ESSAR POWER LTD, MUMBAI V. ASST CIT RG 6(2)(2), MUMBAI

ITA 7329/MUM/2017

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 8013 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 3 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-04-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Assessment Year: misc
• Appeal Filed On: 22-12-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: T ROUMUAN PAITE
• Keywords: Business income; Transfer pricing; International transaction; Earning of tax free income; Rule 8D
• Section: 271(1)(c); 14A; 115JB; 15

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI BEFORE SHRI SAKTIJIT DEY , JUDICIAL MEMBER AND SHRI MANOJ KUMAR AGGARWAL, ACCOUNTANT MEMBER ITA NO. 7329 / MUM . /2017 ( ASSESSMENT YEAR : 20 13 14 ) ESSAR POWER LTD., ESSAR HOUSE 11, KESHAVRAO KHADEY MARG MAHALAXMI, MUMBAI 400 034 PAN AAACE0895J . APPELLANT V/S ASSTT. COMMISSIONER OF INCOME TAX RANGE 6(2)(2), MUMBAI . RESPONDENT ASSESSEE BY : SHRI ANUJ KISNADWALA REVENUE BY : SHRI T. ROUMUAN PAITE DATE OF HEARING 21 .0 1 .201 9 DATE OF ORDER 15.04.2019 O R D E R PER SAKTIJIT DEY. J.M. T HE AFORESAID APPEAL HAS BEEN FILEDBY THE ASSESSEE CHALLENGING THE FINAL ASSESSMENT ORDER DATED 8 TH NOVEMBER 201 7 , PASSED UNDER SECTION 14 3 (3) R/W SECTION 144C(13) OF THE INCOME - TAX ACT, 1961 (FOR SHORT 'THE ACT' ) PERTAINING TO THE ASSESSMENT YEAR 2013 14. 2 . G ROUND NO.1, BEING GENERAL IN NATURE DOES NOT REQUIRE ADJUDICATION. 2 ESSAR POWER LTD. 3 . AT THE TIME OF HEARING, ON THE INSTRUCTIONS OF THE ASSESSEE, LEARNE D AUTHORISED REPRESENTATIVE DI D NOT WANT TO PRESS GROUND NO.6.HENCE , GROUND NO.6 IS DISMISSED AS NOT PRESSED. 4 . IN GROUND NO.2, THE ASSESSEE HAS CHALLENGED ADDITION OF ` 8,90,803, MADE ON ACCOUNT OF ADJUSTMENT TOWARDS INTEREST OF OUTSTANDING RECEIVABLES FR O M ITS ASSOCIATED ENTERPRISE (A E) VIZ. ESSAR AFRICA HOLDING LTD. 5 . BRIEF FACTS ARE, THE ASSESSEE , AN INDIAN COMPANY, IS PART OF ESSAR GROUP AND IS ENGAGED IN POWER GENERATION. IN THE COURSE OF PROCEEDINGS UNDER SECTION 92CA OF THE ACT, THE TRANSFER PRICING O FFICER WHILE VERIFYING THE DETAILS NOTICING THAT THE ASSESSEE HAD SHOWN OUT STANDING RECEIVABLES FROM THE AE AMOUNTING TO ` 18,05,731, CALLED FOR THE DETAILS OF SUCH RECEIVABLES. ON VERIFYING THE DETAILS FURNISHED BY THE ASSESSEE, HE FOUND THAT THE ASSESSEE DID NOT HAVE SINGLE OUTSTANDING RECEIVABLE FROM THIRD PARTIES EXCEPT THE A E. HE, THEREFORE, CALLED UPON THE ASSESSEE TO SHOW CAUSE WHY ARM'S LENGTH PRICE OF THE INTEREST ON THE OUT STANDING RECEIVABLES FROM THE AE SHOULD NOT BE DETERMINED. AFTER CONSIDERIN G THE EXPLANATION OF THE ASSESSEE, THE TRANSFER PRICING OFFICER ULTIMATELY HELD THAT AS PER THE BLOOMBERG DATA BASE INTEREST RATE APPLICABLE TO THE OUTSTANDING RECEIVABLES IS 6.56%. ACCORDINGLY, HE MADE AN ADJUSTMENT OF ` 18,05,731, ON 3 ESSAR POWER LTD. ACCOUNT OF OUTSTANDIN G RECEIVABLES. IN THE DRAFT ASSESSMENT ORDER, THE ADJUSTMENT SUGGESTED BY THE TRANSFER PRICING OFFICER WAS ADDED. 6 . WHILE CONSIDERING THE OBJECTIONS RAISED BY THE ASSESSEE AGAINST THE SAID ADDITION ,LEARNED DRP THOUGH HELD THAT CHARGING OF INTEREST ON THE OUT STANDING RECEIVABLES FROM THE AE IS AN INTERNATIONAL TRANSACTION, HOWEVER, CERTAIN COMPUTATIONAL ERROR S POINTED OUT BY THE ASSESSEE WAS ACCEPTED BY THE DRP AND THEY DIRECTED THE TRANSFER PRICING OFFICER T O EXCLUDE THE A LLOWABLE CREDIT PERIOD TO THE AE OF 30 DAYS WHILE COMPUTING THE INTEREST CHARGEABLE ON OUT STANDING RECEIVABLES FROM THE A E. IN COMPLIANCE TO THE DIRECTIONS OF THE DRP, THE TRANSFER PRICING OFFICER ULTIMATELY MADE AN ADJUSTMENT OF ` 8,90,803, ON ACCOUNT OF INTEREST ON OUT STANDING RECEIVABLES FROM THE A E. 7 . THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED , WHILE APPLYING BLOOMB E RG RATE OF 6.56% FOR COMPUTING THE INTEREST ON OUTSTANDING RECEIVABLE S, THE TRANSFER PRICING OFFICER HAS NOT BROUGHT ANY COMPARABLE TO SHOW THAT SUCH RATE APPLIED BY HIM IS AT ARM'S LENGTH. THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED , AS A NORMAL BUSINESS PRACTICE, THE ASSESSEE DOES NOT CHARGE ANY INTEREST ON OU TSTANDING RECEIVABLES BOTH TO AES AND NON A ES. FURTHER, HE SUBMITTED , BEFORE THE TRANSFER PRICING OFFICER THE ASSESSEE HAD MADE A SPECIFIC SUBMISSION THAT AS PER THE LIBOR RATE THE INTEREST CHARGEABLE ON THE OUTSTANDING RECEIVABLE IS LIBOR PLUS 0.5%. HE SUBMITTED , THE 4 ESSAR POWER LTD. AFORESAID CONTENTION OF THE ASSESSEE HAS NOT A T ALL BEEN CONSIDERED EITHER BY THE TRANSFER PRICING OFFICER OR BY THE DRP. 8 . THE LEARNED DEPARTMENTAL REPRESENTATIVE RELIED UPON THE OBSERVATIONS OF THE TRANSFER PRICING OFFICER AND THE DRP. 9 . WE HAVE CONSIDERED RIVAL SUBMISSIONS AND PERUSED MATERIAL ON REC ORD. UNDISPUTEDLY, THE TRANSFER PRICING OFFICER HAS DETERMINED THE ARM'S LENGTH PRICE OF THE INTEREST CHARGEABLE ON OUTSTANDING RECEIVABLE FROM THE AE BY APPLYING THE RATE OF 6.56% AS PER BLOOMBERG DATA BASE. HOWEVER, IT IS NOTICED THAT BEFORE THE TRANSFER PRICING OFFICER AND LEARNED DRP THE ASSESSEE HAD SUBMITTED THAT AS PER LIBOR RATE OF INTEREST THE INTEREST CHARGEABLE ON SUCH OUTSTANDING RECEIVABLE IS LIBOR PLUS 0.5%. THE AFORESAID CONTENTION OF THE ASSESSEE HAS NOT AT ALL BEEN CONSIDERED BY THE TRANSFER PRICING OFFICER AND LEARNED DRP. AS HELD IN VARIOUS JUDICIAL PRECEDENTS , INTEREST ON OUTSTANDING RECEIVABLES HAS TO BE CHARGED BY APPLYING LIBOR RATE AS APPLICABLE IN THE COUNTRY OF RESIDENCE OF AE . IN VIEW OF THE AFORESAID, WE DIRECT THE ASSESSING OFFICE R TO COMPUTE THE INTEREST CHARGEABLE ON OUTSTANDING RECEIVABLES AT LIBOR PLUS 0.5%. THIS GROUND IS PARTLY ALLOWED. 10 . IN GROUND NO.3, THE ASSESSEE HAS CHALLENGED THE DECISION OF THE ASSESSING OFFICER IN ASSESSING THE INTEREST INCOME OF ` 27,47,80,861, UNDER THE HEAD INCOME FROM OTHER SOURCES INSTEAD OF INCOME FROM BUSINESS. 5 ESSAR POWER LTD. 11 . BRIEF FACTS ARE,DU RING THE ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER NOTICED THAT INTEREST INCOME RECEIVED BY THE ASSESSEE FROM ICDS, MARGIN DEPOSITS FROM BANK AND OTHER AMOUNTED TO ` 27,47,80,861 HAVE BEEN SHOWN BY THE ASSESSEE AS BUSINESS INCOME. REFERRING TO THE TREATMENT GIVEN TO SUCH INCOME BY HIM IN ASSESSMENT YEAR 2006 07 TO 2012 13, THE ASSESSING OFFICER TREATED THE AFORESAID INTEREST INCOME AS INCOME FROM OTHER SOURCES. 12 . THE L EARNED DRP ALSO UPHELD THE DECISION OF THE ASSESSING OFFICER. 13 . THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED , WHILE DECIDING IDENTICAL ISSUE IN ASSESSEES OWN CASE IN THE PRECEDING ASSESSMENT YEAR, THE TRIBUNAL HAS HELD THAT INTEREST INCOME FROM MARGIN MO NEY DEPOSIT IS TO BE ASSESSED AS BUSINESS INCOME , WHEREAS , INTEREST INCOME FROM BANK DEPO S I TS AND ICDS HAVE TO BE TREATED AS INCOME FROM OTHER SOU R CES. IN THIS CONTEXT, HE DREW OUR ATTENTION TO THE APPEAL ORDER PASSED BY THE TRIBUNAL FOR ASSESSMENT YEAR S 2 009 10 TO 2012 13. 14 . L EARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED , THE ISSUE HAS BEEN DECIDED PARTLY IN FAVOUR OF THE ASSESSEE BY THE TRIBUNAL IN THE PRECEDING ASSESSMENT YEAR S . 15 . WE HAVE CONSIDERED RIVAL SUBMISSIONS AND PERUSED MATERIAL ON RECORD. NOTABLY, WHILE DECIDING IDENTICAL ISSUE IN ASSESSEES OWN CASE 6 ESSAR POWER LTD. FOR ASSESSMENT YEAR 2009 10 IN ITA NO.1849/MUM./2015, DATED 17 TH OCTOBER 2017, THE TRIBUNAL HAS HELD THAT IN TEREST EARNED ON MARGIN DEPOSIT HAS TO BE TREATED AS BUSINESS INCOME , WHEREAS , INTEREST ON IC DS AND FIXED DEPOSIT WITH BANK ARE TO BE TREATED AS INCOME FROM OTHER SOURCES. THE SAME VIEW WAS REITERATED BY THE TRIBUNAL WHILE DECIDING ASSESSEES APPEAL FOR THE ASSESSMENT YEAR 2011 12 AND 2010 11 INITA NO.1388/MUM./2016 AND ITA NO.2233/MUM./2015, DATED 3 RD JULY 2018 AND ASSESSEES APPEAL FOR THE ASSESSMENT YEAR 2012 13, IN ITA NO.1332/MUM./2 017, DATED 19 TH SEPTEMBER 2018. FOLLOWING THE CONSISTENT VIEW OF THE TRIBUNAL IN ASSESSEES OWN CASE, AS REFERRED TO ABOVE, WE DIRECT THE ASSESSING OFFICER TO ASSESS THE INTEREST EARNED ON MARGIN DEPOSIT AS BUSINESS INCOME AND INTEREST ON ICDS AND BANK DEP OSITS AS INCOME FROM OTHER SOURCES. THIS GROUND IS PARTLY ALLOWED. 16 . IN GROUND NO.4, THE ASSESSEE HAS CHALLENGED THE DISALLOWANCE MADE UNDER SECTION 14A R/W RULE 8D AMOUNTING TO ` 1,32,89,000. 17 . IN THE RETURN OF INCOME FILED F OR THE IMPUGNED ASSESSMENT YEAR THE ASSESSEE VOLUNTARILY MADE A DISALLOWANCE OF ` 1,57,11,336 UNDER SECTION 14A OF THE ACT. IN THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER , THOUGH , OBSERVED THAT THE ASSESSEE HAS NOT RECEIVED ANY DIVIDEND INCOME DURING THE YEAR, HOWEVER, HE WAS OF THE VIEW THAT T HE INVESTMENT IN SHARES AMOUNTING TO ` 7418.82 CRORE IS CAPABLE OF 7 ESSAR POWER LTD. EARNING EXEMPT INCOME BY WAY OF DIVIDEND IN FUTURE. THEREFORE, HE PROCEEDED TO COMPUTE DISALLOWANCE UNDER SECTION 14A R/W RULE 8D AT ` 134.46 CRORE AND AFTER REDUCING THE DISALLOWANCE ALREADY MADE BY THE ASSESSEE , THE ASSESSING OFFICER ADDED BACK THE AMOUNT OF ` 132.89 CRORE. LEARNED COMMISSIONER (APPEALS) ALSO CONFIRMED THE ADDITION. 18 . THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED , THOUGH THE ASSESSEE HAS MADE SUO MOTU DISALLOWANCE OF ` 1.57 CRORE, HOWEVER, IF IT HAS NOT EARNED ANY EXEMPT INCOME DURING THE YEAR NO DISALLOWANCE UNDER SECTION 14A CAN BE MADE. FURTHER, HE SUBMITTED , THE DISALLOWANCE UNDER SECTION 14A OF THE ACT CANNOT EXCEED THE EXEMPT INCOME EARNED DU RING THE RELEVANT PREVIOUS YEAR. IN SUPPORT OF SUCH CONTENTION, LEARNED AUTHORISED REPRESENTATIVE RELIED UPON A NUMBER OF JUDICIAL PRECEDENTS AS SUBMITTED IN THE LEGAL PAPER BOOK. 19 . THE LEARNED DEPARTMENTAL REPRESENTATIVE RELIED UPON THE OBSERVATIONS OF THE DRP AND THE ASSESSING OFFICER. 20 . WE HAVE CONSIDERED RIVAL SUBMISSIONS AND PERUSED MATERIAL ON RECORD. THOUGH, THE ASSESSING OFFICER HAS OBSERVED IN THE ASSESSMENT ORDER THAT IN THE RELEVANT YEAR, THE ASSESSEE HAS NOT EARNED ANY EXEMPT INCOME BY WAY OF DIVI DEND, HOWEVER, THE LEARNED AUTHORISED REPRESENTATIVE HAS SUBMITTED BEFORE US THAT DURING THE YEAR, THE ASSESSEE HAS EARNED EXEMPT INCOME OF ` 40,795. THEREFORE, HE HAS 8 ESSAR POWER LTD. SUBMITTED , DISALLOWANCE IF ANY UNDER SECTION 14A R/W RULE 8D HAS TO BE RESTRICTED TO THE EXEMPT INCOME EARNED DURING THE YEAR. WE FIND SUBSTANTIAL FOR C E IN THE AFORESAID SUBMISSIONS OF THE ASSESSEE. THE HONBLE DELHI HIGH COURT IN JOINT INVESTMENT V/S CIT, 372 ITR 694 (DEL.) HAS HELD THAT DISALLOWANCE UNDER SECTION 14A OF THE ACT CANNOT EXCEE D THE EXEMPT INCOME EARNED DURING THE YEAR. THE SAME VIEW WAS EXPRESSED BY THE HONBLE P&H HIGH COURT IN PCIT V/S STATE BANK OF INDIA, 393 ITR 476 (P&H). WHILE DISMISSING THE SLP OF THE REVENUE, THE HON'BLE SUPREME COURT UPHELD THE AFORESAID DECISION OF TH E HONBLE P&H HIGH COURT AS REPORTED IN PCIT V/S STATE BANK OF PATIALA, [2018] 99 TAXMANN.COM 286 (P&H). IN VIEW OF THE LEGAL PRINCIPLE LAID DOWN IN THE AFORESAID DECISION S , WE DIRECT THE ASSESSING OFFICER TO RESTRICT THE DISALLOWANCE UNDER SECTION 14A R/W RULE 8D TO THE EXEMPT INCOME EARNED BY THE ASSESSEE DURING THE YEAR. FURTHER, WHILE COMPUTING BOOK PROFIT UNDER SECTION 115JB OF THE ACT, NO ADJUSTMENT CAN BE MADE BY WAY OF DISALLOWANCE UNDER SECTION 14A READ WITH RULE 8D. HOWEVER, EXPLANATION - 1(F) OF SE CTION 115JB OF THE ACT EMPOWERS THE ASSESSING OFFICER TO INCREASE THE BOOK PROFIT BY DISALLOWING EXPENDITURE INCURRED FOR EARNING EXEMPT INCOME. THEREFORE, THE ASSESSING OFFICER MAY LOOK INTO THIS ASPECT. THIS GRO UND IS PARTLY ALLOWED. 9 ESSAR POWER LTD. 21 . IN GROUND NO.5, TH E ASSESSEE HAS CHALLENGED DISALLOWANCE OF PROVISION FOR INCOME TAX RECOVERABLE FROM GUJARAT STATE ELECTRICITY BOARD (GSEB) AND ESSAR STEELS LTD., AMOUNTING TO ` 9,63,52,708. 22 . BRIEF FACTS ARE,THE ASSESSEE HAD ENTERED INTO A POWER PROJECT AGREEMENT WITH GSEB AND ESSAR STEELS LTD., UNDER WHICH THE ASSESSEE IS ENTITLED TO RECOVER INCOME TAX PAID WITH RESPECT TO THE POWER PROJECT FROM THESE COMPANIES. I N THE ASSESSMENT YEAR UNDER DISPUTE, THE ASSESSEE PAID MAT OF ` 9,63,52,708, FROM THESE TWO COMPANIES AND WERE SHOWN AS BELOW THE LINE ITEMS IN THE PROFIT & LOSS ACCOUNT AND NOT INCLUDED IN THE COMPUTATION OF INCOME. IN THE COURSE OF THE ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER DID NOT ACCEPT THE CONTENTION O F TH E ASSESSEE AND HELD THAT ANY PAYMENT BY THE POWER PURCHASER AS PER THE AGREEMENT WOULD CONSTITUTE BUSINESS RECEIPT AT THE HANDS OF THE ASSESSEE, HENCE, HAS TO BE CONSIDERED AS ITS INCOME. ACCORDINGLY, HE ADDED BACK THE SAID AMOUNT TO THE INCOME OF THE ASSE SSEE. 23 . LEARNED DRP ALSO UPHELD THE ADDITION MADE BY THE ASSESSING OFFICER. 24 . THE LEARNED AUTHORISED REPRESENTATIVE, AT THE OUTSET, SUBMITTED THAT THE TRIBUNAL HAS DECIDED IDENTICAL ISSUE AGAINST THE ASSESSEE IN THE PRECEDING ASSESSMENT YEARS INSOFAR AS IT RELATES TO THE ADDITION UNDER THE NORMAL PROVISIONS OF THE ACT. HOWEVER, THE TRIBUNAL HAS HELD 10 ESSAR POWER LTD. THAT WHILE COMPUTING THE BOOK PROFIT UNDER SECTION 115JB OF THE ACT, THE AMOUNT CANNOT BE INCLUDED. 25 . THE LEARNED DEPARTMENTAL REPRESENTATIVE ALSO ACCEPTED THE AF ORESAID FACTUAL AS WELL AS LEGAL POSITION HELD BY THE TRIBUNAL. 26 . HAVING CONSIDERED THE RIVAL SUBMISSIONS, WE FIND THAT THE TRIBUNAL, WHILE DECIDING ASSESSEES APPEAL FOR ASSESSMENT YEAR 2009 10, IN ITA NO.1849/MUM./2015, DATED 17 TH OCTOBER 2017, HAS DECID ED THE ISSUE IN THE FOLLOWING MANNER: 21. GROUND NO. 3 RELATES TO THE ADDITION FOR THE PROVISION OF INCOME TAX RECOVERABLE FROM GUJARAT ELECTRICITY BOARD AND ESSAR STEEL LTD WHILE COMPUTING NORMAL INCOME UNDER THE ACT AS WELL AS COMPUTING BOOK PROFIT U/ S. 115 JB OF THE ACT. THE ISSUE AS REGARDS THE ADDITION UNDER THE NORMAL PROVISIONS OF THE ACT IS COVERED AGAINST THE ASSESSEE BY THE TRIBUNAL'S ORDER IN ASSESSEE'S OWN CASE AS MENTIONED IN THE CHART ABOVE. ACCORDINGLY, UNDER THE NORMAL PROVISIONS OF THE A CT, WE CONFIRM THE ADDITION FOR THE PROVISIONS MADE IN THIS REGARD. 27 . THE SAME VIEW HAS BEEN EXPRESSED BY THE TRIBUNAL WHILE DECIDING ASSESSEES APPEAL FOR THE ASSESSMENT YEAR 2010 11 TO 2012 13 AS PER THE ORDERS PASSED BY THE TRIBUNAL KEPT IN THE PAPER BOOK. THEREFORE, FOLLOWING THE CONSISTENT VIEW OF THE TRIBUNAL, WE HOLD THAT THE INCOME TAX RECOVERABLE HAS TO BE TREATED AS INCOME OF THE ASSESSEE AS PER THE NORMAL PROVISIONS OF THE ACT. HOWEVER, FOLLOWING THE AFORESAID DECISIONS OF THE CO ORDINATE BENCH, WE HOLD THAT THE 11 ESSAR POWER LTD. AMOUNT CANNOT BE INCLUDED WHILE COMPUTING BOOK PROFIT UNDER SECTION 115JB OF THE ACT. THIS GROUND IS PARTLY ALLOWED. 28 . IN GROUND NO.7 , THE ASSESSEE HAS CHALLENGED INITIATION OF PROCEEDINGS UNDER SECTION 271(1)(C) OF THE ACT. 29 . THIS GROUND BEING PREMATURE AT THIS STAGE, DOES NOT REQUIRE ANY ADJUDICATION ,H ENCE, IS DISMISSED. 30 . IN THE RESULT, APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 15.04.2019 SD/ - MANOJ KUMAR AGGARWAL ACCOUNTANT MEMBER SD/ - SAKTIJIT DEY JUDICIAL MEMBER MUMBAI, DATED: 15.04.2019 COPY OF THE ORDER FORWARDED TO : ( 1 ) THE ASSESSEE; ( 2 ) THE REVENUE; ( 3 ) THE CIT(A); ( 4 ) THE CIT, MUMBAI CITY CONCERNED; ( 5 ) THE DR, ITAT, MUMBAI; ( 6 ) GUARD FILE . TRUE COPY BY ORDER PRADEEP J. CHOWDHURY SR. PRIVATE SECRETARY (SR. PRIVATE SECRETARY) ITAT, MUMBAI