES OF THE CASE AN D IN LAW, THE LD. AO/TPO/DRP ERRED IN NOT APPRECIATING THAT A S PRESCRIBED IN PRODUCTION SHARING CONTRACT/PETROLEUM RESOURCE AGREEMENT / JOINT OPERATING AGREEMENT, PARTNERS OF UNINCORPORATED JOINT VENTURE (UJV) ARE PERMISSIBLE TO PAY ONLY FOR ACTUAL COST INCURRED BY THE APPELLANT WITHOUT A NY MARK-UP. 6.2 THAT ON FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LD. AO/TPO/DRP ERRED IN NOT APPRECIATING T HAT THE TRANSACTION OF REIMBURSEMENT OF EXPENSES AMOUNTING TO RS.2,00,40,842 ENTERED INTO BY THE APPELLANT WITH I TS ASSOCIATED ENTERPRISES (' AES') IS IN THE NATURE OF PASS THROU GH COSTS AND HENCE NOTIONAL MARK UP OF 5% ON THE SAME IS UNWARRA NTED. 6.3 THAT ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE & IN LAW, THE LD. AO/TPO ERRED IN NOT APPLYING COMPARABL E UNCONTROLLED PRICE ('CUP') METHOD AS DIRECTED BY LD . DRP WITH RESPECT TO DETERMINATION OF ARM'S LENGTH PRICE OF M GA COSTS OF RS.211,41,48,589 REIMBURSED BY CEHL WHEN SAME TRANS ACTION WAS ENTERED INTO BETWEEN UNINCORPORATED JOINT VENTU RE ('UJV') OF RJ ON-901L OIL BLOCK (ALLEGEDLY THE APPELLANT) A ND THIRD PARTY OIL & NATURAL GAS CORPORATION OF INDIA LTD ('ONGC') . 6.4 THAT WITHOUT PREJUDICE TO THE ABOVE GROUNDS, TH E LD. AO/TPO/DRP ERRED IN IMPUTING NOTIONAL MARK UP OF 5% ON REIMBURSEMENT OF EXPENSES, MGA COSTS AND PCO COSTS IN GROSS DISREGARD OF RULE 108(2) OF THE INCOME TAX RULES, 1 962 ('THE RULES') AND OECD GUIDELINES. ITA NO.6937/DEL/2017 4 6.5 THAT ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE & IN LAW, LD. TPO GROSSLY ERRED IN HOLDING THAT: - THE APPELLANT HAS NOT FURNISHED ANY DOCUMENTARY EVIDENCE TO DEMONSTRATE THE BENEFITS RECEIVED FROM THE SERVICES PROVIDED BY THE AE, IGNORING THE SUBMISSIO NS AND DOCUMENTS SUBMITTED BY THE ASSESSEE DURING THE ASSESSMENT PROCEEDINGS - THE APPELLANT HAS NOT FURNISHED ANY COST BENEFIT AN ALYSIS WITH RESPECT TO COST OF SERVICES AND BENEFITS RECEI VED FROM AE VIS-A-VIS INDEPENDENT PARTIES. - THERE IS NO CLAUSE DEFINING THE SCOPE OF WORK FOR W HICH THE PAYMENT WAS TO BE MADE. - THERE IS ABSENCE OF WRITTEN BINDING CONTRACT BETWEE N THE PAYER AND PAYEE COMPANIES. - THE APPELLANT HAS NOT PROVIDED FULL DETAILS OF NATU RE AND EXTENT OF SERVICES PROVIDED BY AE. - THE APPELLANT HAS NOT PROVIDED BASIS FOR DETERMININ G THE REIMBURSEMENT TO BE CHARGED. 2. BRIEFLY STATED THE FACTS NECESSARY FOR ADJUDICAT ION OF THE CONTROVERSY AT HAND ARE : CAIRN INDIA LIMITED (CIL) , THE TAXPAYER WAS A RESIDENT COMPANY INCORPORATED UNDER THE COMPA NIES ACT, 1956 PRIMARILY ENGAGED IN THE BUSINESS OF EXPLORATI ON AND PRODUCTION OF MINERAL, OILS, PETROLEUM, GAS AND REL ATED BY PRODUCTS. THE TAXPAYER HAS ENTERED INTO PRODUCT SHARING CONTR ACTS (PSCS) QUA CERTAIN BLOCKS/OIL AND GAS FIELDS. SUBSEQUENTLY , ON JANUARY 25, 2017, CIL MERGED WITH VEDANTA LIMITED BY VIRTUE OF THE SCHEME OF ARRANGEMENT UNDER SECTIONS 391(2) AND 394 READ WITH SECTIONS 100 TO 103 OF THE COMPANIES ACT, 1956 AND SECTION 52 OF THE COMPANIES ACT, 1956 WITH THE APPOINTED DATE OF 1 ST APRIL, 2016 (EFFECTIVE DATE 11.04.2017) VIDE APPROVAL DATED MAR CH 23, 2017 ACCORDED BY NATIONAL COMPANY LAW TRIBUNAL (NCLT). ITA NO.6937/DEL/2017 5 3. THE TAXPAYER IS ENGAGED IN THE BUSINESS OF SURVE YING, PROSPECTING, DRILLING, EXPLORING, ACQUIRING, DEVELO PING, PRODUCING, MAINTAINING, REFINING, STORING, TRADING, SUPPLYING, TRANSPORTING, MARKETING, DISTRIBUTING, IMPORTING, EXPORTING AND G ENERALLY DEALING IN MINERAL OILS, PETROLEUM, GAS AND RELATED BY-PROD UCTS AND OTHER ACTIVITIES INCIDENTAL TO THE ABOVE. THE TAXPAYER A S PART OF ITS BUSINESS ACTIVITIES ALSO HELD INTERESTS IN ITS SUBS IDIARY COMPANIES WHICH HAVE BEEN GRANTED RIGHTS TO EXPLORE AND DEVEL OP OIL EXPLORATION BLOCKS. THE TAXPAYER IS A PARTICIPANT IN THE VARIOUS OIL AND GAS BLOCKS/FIELDS WHICH ARE IN THE NATURE OF JO INTLY CONTROLLED ASSETS GRANTED BY THE GOVERNMENT OF INDIA THROUGH P RODUCTION SHARING CONTRACTS ENTERED INTO BETWEEN THE COMPANY AND GOVERNMENT OF INDIA AND OTHER VENTURE PARTNERS. 4. DURING THE YEAR UNDER ASSESSMENT, THE TAXPAYER E NTERED INTO INTERNATIONAL TRANSACTION AND SPECIFIED DOMESTIC TR ANSACTIONS REPORTED IN FORM 3CEB AS UNDER :- INTERNATIONAL TRANSACTIONS S.NO. NATURE OF TRANSACTION AMOUNT IN (RS.) METHOD APPLIED 1 BANK GUARANTEE 16,01,369 CUP 2 SUBSCRIPTION OF EQUITY SHARES 1,37,37,49,700 OTHER METHOD 3 RECOVERY OF EXPENSES 2,00,40,842 4 REIMBURSEMENT OF EXPENSES 1,80,55,556 5 RECOVERY OF EXPENSES FROM UJVS 2,42,79,41,802 6 REIMBURSEMENT OF EXPENSES TO UJVS 15,93,54,699 ITA NO.6937/DEL/2017 6 SPECIFIED DOMESTIC TRANSACTIONS S.NO. NATURE OF TRANSACTION AMOUNT IN (RS.) METHOD APPLIED 1 DIRECTORS REMUNERATION 17,44,90,925 OTHER METHOD 2 DIRECTOR SITTING FEE 13,40,000 3 TRANSFER OF INVENTORY AND CONSUMABLES FROM AN ELIGIBLE UNIT TO NON-ELIGIBLE UNIT 1,70,79,100 4 HEAD OFFICE ALLOCATION 33,78,17,143 5 SHARE OF MANPOWER, GENERAL AND ADMINISTRATIVE COST 211,41,48,575 5. DURING THE YEAR UNDER ASSESSMENT, THE TAXPAYER H AS INCURRED EXPENSES WHICH WERE LATER ON REIMBURSED TO IT BY IT S ASSOCIATED ENTERPRISES (AES) ON COST TO COST BASIS, WHICH ARE DETAILED AS UNDER:- (I) RECOVERY OF CONSULTANCY EXPENSES RS.98,39,539/- (II) RECOVERY OF TRAVEL AND ACCOMMODATION EXPENSES RS.86,99,335/- (III) RECOVERY OF TRAVEL AND ACCOMMODATION EXPENSES RS.12,58,195/- (IV) RECOVERY OF STATIONERY AND MISC. EXPENSES RS.2,43,773/- (V) PARENT COMPANY OVERHEADS RS.3,54,53,085/- (VI) SHARE OF MGA COST RECHARGED TO UJV RS.24,51,68 ,589/- (VII) SHARE OF MGA COST RECHARGED TO UJV RS.211,41, 48,575/- (VIII) SHARE OF MGA COST THROUGH UJV RS.1,16,52,723 /- TOTAL RS.2,42,64,63,814/- 6. THE LD. TPO SOUGHT TO ADD MARKUP TO THE SERVICES RENDERED BY THE TAXPAYER FOR WHICH IT WAS REIMBURSED ON COST TO COST BASIS ON THE GROUND THAT AS TO WHY FINANCE COST AND OTHER OVERHEADS COMPONENTS WAS NOT CHARGED. DECLINING THE CONTENTI ONS RAISED BY ITA NO.6937/DEL/2017 7 THE TAXPAYER, THE LD. TPO PROCEEDED TO ADD MARKUP O F 5% AND THEREBY PROPOSED TO DETERMINE THE ARM'S LENGTH PRIC E OF AFORESAID TRANSACTIONS ENTERED INTO BY THE TAXPAYER TO THE TU NE OF RS.12,13,23,191/-. 7. AO NOTICED FROM PERUSAL OF PROFIT & LOSS ACCOUNT AND BALANCE SHEET THAT THE TAXPAYER HAD INVESTED IN SHA RES AND MUTUAL FUNDS IN TAX FREE BONDS AND THEREBY EARNED DIVIDEND INCOME AND INTEREST INCOME OF RS.94,74,34,528/- AND RS.4,03,26 ,027/- RESPECTIVELY WHICH WAS CLAIMED AS EXEMPT INCOME UND ER SECTION 10 OF THE ACT AND HAS ADDED BACK THE AMOUNT OF RS.26,9 6,640/- ON ACCOUNT OF EXPENSES PROPORTIONATE TO EARN THIS INCO ME UNDER SECTION 14A AND 115 JB OF THE INCOME-TAX ACT, 1961 (FOR SHORT THE ACT). CONSEQUENTLY, AO MADE DISALLOWANCE OF RS.2,3 9,10,053/- MINUS RS.26,96,640/- ALREADY OFFERED FOR TAX BY THE TAXPAYER UNDER SECTION 14A READ WITH RULE 8D IN COMPUTING THE PRO FIT UNDER SECTION 115 JB OF THE ACT. AO/DRP HAVE ALSO ALLOWED CLAIM OF ADDITIONAL DEPRECIATION AMOUNTING TO RS.17,12,04,09 6/- UNDER SECTION 32(1)(IIA) OF THE ACT WHICH HAS NOT BEEN CL AIMED BY THE TAXPAYER WHILE FILING ITS ORIGINAL RETURN OF INCOME . 8. AO/DRP HAVE ALSO REDUCED THE DEPRECIATION TO RS.164,14,71,567/- BY RECASTING THE AUDITED FINANCI AL STATEMENT AND THEREBY MADE DISALLOWANCE OF RS.180,40,27,029/- TO THE PEAK PROFIT ITA NO.6937/DEL/2017 8 UNDER SECTION 115 JB OF THE ACT BY USING UNIT OF P RODUCTION METHOD INSTEAD OF ALLOWING DEPRECIATION ON PRODUCI NG FACILITY AT 5.28% ON STRAIGHT LINE METHOD. 9. THE TAXPAYER CARRIED THE MATTER BY WAY OF FILING OBJECTIONS BEFORE THE LD. DRP WHO HAS DISPOSED OF THE SAME BY CONFIRMING THE PROPOSAL MADE BY THE LD. TPO. 10. IN COMPLIANCE TO THE ORDER PASSED BY THE TPO/DR P, AO PROCEEDED TO COMPUTE THE INCOME OF THE TAXPAYER FOR THE YEAR UNDER ASSESSMENT AS UNDER :- CAIRN INDIA LTD. AY 2013-14 UNDER NORMAL PROVISIONS AMOUNT (IN RS.) GROSS TOTAL INCOME AS PER RETURN OF INCOME 6793,84,85,088/- ADD : TRANSFER PRICING ADJUSTMENTS 12,13,23,191/- ADD: DISALLOWANCE U/S 14A READ WITH RULE 8D 2,39,12,053/- LESS : ALREADY OFFERED FOR TAX BY THE ASSESSEE U/S 14A (26,96,640/-) 14,25,38,604/- GROSS TOTAL INCOME 6808,10,23,691/- LESS : DEDUCTION U/S 80IB (9) AS PER ORIGINAL RETURN (5900,48,26,894/-) LESS : IMPACT OF ADDITIONAL DEPRECIATION (1,56,03,293) TOTAL INCOME 906,05,93,504/- TAX PAYABLE BASIC @ 30% 271,81,78,051/- ADD : SURCHARGE @ 5% 13,59,08,903/- ADD : EDUCATION CESS 3% 8,56,22,609/- TOTAL TAX 293,97,09,563/- UNDER MAT PROVISIONS U/S 115JB OF THE I.T. ACT, 1961 BOOK PROFIT SHOWN IN RETURN 6667,49,45,379/- ITA NO.6937/DEL/2017 9 ADD : EXPENSES RELATED TO EXEMPT INCOME (RS.239,12,053 RS.26,96,604) 212,15,413/- ADD : EXCESS DEPRECIATION DISALLOWED UNDER UOP METHOD 180,40,27,029/- 6850,01,87,820/- TAXABLE BOOK PROFIT U/S 115JB 6850,01,87,820/- TAX PAYABLE BASIC @ 18.5% 1267,25,34,747/- ADD : SURCHARGE @ 5% 63,36,26,737/- ADD : EDUCATION CESS 3% 39,91,84,845/- TOTAL TAX PAYABLE UNDER MAT 1370,53,46,329/- 11. SO, THE AO ASSESSED THE TOTAL TAX PAYABLE UNDER SECTION 115JB AT RS.13,70,53,46,329/-. THE TAXPAYER ORDERED TO BE CHARGED ON PEAK PROFITS UNDER SECTION 115 JB OF THE ACT. 12. FEELING AGGRIEVED, THE TAXPAYER HAS COME UP BEF ORE THE TRIBUNAL BY WAY OF FILING THE PRESENT APPEAL. 13. WE HAVE HEARD THE LD. AUTHORIZED REPRESENTATIVE S OF THE PARTIES TO THE APPEAL, GONE THROUGH THE DOCUMENTS R ELIED UPON AND ORDERS PASSED BY THE REVENUE AUTHORITIES BELOW IN T HE LIGHT OF THE FACTS AND CIRCUMSTANCES OF THE CASE. OUR GROUND-WI SE FINDINGS ARE AS UNDER. GROUND NO.1 14. GROUND NO.1 NEEDS NO FINDINGS BEING GENERAL IN NATURE. GROUND NOS.2, 2.1 & 2.2 15. AO AFTER NOTICING THE INVESTMENT MADE BY THE TA XPAYER IN SHARES, MUTUAL FUNDS AND TAX FREE BONDS FROM WHICH IT HAS EARNED ITA NO.6937/DEL/2017 10 DIVIDEND INCOME AND INTEREST INCOME TO THE TUNE OF RS.94,74,34,528/- AND RS.4,03,26,027/- RESPECTIVELY CLAIMED AS EXEMPT INCOME UNDER SECTION 10 OF THE ACT PROCEEDED TO MAKE DISALLOWANCE OF RS.2,12,15,413/- BY INVOKING THE PR OVISIONS CONTAINED UNDER SECTION 14A READ WITH RULE 8D OF TH E INCOME-TAX RULES, 1962 (FOR SHORT THE RULES). LD. AR FOR THE TAXPAYER CHALLENGING THE IMPUGNED FINDING CONTENDED THAT AO WITHOUT DIS- RECORDING DISSATISFACTION AS TO THE ACTUAL COMPUTAT ION OF EXPENDITURE INCURRED BY THE TAXPAYER TO EARN THE EX EMPT INCOME PROCEEDED TO ARBITRARILY MADE THE DISALLOWANCE WHIC H IS NOT SUSTAINABLE. 16. HOWEVER, AT THE SAME TIME, LD. AR FOR THE TAXPA YER FAIRLY CONCEDED THAT THIS ISSUE HAS BEEN DECIDED AGAINST T HE TAXPAYER IN ASSESSMENT YEARS 2011-12 AND 2012-13 BUT APPEAL ON THIS ISSUE ON QUESTION OF LAW IS LYING ADMITTED IN THE HONBLE DE LHI HIGH COURT. 17. UNDISPUTEDLY, AO/DRP HAVE DECIDED THIS ISSUE AG AINST THE TAXPAYER BY FOLLOWING THEIR OWN DECISION RENDERED I N ASSESSMENT YEARS 2011-12 AND 2012-13. AO BASED ITS DECISION ON THE FACT THAT THE TAXPAYER HAS FAILED TO CONSIDER INDIRECT EXPENS ES IN THE SHAPE OF ESTABLISHMENT IN ADDITION TO DIRECT EXPENSES AND TH ERE ARE LOT OF COST FACTORS INVOLVED IN INVESTMENT IN SHARES AND M UTUAL FUNDS. ITA NO.6937/DEL/2017 11 18. IN THE IDENTICAL SET OF FACTS IN TAXPAYERS OWN CASE FOR AY 2011-12, AO/DRPS DECISION OF MAKING DISALLOWANCE U NDER SECTION 14A UNDER THE NORMAL PROVISIONS OF THE AC T HAS BEEN UPHELD WHICH HAS BEEN FOLLOWED BY AO/DRP WHILE PASS ING THE IMPUGNED ORDER. 19. CO-ORDINATE BENCH OF THE TRIBUNAL IN THE TAXPAYERS OWN CASE FOR AY 2011-12 DECIDED BY ORDER DATED 09.10.20 17 IN ITA NO.1459/DEL/2016 , AVAILABLE AT PAGES 82 OF THE CASE LAW PAPER BOOK, THRASHED THE ISSUE AT LENGTH AND DECIDED AGAI NST THE TAXPAYER BY RETURNING FOLLOWING FINDINGS :- 5. ON GOING THROUGH THE ABOVE EXTRACTION FROM THE ASSESSMENT ORDER, IT IS ABUNDANTLY CLEAR THAT THE A SSESSING OFFICER DID NOT FIND SATISFACTORY THE REPLY OF THE ASSESSEE AS REGARDS THE DISALLOWANCE OF RS.18.00 LAC ON THE BAS IS OF THE QUOTATION FROM JM FINANCIAL SERVICES. HAVING REGARD TO THE LANGUAGE OF SECTION 14A(2), PROVIDING FOR EXAMINING THE CLAIM `HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, I T WAS ONCE AGAIN REQUIRED TO FURNISH THE WORKING OF DISALLOWAN CE UNDER SECTION 14A. THE ASSESSEE FURNISHED WORKING OF EXPE NSES U/S 14A HAVING REGARD TO ITS ACCOUNTS COMPUTING THE AMOUNT OF DISALLOWANCE AT RS. 13,35,108. THE SAME WAS AGAIN C ONSIDERED CAREFULLY BUT NOT FOUND TO BE CORRECT AS THE ASSESS EE : `DID NOT CONSIDER VARIOUS ASPECTS OF INDIRECT EXPENSES IN TH E SHAPE OF ESTABLISHMENT IN ADDITION TO DIRECT EXPENSES. HE FURTHER FOUND THAT : `THERE ARE LOT OF COST FACTORS INVOLVED IN I NVESTMENT IN SHARES/MUTUAL FUNDS, WHICH WERE NOT CONSIDERED BY THE ASSESSEE. IN THE NEXT PARA, THE ASSESSING OFFICER DEALT WITH THE CLAIM OF THE ASSESSEE ABOUT THE NOT MAKING ANY INVESTMENT IN SHA RES OUT OF BORROWED FUNDS. HE PLACED RELIANCE ON THE JUDGMENT OF HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. AB HISHEK INDUSTRIES [2006] 156 TAXMAN 257 (P&H) TO NEGATIVE THE ASSESSEES CLAIM ON THIS ISSUE AS WELL. THAT IS HOW , HE DID NOT FIND CORRECT THE ASSESSEES WORKING OF DISALLOWANCE. THE REAFTER, THE PROVISIONS OF SECTION 14A READ WITH RULE 8D WERE AP PLIED TO DETERMINE THE AMOUNT OF EXPENDITURE IN RELATION TO INCOME NOT INCLUDIBLE IN TOTAL INCOME. ITA NO.6937/DEL/2017 12 6. IT IS THUS DISCERNIBLE FROM PAGE 6 OF THE ASSES SMENT ORDER THAT THE ASSESSING OFFICER RECORDED PROPER SATISFAC TION WITH REGARD TO THE ASSESSEES COMPUTATION OF DISALLOWANC E AND ONLY THEREAFTER MOVED TO COMPUTE DISALLOWANCE U/S 14A OF THE ACT IN TERMS OF RULE 8D OF THE INCOME-TAX RULES, 1962. IN OUR CONSIDERED OPINION, THE ASSESSING OFFICER DID RECOR D PROPER SATISFACTION IN TERMS OF SECTION 14(2) OF THE ACT B EFORE RESORTING TO RULE 8D. THIS CONTENTION OF THE ASSESSEE, THEREF ORE, FAILS. 7. FIRST PART OF THE DISALLOWANCE BY THE AO IS RS. 9.63 CRORE AND ODD WHICH HAS BEEN MADE UNDER RULE 8D(2)(II). T HIS PROVISION STIPULATES THAT IN A CASE WHERE THE ASSES SEE HAS INCURRED EXPENDITURE BY WAY OF INTEREST DURING THE YEAR WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME, THE DISALLOWANCE SHALL BE MADE FOR AN AMOUNT COMPUTED I N ACCORDANCE WITH THE FORMULA GIVEN THEREIN. SUM AND SUBSTANCE OF DISALLOWANCE UNDER RULE 8D(2)(II) IS THAT THE IN TEREST RELATABLE TO INVESTMENTS/SECURITIES YIELDING EXEMPT INCOME IS TO BE DISALLOWED. 8. AT THIS JUNCTURE, IT IS RELEVANT TO NOTE THAT SE CTION 36(1)(III) PROVIDES FOR DEDUCTION OF INTEREST OF THE AMOUNT OF INTEREST PAID IN RESPECT OF CAPITAL BORROWED FOR THE PURPOSE OF B USINESS OR PROFESSION. THE ESSENCE OF THIS PROVISION IS THAT THE INTEREST SHOULD BE ALLOWED SO LONG AS THE CAPITAL BORROWED, ON WHICH SUCH INTEREST IS PAID, IS USED FOR THE PURPOSE OF BUSINE SS OR PROFESSION. IF, HOWEVER, AN ASSESSEE IS HAVING ITS OWN INTEREST FREE SURPLUS FUNDS AND SUCH FUNDS ARE UTILISED AS INTEREST FREE ADVANCES EVEN FOR A NON-BUSINESS PURPOSE, THERE CANNOT BE ANY DIS ALLOWANCE OF INTEREST PAID ON INTEREST BEARING LOANS. THE HON'B LE BOMBAY HIGH COURT IN CIT VS. RELIANCE UTILITIES AND POWER LTD. (2009) 313 ITR 340 (BOM), HAS HELD THAT WHERE AN ASSESSEE POSSESSED SUFFICIENT INTEREST FREE FUNDS OF ITS OWN WHICH WER E GENERATED IN THE COURSE OF RELEVANT FINANCIAL YEAR, APART FROM S UBSTANTIAL SHAREHOLDERS FUNDS, PRESUMPTION STANDS ESTABLISHED THAT THE INVESTMENTS IN SISTER CONCERNS WERE MADE BY THE ASS ESSEE OUT OF INTEREST FREE FUNDS AND, THEREFORE, NO PART OF INTE REST ON BORROWINGS CAN BE DISALLOWED ON THE BASIS THAT THE INVESTMENTS WERE MADE OUT OF INTEREST BEARING FUNDS. IN THAT CA SE, THE AO RECORDED A FINDING THAT A SUM OF RS.213 CRORE WAS I NVESTED BY THE ASSESSEE OUT OF ITS OWN FUNDS AND RS.1.74 CRORE OUT OF BORROWED FUNDS. ACCORDINGLY, DISALLOWANCE OF INTEREST WAS MA DE TO THE TUNE OF RS.2.40 CRORE. THE ASSESSEE ARGUED THAT NO PART OF INTEREST BEARING FUNDS HAD GONE INTO INVESTMENT IN THOSE TWO COMPANIES IN RESPECT OF WHICH THE AO MADE DISALLOWANCE OF INT EREST. IT WAS ALSO ARGUED THAT INCOME FROM OPERATIONS OF THE COMP ANY WAS RS.418.04 CRORE AND THE ASSESSEE HAD ALSO RAISED CA PITAL OF ITA NO.6937/DEL/2017 13 RS.7.90 CRORE, APART FROM RECEIVING INTEREST FREE D EPOSIT OF RS.10.03 CRORE. THE ASSESSEE SUBMITTED BEFORE THE FIRST APPELLATE AUTHORITY THAT THE BALANCE-SHEET OF THE ASSESSEE AD EQUATELY DEPICTED THAT THERE WERE ENOUGH INTEREST FREE FUNDS AT ITS DISPOSAL FOR MAKING INVESTMENT. THE LD. CIT(A) GOT CONVINCED WITH THE ASSESSEES SUBMISSIONS AND DELETED THE ADDITION. BE FORE THE TRIBUNAL, IT WAS CONTENDED ON BEHALF OF THE REVENUE THAT THE SHAREHOLDERS FUNDS WERE UTILIZED FOR THE PURCHASE OF ITS ASSETS AND HENCE THE ASSESSEE WAS LEFT WITH NO RESERVE OR OWN FUNDS FOR MAKING INVESTMENT IN THE SISTER CONCERN. THUS, IT W AS ARGUED THAT THE BORROWED FUNDS HAD BEEN UTILIZED FOR THE PURPOS E OF MAKING INVESTMENT IN THE SISTER CONCERN AND THE DISALLOWAN CE OF INTEREST WAS RIGHTLY CALLED FOR. THE TRIBUNAL, ON APPRECIATI ON OF FACTS, RECORDED A FINDING THAT THE ASSESSEE HAD SUFFICIENT FUNDS OF ITS OWN FOR MAKING INVESTMENT WITHOUT USING THE INTERES T BEARING FUNDS. ACCORDINGLY, THE ORDER OF CIT(A) WAS UPHELD. WHEN THE MATTER CAME UP BEFORE THE HONBLE HIGH COURT, IT WA S CONTENDED BY THE DEPARTMENT THAT THE SHAREHOLDERS FUNDS STOO D UTILIZED IN THE PURCHASE OF FIXED ASSETS AND HENCE COULD NOT BE CONSTRUED AS AVAILABLE FOR INVESTMENT IN SISTER CONCERN. REPELL ING THIS CONTENTION, THE HONBLE HIGH COURT OBSERVED THAT : IN OUR OPINION, THE VERY BASIS ON WHICH THE REVENUE HAD SO UGHT TO CONTEND OR ARGUE THEIR CASE THAT THE SHAREHOLDERS FUND TO THE TUNE OF OVER RS.172 CRORE WAS UTILIZED FOR THE PUR POSE OF FIXED ASSETS IN TERMS OF THE BALANCE-SHEET AS ON MARCH 31 , 1999, IS FALLACIOUS. IN UPHOLDING THE ORDER OF THE TRIBUNA L, THE HONBLE HIGH COURT HELD THAT: IF THERE BE INTEREST FREE FU NDS AVAILABLE TO AN ASSESSEE SUFFICIENT TO MEET ITS INVESTMENT AND A T THE SAME TIME THE ASSESSEE HAD RAISED A LOAN, IT CAN BE PRESUMED THAT THE INVESTMENTS WERE FROM THE INTEREST FREE FUNDS AVAIL ABLE. THEREAFTER, THE JUDGMENT OF THE HONBLE SUPREME COU RT IN THE CASE OF EAST INDIA PHARMACEUTICAL WORKS LTD. VS. CI T (1997) 224 ITR 627 (SC) AND ALSO THE JUDGMENT OF THE HONB LE CALCUTTA HIGH COURT IN WOOLCOMBERS OF INDIA LTD. VS. CIT (19 81) 134 ITR 219 (CAL) WERE CONSIDERED. IT WAS FINALLY CONC LUDED THAT: THE PRINCIPLE, THEREFORE, WOULD BE THAT IF THERE A RE FUNDS AVAILABLE BOTH INTEREST FREE AND OVERDRAFT AND/OR L OANS TAKEN, THEN A PRESUMPTION WOULD ARISE THAT THE INVESTMENTS WOULD BE OUT OF INTEREST FREE FUNDS GENERATED OR AVAILABLE W ITH THE COMPANY, IF THE INTEREST FREE FUNDS WERE SUFFICIENT TO MEET THE INVESTMENT. CONSEQUENTLY THE INTEREST WAS HELD TO BE DEDUCTIBLE IN FULL. FROM THE ABOVE JUDGMENT, IT IS MANIFEST TH AT THERE CAN BE NO PRESUMPTION THAT THE SHAREHOLDERS FUND OF A COM PANY WAS UTILIZED FOR THE PURCHASE OF FIXED ASSETS. IF AN AS SESSEE HAS INTEREST FREE FUNDS AS WELL AS INTEREST BEARING FUN DS AT ITS DISPOSAL, THEN THE PRESUMPTION WOULD BE THAT INVEST MENTS WERE MADE FROM INTEREST FREE FUNDS AT THE DISPOSAL OF TH E ASSESSEE. SIMILAR VIEW HAS BEEN TAKEN BY THE HON'BLE DELHI HI GH COURT IN CIT VS. TIN BOX COMPANY (2003) 260 ITR 637 (DEL), H OLDING THAT WHEN THE CAPITAL AND INTEREST FREE UNSECURED L OAN WITH THE ITA NO.6937/DEL/2017 14 ASSESSEE FAR EXCEEDED THE INTEREST FREE LOAN ADVANC ED TO THE SISTER CONCERN, DISALLOWANCE OF PART OF INTEREST OUT OF TO TAL INTEREST PAID BY THE ASSESSEE TO THE BANK WAS NOT JUSTIFIED. 9. APPLYING THE ABOVE PROPOSITION IN THE CONTEXT OF SECTION 14A, THE HON'BLE KARNATAKA HIGH COURT IN CIT & ANR VS. M ICROLABS (2016) 383 ITR 490 (KAR) HAS HELD THAT WHEN INVESTM ENTS ARE MADE FROM COMMON POOL AND NON-INTEREST BEARING FUND S ARE MORE THAN THE INVESTMENT IN TAX FREE SECURITIES, NO DISALLOWANCE OF INTEREST EXPENDITURE U/S 14A CAN BE MADE. THIS VIEW HAS BEEN TAKEN BY FOLLOWING THE JUDGMENT OF THE HON'BLE BOMB AY HIGH COURT IN CIT VS. HDFC BANK LTD. (2014) 366 ITR 515 (BOM). IT IS FURTHER OBSERVED THAT THIS ISSUE IS NO MORE RES INTEGRA IN VIEW OF THE RECENT JUDGMENT DELIVERED BY THE HON'BLE SUP REME COURT IN GODREJ & BOYCE MANUFACTURING COMPANY LTD. VS. DC IT (2017) 394 ITR 449 (SC), IN WHICH IT HAS BEEN HELD THAT WHEN INTEREST FREE FUNDS IN THE FORM OF SHARE CAPITAL AN D RESERVES ARE MORE THAN INVESTMENT, THEN NO DISALLOWANCE OF INTER EST CAN BE MADE U/S 14A. 10. ADVERTING TO THE FACTS OF THE INSTANT CASE, WE FIND THAT THE ASSESSING OFFICER HAS TAKEN VALUE OF INVESTMENTS YI ELDING EXEMPT INCOME AT RS.1,179.96 CRORE. AS AGAINST THIS, THE A SSESSEES SHARE CAPITAL WITH THE RESERVE AND SURPLUS AT THE CLOSE O F THE YEAR STANDS AT RS.25,351.75 CRORE. THIS SHOWS THAT THE A SSESSEES SHAREHOLDERS FUND IS FAR IN EXCESS OF THE AMOUNT O F INVESTMENTS IN SECURITIES YIELDING EXEMPT INCOME. 11. THE LD. DEPARTMENTAL REPRESENTATIVE VEHEMENTL Y ARGUED THAT THE CONTENTION OF THE ASSESSEE FOR HAVING UTIL IZED IDLE IPO PROCEEDS IN MAKING INVESTMENTS IS NOT CORRECT AND H ENCE DISALLOWANCE TOWARDS INTEREST UNDER RULE 8D(2)(II) SHOULD BE SUSTAINED. THIS WAS SOUGHT TO BE ESTABLISHED W.R.T. THE ANNUAL REPORTS OF THE ASSESSEE COMPANY FOR THE PRECEDING Y EARS. THERE IS NO DOUBT THAT SUCH ANNUAL REPORTS DO REFLECT THE UT ILIZATION OF IPO FUNDS AT PLACES OTHER THAN THE SECURITIES EARNI NG EXEMPT INCOME. HOWEVER, IT IS ALSO PERTINENT TO NOTE FROM THE SAME ANNUAL REPORTS, AS HAS BEEN POINTED OUT BY THE LD. AR, THAT IT HAS BEEN MENTIONED THAT PART OF THE INVESTMENTS WERE AL SO FINANCED FROM IPO. BE THAT AS IT MAY, WE ARE NOT SO MUCH CON CERNED WITH THE QUESTION AS TO WHETHER OR NOT PROCEEDS FROM IPO WERE UTILIZED FOR THE PURPOSES OF MAKING INVESTMENTS IN SECURITIES YIELDING EXEMPT INCOME. SINCE THE INVESTMENTS IN S ECURITIES FETCHING EXEMPT INCOME IS FAR LESS THAN THE AMOUNT OF SHAREHOLDERS FUNDS NOT ONLY AT THE END OF THE FINA NCIAL YEAR 2010-11 UNDER CONSIDERATION BUT EVEN IN THE EARLIER YEARS, WHOSE ANNUAL REPORTS HAVE BEEN PLACED ON RECORD, AS THE S EQUITUR, SUCH SECURITIES ARE HELD TO HAVE BEEN PURCHASED FROM THE INTEREST-FREE SHAREHOLDERS FUND. ERGO, WE ARE SATISFIED THAT THE DISALLOWANCE ITA NO.6937/DEL/2017 15 UNDER RULE 8D(2)(II) AT RS.9.63 CRORE IS NOT SUSTAI NABLE. THE SAME IS DIRECTED TO BE DELETED. 12. NOW, WE TURN TO THE LAST PART OF THE DISALLOWA NCE MADE UNDER RULE 8D(2)(III). THIS PART OF THE RULE PROVID ES THAT AN AMOUNT EQUAL TO 1/2 % OF THE AVERAGE OF THE VALUE O F INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART O F THE TOTAL INCOME, SHALL BE DISALLOWED. THE ASSESSING OFFICER HAS COMPUTED THIS AMOUNT OF DISALLOWANCE AT RS.5,89,98,005/-. WE HAVE NOTICED ABOVE THAT THE ASSESSEE FURNISHED QUOTATION FROM JM FINANCIAL SERVICES STATING FEE OF RS.18 LAKH AS A BASIS OF IT S DISALLOWANCE. HOWEVER, WHEN THE ASSESSING OFFICER REQUIRED THE AS SESSEE TO COMPUTE THE DISALLOWANCE AS PER ITS BOOKS OF ACCOUN TS, THE ASSESSEE DETERMINED SUCH AMOUNT AT 13,35,108/- AS U NDER:- `WORKING OF EXPENSES DIRECTLY OR INDIRECTLY RELATED TO EARNING DIVIDEND INCOME. MARCH, 2011 PARTICULARS AMOUNT (IN RS.) STAFF COST 1,07,56,90,703 ADMINISTRATIVE EXPENSES 1,96,86,30,968 LESS: COMPANY SHARE IN FOLLOWING EXPENSES NOT RELATED TO EARNING DIVIDEND INCOME - LEGAL & PROFESSIONAL SERVICES 62,99,47,521 -CONTRACT EMPLOYEE CHARGES 66,50,568 63,65,98,089 TOTAL 2,40,77,23,582 LESS: DIRECTORS SALARY (REFER TAX AUDIT REPORT) 23,59,48,525 BALANCE 2,17,17,75,057 NO OF EMPLOYEES (SUPPORT STAFF) 244 COST PER EMPLOYEE 89,00,717 CONSIDERING THE NUMBER OF TRANSACTIONS 15% COST OF EMPLOYEE IS CONSIDERED ALSO REFER TO NOTE 1 13,35,108 NOTE 1: CONSERVATIVELY AMOUNT IS VERY HIGH AS IT INCLUDES SALARY OF EMPLOYEE AT VERY SENIOR LEVEL AND WHO ARE NOT DIRECTLY OR INDIRECTLY INVOLVED IN INVESTMENT PORTFOLIO MANAGEMENT 13. IT CAN BE SEEN FROM THE ABOVE COMPUTATION THAT THE ASSESSEE TOOK STAFF COST AT RS.107.56 CRORE AND ADM INISTRATIVE EXPENSES AT RS.196.86 CRORE. THEREAFTER, IT REDUCED A SUM OR RS.63.65 CRORE TOWARDS LEGAL AND PROFESSIONAL SERVI CES AND CONTRACT EMPLOYEES. FROM THE REMAINING AMOUNT OF RS .240.77 CRORE, THE ASSESSEE FURTHER REDUCED DIRECTORS SALA RY AMOUNTING TO RS.23.59 CRORE FOR COMPUTING THE REMAINING AMOUN T OF RS.217.17 CRORE. THIS AMOUNT HAS BEEN DIVIDED WITH 244, BEING, ITA NO.6937/DEL/2017 16 NUMBER OF EMPLOYEES FOR WORKING OUT THE COST PER EM PLOYEE AT RS.89.00 LAKH. THEREAFTER, 15% OF THE COST OF ONE E MPLOYEE HAS BEEN ATTRIBUTED TO DISALLOWANCE UNDER SECTION 14A A T RS.13,35,108/-. WE FIND THAT THERE ARE SEVERAL INCO NSISTENCIES IN THE ABOVE CALCULATION MADE BY THE ASSESSEE. THE ASS ESSING OFFICER HAS ALSO HELD SUCH CALCULATION AS INCORRECT : `AS IT HAS NOT CONSIDERED VARIOUS ASPECTS OF INDIRECT EXPENSES IN THE SHAPE OF ESTABLISHMENT IN ADDITION TO DIRECT EXPENSES. THERE ARE A LOT OF COST FACTORS INVOLVED IN INVESTMENTS IN SHARES/MUTU AL FUNDS. TURNING TO THE ABOVE COMPUTATION, IT IS SEEN THAT T HE ASSESSEE HAS REDUCED DIRECTORS SALARY FROM THE BASE FIGURE, IMP LYING, THAT THE DIRECTORS WERE NOWHERE INVOLVED IN TAKING ANY DECIS IONS OR HANDLING THE INVESTMENTS. THIS IS AN ABSURD PROPOSI TION. THE ASSESSEE IS A LIMITED COMPANY AND ALL THE RELEVANT DECISIONS OF THE COMPANY ARE TAKEN BY THE BOARD OF DIRECTORS. HERE I S A CASE IN WHICH THE ASSESSEE IS HOLDING INVESTMENTS TO THE TU NE OF RS.1179.96 CRORE AND HAS EARNED EXEMPT INCOME OF RS .64.76 CRORE AND THERE IS A CONTENTION THAT BOARD OF DIREC TORS WAS NOT INVOLVED IN ANY OF THE DECISIONS QUA SUCH INVESTMEN TS. THIS CONTENTION IS OBVIOUSLY NOT ACCEPTABLE. FURTHER, TH E ASSESSEE DETERMINED COST PER EMPLOYEE AT RS.89.00 LAKH AND T HE AMOUNT DISALLOWABLE UNDER SECTION 14A AT RS.13.35 LAKH, BE ING, 15% OF THE COST OF ONE EMPLOYEE. THIS MEANS THAT THE CLAI M OF THE ASSESSEE IS THAT OUT OF ITS 244 EMPLOYEES, ONLY ONE PERSON WAS INVOLVED IN THE INVESTMENTS AND DIVIDEND INCOME AN D THAT TOO, ONLY 15% OF THE TIME OF THAT SINGLE PERSON WAS UTIL IZED IN SUCH ACTIVITY. IN OTHER WORDS, OUT OF 244 EMPLOYEES, 243 EMPLOYEES IN FULL AND 85% OF THE REMAINING EMPLOYEE WERE LOOKING AFTER THE REGULAR OPERATIONS OF THE BUSINESS AND ONLY 0.15% O F ONE EMPLOYEE WAS ATTENDING TO SUCH HUGE INVESTMENTS IN TERMS OF VALUE AND VOLUME. IN OUR CONSIDERED OPINION, THIS C OMPUTATION OF DISALLOWANCE MADE BY THE ASSESSEE AT RS.13.35 LA KH IS ABSOLUTELY DEVOID OF ANY MERIT AND TOTALLY UNACCEPT ABLE. 14. AS REGARDS QUOTATION OF JM FINANCIAL SERVICES PVT. LTD., WHOSE COPY PLACED ON RECORD, WE FIND THAT THE SAME IS MERELY A QUOTATION AND DOES NOT SATISFY PRESCRIPTION OF SECT ION 14A(2) BEING ACTUAL EXPENDITURE INCURRED BY THE ASSESSEE F OR EARNING EXEMPT INCOME, AND THE SATISFACTION OF THE ASSESSIN G OFFICER HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. MO REOVER, THIS QUOTATION IS ONLY FOR HANDLING THE SURPLUS FUNDS `I N LINE WITH YOUR INVESTMENT POLICY GUIDELINES. IT TRANSPIRES T HAT EVEN AS PER THIS QUOTATION, INVESTMENT POLICY GUIDELINES HAVE T O BE DRAWN BY THE ASSESSEE ONLY, WHICH AGAIN ENTAILS COSTS. WE, THEREFORE, HOLD THAT THE ASSESSEES CALCULATION OF DISALLOWANCE UND ER SECTION 14A OF THE ACT READ WITH RULE 8D(2)(III) HAS BEEN RIGHT LY REJECTED BY THE ASSESSING OFFICER. 15. AT THIS JUNCTURE, IT IS RELEVANT TO NOTE THE RATIO DECIDENDI OF THE JUDGMENT OF THE HONBLE JURISDICTIONAL HIGH COURT IN ITA NO.6937/DEL/2017 17 PUNJAB TRACTORS LTD. VS. COMMISSIONER OF INCOME TAX , (2017) 78 TAXMANN.COM 65 (P&H). IN THIS CASE, THE DISALLOW ANCE WAS MADE BY THE ASSESSING OFFICER UNDER SECTION 14A REA D WITH RULE 8D. THE ASSESSEE CHALLENGED THE SAME BEFORE THE HON BLE HIGH COURT. THEIR LORDSHIPS OBSERVED IN PARA 38 THAT A SSESSING OFFICER CANNOT BE FAULTED FOR NOT BEING SATISFIED W ITH THE CLAIM OF THE ASSESSEE. THEREAFTER, THE LORDSHIPS OBSERVED I N PARA 40 THAT THE ASSESSING OFFICER ON NOT BEING SATISFIED WITH THE CORRECTNESS OF THE CLAIM BY THE ASSESSEE IN RESPECT OF THE EXPENDITURE INCURRED TO EARN EXEMPT INCOME OUGHT TO HAVE APPLIED RULE 8D WHICH HE DID NOT.......WHERE AN ASS ESSING OFFICER IS NOT SATISFIED WITH THE CORRECTNESS OF TH E CLAIM OF THE ASSESSEE, IN THIS REGARD, HE IS BOUND BY THE PROVIS IONS OF SUB SECTION (2) OF SECTION 14A TO FOLLOW THE PRESCRIBED METHOD WHICH AT THE RELEVANT TIME WAS RULE 8D. IT IS CLEAR FROM THE JUDGMENT OF THE HONBLE JURISDICTIONAL HIGH COURT THAT WHERE THE ASSESSING OFFICER HAS REJECTED THE ASSESSEES CLAIM OF DISALLOWANCE UNDER SECTION 14A OF THE ACT, THEN SUC H DISALLOWANCE HAS NECESSARILY TO BE COMPUTED IN TERM S OF RULE 8D TO THE RELEVANT EXTENT. 16. ADVERTING TO THE FACTS OF THE INSTANT CASE, WE FIND THAT THE ASSESSING OFFICER, ON BEING DISSATISFIED WITH THE A SSESSEES COMPUTATION OF DISALLOWANCE, EMBARKED ON HIS OWN CO MPUTATION UNDER RULE 8D(2)(III) AT RS. 5,89,98,005/-. THE ASS ESSEE HAS NOT DISPUTED ANY PART OF THE CALCULATION OF SUCH DISALL OWANCE. THIS COMPUTATION OF DISALLOWANCE, HAVING BEEN MADE IN TE RMS OF RULE 8D(2)(III), IS HELD TO HAVE RIGHTLY MADE. THE ASSE SSMENT ORDER MAKING DISALLOWANCE OF RS.5.89 CRORE U/S 14A UNDER THE NORMAL PROVISIONS OF THE ACT IS UPHELD PRO TANTO. 20. SO, FOLLOWING THE ORDER PASSED BY THE CO-ORDINA TE BENCH OF THE TRIBUNAL FOR AY 2011-12 (SUPRA), WE ARE OF THE CONSIDERED VIEW THAT AO HAS RIGHTLY MADE DISALLOWANCE OF RS.2, 12,15,413/- AFTER TAKING INTO CONSIDERATION SUO MOTO DISALLOWAN CE OF RS.26,96,640/- MADE BY THE ASSESSEE UNDER THE NORM AL POSITIONS OF THE ACT. 21. HOWEVER, THESE FINDINGS OF FACT ARE SUBJECT TO THE DECISION TO BE RENDERED BY HONBLE HIGH COURT WHERE APPEAL OF T HE TAXPAYER ITA NO.6937/DEL/2017 18 FOR AY 2011-12 ON QUESTION OF LAW IS LYING ADMITTED . CONSEQUENTLY, GROUNDS NO.2, 2.1 & 2.2 ARE DETERMINE D AGAINST THE TAXPAYER. GROUN NO. 3 22. AO/DRP HAVE PROCEEDED TO ADD BACK DISALLOWANCE OF RS.2,12,15,413/- MADE UNDER SECTION 14A READ WITH R ULE 8D OF THE RULES IN COMPUTING THE PROFIT UNDER SECTION 115JB O F THE ACT BY FOLLOWING ITS OWN DECISIONS IN AY 2011-12 & 2012-13 . AO IN ORDER TO MAKE DISALLOWANCE UNDER SECTION 14A READ W ITH RULE 8D AND SECTION 115JB READ WITH EXPLANATION 1(F) COMPUT ED THE EXPENSES IN RELATION TO DIVIDEND INCOME AS UNDER :- RULE AMOUNT IN RS. 8D (I) NIL 8D(II) NIL 8D(III) 0.5% OF 478,24,10,500/- = 2,39,12,053/- TOTAL RS.2,39,12,053/- 23. HOWEVER, AT THE VERY OUTSET, THE LD. AR FOR THE TAXPAYER BROUGHT TO OUR NOTICE THAT THIS ISSUE HAS BEEN DECI DED IN FAVOUR OF THE TAXPAYER BY THE CO-ORDINATE BENCH OF THE TRIBUN AL IN AY 2011- 12 (SUPRA) BY FOLLOWING THE DECISION RENDERED BY TH E SPECIAL BENCH OF DELHI TERMINAL IN ACIT VS. VIREET INVESTME NTS (P) LTD. DATED 16.06.2017 . OPERATIVE PART OF THE FINDINGS RETURNED BY THE ITA NO.6937/DEL/2017 19 CO-ORDINATE BENCH OF THE TRIBUNAL IN THE TAXPAYERS OWN CASE FOR AY 2011-12 ARE EXTRACTED FOR READY PERUSAL AS UNDER :- 17. AS REGARDS THE ADDING BACK OF THE AMOUNT OF D ISALLOWANCE UNDER SECTION 14A IN THE CALCULATION OF `BOOK PROFI T UNDER SECTION 115JB OF THE ACT, WE FIND THAT THE ISSUE IS NO MORE RES INTEGRA IN VIEW OF THE DECISION OF THE SPECIAL BEN CH OF THE DELHI TRIBUNAL IN ACIT VS. VIREET INVESTMENTS (P) LTD. DA TED 16.6.2017 HOLDING THAT THE COMPUTATION UNDER CLAUSE (F) OF EX PLANATION 1 TO SECTION 115JB(2) IS TO BE MADE WITHOUT RESORTING TO THE COMPUTATION AS CONTEMPLATED U/S 14A READ WITH RULE 8D OF THE INCOME TAX RULES 1962. RESPECTFULLY FOLLOWING THE S PECIAL BENCH DECISION, WE HOLD THAT NO SEPARATE DISALLOWANCE SHO ULD BE MADE UNDER SECTION 14A IN THE COMPUTATION OF BOOK PROFIT S UNDER SECTION 115JB OF THE ACT. THE IMPUGNED ORDER IS SET ASIDE TO THIS EXTENT. 24. FOLLOWING THE DECISION RENDERED BY THE CO-ORDIN ATE BENCH OF THE TRIBUNAL IN AY 2011-12 (SUPRA), WE ARE OF THE C ONSIDERED VIEW THAT WHEN DISALLOWANCE OF RS.2,12,15,413/- HAS BEEN MADE BY THE AO UNDER SECTION 14A UNDER THE NORMAL PROVISIONS OF THE ACT, THE SAME CANNOT BE SIMULTANEOUSLY ASSESSED UNDER SECTIO N 14A IN THE COMPUTATION OF PEAK PROFITS UNDER SECTION 115JB OF THE ACT. CONSEQUENTLY, GROUND NO. 3 IS DETERMINED IN FAVOUR OF THE TAXPAYER. GROUNDS NO.4 & 4.1 25. AO MADE ADDITION OF RS.17,12,04,096/- AS ADDITI ONAL DEPRECIATION BY INVOKING THE PROVISIONS CONTAINED U NDER SECTION 32 (1)(IIA) READ WITH SECTION 32(1)(I) & 32(1)(II) AND EXPLANATION 5 ITA NO.6937/DEL/2017 20 HOLDING THE SAME AS MANDATORY ON THE GROUND THAT TH E TAXPAYER HAS INTENTIONALLY NOT CLAIMED ADDITIONAL DEPRECIATION I N ORDER TO ENHANCE ITS CLAIM OF DEDUCTION UNDER SECTION 32 OF THE ACT IN THE SUBSEQUENT YEARS. 26. HOWEVER, LD. AR FOR THE TAXPAYER FAIRLY CONCEDE D THAT THIS ISSUE HAS ALREADY BEEN DECIDED AGAINST THE TAXPAYER IN AY 2011-12 (SUPRA). 27. IDENTICAL ISSUE HAS BEEN DECIDED BY THE CO-ORDI NATE BENCH OF THE TRIBUNAL IN TAXPAYERS OWN CASE FOR AY 2011-12 (SUPRA) BY RETURNING THE FOLLOWING FINDINGS :- 19. FACTS APROPOS THIS ISSUE ARE THAT THE ASSESSE E CLAIMED DEPRECIATION AMOUNTING TO RS.503.24 CRORE APART FRO M ADDITIONAL DEPRECIATION AMOUNTING TO RS.538.66 CRORE IN THE RE VISED RETURN. HOWEVER, AS PER LETTER DATED 07.01.2005 FILED DURIN G THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSEE WITHDREW THE C LAIM OF ADDITIONAL DEPRECIATION AMOUNTING TO RS.538.66 CROR E. AS A RESULT OF WITHDRAWAL OF THE CLAIM OF ADDITIONAL DEPRECIATI ON, THE ORIGINAL DEDUCTION CLAIM UNDER SECTION 80IB FROM RS . 2042.81 CRORE SHOT UP TO RS.2579.07 CRORE. THE ASSESSING OF FICER ALLOWED THE CLAIM OF ADDITIONAL DEPRECIATION BY RELYING ON EXPLANATION 5 TO SECTION 32(1)(II) AND ALSO HOLDING THAT THE JUDG MENT OF THE HONBLE SUPREME COURT IN THE CASE OF GOETZE INDIA L TD. VS. COMMISSIONER OF INCOME TAX (2006) 284 ITR 323 (SC) DOES NOT PERMIT HIM TO TAKE COGNIZANCE OF A CLAIM MADE DURIN G THE COURSE OF ASSESSMENT PROCEEDINGS AFTER THE COMPLETION OF T HE TIME FOR FILING REVISED RETURN. THE ASSESSEE IS AGGRIEVED AG AINST THE DECISION OF THE ASSESSING OFFICER IN THIS REGARD. 20. HAVING HEARD BOTH THE SIDES AND PERUSED THE RE LEVANT MATERIAL ON RECORD, WE FIND THAT THE JUDGMENT OF TH E HONBLE SUPREME COURT IN THE CASE OF GOETZE INDIA LTD. (SUP RA) THOUGH RESTRICTS THE POWER OF THE ASSESSING OFFICER IN ENT ERTAINING A NEW CLAIM MADE BEFORE HIM OTHERWISE THEN BY WAY OF A RE VISED RETURN, BUT SUCH DECISION DOES NOT AFFECT THE POWERS OF THE APPELLATE AUTHORITIES IN ENTERTAINING SUCH A CLAIM IF IT IS L EGALLY SUSTAINABLE. HOWEVER, WE FIND THAT THE ON THE FACTS AND IN THE ITA NO.6937/DEL/2017 21 CIRCUMSTANCES OF THE CASE, THE ASSESSEE DOES NOT DE SERVE ANY RELIEF ON THIS SCORE. 21. THE HONBLE SUPREME COURT IN THE CASE OF COMMIS SIONER OF INCOME TAX VS. MAHENDRA MILLS (2000) 243 ITR 56 (SC), HAS HELD THAT IF AN ASSESSEE DOES NOT CLAIM THE DEPREC IATION AND DOES NOT FURNISH PARTICULARS FOR CLAIMING DEPRECIATION, AS PRESCRIBED, DEPRECIATION CANNOT THRUST UPON HIM. TO REMEDY THE SITUATION FLOWING FROM SUCH JUDGMENT, THE LEGISLATURE BROUGHT IN EXPLANATION 5 TO SECTION 32(1)(II) THROUGH THE FINA NCE ACT, 2001 W.E.F. 01.04.2002. THE EXPLANATION PROVIDES THAT TH E PROVISIONS OF THIS SUB-SECTION SHALL APPLY WHETHER OR NOT THE ASSESSEE HAS CLAIMED DEDUCTION IN RESPECT OF DEPREC IATION IN COMPUTING HIS TOTAL INCOME. THE EFFECT OF THIS EXP LANATION IS THAT DEDUCTION ON ACCOUNT OF DEPRECIATION HAS TO BE MANDATORILY ALLOWED UNDER SECTION 32(1)(II) OF THE ACT NOTWITHS TANDING THE FACT THAT ASSESSEE CLAIMS OR DOES NOT CLAIM IT IN T HE COMPUTATION OF ITS TOTAL INCOME. 22. THE LD. AUTHORIZED REPRESENTATIVE CONTENDED TH AT THE EXPLANATION DOES NOT COVER THE ASSESSEES CASE INAS MUCH AS THE AMOUNT OF ADDITIONAL DEPRECIATION ORIGINALLY CLAIME D BUT SUBSEQUENTLY WITHDRAWN BY THE ASSESSEE IS AN INCENT IVE AND NOT DEPRECIATION, AND THE SAME IS ADMISSIBLE UNDER SECT ION 32(1)(IIA). IT WAS SUBMITTED THAT EXPLANATION 5 OPERATES ONLY F OR THE PURPOSES OF SECTION 32(1)(II) AND NOT SECTION 32(1) (IIA) OF THE ACT. 23. IN ORDER TO APPRECIATE THE CONTENTION, IT WILL BE SIGNIFICANT TO NOTE THE PRESCRIPTION OF THE RELEVANT PARTS OF S ECTION 32 AS UNDER : - DEPRECIATION. 32. (1) IN RESPECT OF DEPRECIATION OF (I) BUILDINGS, MACHINERY, PLANT OR FURNITURE, BEING TANGIBLE ASSETS; (II) KNOW-HOW, PATENTS, COPYRIGHTS, TRADEMARKS, LIC ENCES, FRANCHISES OR ANY OTHER BUSINESS OR COMMERCIAL RIGH TS OF SIMILAR NATURE, BEING INTANGIBLE ASSETS ACQUIRED ON OR AFTE R THE 1ST DAY OF APRIL, 1998, OWNED, WHOLLY OR PARTLY, BY THE ASSESSEE AND USED F OR THE PURPOSES OF THE BUSINESS OR PROFESSION, THE FOLLOWI NG DEDUCTIONS SHALL BE ALLOWED (I) . (II) IN THE CASE OF ANY BLOCK OF ASSETS, SUCH PERCENTAG E ON THE WRITTEN DOWN VALUE THEREOF AS MAY BE PRESCRIBED: PROVIDED THAT .. ITA NO.6937/DEL/2017 22 EXPLANATION 5.FOR THE REMOVAL OF DOUBTS, IT IS HER EBY DECLARED THAT THE PROVISIONS OF THIS SUB-SECTION SHALL APPLY WHETHER OR NOT THE ASSESSEE HAS CLAIMED THE DEDUCTION IN RESPECT O F DEPRECIATION IN COMPUTING HIS TOTAL INCOME; (IIA) IN THE CASE OF ANY NEW MACHINERY OR PLANT (OT HER THAN SHIPS AND AIRCRAFT), WHICH HAS BEEN ACQUIRED AND INSTALLE D AFTER THE 31ST DAY OF MARCH, 2005, BY AN ASSESSEE ENGAGED IN THE BUSINESS OF MANUFACTURE OR PRODUCTION OF ANY ARTICLE OR THIN G OR IN THE BUSINESS OF GENERATION OR GENERATION AND DISTRIBUTI ON OF POWER, A FURTHER SUM EQUAL TO TWENTY PER CENT OF THE ACTUAL COST OF SUCH MACHINERY OR PLANT SHALL BE ALLOWED AS DEDUCTION UN DER CLAUSE (II) : 24. IN OUR CONSIDERED OPINION, THE CONTENTION THAT ADDITIONAL DEPRECIATION IS AN INCENTIVE AND NOT DEPRECIATION H AS NO LEGAL LEGS TO STAND. IT CAN BE NOTICED THAT SECTION 32 WI TH CAPTION DEPRECIATION OPENS THROUGH SUB-SECTION (1) WITH T HE EXPRESSION IN RESPECT OF DEPRECIATION OF AND THEN SETS OUT TANGIBLE AND INTANGIBLE ASSETS OWNED AND USED BY TH E ASSESSEE FOR THE PURPOSES OF BUSINESS OR PROFESSION AND THEN PRO VIDES THAT `THE FOLLOWING DEDUCTIONS SHALL BE ALLOWED. THEN THERE ARE CLAUSES (I), (II), (IIA) AND (III). THIS SHOWS THAT THE DEDUCTION ON ACCOUNT OF DEPRECIATION IS RELEVANT TO ALL THE CLAU SES INCLUDING CLAUSES (II) AND (IIA). THUS, IT IS NOT CORRECT TO CONTEND THAT RELIEF PROVIDED U/S 32(1)(IIA) IS A SEPARATE INCENTIVE DE HORS DEPRECIATION. 25. A CURSORY LOOK AT CLAUSE (IIA) DIVULGES THAT T HE ASSESSEE IS ENTITLED TO DEDUCTION EQUAL TO 20% OF THE ACTUAL CO ST OF SUCH MACHINERY OR PLANT, WHICH SHALL BE ALLOWED AS A DED UCTION UNDER CLAUSE (II). CONTENTION OF THE LD. AUTHORIZED REPRE SENTATIVE THAT THE MANDATE OF EXPLANATION 5 DOES NOT APPLY TO RELI EF UNDER CLAUSE (IIA) AS THE SAME HAS BEEN PLACED UNDER CLAU SE (II), IN OUR VIEW, IS FAR-FETCHED. IT IS NO DOUBT CLEAR THAT EXP LANATION 5 GRANTING MANDATORY DEPRECIATION IS PLACED IN CLAUSE (II) OF SECTION 32(1) OF THE ACT, BUT WHEN WE CONSIDER THE LANGUAGE OF CLAUSE (IIA) PROVIDING FURTHER DEDUCTION FOR DEPREC IATION @ 20%, IT BECOMES VIVID THAT SUCH FURTHER CLAIM SHALL BE ALLOWED AS DEDUCTION UNDER CLAUSE (II). IT ERGO BECOMES OVERT THAT THE CLAIM FOR ADDITIONAL DEPRECIATION AS PROVIDED UNDER CLAUS E (IIA) HAS TO BE ALLOWED AS DEDUCTION UNDER CLAUSE (II). SO, FOR ALL PRACTICAL PURPOSES, THE CLAIM FOR ADDITIONAL DEPRECIATION HAS TO BE CONSIDERED AND ALLOWED AS DEDUCTION ONLY UNDER CLAU SE (II) AND THERE IS NO SEPARATE PROVISION FOR ALLOWING ADDITIO NAL DEPRECIATION UNDER CLAUSE (IIA) SO AS TO MAKE THE P RESCRIPTION OF EXPLANATION 5 INOPERATIVE. ITA NO.6937/DEL/2017 23 26. WE AGREE WITH THE LD. AUTHORIZED REPRESENTATIVE THAT THE WORD SHALL IS NOT ALWAYS CONCLUSIVE OF THE MANDAT ORY NATURE AND CAN BE READ AS THE WORD MAY IN CERTAIN CIRCUM STANCES. HOWEVER, WHEN WE CONSIDER THE TEXT AND THE CONTEXT OF THE WORD SHALL AS EMPLOYED IN CLAUSE (IIA), THERE REMAINS NO DOUBT WHATSOEVER THAT THE GRANT OF ADDITIONAL CLAIM AT TH E RATE OF 20% HAS NECESSARILY TO BE ALLOWED AS DEDUCTION UNDER CL AUSE (II). ONCE THE CLAIM OF ADDITIONAL DEPRECIATION UNDER CLA USE (IIA) IS TO BE ALLOWED AS DEDUCTION UNDER CLAUSE (II), A FORTIO RI, THE COMMAND OF EXPLANATION 5 WHICH APPLIES TO CLAUSE (I I) AUTOMATICALLY BECOMES APPLICABLE TO SUCH A CLAIM OF ADDITIONAL DEPRECIATION. ONCE WE HOLD THAT THE CLAIM FOR ADDIT IONAL DEPRECIATION IS ALLOWABLE AS DEDUCTION UNDER SECTIO N 32(1)(II), THE WRIT OF EXPLANATION 5 PROVIDING FOR ALLOWING DE PRECIATION MANDATORILY, GETS MAGNETIZED. EXPLANATION 5, EVEN IF PLACED UNDER CLAUSE (II), APPLIES TO SUB-SECTION (1) OF SE CTION 32, WHICH ALSO COVERS CLAUSE (IIA). WE, THEREFORE, HOLD THAT THE ASSESSING OFFICER WAS FULLY JUSTIFIED IN GRANTING ADDITIONAL DEPRECIATION AMOUNTING TO RS. 538.66 CRORE UNDER CLAUSE (IIA) R EAD WITH CLAUSE (II) OF SECTION 32(1). THIS GROUND IS NOT AL LOWED. 28. FOLLOWING THE DECISION RENDERED BY THE CO-ORDIN ATE BENCH OF THE TRIBUNAL, WE ARE OF THE CONSIDERED VIEW THAT AO HAS RIGHTLY GRANTED THE ADDITIONAL DEPRECIATION OF RS.17,12,04, 096/- UNDER CLAUSE (IIA) READ WITH CLAUSE (II) OF SECTION 32(1) OF THE ACT. CONSEQUENTLY, GROUNDS NO. 4 AND 4.1 ARE DETERMINED AGAINST THE TAXPAYER. GROUNDS NO. 5 AND 5.1 29. THE TAXPAYER HAS CHALLENGED THE ADJUSTMENT OF RS.180,40,27,029/- MADE BY THE AO TO THE PEAK PROFI T UNDER SECTION 115 JB OF THE ACT BY ADDING BACK THE AMOUNT OF DEPLETION OF PRODUCING PROPERTIES DEBITED IN THE PROFIT AND LOSS ACCOUNT USING UNIT OF PRODUCTION METHOD INSTEAD OF ALLOWING THE DEPRECIATION ITA NO.6937/DEL/2017 24 ON PRODUCING FACILITIES AT 5.28 % ON STRAIGHT LINE METHOD. LD. DRP ALSO UPHELD THE FINDINGS RETURNED BY THE AO BY FOLLOWING ITS OWN DECISION RENDERED IN AY 2011-12 AND 2012-13. H OWEVER, AT THE VERY OUTSET, IT IS BROUGHT TO OUR NOTICE THAT T HIS ISSUE HAS ALREADY BEEN DECIDED IN FAVOUR OF ASSESSEE IN AY 2011-12. OPERATIVE PART OF THE FINDINGS RETURNED BY THE CO-ORDINATE BENCH O F THE TRIBUNAL IS AS UNDER :- 65. REVERTING TO THE FACTS OF THE EXTANT CASE, WE FIND THAT THE ASSESSEE DETERMINED THE AMOUNT OF NET PROFIT AS PER ITS PROFIT AND LOSS ACCOUNT - BOTH FOR THE PURPOSES OF SECTION 115 JB AND ALSO FOR PLACING IN THE ANNUAL GENERAL MEETING - AFTER C LAIMING DEPLETION (DEPRECIATION) AT A HIGHER RATE THAN THE ONE PRESCRIBED IN SCHEDULE XIV OF THE COMPANIES ACT, WHICH IS NOT FORBIDDEN IN PARTS II AND III TO SCHEDULE VI OF THE COMPANIES AC T. IT IS FURTHER FOUND THAT THE AUDIT REPORT ISSUED BY THE A UDITORS OF THE ASSESSEE COMPANY IS UNQUALIFIED. THE ANNUAL ACCOUN TS AS PREPARED BY THE AUDITORS ARE STATED TO HAVE BEEN AP PROVED BY THE COMPANY IN ITS AGM AND THEN REGISTERED BY THE REGIS TRAR OF COMPANIES WITHOUT ANY OBJECTION. SUCH A CONTENTION PUT FORTH ON BEHALF OF THE ASSESSEE HAS NOT BEEN DISPUTED BY THE REVENUE. WHEN POSITION IS SO, WE FAIL TO COMPREHEND AS TO HO W THE ACTION OF THE AO IN ADDING THE ALLEGED EXCESS DEPRECIATION CAN BE SUSTAINED. THE IMPUGNED ORDER IS SET ASIDE PRO TANT O AND THE ENHANCEMENT TO THE AMOUNT OF NET PROFIT TO THE TUNE OF RS.2,53,87,76,183/- MADE FOR THE PURPOSES OF SECTIO N 115JB OF THE ACT IS HEREBY DELETED. 30. SO, FOLLOWING THE DECISION RENDERED BY THE COOR DINATE BENCH OF THE TRIBUNAL IN AY 2011-12 (SUPRA), WHEN UNDISPU TEDLY ANNUAL ACCOUNTS OF THE TAXPAYER AUDITED BY THE AUDITORS HA VE BEEN RATIFIED BY THE TAXPAYER IN ITS ANNUAL GENERAL MEETING AND T HEN TAXPAYER IS REGISTERED BY THE REGISTRAR OF COMPANIES WITHOUT AN Y OBJECTION, AO IS NOT EMPOWERED TO MAKE ADJUSTMENT OF RS.1,80,4 0,27,092/- ITA NO.6937/DEL/2017 25 TO THE PEAK PROFITS UNDER SECTION 115JB OF THE ACT ON ACCOUNT OF DEPLETION OF PRODUCING PROPERTIES BY USING UNIT OF PRODUCTION METHOD. SO, ADDITION MADE BY THE AO TO THE PEAK P ROFITS UNDER SECTION 115JB OF THE ACT IS ORDERED TO BE DELETED. CONSEQUENTLY, GROUNDS NO. 5 AND 5.1 ARE DETERMINED IN FAVOUR OF T HE ASSESSEE. TRANSFER PRICING GROUNDS GROUNDS NO.6 TO 6.5 31. UNDISPUTEDLY, THE TAXPAYER HAS RECEIVED REIMBUR SEMENT FROM ITS AES AS UNDER :- DESCRIPTION OF TRANSACTION TOTAL COST REIMBURSED IN INR A REIMBURSEMENT OF MANPOWER, GENERAL AND ADMINISTRATIVE (MGA) COST RECHARGED TO UJV (RECEI PTS) CAIRN ENERGY HYDROCARBON LTD. (CEHL) SHARE OF MGA COST (RECHARGED TO UJVS) 211,41,48,589 CAIRN LANKA SHARE OF MGA COST (RECHARGED TO UJVS) 24,51,68,589 CAIRN AFRICA SHARE OF MGA COST (RECHARGED TO UJVS) 1,16,52,723 SUB TOTAL (B) 237,09,69,901 B. REIMBURSEMENT OF EXPENDITURE (RECEIPTS) CAIRN LANKA PVT. LTD. (CAIRN LANKA) RECOVERY OF CONSULTANCY EXPENSES 98,39,539 RECOVERY OF TRAVEL AND ACCOMMODATION EXPENSES 86,99,335 RECOVERY OF STATIONERY AND OTHER MISCELLANEOUS EXPENSES 2,43,773 CAIRN SOUTH AFRICA PROPRIETARY LTD. (CAIRN AFRICA) RECOVERY OF TRAVEL AND ACCOMMODATION EXPENSES 12,58,195 SUB TOTAL (B) 2,00,40,842 C. PARENT COMPANY OVERHEAD (PCO) (RECEIPTS) CAIRN LANKA PCO THROUGH UJVS 3,54,53,085 SUB TOTAL (C) 3,54,53,085 TOTAL (A+B+C) 242,64,63,828 ITA NO.6937/DEL/2017 26 32. IT IS CATEGORIC CASE OF THE TAXPAYER THAT THE I SSUE OF REIMBURSEMENT OF EXPENSES BY THE AES TO THE TAXPAYE R, REIMBURSEMENT OF MANPOWER, GENERAL AND ADMINISTRATI VE (MGA) COST RECHARGED TO UJVS AS WELL AS RECEIPT OF PARENT COMPANY OVERHEAD (PCO) HAS ALREADY BEEN ACCEPTED AT ARMS L ENGTH WITHOUT ANY ADVERSE INFERENCE BY THE LD. TPO IN THE PRECEDI NG AYS 2010- 11 AND 2012-13 AND HAS ALSO PLACED RELIANCE ON HON BLE SUPREME COURT IN THE CASE OF RADHASOAMI SATSANG VS. CIT (1992) 193 ITR 321 (SC) AND DECISION OF ITAT, PUNE BENCH IN TH E CASE OF BRINTONS CARPETS ASIA P. LTD. [ITA NO.1296/PN/10] . 33. IT IS ALSO NOT IN DISPUTE THAT MGA COST IS EXPL AINED AS UNDER:- A. MANPOWER COSTS COMPRISE OF: SALARY, EMPLOYER'S TAXES AND PENSION CONTRIBUTION S AND OTHER EMPLOYEE BENEFITS AND ALLOWANCES COST OF CONSULTANTS AND THEIR RELATED TRAVEL COST S B. GENERAL AND ADMINISTRATIVE (G&A) COSTS* COMPRIS E OF: PREMISES COSTS AMORTIZATION OF EQUIPMENT, SOFTWARE AND FURNITURE COSTS COMMUNICATION COSTS CONSULTANTS AND PROFESSIONAL FEES RECRUITMENT, RELOCATION AND TRAINING COSTS ETC. OTHERS *SOLE ADMINISTRATION COSTS OF THE OPERATOR AND EXCH ANGE FLUCTUATION ARE EXCLUDED FOR THE PURPOSES OF DETERM INING THE RECHARGE TO THE UJVS 34. SO FAR AS COST RECHARGED TO CAIRN ENERGY HYDROC ARBON LTD. (CEHL), IT IS THE CASE OF THE ASSESSEE THAT IT HAS INCURRED MGA ITA NO.6937/DEL/2017 27 EXPENSES ON BEHALF OF RAJASTHAN UNINCORPORATED JOIN T VENTURE (RJ UJV) IN TERMS OF THE PRODUCTION SHARING CONTRACTS ( PSC) DATED MAY 15, 1995 AS EFFECTIVE BETWEEN THE GOVERNMENT OF INDIA, OIL & NATURAL GAS LTD. (ONGC), CEHL AND THE TAXPAYER DURI NG THE YEAR UNDER ASSESSMENT. IT IS ALSO THE CASE OF THE TAXPA YER THAT CEHL AND ONGC WHICH ARE JOINT VENTURE PARTNER IN RJ UJV ACCOUNTED THESE EXPENSES AND REIMBURSED THESE COSTS TO THE EX TENT OF ITS PARTICIPATING INTEREST HELD IN RJ UJV. 35. IT IS ALSO THE CASE OF THE TAXPAYER THAT TPO SH OULD HAVE APPLIED COMPARABLE UNCONTROLLED PRICE (CUP) METHOD FOR DETERMINATION OF ARMS LENGTH PRICE (ALP) OF MGA CO ST OF RS.211,41,48,589/- REIMBURSED BY CEHL. THE TAXPAYE R ALSO CONTENDED THAT THE RJ UJV INCURRED TOTAL MGA COST O F RS.486,15,85,986/- AND THE MGA COST WAS REIMBURSED BY ONGC, CEHL AND BORNE BY THE TAXPAYER IN RATIO OF THEIR PA RTICIPATING INTEREST. 36. IT IS FURTHER CASE OF THE TAXPAYER THAT AS PER CLAUSE 3.1.4 (II) OF ACCOUNTING PROCEDURE TO THE PSC, RJ UJV IS PERMI TTED TO PAY ONLY FOR ACTUAL COST INCURRED BY THE TAXPAYER WITHO UT ANY MARK UP AND THE OPERATOR SHALL PROCURE A CERTIFICATE FROM T HE STATUTORY AUDITOR TO THAT EFFECT. THE TAXPAYER FURTHER CONTE NDED THAT SIMILAR PROVISIONS EXISTED IN PETROLEUM RESOURCES AGREEMENT (PRA) ITA NO.6937/DEL/2017 28 BETWEEN JULY 07, 2008 WITH THE GOVERNMENT OF SRI LA NKA AND JOINT OPERATING AGREEMENT (JOA) DATED FEBRUARY 07, 2013 I N CASE OF SOUTH AFRICA FOR WHICH CERTIFICATE RECEIVED FROM TH E STATUTORY AUDITORS DATED APRIL 8, 2013 CERTIFYING THE ACTUAL COSTS RECHARGED TO RJ UJV HAS BEEN FURNISHED. 37. THE LD. AR FOR THE TAXPAYER CONTENDED THAT THE LD. TPO OUGHT TO HAVE BEEN APPLIED CUP METHOD FOR ALP OF MG A COST OF RS.211,41,48,589/- REIMBURSED BY CEHL. UNDISPUTEDL Y, LD. DRP BY ACCEPTING THIS CONTENTION RAISED BY THE TAXPAYER DIRECTED TPO TO VERIFY IF CUP CAN BE APPLIED IN TAXPAYERS CASE. T HE TAXPAYER ALSO RELIED UPON THE DECISION RENDERED BY THE COORDINATE BENCH OF THE TRIBUNAL IN CASE CITED AS TOLL GLOBAL FORWARDING INDIA (P.) LTD. (2014) 51 TAXMANN.COM 342 (DELHI-TRIB.) . THE LD. TPO HAS ALSO NOT APPLIED CUP IN THE REMAND PROCEEDINGS. 38. WHEN WE EXAMINE ARTICLE 6.4, 1.4.4, 3.1.4 (II) OF PSC FOR RJ-ON-90/1, AVAILABLE AT PAGES 335, 356 & 359 RESPE CTIVELY OF THE PAPER BOOK, IT BECOMES APPARENTLY CLEAR THAT OPERA TING FUNCTION REQUIRED OF THE CONTRACTOR UNDER THIS CONTRACT SHAL L BE PERFORMED BY THE OPERATOR ON BEHALF OF ALL CONSTITUENTS OF THE C ONTRACTOR, SUBJECT TO, AND IN ACCORDANCE WITH, THE TERMS AND PROVISION S OF THE CONTRACT AND GENERALLY ACCEPTED BY THE INTERNATIONAL PETROLE UM INDUSTRY PRACTICE; THAT THE OPERATOR SHALL MAINTAIN BOOKS OF ACCOUNT AND ITA NO.6937/DEL/2017 29 OTHER RECORDS INCLUDING AUDIT IN ACCORDANCE WITH TH E TERMS OF THE PSC ON BEHALF OF EACH OF THE PARTIES CONSTITUTING T HE CONTRACT; AND THAT AS PER CLAUSE 3.1.4 (II) OF ACCOUNTING PROCEDU RE TO PSC, RJ UJV IS PERMITTED TO PAY ONLY FOR ACTUAL COST INCURR ED BY THE TAXPAYER WITHOUT ANY MARK-UP. THE TAXPAYER IN ORDE R TO SUPPORT ITS ARGUMENT RELIED UPON THE DECISIONS RENDERED BY COOR DINATE BENCH OF THE TRIBUNAL IN CASE CITED AS TOLL GLOBAL FORWARDING INDIA (P.) LTD. (SUPRA), JUDGMENT OF THE HONBLE SUPREME COURT IN CIT VS. ENRON OIL & GAS LTD. (2008) 305 ITR 75 (SC) AND JUDGMENT OF HONBLE UTTARAKHAND HIGH COURT IN CIT VS. ENRON EX PAT SERVICES INC. (2010) 327 ITR 626 . 39. SO FAR AS CONTENTION OF THE TAXPAYER THAT THE L D. TPO OUGHT TO HAVE APPLIED CUP METHOD FOR DETERMINATION OF MGA CO ST IS CONCERNED, IT IS HELD BY THE COORDINATE BENCH OF TH E TRIBUNAL THAT AS PER RULE 10B((1)(A) OF THE RULES, CUP METHOD CAN BE APPLIED WHEN THE AMOUNT CHARGED FOR SIMILAR UNCONTROLLED TR ANSACTION IS THE SAME AS INTERNATIONAL TRANSACTION BETWEEN THE AES A ND EVEN IF THE TAXPAYER HAD NOT EVEN MADE EFFORT TO DEMONSTRATE TH AT THE ACTUAL AMOUNT CHARGED FOR COMPARABLE SERVICES RENDERED TO, OR RECEIVED FROM, AES WERE THE SAME AS IN THE CASE OF INDEPENDE NT ENTERPRISES, BUT PROFIT SHARING RATIO OF TRANSACTION BETWEEN THE TAXPAYER AND AES ARE NOT DIFFERENT FROM THAT WITH A THIRD PARTY, VIZ. 50 : 50 AND ITA NO.6937/DEL/2017 30 PRICE DETERMINATION OF ALL BUSINESS ASSOCIATES, CUP METHOD CAN BE APPLIED. SO, WHEN UNDISPUTEDLY THE TAXPAYER IS OPE RATOR OF PSC AND EACH MEMBER OF PSC WOULD BE CHARGED COST TO RAT IO OF PROFIT, THE TPO/AO IS DIRECTED TO VERIFY THE RATIO AND THEN TO APPLY THE CUP METHOD FOR BENCHMARKING THE TRANSACTION. MOREO VER, TPO/AO WAS DIRECTED BY THE LD. DRP TO APPLY THE CUP . 40. SO FAR AS CONTENTION OF THE TAXPAYER THAT RJ UJ V IS PERMITTED TO PAY ONLY FOR ACTUAL COST INCURRED BY THE TAXPAYE R WITHOUT ANY MARK-UP IS CONCERNED, CLAUSE 3.1.4 (II) OF ACCOUNTI NG PROCEDURE TO PSC, AVAILABLE AT PAGE 359 OF THE PAPER BOOK, IS VE RY CATEGORIC IN THIS REGARD THAT RJ UJV IS REQUIRED TO PAY ONLY FOR ACTUAL COST INCURRED BY THE TAXPAYER WITHOUT ANY MARK-UP. FOR FACILITY OF REFERENCE, CLAUSE 3.1.4 (II) IS EXTRACTED AS UNDER :- (II) AFFILIATES OF OPERATOR A) CHARGES FOR SERVIC ES COSTS OF SPECIFIC PROFESSIONAL, TECHNICAL OR OTHER SERVICES, PROVIDED BY ANY AFFILIATE AT THE REQUEST OF THE OPE RATOR FOR THE DIRECT BENEFIT OF PETROLEUM OPERATIONS. IF SUCH WO RK IS NOT COVERED BY AN APPROVED BUDGET AND WORK PROGRAMME, CONTRACTOR SHALL SUBMIT A REVISED BUDGET AND WORK P ROGRAMME TO THE MANAGEMENT COMMITTEE AS SOON AS POSSIBLE. S UCH CHARGES SHALL NOT INCLUDE ANY ELEMENT OF PROFIT AND SHALL BE CALCULATED IN ACCORDANCE WITH THE AFFILIATES CUSTO MARY ACCOUNTING PRACTICE FOR RECOVERING THE ACTUAL COST OF PROVIDING SUCH SERVICES. AT THE REQUEST OF ANY PARTY, OPERAT OR SHALL PROCURE THAT A CERTIFICATE FROM THE STATUTORY AUDIT ORS OF THE AFFILIATE IS OBTAINED TO THE EFFECT THAT ANY SUM CH ARGED. 41. THIS ISSUE HAS ALREADY BEEN DECIDED BY THE HON BLE SUPREME COURT IN CASE CITED AS CIT VS. ENRON OIL & GAS LTD. (SUPRA) ITA NO.6937/DEL/2017 31 WHEREIN IT IS HELD THAT, SECTION 42 BECOMES OPERATIVE ONLY WHEN IT IS READ WITH PRODUCTION SHARING CONTRACT (PSC) AND THE EXPENSES DEDUCTIBLE UNDER THIS SECTION HAS TO BE DETERMINED AS PER PSC. 42. HONBLE HIGH COURT OF UTTARAKHAND IN THE CASE O F CIT VS. ENRON EXPAT SERVICES INC. (SUPRA), IN THE IDENTICAL SET OF FACTS, HELD THAT, AFFILIATED COMPANIES OF EOGIL ARE PROHIBITED UNDE R CLAUSE 3.1.4(B)(1) OF PRODUCTION SHARING CONTRACT F ROM CHARGING THE MEMBERS OF THE CONSORTIUM ANYTHING MORE THAN AC TUAL COST OF SERVICES. 43. IDENTICAL CLAUSE IN CASE OF THE TAXPAYER IN CLA USE 3.1.4(1) IS ALSO THERE WHICH READS AS COST OF SERVICES REPRESEN TED FAIR ALLOCATION OF ACTUAL COSTS AND DOES NOT INCLUDE ANY ELEMENT OF PROFIT . MOREOVER, IT IS THE CASE OF REIMBURSEMENT MADE B Y THE AE TO THE TAXPAYER AND HAS RECEIVED MONEY FOR THE SERV ICES RENDERED. IN THESE CIRCUMSTANCES, THE TAXPAYER WAS NOT REQUIR ED TO DEMONSTRATE THE BENEFITS RECEIVED BY IT BY CARRYING OUT A COST ANALYSIS BENEFIT. 44. LIKEWISE, IN CASE OF CAIRN LANKA UNDERTAKES EXP LORATION OF PETROLEUM RESOURCES, DEVELOPMENT AND PRODUCTION ACT IVITIES UNDER PETROLEUM RESEARCH AGREEMENT (PRA) AS PER APPENDIX C, SECTION 3, PARA 3.1.4 (II)(A) OF PRA, AVAILABLE AT PAGE 578 OF THE PAPER BOOK, WHERE UJV WITH CAIRN LANKA AS OPERATOR AVAILS ITA NO.6937/DEL/2017 32 PROFESSIONAL AND ADMINISTRATIVE SERVICES OF CAIRN LANKA AFFILIATES, IT IS PERMITTED TO PAY ONLY ACTUAL COST INCURRED BY THE TAXPAYER WITHOUT ANY ELEMENT OF PROFIT. RELEVANT P ROVISIONS ARE EXTRACTED FOR READY PERUSAL AS UNDER :- CHARGES FOR SERVICES (II) AFFILIATES OF CONTRACTOR (A) PROFESSIONAL AND ADMINISTRATIVE SERVICES AND EXPENS ES COST OF PROFESSIONAL AND ADMINISTRATIVE SERVICES PR OVIDED BY ANY AFFILIATE FOR THE DIRECT BENEFIT OF PETROLEUM O PERATIONS INCLUDING SERVICES PROVIDED BY THE PRODUCTION, EXPL ORATION, LEGAL, FINANCIAL INSURANCE, ACCOUNTING AND COMPUTER SERVICES DIVISIONS OTHER THAN THOSE COVERED BY SECTION 3.1.4 (II)(B) WHICH THE CONTRACTOR MAY USE IN LIEU OF HAVING ITS OWN EMPLOYEES. CHARGES SHALL BE EQUAL TO THE ACTUAL CO ST OF PROVIDING THEIR SERVICES, SHALL NOT INCLUDE ANY ELE MENT OF PROFIT AND SHALL NOT BE ANY HIGHER THAN THE MOST FA VOURABLE PRICES CHARGED BY THE AFFILIATE TO THIRD PARTIES FO R COMPARABLE SERVICES UNDER SIMILAR TERMS AND CONDITIONS ELSEWHE RE AND WILL BE FAIR AND REASONABLE IN THE LIGHT OF PREVAIL ING MODERN OILFIELD/GAS FIELD AND PETROLEUM INDUSTRY PRACTICES . 45. SIMILARLY, IN CASE OF CAIRN SOUTH AFRICA WHICH IS AN OPERATOR OF UJV AS PER PARTICIPATING INTEREST HOLDERS IN 60% AND IT UNDERTAKES EXPLORATION OF PETROLEUM RESOURCES AND D EVELOPMENT AND PRODUCTION ACTIVITIES UNDER JOA AS PER SECTION 2 OF JOA. SECTION 2 OF JOA, AVAILABLE AT PAGE 437 OF THE PAPE R BOOK, WHICH SETS OUT THE PROCEDURE TO BE FOLLOWED FOR THE COST ACCUMULATION AND ALLOCATION OF SUCH COSTS TO THE UJV BASED ON TIME W RITING SYSTEM. SO, THE TAXPAYER IS TO BE REIMBURSED ACTUAL COST IN CURRED BY IT WITHOUT ANY ELEMENT OF PROFIT. ITA NO.6937/DEL/2017 33 46. LD. DR FOR THE REVENUE BY PLACING RELIANCE ON D ECISION RENDERED BY HONBLE HIGH COURT IN CASE OF CUSHMAN AND WAKEFIELD (INDIA) PVT. LTD. (2014) 367 ITR 730 CONTENDED THAT THE TAXPAYER HAS FAILED TO SUBSTANTIATE IF EFFORTS WERE MADE BY IT FOR MAKING ARRANGEMENT TO PROVIDE SUCH SERVICES AND THA T THE REIMBURSEMENT OF EXPENDITURE WAS MADE ON THE SAME D AY WHEN THE EXPENDITURE WERE INCURRED BY THE TAXPAYER. LD. DR FURTHER CONTENDED THAT WHATEVER SERVICES HAVE BEEN RENDERED BY THE TAXPAYER MARK-UP ON THE COST INCURRED SHOULD BE THE RE. 47. SO FAR AS QUESTION OF APPLICABILITY OF DECISION RENDERED BY HONBLE HIGH COURT IN CASE OF CUSHMAN AND WAKEFIELD (INDIA) PVT. LTD. (SUPRA) TO THE FACTS AND CIRCUMSTANCES OF THE CASE IS CONCERNED, WE ARE OF THE CONSIDERED VIEW THAT THE S ERVICES HAVE BEEN ADMITTEDLY RENDERED IN THIS CASE BY THE TAXPAY ER DESIGNATED AS OPERATOR OF PSC, AND THE CONTRACT IS TO BE CARRIED OUT AS PER CONDITIONS LAID DOWN BY THE GOVERNMENT OF INDIA AND IN VIEW OF THE FACT AND MARKET CONDITION, THE SERVICES REQUIRE D TO BE AVAILED OF AT COST WITHOUT ANY MARK-UP. SO, THE CONTRACT AS T O RENDERING SERVICES BY THE TAXPAYER TO ITS AES ON COST TO COST BASIS IS ON DIFFERENT FOOTING THEN IN THE CASE OF CUSHMAN AND WAKEFIELD (INDIA) PVT. LTD. (SUPRA). SO, THE CASE OF CUSHMAN AND WAKEFIELD ITA NO.6937/DEL/2017 34 (INDIA) PVT. LTD. (SUPRA) IS NOT APPLICABLE TO THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE. 48. SO FAR AS QUESTION OF REIMBURSEMENT OF EXPENDIT URE IS CONCERNED, IT IS THE CASE OF THE TAXPAYER THAT THES E EXPENSES WERE INCURRED ON BEHALF OF AES AND RECOVERY FROM THEM ON COST TO COST BASIS FOR WHICH A COPY OF RELATED INVOICE ON SAMPLE BASIS WAS FURNISHED BY THE TAXPAYER VIDE LETTER DATED 26.10.2 016 FOR VERIFICATION. SINCE THE REIMBURSEMENT COST IS MERE RECOUPMENT OF EXPENSES AND DO NOT INCLUDE PROVISIONS OF ANY SERVI CES BY THE TAXPAYER, THIS COST IS TO BE TREATED AS A PASS-THR OUGH COST AND NOT TO BE INCLUDED IN THE PROFIT OF THE TAXPAYER. MORE OVER, IT IS NEITHER THE CASE OF THE TAXPAYER NOR THE TPO THAT THE TAXPA YER HAS ADDED ANY VALUE TO THE SERVICES RENDERED OR THE TAXPAYER HAS ASSUMED ANY RISK WITH RESPECT TO THE THIRD PARTY SERVICES. SO, NO MARK-UP IS REQUIRED TO BE ADDED IN THIS CASE. IDENTICAL ISSUE HAS BEEN DECIDED BY THE COORDINATE BENCH OF THE TRIBUNAL IN CASE CIT ED AS DCIT VS. ERICSSON INDIA (P.) LTD. (2016) 74 TAXMANN.COM 173 (DELHI- TRIB.) BY RETURNING FOLLOWING FINDINGS :- IT IS OBSERVED THAT THE COMMISSIONER (APPEALS) HAS DEALT WITH THE ISSUE AT LENGTH AND HAS EXAMINED THE SCOPE AND NATURE OF SERVICES RENDERED BY THE ASSESS EE TO ITS AES IN EACH SEGMENT. THE COMMISSIONER (APPEALS) OBSERVED THAT A FAR ANALYSIS FORMS THE BEDROCK OF A NY TRANSFER PRICING ANALYSIS. IN THE INSTANT CASE THE ASSESSEE BY WAY OF ANY FAR ANALYSIS HAS CLEARLY ITA NO.6937/DEL/2017 35 DEMONSTRATED THAT IT DID NOT UNDERTAKE ANY SIGNIFIC ANT FUNCTIONS, EMPLOYED SIGNIFICANT ASSETS AND BORE SIGNIFICANT RISKS. FURTHER, THE ASSESSEE HAS ALSO SUBMITTED SAMPLE COPIES OF THIRD PARTY INVOICES FOR THE SAID INTERNATIONAL TRANSACTIONS WHICH ALSO MENTIONS THE NAME OF THE CUSTOMER TO WHICH IT IS SUPPLIED. THE AGREEMENT BETWEEN THE ASSESSEE AND ITS AE WAS ALSO EXAMINED FROM WHERE IT WAS OBSERVED THAT FOR SUPPLY OF EQUIPMENT THE CONTRACT IS BETWEEN BHARTI AND THE AE , AND THE ASSESSEE PURCHASES AND SUPPLIES THE EQUIPME NT AT THE INSTRUCTION OF AE. BASED ON THE FACTS PRESEN T AND THE MATERIAL PLACED ON RECORD, THE ASSESSEE'S CONTE NTION THAT THE COST REIMBURSEMENT TRANSACTION WAS UNDERTAKEN BY THE ASSESSEE ONLY FOR ADMINISTRATIVE CONVENIENCE AND THE ASSESSEE HAD NOT UNDERTAKEN ANY SIGNIFICANT ACTIVITY IN THIS REGARD WAS ACCEPTABLE. 49. SO FAR AS QUESTION OF RECEIVING PARENT COMPANY OVERHEADS (PCO) CHARGES FROM CAIRN LANKA IS CONCERNED, IT IS THE CASE OF THE TAXPAYER THAT THIS AMOUNT IS RECEIVED UNDER PRA ENT ERED BY CAIRN LANKA WITH GOVERNMENT OF SRI LANKA AND ANNUAL OVERH EAD CHARGE AT THE PRE-SPECIFIED BASIS AS PER RESPECTIVE PETROL EUM RESOURCES AGREEMENT (PRA) IS REQUIRED TO BE PAID TO AFFILIATE S/PARENT COMPANY OF THE OPERATOR IN LIEU OF FINANCIAL, LEGAL , ACCOUNTING SERVICES AND ASSISTANCE PROVIDED BY THE AFFILIATES/ PARENT COMPANY TO THE UJVS AND RELIED UPON CLAUSE 2.6.2, APPENDIX C OF PRA RELATING TO ANNUAL PCO PERTAINING TO BLOCK NO.SL 2 007-01-001. SO, THE TAXPAYER BEING THE PARENT COMPANY OF CAIRN LANKA HAS RECEIVED PCO CHARGES DURING THE YEAR UNDER ASSESSME NT FROM CAIRN LANKA. WHEN RENDERING OF SERVICES BY THE TAXPAYER HAS NOT BEEN ITA NO.6937/DEL/2017 36 DISPUTED COMMERCIAL EXPEDIENCY OF THE TRANSACTION C ANNOT BE QUESTIONED BY THE REVENUE. MOREOVER LEGAL AND CONT RACTUAL AGREEMENT BETWEEN THE PARTIES CANNOT BE QUESTIONED BY THE REVENUE WITHOUT ASSIGNING ANY COGENT REASONS. 50. SO FAR AS CONTENTION OF THE LD. DR THAT SEGMENT AL VALUE OF COST SHARING TO ONGC IS NOT AVAILABLE IS CONCERNED, LD. AR FOR THE TAXPAYER DREW OUR ATTENTION TOWARDS DETAIL OF ALLOC ATION/RECHARGE OF MGA COST/SHARED VENTURE COST IN US $, AVAILABLE AT PAGE 426 OF THE PAPER BOOK, WHICH IS EXTRACTED FOR READY PERUSAL AS UNDER :- B. ALLOCATION / RECHARGE OF MGA COST/SHARED VENTUR E COST IN USD PARTICULARS USD INR CIL CEHYL ONGC EXPLORATION 15,99,313 8,85,65,064 4,42,82,532 4,42,82,532 DEVELOPMENT & PRODUCTION 1,74,96,458 96,42,02,382 33,74,70,834 33,74,70,834 28,92,60,715 TOTAL 1,90,95,771 1,05,27,67,446 38,17,53,366 38,17,53,366 28,92,60,715 51. LD. AR FOR THE TAXPAYER ALSO DREW OUR ATTENTION TOWARDS STATEMENT OF ALLOCATION / RECHARGE OF MANPOWER, GEN ERAL AND ADMINISTRATIVE COST TO RJ-ON-90-1-UNINCORPORATED JO INT VENTURE FOR THE YEAR ENDING MARCH 31, 2013 WHICH IS ALSO EX TRACTED FOR READY PERUSAL AS UNDER :- SL.NO. PARTICULARS AMOUNT IN US DOLLARS (US $) AMOUNT IN INDIAN RUPEES (INR) 1 ALLOCATION / RECHARGE OF MANPOWER, GENERAL AND ADMINISTRATIVE COSTS IN INR - 4,859,678,933 2 ALLOCATION / RECHARGE OF MANPOWER, GENERAL AND ADMINISTRATIVE COSTS IN US$ 19,095,771 - 3 ALLOCATION OF SHARED VENTURE COSTS IN INR - 1,907,05 3 4 ALLOCATION OF SHARED VENTURE COSTS IN US $ - - TOTAL 19,095,771 4,861,585,986 ITA NO.6937/DEL/2017 37 52. STATEMENT OF ALLOCATION / RECHARGE OF MGA COST / SHARED VENTURE COST IN US $ IS DULY CERTIFIED BY THE AUDIT OR AS PER CERTIFICATE AVAILABLE AT PAGE 419 OF THE PAPER BOOK . MOREOVER, STATEMENT OF ALLOCATION AVAILABLE AT PAGE 427 OF TH E PAPER BOOK IS DULY TALLIED WITH ALLOCATION / RECHARGE OF MGA COST / SHARED VENTURE COST IN US $ AVAILABLE AT PAGE 426 OF THE P APER BOOK. 53. FURTHERMORE, THE LD. TPO HAS MADE DISALLOWANCE ON THE BASIS OF COST ANALYSIS ON THE GROUND THAT THE TAXPA YER HAS NOT BEEN ABLE TO SHOW AS TO WHEN AND HOW VARIOUS SERVICES WE RE REQUISITIONED FROM THE AES, WHETHER THE SERVICES AC TUALLY NEEDED BY IT, WHETHER THE SAME WERE ACTUALLY RECEIVED BY I T, WHAT BENCHMARKING ANALYSIS WAS DONE, WHAT COST ANALYSIS WAS DONE PARTICULARLY WHEN HUGE PAYMENT HAS BEEN MADE BY IT TO THE AES. 54. HOWEVER, WE ARE OF THE CONSIDERED VIEW THAT WHE N THE TAXPAYER IS A DESIGNATED OPERATOR OF PSC WHO HAS AL WAYS KEPT MONEY IN ADVANCE AS A CASH CALL FOR AND ON BEHALF O F ITS MEMBERS. HONBLE SUPREME COURT IN CASE CITED AS IN CIT VS. ENRON OIL & GAS LTD. (SUPRA) HAS HELD AS TO HOW THE PSC WORKS, THE OPER ATIVE PART OF THE JUDGMENT IS EXTRACTED FOR READY PERUSAL AS UNDER :- 15. IF THE PRICE OF OIL INCREASED, THE EXTENT OF P ROFIT OIL WOULD ALSO INCREASE AND THEREBY THE SHARE OF TH E GOVERNMENT WOULD AUTOMATICALLY INCREASE. IT IS FOR THIS ITA NO.6937/DEL/2017 38 REASON THAT PSCS WERE CONSIDERED TO BE A BETTER ARRANGEMENT FOR ENSURING THE SOVEREIGN GOVERNMENTS (OWNERS OF THE NATURAL RESOURCES) THE MAXIMUM POSSIBLE TAKE. AT THE SAME TIME, SUCH CONTRACTS E NSURE THAT THE PROJECTS REMAINED ATTRACTIVE ENOUGH FOR FO REIGN INVESTORS. HOWEVER, DUE TO THIS KIND OF STRUCTURE O F THE PSC, INHERENTLY THERE HAS TO BE FREQUENT CONVERSION FROM ONE CURRENCY TO THE OTHER. CASH CALLS WERE MAD E IN USD; SOME OF THE CASH CALLS WERE REQUIRED TO BE CONVERTED TO INR FOR LOCAL EXPENSES; SOME OF THE EXPENSES STOOD INCURRED IN USD WHEREAS SOME TO BE INCURRED IN INR; THE SALE PRICE OF OIL WAS IN USD WHEREAS THE ACCOUNTS WERE DRAWN UP IN USD. WHEN SOME OF THE EXPENSES WERE INCURRED IN USD AND SOME INCURRED IN INR, CONVERSION HAD TO BE MADE AT THE PREVALENT RATES OF EXCHANGE TO BRING THEM ALL TO TH E CONTRACT CURRENCY, I.E., USD. SIMILARLY, AS STATED ABOVE, THE SALE PRICE OF OIL WAS IN USD. AT THE TIME OF SA LE, THE INR USD RATE WOULD CHANGE FROM THAT ON THE DATE O F THE CASH CALLS. SIMILARLY, AS STATED ABOVE, THE ACC OUNTS WERE REQUIRED TO BE DRAWN UP IN USD. FOR THAT PURPO SE ALSO ONE HAD TO RECONVERT THE COSTS FROM BARRELS TO MONETARY TERMS. FOR THE SAID REASONS, CLAUSES 1.6.1 AND 1.6.2 OF APPENDIX C TO THE PSC ENVISAGED BOOKING OF ALL CURRENCY GAINS AND LOSSES IRRESPECTIVE OF WHETH ER SUCH GAINS/LOSSES STOOD REALIZED OR REMAINED UNREAL IZED. IN CASE OF GAINS, A PART OF THE CREDIT WOULD GO TO THE GOVERNMENT, AND TAXES WOULD BE PAYABLE ON THE INCOM E TO THE EXTENT OF SUCH GAINS CREDITED. THEREFORE, IN OUR VIEW, CURRENCY GAINS AND LOSSES CONSTITUTED AN INEXTRICABLE PART OF THE ACCOUNTING MECHANISM FOR EXPENSES INCURRED ON THE DEVELOPMENT AND PRODUCTION OF OIL. 55. LD. DR FOR THE REVENUE ALSO CONTENDED THAT THE BALANCE SHEET OF THE TAXPAYER DOES NOT DISCLOSE DATE OF PAY MENT ON DAILY BASIS, SO THE QUESTION OF HAVING ADVANCE MONEY WITH THE TAXPAYER AS A CASH CALL FOR AND ON BEHALF OF ITS MEMBERS DOE S NOT ARISE. ITA NO.6937/DEL/2017 39 HOWEVER, WE ARE OF THE CONSIDERED VIEW THAT IN CASE OF PSC, WHEN RATES OF THE OIL BLOCKS FLUCTUATE ON DAILY BASIS, T HIS INFORMATION CANNOT BE GIVEN IN THE BALANCE SHEET. HOWEVER, IN THE INTEREST OF JUSTICE, WE ARE OF THE CONSIDERED VIEW THAT THE MAT TER IS REMANDED TO TPO/AO TO VERIFY WHETHER CASH CALL WAS RECEIVED IN ADVANCE BY THE TAXPAYER AS OPERATOR FOR AND ON BEHALF OF ITS M EMBERS. 56. IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, WE AR E OF THE CONSIDERED VIEW THAT WHEN UNDISPUTEDLY THE TAXPAYER IS DESIGNATED AS OPERATOR OF PSC AND WAS HAVING MONEY IN ADVANCE AS A CASH CALL FOR AND ON BEHALF OF ITS MEMBERS, IT IS TO ACT ON A ND ON BEHALF OF UJVS AND DOES NOT ENTER INTO THE TRANSACTIONS IN IT S OWN CAPACITY. MOREOVER, OPERATOR HAS DULY MAINTAINED ITS BOOKS OF ACCOUNT AND OTHER RECORDS WHICH ARE AUDITED IN TERMS OF PAC ON BEHALF OF EACH OF THE PARTIES CONSTITUTING CONTRACTOR, AND THE TAX PAYER HAS INCURRED EXPENSES ON BEHALF OF JOINT VENTURE PARTNER OF CEHL , IT IS NOT AN INTERNATIONAL TRANSACTION BETWEEN AES IN TERMS OF S ECTION 92B (1) OF THE ACT AND JOINT VENTURE PARTNERS ARE ONLY PERM ITTED TO PAY THE ACTUAL COST WITHOUT ANY MARK-UP. HOWEVER, TO WORK OUT THE CASH CALL, THE TPO MAY VERIFY THE LEDGERS DULY MAINTAINE D BY THE TAXPAYER TO SEE IF TAXPAYER HAS ALWAYS KEPT MONEY I N ADVANCE AS A CASH CALL TO BE SPENT FOR AND ON BEHALF OF ITS MEMB ERS. ITA NO.6937/DEL/2017 40 57. SO, WHEN UNDISPUTEDLY THE TAXPAYER IS OPERATOR OF PSC AND EACH MEMBER OF PSC WOULD BE CHARGED COST TO RATIO O F PROFIT, THE TPO/AO IS DIRECTED TO VERIFY THE RATIO AND THEN TO APPLY THE CUP METHOD FOR BENCHMARKING THE TRANSACTION. MOREOVER, TPO/AO WAS DIRECTED BY THE LD. DRP TO APPLY THE CUP. CONS EQUENTLY, GROUNDS NO.6 TO 6.5 ARE DETERMINED IN FAVOUR OF THE TAXPAYER FOR STATISTICAL PURPOSES. 58. RESULTANTLY, THE APPEAL FILED BY THE TAXPAYER I S ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT ON THIS 12 TH DAY OF FEBRUARY, 2019. SD/- SD/- (N.K. SAINI) (KULDIP SINGH) VICE PRESIDENT JUDICIAL MEMBER DATED THE 12 TH DAY OF FEBRUARY, 2019 TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT (A). 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.