M/S.APPOLLO TYRES LTD,COCHIN V. THE ACIT, COCHIN

ITTPA 575/COCH/2018

AI Insights

Apollo Tyres Ltd. appealed against the final assessment order for the Assessment Year 2014-15, which included significant tax adjustments and disallowances. The company contested various additions made by the Assessing Officer (AO), including transfer pricing adjustments, disallowances of pre-operative expenses, and deductions under section 35(2AB) of the Income Tax Act. The Tribunal's decision addressed these issues, referencing previous cases and legal provisions to determine the appropriateness of the AO's adjustments. The Tribunal's ruling reflects a balance between adhering to statutory tax provisions and recognizing the economic realities of the transactions involved.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 775782 (ITAT-COCHIN)
• Duration Of Justice: 6 year(s) 8 month(s) 25 day(s)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 12-09-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: DB
• Assessment Year: 2014-2015
• Appeal Filed On: 18-12-2018
• Other Referred Cases: Bell Ceramics Ltd. v. DCIT, Jay Engineering Works Ltd. v. CIT, CIT vs. Modi Industries Ltd. (No. 3), CIT v. Triveni Engineering and Industries Ltd., Prem Spinning and Weaving Mills Co. Ltd. v. CIT, Kashiram Ramgopal v. CIT, Hon'ble Supreme Court in the case of GE India Technology Centre Pvt. Ltd. v. CIT, Hon'ble Supreme Court in the case of Transmission Corporation of AP Ltd. v. CIT, Hon'ble Supreme Court in the case of Apollo Tyres Ltd. v. CIT, Hon'ble Supreme Court in the case of Indo Rama Synthetics (I) Ltd. v. CIT, Hon'ble Supreme Court in the case of P.J. Chemicals Ltd. v. CIT, Hon'ble Supreme Court in the case of CIT vs. Swastik Sanitary Works Ltd., Hon'ble Supreme Court in the case of PCIT vs. Welspun Steel Ltd., Hon'ble Supreme Court in the case of CIT vs. Rajanikant Schnelder and Associates P. Ltd.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SANJIT KUMAR DAS
• Assessee Lawyers: ABRAHAM JOSEPH MARKOS
• Keywords: Capital asset; Revenue expenditure; Transfer pricing; International transaction; Depreciation; Additional depreciation; Cost of acquisition; Rule of consistency; Capital receipt; Gift; Capital expenditure; TDS; Deemed to accrue or arise in india; Double taxation relief; Non-deduction of tax; FORM 26AS
• Section: 143(3); 32; 234B; 37; 28; 115JB; 37(1); 80G; 32(1)(iia)

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH BEFORE SHRI INTURI RAMA RAO, AM AND SHRI RAHUL CHAUDHARY, JM IT(TP)A No. 575/Coch/2018 Assessment Year: 2014-15 Apollo Tyres Ltd. .......... Appellant 3rd Floor, Areekal Mansion, Panampilly Nagar, Kochi 682036 [PAN: AAACA6990Q] vs. ACIT, Corporate Circle-1(1), Kochi ......... Respondent Assessee by: Shri Abraham Joseph Markos, Adv. Revenue by: Shri Sanjit Kumar Das, CIT-DR Date of Hearing: 20.08.2025 Date of Pronouncement: 12.09.2025 O R D E R Per: Inturi Rama Rao, AM This appeal filed by the assessee is directed against the final assessment order dated 23.10.2018passed u/s. 143(3) r.w.s. 144C(13) of Income Tax Act, 1961 (hereinafter \"the Act\") for Assessment Year (AY) 2014-15. 2. Brief facts of the case are that the appellant is a company incorporated under the provisions of Companies Act, 1956. It is engaged in the business of manufacture and sale of tyres, tubes and dealing in flaps. The return of income for AY 2014-15 was filed on Printed from counselvise.com 2 IT(TP)A No. 575/Coch/2018 Apollo Tyres Ltd. 27.11.2014 declaring income of Rs. 300,58,69,030/- and also reported book profit u/s. 115JB of Rs. 556,44,91,102/-. The return of income was revised on 28.03.2016 declaring income of Rs. 301,09,59,917/- and book profit u/s. 115JB of Rs. 556,44,91,102/-. 3. The assessee company also reported the following international transactions from AE in from 3CEB: (Table from TPO order) S.No. Description of Transaction Amount 1 Sale of tyres 665,94,14,788 2 Sale of semi finished goods 45,84,417 3 Purchase of tyres 5,60,31,554 4 Purchase of raw material 5,48,838 5 Purchase of semi finished goods 13,35,810 6 Receipt of royalty 5,72,83,943 7 Payment of royalty 78,29,792 8 Receipt of research and testing services 43,82,11,976 9 Receipt of corporate marketing services 15,09,18,501 10 Receipt of corporate strategy services 13,02,42,432 11 Provision of corporate purchase services 31,54,406 12 Provision of corporate information technology services 2,53,94,881 13 Investment in equity 38,39,72,500 15 Reimbursement of expenses 50,06,78,680 16 Recovery of expenses 3,00,98,955 4. On noticing the international transactions, the AO referred the matter to the Transfer Pricing Officer (TPO) u/s. 92CA(1) of the Act for the purpose of benchmarking the above international Printed from counselvise.com 3 IT(TP)A No. 575/Coch/2018 Apollo Tyres Ltd. transactions. The TPO vide order dated 30.10.2017 passed u/s. 92CA(3) of the Act suggested upward TP adjustment aggregating to Rs. 3,31,10,141/- in respect of the following segments: - a) Software segments of Rs. 36,76,780/- b) Corporate guarantee commission of Rs. 2,78,47,806/- c) Recovery of expenses from AE of Rs. 15,85,555/- 5. On receipt of the TPO’s order, the AO passed draft assessment order u/s. 143(3) r.w.s. 144C(1) of the Act on 29.12.2017 proposing to make the following additions: - i. TP adjustment – Rs. 3,31,10,141/- ii. Disallowance of additional depreciation u/s. 32(1)(iia) of the Act on the ground that the plant and machinery was acquired and put to use during the previous year relevant to AY 2013- 14. Since the assets were put to use for less than 180 days, additional depreciation was allowed only at 10% as per second proviso to section 31 of the Act. Balance additional depreciation cannot be allowed in subsequent AY, i.e. the year under consideration – Rs. 16,43,86,610/- iii. Disallowance of pre-operative expenditure details of which were extracted by the AO vide para 9 of the draft assessment order. These pre-operative expenditures were incurred during setting up of new plant at Chennai. In the books of account the appellant company had capitalised the pre-operative expenditure. However, in the return of income it is claimed as revenue expenditure placing reliance on the following decisions: - - Bell Ceramics Ltd. v. DCIT 2016 – TIOL-1688-HC-AHM- IT (Gujarat) Printed from counselvise.com 4 IT(TP)A No. 575/Coch/2018 Apollo Tyres Ltd. - Jay Engineering Works Ltd. v. CIT 311 ITR 405 (Del) - CIT VS. Modi Industries Ltd. (No. 3) : 200 ITR 341 (Del) - CIT v. Triveni Engineering and Industries Ltd. 181 Taxman 5 (Del) - Prem Spinning and Weaving Mills Co. Ltd. v. CIT 98 ITR 20 - Kashiram Ramgopal v. CIT 36 Taxman 305 However, the AO was of the opinion that that these pre- operative expenditure should form part of cost of plant and machinery and buildings as envisaged u/s. 43(1) of the Act. Accordingly, disallowed the expenditure as revenue expenditure –Rs.10,24,48,989/- iv. Disallowance of excess claim of deduction u/s. 35(2AB) – The appellant company made claim for deduction of Rs. 76,97,86,295/- u/s. 35(2AB) of the Act. The assessee had not received the form 3CL till the passing of the draft assessment order. The AO was of the opinion that the details of expenditure incurred during the previous year relevant to the assessment year under consideration is as under: - Particulars Amount in Rs. R&D expense incurred by Apollo Tyres Global R&D BV, Netherlands 43,82,25,135 R&D expense incurred for clinical trials 7,27,77,529 R&D expense incurred for testing and certification 9,53,199 Other expenses incurred purely for R&D purposes at Limda (Vadodra) 43,16,89,157 Total 94,36,45,020 The AO was of the opinion that the R&D expenditure incurred in-house is alone is eligible for deduction. Accordingly, made an addition u/s. 35(2AB) of Rs. 76,97,86,295/-. Printed from counselvise.com 5 IT(TP)A No. 575/Coch/2018 Apollo Tyres Ltd. v. The AO disallowed Rs. 4,81,98,901/- u/s. 40(a)(i) of the Act on the ground that the appellant company had failed to deduct tax at source on the expenditure incurred by the appellant on R&D outside India, the details of which are extracted by the AO at page 14 of the assessment order. Rejecting the contention of the appellant that there is no obligation to deduct tax at source on reimbursement of expenditure as the same fall under the category of fees for technical services and also placing reliance on the decision of the Hon'ble Supreme Court in the case of GE India Technology Centre Pvt. Ltd. v. CIT 327 ITR 456 and also in the case of Transmission Corporation of AP Ltd. v. CIT 239 ITR 587. vi. The AO disallowed the claim made in the return of income on account of unrealised foreign exchange loss on capital assets debited to Profit & Loss A/c. of FY 2012-13 and reversed during the current year. The same was claimed as deduction. However, during the previous year relevant to the assessment year under consideration the foreign exchange contract had been realised which resulted in a gain. The gains made on realization of foreign exchange contract were credited to Profit & Loss A/c. Since the resultant loss was adjusted in the cost of the assets in terms of provisions of section 43A of the Act, it is claimed that the amount credited to Profit & Loss A/c. is required to be reduced while computing taxable income. The AO, placing reliance on the decision of the Tribunal in assessee’s own case for AY 2009-10 in ITA No. 2/Coch/2014 dated 21.11.2015 disallowed the claim. vii. The AO also made addition of Rs. 3,53,321/- on account of discrepancies in TDS reconciliation statement. viii. The AO disallowed the year end provisions of Rs. 26,13,000/- on the ground that the expenditure is an unascertained liability. ix. The AO denied the claim for allowance of depreciation of Rs. 83,89,407/-on WDV of Gas Turbine. x. Disallowance of gifts Rs. 1,68,15,050/- Printed from counselvise.com 6 IT(TP)A No. 575/Coch/2018 Apollo Tyres Ltd. xi. Disallowance of exception items Rs. 71,04,74,322/- xii. Disallowance of CSR expenses Rs. 3,73,86,697/- xiii. Investment promotion subsidy Rs. 93,91,40,380/- xiv. Disallowance out of 80IA Rs. 57,14,791/- xv. Disallowance of deduction u/s. 80G Rs. 29,87,922/- xvi. The AO also made several additions to the book profits returned u/s. 115JB of the Act. 6. On receipt of the draft assessment order, the appellant company filed objections before the Dispute Resolution Panel (DRP) contesting all the above additions. The DRP issued directions on 18.09.2018 confirming the TP adjustments and other additions except allowing additional depreciation following the Tribunal’s decision in assessee’s own case. On receipt of the directions from the DRP, the AO had passed the final assessment order dated 23.10.2018 passed u/s. 143(3) r.w.s. 144C(13) of the Act at a total income of Rs. 5,70,98,13,470/- after making the following additions: - Adjustment recommended by TPO 3,31,10,141 Disallowance of pre-operative expenditure 10,24,48,989 Disallowance of claim of deduction u/s. 35(2AB) 76,97,86,295 Disallowance u/s. 40(a)(i) 4,81,98,901 Unrealised foreign exchange loss on capital assets 3,28,11,664 Difference out of TDS reconciliation 3,53,321 Disallowance of year end provisions 26,13,000 Disallowance of gifts 1,68,15,500 Disallowance of exceptional items 71,04,74,322 Disallowance of CSR expenses 3,73,86,687 Addition of Investment Promotion Subsidy 93,91,40,380 Disallowance out of 80IA 57,14,791 Printed from counselvise.com 7 IT(TP)A No. 575/Coch/2018 Apollo Tyres Ltd. 7. Being aggrieved by the final assessment order the appellant is in appeal before this Tribunal in the present appeal raising the following grounds: “1. The assessment order passed u/s 143(3) r.w.s. 92CA(3) r.w.s. 144C(13) of the Income Tax Act, 1961('the Act') by the Assessing Officer (AO') pursuant to the directions of the Dispute Resolution Panel (DRP) and the additions/disallowances made by the AO are illegal, bad in law and without jurisdiction. 2. The additions/disallowances made are unsustainable, unjust, highly excessive and are not based on any material on record. The total income of the Appellant has been incorrectly and un-lawfully assessed under normal provision of the Act by the AO at Rs. 570,98,13,470/-. The AO also incorrectly and un-lawfully assessed Book Profit under sec. 115JB of the Act at Rs. 605,49,57,423/-. 3. Regarding addition / disallowance of Rs. 10,24,48,989 (pre-operative expenses) a. The AO/DRP erred in law and on facts in making an addition/disallowance of Rs. 10,24,48,989/- without appreciating that the same represents an allowable revenue expenditure. Such expenses are incurred by the Appellant for the expansion of its existing business of manufacturing tyres and are revenue in nature. b. The AO/DRP erred in applying Section 43 and stating that expenses should be capitalized without appreciating that they have been incurred with a view to expand the manufacturing base, and that they are revenue in nature. The said expenses are not for setting-up a distinct / separate unit, but have been incurred only to expand the existing business of the Appellant. Printed from counselvise.com 8 IT(TP)A No. 575/Coch/2018 Apollo Tyres Ltd. c. The AO/DRP erred in law and on the facts, in disallowing the expenditure without appreciating that all the pre- conditions of claiming such expenses as business expense under the provisions of Income Tax Act, 1961 are satisfied and these expenses are deductible in computing the taxable income of the Appellant. d. Moreover, the AO has not disputed the facts submitted by the Appellant, and has not distinguished legal decisions relied upon by the Appellant while making the claim. The AO has only stated that the decision of Hon'ble ITAT in the Appellant's own case for prior years has not been accepted by the Revenue. e. That, without prejudice, the AO erred in not appreciating that the assets have actually been put to use and hence, erred in not granting depreciating (including additional depreciation & investment allowance u/s 32AC) on this expenditure. Moreover, the DRP erred in not adjudicating this alternative ground, even though all the facts, material and evidence necessary to adjudicate the ground, was placed before the DRP, during the course of the hearing. 4. Regarding disallowance of Rs. 76,97,86,295, being deduction claimed under sec. 35(2AB) of the Act a. The AO/DRP erred in law and on facts, in disallowing the weighted deduction of Rs. 76,97,86,295/- as claimed by the Appellant under sec. 35(2AB) of the Act in respect of expenditure incurred by it for its in-house R&D facility. b. The AO/DRP erred in adopting a restrictive interpretation to the phrase \"in-house\" without appreciating that there is no embargo under sec. 35(2AB), which restricts the deductibility of an expenditure that is incurred at different premises, relatable to the \"in-house\" R& D activity. c. The AO/DRP failed to appreciate that all the requisite pre- conditions for 35(2AB) have been fulfilled by the Appellant, and 35(2AB) being a beneficial provision with a view to Printed from counselvise.com 9 IT(TP)A No. 575/Coch/2018 Apollo Tyres Ltd. encourage in-house research and development, is applicable on the facts of the present case. d. The AO failed to appreciate that Form 3CL is a mere procedural intimation and cannot form the basis to compute the deduction u/s 35(2AB). e. The DRP erred in not adjudicating the ground of 200% weighted deduction, even though all the facts, material and evidence necessary to adjudicate the ground, was placed before the DRP, during the course of the hearing. f. The AO/DRP has erred in law and on fact, by proceeding on an incorrect assertion that Form 3CL has not been issued to the Appellant till the date of passing of his Final Assessment Order, when the same has already been issued on 4 January 2018. g. Without prejudice to above, AO/DRP has erred in not a allowing the deduction as per Form 3CL dated 4 January 2018, amounting to Rs. 2471.47 lakhs. 5. Regarding disallowance of Rs. 4,81,98,901/- for non- deduction of tax at source a. The Ld. AO has erred in law and on facts, in making disallowance of Rs. 4,81,98,901/- u/s 40(a)(i) of the Act without appreciating the fact that the provisions of TDS are not applicable on the said expense as this amount is not 'Fee for Technical Services & therefore, not taxable under the of Income Tax Act, 1961 as well as relevant provisions of DTAA. b. The Ld. AO has failed to appreciate that the reimbursement did not have any element of income, as it was made on a cost to cost basis, and accordingly, the same was not liable for deduction of tax at source. c. Without prejudice to the above, if for any reason such payment is treated as towards fee for technical services under the Act, no tax is required to be deducted by invoking the relevant provisions of the DTAA. Printed from counselvise.com 10 IT(TP)A No. 575/Coch/2018 Apollo Tyres Ltd. 6. Regarding disallowance of Rs. 3,28.11,664, being unrealised foreign exchange fluctuations a. The AO erred in law and on facts, in adding / disallowing the claim of foreign exchange fluctuations of Rs. 3,28,11,664. b. This sum includes Rs.1,80,80,600 being a foreign exchange loss which has already been offered to tax by the Appellant on a suo moto basis in AY 2013-14. Accordingly, the AO has erred in law and on facts, in disallowing the same again in AY 2014-15, and the same results in a duplication or double disallowance. c. This sum also includes an amount of unrealized foreign exchange fluctuation gain on capital account of Rs. 1,47,31,064, which is to be adjusted against the cost of assets on actual payment. This amount was duly offered to tax by the Appellant on a suo moto basis in ITR for AY 2015-16. Accordingly, the AO has erred in law and on facts, in adding the same in his order for AY 2014-15, and this results in a double addition. 7. Regarding disallowance for year end provision of Rs. 26,13,000/- a. The AO erred in law and on facts, in disallowing the year end provision of Rs. 26,13,000 created for expenses on business development initiative. b. The AO erred in alleging that this provision is an unascertained liability without appreciating that provision for business development initiative has been made on a scientific, reasonable and consistent basis, and hence represents an allowable expenditure under the Act. c. The AO has failed to appreciate that since individual payees, in respect of which such provision was created, were not identifiable at the time of creation of the provision, no tax could have been deducted therefrom. Printed from counselvise.com 11 IT(TP)A No. 575/Coch/2018 Apollo Tyres Ltd. d. The AO has erred in not appreciating that the provision created at the end of year, is reversed in subsequent year, and tax was duly deducted at the time of actual credit/payment to individual payees. e. The AO has grossly erred in law, in holding that any provision made but not actually paid is not an allowable deduction under the Act. f. The AO also erred in law, in adding the said sum in computing the book profits of the Appellant under sec. 11511 of the Act, by treating the same as a provision for unascertained liability. 8. Regarding disallowance of expenditure on gifts, of Rs. 1.68.15,050 a. The AO has erred in disallowing the deduction claimed under sec. 37 of the Act, for Rs. 1,68,15,050, being expenditure incurred by the Appellant on gifts, without appreciating that the same was wholly and exclusively incurred for the purpose of business of the Appellant. b. The AO has also erred in law and on facts, in considering the expenditure on gifts, as personal in nature. 9. Regarding disallowance of Rs. 71,04,74,322/- towards expenditure towards legal charges paid for acquisition of US tyre company a. The AO/DRP has erred in law and on facts, in disallowing Rs. 710,474,322, being a revenue expenditure incurred by the Appellant with the intention of expansion of existing business, by incorrectly treating the same as an expenditure incurred for acquisition of a new business. b. The AO has erred in holding that expenses incurred for expanding an existing business unit or for expanding the profit making apparatus, are capital in nature. He has also erred in holding that the Appellant was in the process of 'establishing’ a capital asset by incurring such expenditure. Printed from counselvise.com 12 IT(TP)A No. 575/Coch/2018 Apollo Tyres Ltd. c. The AO has also erred in treating the entire expenditure as 'litigation expenses when the fact of the matter is that only a part of such expenditure could, at best, be said to be legal expenditure. 10. Regarding disallowance of expenditure on 'Corporate Social Responsibility of Rs. 3,73,86,697 a. The AO erred in law and on facts, in holding that expenses incurred towards spreading awareness about its brand to its customers, supply chain and local community were not incurred wholly and exclusively for the purpose of business of the Appellant. b. The AO has erred in disallowing Rs. 37,386,697 by treating the same as non-deductible under section 37 of the Act. c. Without prejudice to the above, on the facts and circumstances of the case and in law, the AO failed to appreciate that the said expenses were also eligible for deduction under section 80G of the Act, and thereby erred in not allowing deduction under the said provision. 11. Regarding the disallowance for claim of Investment Promotion Subsidy of Rs. 93,91,40,380 as capital subsidy a. The AO/ DRP erred in law and on facts, in disallowing the claim of the Appellant, that the investment promotion subsidy received by it for setting up a Tyre manufacturing plant in the state of Tamil Nadu, is a capital receipt. b. On the facts and circumstances of the case and in law, the AO erred in holding that the investment promotion subsidy is linked to production and therefore, a revenue receipt. 12. Regarding claim of deduction under sec. 80-1A of the Act, in respect of shortfall compensation received a. The AO has erred in law and on facts, in reducing the deduction claimed under sec. 80-1A of the Act, by Rs. 57,14.791, being the amount of shortfall compensation received by the Appellant. Printed from counselvise.com 13 IT(TP)A No. 575/Coch/2018 Apollo Tyres Ltd. b. The AO has erred in law and on facts, in holding that the said compensation received for shortfall in production of power, was not linked to power generation undertaking i.e windmill, and therefore, not eligible for deduction u/s 80-IA of the Act. 13. Regarding additions/ adjustments made in computing \"book profits' under sec. 115JB of the Act., a. The AO has erred in law and on facts in not reducing the subsidy of Rs. 93,91,40,380 in computing 'book profits' under sec. 115JB of the Act. Ld. AO has erred in appreciating that the investment promotion subsidy received by it for setting up a Tyre manufacturing plant in the state of Tamil Nadu, is not an income and therefore, cannot be brought to tax under the Act even by virtue of the provisions of sec. 115JB of the Act. b. The AO erred in law and on facts, in adding Rs 3,53,321/-, being the difference in income as per Form 26AS and as per Profit & Loss account for the relevant year, in computing the book profits of the Appellant under sec. 115JB of the Act. c. The AO erred in law and on facts, in adding Rs. 26,13,000 in computing the book profits of the Appellant under sec. 115JB of the Act, by treating the same as a provision for unascertained liability, when the same represented year end provisions for business development initiative that were made on a scientific, reasonable and consistent basis. 14. Regarding transfer pricing adjustment of Rs. 33,94,918/- (Corporate IT services) a. That the TPO/ AO/DRP erred in not appreciating that the Transfer Pricing documentation is maintained as per the provisions of the Indian Transfer Pricing Law, and in the absence of any defect, the economic analysis undertaken by the Appellant should stand accepted. Moreover, the Printed from counselvise.com 14 IT(TP)A No. 575/Coch/2018 Apollo Tyres Ltd. AO/DRP/TPO grossly erred by making a transfer pricing addition of Rs. 33,94,918/- to the income of the Appellant and erred in holding that the international transactions pertaining to provision of software development services do not satisfy the arm's length principle envisaged under the Act. b. That the TPO/AO/DRP erred in adopting and applying filters of current year data, companies having different financial year ending, service income < 1 cr. SWD is less than 75% of the total operating revenues, RPT more than 25%, export service income than 75% of the sales and employee cost < 25% of the turnover. Adoption of such filters is arbitrary and contrary to the provisions of the Act. c. The TPO/AO/DRP failed to appreciate that the comparables chosen by the FTPO are not functionally comparable since they do not meet the Functions performed, assets used, risks assumed ('FAR') test as envisaged under Rule 10B(2) of the Income Tax Rules, 1962 ('the Rules') and hence cannot be used for benchmarking the transaction. Hence, such comparables ought to be excluded from the final list of comparable companies. d. The TPO/AO/DRP erred in not appreciating that all the comparables chosen by the Appellant in its Transfer Pricing Documentation meet the FAR test, and as such are comparable to the Appellant. Hence, such comparables ought to be included in the final list of comparable companies. e. That the TPO/AO/DRP erred in not allowing the benefit of working capital adjustment and risk adjustment, to the Appellant, without appreciating that such an adjustment is warranted in terms of Rule 10B(3) of the Rules. 15. Regarding Transfer Pricing adjustment of Rs. 2,78,47,806/- (Corporate guarantee) Printed from counselvise.com 15 IT(TP)A No. 575/Coch/2018 Apollo Tyres Ltd. a. The TPO has erred in law and on the facts of the case in making an adjustment on account of corporate guarantee and the DRP has erred in upholding the adjustment up to Rs. 2,78,47,806/-. b. Without prejudice to the above, even assuming that the corporate guarantee is an international transaction, the Appellant provided the corporate guarantee for commercial reasons only, to do away with the Ring Fencing structure of the Dutch Banks. Hence, no adjustment/addition on this account should have been made by the AO/DRP/TPO. c. The AO/DRP/TPO ought to have appreciated that the corporate guarantee did not transpire any benefit to the AE. It does not have any bearing on the profits/income of the Appellant/AE.Hence, the TPO erred in making an adjustment/addition on this account and the DRP/AO erred in upholding the same. d. Without prejudice, the approach adopted by the TPO/AO/DRP in determining the arm's length price in providing corporate guarantee to its AE, is incorrect and untenable in law. The TPO/AO/DRP has wrongly and illegally upheld the rate of 2.09%. Such rate of 2.09% is arbitrary, without any basis and is not warranted. The adjustment, if any, should be restricted to a reasonable rate only. 16. Further, the Ld. AO has erred in making Transfer Pricing adjustment of Rs. 3,31,10,141/- disregarding the TPO's order (giving effect to DRP's direction) dt. 15.10.2015 wherein TP adjustment was modified to Rs. 3,28,28,279/-. 17. The AO has erred in law and on facts, in not allowing depreciation on gas turbine amounting to Rs. 83,89,407. He has failed to appreciate that the said depreciation pertains to expenditure on overhauling charges, which were treated as capital expenditure by the Learned AO himself, in his assessment order for AY 2013-14. Printed from counselvise.com 16 IT(TP)A No. 575/Coch/2018 Apollo Tyres Ltd. Hence, the allowance for depreciation for the subject assessment year is consequential to his own order in the preceding previous year, and ought to have been allowed even without a claim thereof in the return of income by the Appellant. 18. The Ld. AO has erred in law and on facts in allowing TDS credit of only Rs. 69,73,348/- as against credit of Rs. 3,00,19,929/- claimed & also duly reflected in Form 26AS. 19. The AO has erred in law and on facts, in not adjusting MAT credit carried forwarded from past years while determining the tax liability for the year under consideration i.e. AY 2014-15, 20. The AO has erred in law and on facts, in charging interest of Rs. 1,61,00,858/- u/s 234A of the Act disregarding the fact that the appellant duly filed its ITR within due date. 21. The AO has erred in law and on facts in charging interest of Rs. 39,85,52,015/- & Rs. 2,47,06,433/- u/s 234B & 234C of the Act respectively.” 8. The ground of appeal Nos. 1 & 2 are general in nature, requiring no adjudication. 9. The ground of appeal No. 3 challenges the disallowance of pre-operative expenditure. Similar issue had been decided by this Bench in assessee’s own case in ITA No. 609/Coch/2017 for AY 2013-14. For the detailed reasons given in para 8 of the said order, this issue stands allowed. In the result, this ground of appeal stands allowed. 10. The ground of appeal No. 4 challenges the disallowance of claim u/s. 35(2AB) of the Act. Similar issue is also decided by this Printed from counselvise.com 17 IT(TP)A No. 575/Coch/2018 Apollo Tyres Ltd. Bench in assessee’s on case in ITA No. 609/Coch/2017 for AY 2013-14. For the detailed reasons given paras 10&11 of the said order, this ground stands partly allowed. 11. The ground of appeal No. 5 challenges the disallowance of Rs. 4,81,98,901/- u/s. 40(a)(i) of the Act for non-deduction of tax at source on reimbursement of cost incurred for R&D as there is no element of income. Similar issue is also decided by this Bench in assessee’s on case in ITA No. 609/Coch/2017 for AY 2013-14 vide paras 12 & 13 of the order. For the detailed reasons given therein, we confirm the disallowance. Accordingly, this ground of appeal stands dismissed. 12. The ground of appeal No. 6 challenges the claim for deduction on foreign exchange fluctuations of Rs. 3,28,11,664/- credited to Profit & Loss A/c. This issue is decided in favour of the by this Bench in assessee’s on case in ITA No. 609/Coch/2017 for AY 2013-14 vide para 14 of the order. For the detailed reasons given therein, we direct the AO to allow the deduction. In the result, this ground of appeal stands allowed. 13. The ground of appeal No. 7 challenges the disallowance of year end provisions of Rs. 26,13,000/-. Similar issue was decided in ITA No. 690/Coch/2017 vide paras 15 & 16 of the order. For the detailed reasons given therein, this issue stands remitted back to the file of AO. In the result, this ground of appeal is partly allowed. Printed from counselvise.com 18 IT(TP)A No. 575/Coch/2018 Apollo Tyres Ltd. 14. The ground of appeal No. 8 challenges disallowance of gift of Rs. 1,68,15,050/-. Similar issue was decided in ITA No. 690/Coch/2017 vide paras 18 & 19 of the order. For the detailed reasons given therein, this issue stands allowed. 15. The ground of appeal No. 9 challenges disallowance of expenditure towards legal charges paid for acquisition of US tyre company of Rs. 71,04,74,322/-. This expenditure was incurred by the appellant company towards cost of litigation paid of Sullivaan and Cromwell of Rs. 20.58 crores and Rs. 24.46 crores to Standard and Chartered Bank and the balance expenditure was incurred towards underwriting commission. This expenditure was incurred on proposed acquisition of company called Copper Tyre and Rubber Company which was not materialized. The AO was of the opinion that since the expenditure was incurred towards acquisition of a foreign company, the same is in the nature of capital expenditure. Even the DRP rejected the contention of the appellant that it is revenue expenditure. This Tribunal in assessee’s own case in ITA No. 616/Coch/2011 dated 30.06.2024 held that the expenditure incurred towards proposed acquisition of a company was held to be capital expenditure by holding as under : - “14. In our considered opinion, the loan of Rs. 232.92 crores given to the wholly owned AMPHL is an investment in the hands of the appellant company earning interest at 7.5% and forming part of fixed capital of the appellant company. Moreover, the object of making this advance was to acquire Printed from counselvise.com 19 IT(TP)A No. 575/Coch/2018 Apollo Tyres Ltd. Dunlop Tyres International Pty. Ltd. Thus, the object behind advancing money to its wholly owned AMPHL is only for the purpose of acquiring Dunlop Tyres International Pvt. Ltd., South Africa. When the expenditure is laid out once and for all with a view of brining into existence an asset or advantage for the enduring benefit of trade, such expenditure is attributable to capital as held by the House of Lords in the case of Atherton v. British Insulated & Helsby Cables Ltd. [1925] 10 tc 155(HL). This decision was consistently followed by the Hon'ble Supreme Court, for example in the case of CIT v. Madras Auto Services Pvt. Ltd. 233 ITR 468 (SC). 15. It is the settled principle of law that the aim and object of the expenditure would determine the character of the expenditure whether it is capital expenditure or revenue expenditure as held by the Hon'ble Supreme Court in the case of M.K. Bros v. CIT 86 ITR 38. Similarly, if the expenditure is made for acquiring a source of income, by bringing into existence an asset or advantage for the benefit of the business, it is attributable to capital and is of the nature of capital expenditure as held by the Hon'ble Apex Court in the case of Assam Bengal Cement Co. Ltd. v. CIT [1995] 27 ITR 34. 16. Even assuming for a moment that the expenditure incurred ultimately helps in improving the profits of the company, the expenditure incurred on capital asset does not lose the character of capital expenditure and does not become revenue expenditure as held by the Hon'ble Supreme Court in the case of Arvind Mills Ltd. v. CIT [1992] 197 ITR 422.” Respectfully following the above judgement, we hold that the subject expenditure cannot be allowed as revenue deduction and confirm the decision of the AO. 17. Ground No. 10 challenges the disallowance of expenditure on Corporate Social Responsibility (CSR) of Rs. 3,73,86,697/-. During Printed from counselvise.com 20 IT(TP)A No. 575/Coch/2018 Apollo Tyres Ltd. the previous year relevant to the assessment year under consideration the appellant company incurred the following expenditures as a part of the corporate social responsibility: - i. HIV-AIDS awareness program Rs.2,86,24,208/- ii. Clean my transport project Rs. 37,30,119/- iii. Skills Development program and Rs. 50,32,370/- Bio diversity projects The AO disallowed the above expenditure by holding that the expenditure was not incurred for the purpose of business but for the community benefit. The DRP has confirmed the disallowance placing reliance on the provisions of explanation 2 to section 37(1) of the Act. 18. The learned counsel submits that provisions of explanation 2 to section 37(1) have not application as the said provisions were inserted by Finance Act, 2014 w.e.f. 01.04.2015 and applicable from the AY 2015-16. The provisions are prospective in nature as held by the Hon'ble Delhi High Court in the case of PCIT v. Rites Ltd. and the SLP against the said judgement was dismissed by the Hon'ble Supreme Court reported in [2024] 158 taxmann.com 78. The assessee also placing reliance on the decision of the Madras High Court submits that the Hon'ble High Court has allowed the deduction for such expenses by considering the fact that by making such expenses an assessee gets known as a good corporate citizen, which brings goodwill of the local community as also the regulatory Printed from counselvise.com 21 IT(TP)A No. 575/Coch/2018 Apollo Tyres Ltd. authorities and also the society at large, which creates an atmosphere in which business can succeed. Assessee also relies upon the decision of the Rajasthan High Court in Rajasthan Spinning and Weaving Mills Ltd. 281 ITR 408 whereby the court has allowed the expenditure of donation of a bus to a govt. school where some of the employee’s children were receiving education. 19. On the other hand, the ld. CIT-DR opposed the above submission. 20. We heard the rival submission and perused the material on record. The expenditure incurred by the appellant as part of corporate of social responsibility are undoubtedly enhance the goodwill of the company in local community and also government authorities, which would enhance image of the appellant company which would definitely benefit the company. Therefore, the ratio of the judgement of Hon'ble Madras High Court in the case of 266 ITR 170 and Rajasthan High Court in the case of 282 ITR 408 are squarely applicable to the facts of the case. Accordingly, we direct the AO to allow the expenditure incurred on corporate social responsibility as a deduction. In the result, this ground of appeal stands allowed. 21. The ground of appeal No. 11 is with regard to the disallowance of claim of investment promotion subsidy of Rs. 93,91,40,380/-. During the previous year relevant to the assessment Printed from counselvise.com 22 IT(TP)A No. 575/Coch/2018 Apollo Tyres Ltd. year udder consideration the appellant company received Rs. 93,91,40,380/- as investment promotion subsidy from the Government of Tamil Nadu. The relevant clauses of MOU are extracted as below: - “2. Obligation of the GoTN (a) GoTN acknowledges that Apollo investment would be in the public interest of the State Government creating tangible economic benefits including job creation. In consideration of investment by Apollo and commitment in the Facility, in the public interest, the State Government hereunder undertakes to grant to Apollo, the benefits, concessions, incentives and facilities set forth in the Schedule to this MOU... (b) GoTN agrees to extend a structured package of support as enunciated in this MoU to Apollo. The parties agree that the incentives package offered in this MoU contingent on the investment commitment made by Apollo...\" “… AND WHEREAS Apollo informed GoTN in July 2009 that it had invested more than Rs. 300 crores in fixed assets in the project. Apollo also informed thqat the management of Apollo granted in-principle approval to enhance the plant capacity at a total project outlay of Rs. 2100 crores. In view of high level of automation envisaged in the project to cater to the latest range of trucks and buses, Apollo has proposed to maintain the employee strength at 2000, comprising around 1100 direct and 900 indirect employees. Apollo requested the GoTN to grant additional benefits and incentives for the enhanced level of investment in terms of New Industrial Policy. 2007. AND WHEREAS GOTN considered the request of Apollo and expressed its willingness to modify the fiscal incentives and other supports offered to Apollo to a certain extent in view of Printed from counselvise.com 23 IT(TP)A No. 575/Coch/2018 Apollo Tyres Ltd. the benefits that are engendered due to enhanced investment in the project being implemented by Apollo... … 3 (a)... Considering the increased level of investment proposed by Apollo and its spin off benefits, and considering the fact that Apollo has not commenced commercial production, GoTN offers the following, in lieu of the offer given in paragraph 24 and 25 of the Schedule to the MoU dated 7.8.2006:- (i) An amount equal to Net output VAT + CST paid by Apollo to the GoTN will be refunded to Apollo in the form of Investment Promotion Subsidy for a period of fourteen years... (underlining ours”) 22. The subsidy was granted to the appellant in terms of the Industrial Policy, 2007, Tamil Nadu. It is stated that the object behind grant of the subsidy was to encourage setting up of a new plant to encourage job creation by setting up of new plants. The appellant company claimed that the subsidy received is in the nature of capital not exigible to tax. However, the AO as well as the DRP rejected the above claim. 23. Being aggrieved, the appellant is in appeal in the present appeal. 24. The learned counsel submits that the subsidy is capital in nature placing reliance on the judgement of the Hon'ble Supreme Court in the case of Ponni Sugars and Chemicals Ltd. 306 ITR 392. This issue was considered by the Pune Bench of this Tribunal to which the Accountant Member was party in Shriniwas Engineering Printed from counselvise.com 24 IT(TP)A No. 575/Coch/2018 Apollo Tyres Ltd. Auto Components Pvt. Ltd. in ITA No, 2992/Pun/2017 dated 27.04.2022 wherein it was held as under: - 10. We heard the rival submissions and perused the material on record. We have carefully gone through the Package Scheme of Incentives, 2007, the preamble of the scheme, extracted above, clearly indicates the intention behind grant of subsidy was to encourage the setting up the new industries in under developed region in the State of Maharashtra. Indisputably, it is not the case of the Assessing Officer that the subsidy is revenue in nature, as the Assessing Officer himself had invoked the provisions of Explanation 10 to section 43(1) of the Act. Therefore, the issue that arises for our consideration in the present appeal is whether the amount of subsidy received from the Government of Maharashtra shall go to reduce the actual costs of assets u/s 43(1) for the purpose of allowing the depreciation u/s 32 of Act. No doubt, the subsidy was granted in terms of the certain percentage of fixed assets to be disbursed in the form of refund of octroi, electricity duty exemption, entry tax refund, VAT etc. over a period of 8 years. Then the next question, that arises for consideration in such circumstances is that, can be it said that subsidy is granted to meet the cost of the actual fixed assets, merely because the amount of subsidy is calculated in term of certain percentage of investment in fixed assets. The Hon’ble Supreme Court had an occasion to consider the identical issue in the case of CIT vs. P.J. Chemicals Ltd., 210 ITR 830 and after review of the case law on the point, the Hon’ble Supreme Court held as under :- “Where Government subsidy is intended as an incentive to encourage entrepreneurs to move to backward areas and establish industries, the specified percentage of the fixed capital cost, which is the basis for determining the subsidy, being only a measure adopted under the scheme to quantify the financial aid, is not a payment, directly or indirectly, to meet Printed from counselvise.com 25 IT(TP)A No. 575/Coch/2018 Apollo Tyres Ltd. any portion of the 'actual cost. The expression 'actual cost in section 43(1) of the Income-tax Act, 1961, needs to be interpreted liberally. Such a subsidy does not partake of the incidents which attract the conditions for its deductibility from 'actual cost'. The amount of subsidy is not to be deducted from the 'actual cost' under section 43(1) for the purpose of calculation of depreciation etc.” 11. The Hon’ble Gujarat High Court in the case of CIT vs. Swastik Sanitary Works Ltd., 286 ITR 544 (Guj.) following the principle laid down by the Hon’ble Supreme Court in the case of P.J. Chemicals Ltd. (supra) held that the subsidy is intended as an incentive to encourage entrepreneurs to move and establish industries,, the specified percentage of the fixed capital cost, which is the basis for determining the subsidy, being only a measure adopted under the scheme to quantify the financial aid, is not a payment, directly or indirectly, to meet any portion of the “actual cost” as defined under the provisions of section 43(1) of the Act. Similarly, the Hon’ble Bombay High Court in the case of PCIT vs. Welspun Steel Ltd., 264 Taxman 252 followed the ratio of the decision of the Hon’ble Gujarat High Court (supra).” Respectfully following the judgement of the Pune Tribunal, we hold that the expenditure is capital in nature. The Hon'ble Apex Court in the case of PCIT v. Sunbeam Auto (P.) Ltd. [2024] 463 ITR 3 also held that subsidy income is capital in nature. 25. However, the same is required to be reduced from the actual cost of the assets in terms of explanation 10 to section 43(1) of the Act as held by the Hon'ble Jurisdictional High Court in the case of Kinfa Export Promotion Industrial Parks Ltd. v JCIT [2022] 137 taxmann.com 379 which reads as under: - Printed from counselvise.com 26 IT(TP)A No. 575/Coch/2018 Apollo Tyres Ltd. “13. The controversy between the Revenue and the assessee is that for the purpose of determining the actual cost of assets on which depreciation has to be allowed under section 32 of the Act, the amount of subsidy received by the assessee should be reduced from the actual cost of the assets and the depreciation allowable only on the actual cost so reduced. The Revenue contends that the depreciation is allowable on actual cost, financial assistance/ incentives/subsidy received by the assessee could be adjusted, and the actual cost of asset reduced to that extent. The issue, in a way, begs the question since the Revenue places reliance on Explanation 10 r/w proviso to section 43(1) of the Act, whereas the assessee would lay emphasis on P.J. Chemicals Ltd. case (supra) and the similarity of expressions used in section 43(1) and Explanation 10 for applying the view taken in P.J. Chemicals Ltd. case (supra). 13.1 The summary and ratio of P.J. Chemicals Ltd. (supra) The majority of the High Courts, while interpreting what constitutes actual cost, opined that the subsidies granted to industries on a percentage of the capital costs ought not to be deductible from the actual cost under section 43(1) of the Act for the purpose of calculation of depreciation. On the other hand, a few High Courts have taken the view that the subsidies so received by the assessee ought to be adjusted and reduced from the acquisition cost of the asset by the assessee. The ratio is the rebate as obtained on the point comes under the definition of actual cost under section 43(1) of the Act. According to section 43(1), actual cost means the \"actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority\". The emphasis laid in the ratio is that if a portion of the cost is met directly or indirectly by any person or authority, the actual cost would, for the purposes of sections 28 to 41, be the cost minus the subsidy. The logic behind such deduction from actual cost is that the assessee should not have the benefit of depreciation on a cost that the Printed from counselvise.com 27 IT(TP)A No. 575/Coch/2018 Apollo Tyres Ltd. assessee did not pay himself. The Supreme Court also noted the controversy in P J Chemicals is not whether a portion of the cost is met directly or indirectly by any other person or authority, and if so, it should be deducted or not. If a portion of the cost is met directly or indirectly, such subsidy shall be adjusted in the actual cost of the asset. The real question deals with the character and nature of the subsidy, whether it was intended to subsidise the cost of the capital or was intended as an incentive to encourage entrepreneurs to move to backward areas and establish industries, the specified percentage of the fixed capital cost, which is the basis for determining the subsidy being only a measure adopted under the scheme to quantify the financial aid. The expression 'actual cost' needs to be interpreted liberally. The subsidy of the nature the court examining does not partake the incidence, which attracts the conditions for the deductibility from the actual cost. The Government subsidy is not unreasonable to say it is an incentive not for the specific purpose of meeting a portion of the cost of the assets though quantified as or get to a percentage of that cost. If that be so, it does not partake of the character of the payment intended either directly or indirectly to meet the actual cost. 14. The Parliament by the Finance (No.2) Act, 1998 introduced Explanation 10 r/w proviso to section 43 of the Act. 14.1 The Revenue argues that a line has to be drawn for the application of the dictum in P J Chemicals between pre and post 1-4-1999. In cases where the subsidy is received, Explanation 10 deals with a portion of the cost of an asset acquired by the assessee has been met directly or indirectly by a third party and the grant is in the form of a subsidy in such a situation so much of the cost as is relatable to such subsidy shall not be included in the actual cost to the assessee. In terms of the proviso, the subsidy if cannot be directly relatable to any asset acquired by the assessee, then so much of the amount which bears to the total subsidy or reimbursement, the same proportion as such asset bears to all Printed from counselvise.com 28 IT(TP)A No. 575/Coch/2018 Apollo Tyres Ltd. the assets in respect of the subsidy is so received with reference to which the subsidy or grant or reimbursement is so received. 14.2 The assessee claims that the grant received under ASIDE guidelines is not for the acquisition of a particular asset. Therefore, Explanation 10 is not attracted or adjustment of subsidy in the actual cost of the asset. A proviso excepts or excludes, and the proviso shall not be read as an independent section. 15. The decisions relied on by the parties are either prior to 1- 4-1999, or the decisions have not considered Explanation 10 as a stand-alone provision or interpreted Explanation 10 and the proviso to section 43(1) of the Act. Therefore, the learned counsel appearing for the parties commended to us construction of the Explanation and the proviso as it supports their respective arguments. For brevity, we are not referring to the argument once again at this juncture of the discussion. 15.1 Finance (No.2) Bill, 1998 is effective from 1-4-1999 and is introduced post P.J. Chemicals Ltd. case (supra). The case law under section 43(1) of the Act up to 31-3-1999 would be helpful, if the actual cost is determined only by interpreting section 43(1) of the Act. Now the Court, in the case on hand, is called upon to construe Explanation 10 r/w proviso and apply it to the circumstances of the case. 15.2 It is apt to refer to the Hon'ble Mr. Justice R.C Lohati's view in Bhaiji v. Sub Divisional Officer Thandla [2003] 1 SCC 692 on the utility and interpretative value of SOR or Memorandum appended to a Bill. \"Reference to the Statement of Objects and Reasons is permissible for understanding the background, the antecedent state of affairs, the surrounding circumstances in relation to the statute, and the evil which the statute sought to remedy. The weight of judicial authority leans in favour of the view that Statement of Objects and Reasons cannot be utilized for the purpose of restricting and controlling the plain meaning of the language employed by the Legislature in drafting statute and Printed from counselvise.com 29 IT(TP)A No. 575/Coch/2018 Apollo Tyres Ltd. excluding from its operation such transactions which it plainly covers\". The above view is an answer to the first argument of the assessee that the Bill and the Memorandum are silent on P.J. Chemicals Ltd. case (supra). The Memorandum is an introductory note and serves the purpose of SOR for the proposed amendment. The reason that PJ Chemicals is not referred to in the Memorandum, in our considered view is not making a material difference to Explanation 10 and the proviso of section 43(1) unless this Court notices ambiguity in the text of Explanation 10 r/w proviso. This Court is under obligation to appreciate the Explanation and the proviso and would decide its meaning and scope. 15.3 An explanation at times is appended to a section to explain the meaning of words, contained in the section. It becomes a part and parcel of the enactment. The meaning to be given to an explanation must depend upon its terms, and no theory of its purpose can be entertained unless it is to be inferred from the language used. Krishan Ayyangar v. Nallaperumal Pillai [1920] ILR 43 Mad 550 Dattatraya Govind Mahjan v. State of Maharastra [1977] 2 SCC 548 and Aphali Pharmaceuticals Ltd. v. State of Maharashtra [1989] 4 SCC 378. Purposive construction is permissible if any other construction which does not fit in with the description or the avowed purpose. We may sum up the objects of an explanation by referring to S. Sundaram Pillai v. VR. Pattabiraman [1985] 1 SCC 591: \"(a) to explain the meaning and intendment of the Act itself, (b) where there is any obscurity or vagueness in the main enactment, to clarify the same so as to make it consistent with the dominant object which it seems to subserve. (c) to provide an additional support to the dominant object of the Act in order to make it meaningful and purposeful, Printed from counselvise.com 30 IT(TP)A No. 575/Coch/2018 Apollo Tyres Ltd. (d) an Explanation cannot in any way interfere with or change the enactment or any part thereof but where some gap is left which is relevant for the purpose of the Explanation, in order to suppress the mischief and advance the object of the Act it can help or assist the Court in interpreting the true purport and intendment of the enactment, and (e) it cannot, however, take away a statutory right with which any person under a statute has been clothed or set at naught the working of an Act by becoming an hindrance in the interpretation of the same.\" 15.4 Precisely stated a proviso is a clause that introduces a condition by the word 'provided'. A proviso is introduced to indicate the effect of certain things which are within the statute but accompanied with the peculiar conditions embraced within the proviso. It modifies the immediately preceding language. (James DeWitt Andrews- statutory construction) 15.5 The purpose and functions of a proviso are set out in great detail by the Supreme Court in VKC Footsteps (India) (P.) Ltd. (supra) in paras 91 to 94, read thus: \"Construing the proviso. 91. Provisos in a statute have multi-faceted personalities. As interpretational principles governing statutes have evolved, certain basic ideas have been recognised, while heeding to the text and context. Justice G.P. Singh, in his seminal text, Principles of Statutory Interpretation formulates the governing principles of interpretation which have been adopted by courts while construing a statutory proviso. The first rule of interpretation is that: \"The normal function of a proviso is to except something out of the enactment or to qualify something enacted therein which but for the proviso would be within the purview of the enactment. As stated by Lush, J.; (QBD p. 173). '…. When one finds a proviso to the section, the natural presumption is that Printed from counselvise.com 31 IT(TP)A No. 575/Coch/2018 Apollo Tyres Ltd. but for the proviso the enacting part of the section would have included the subject-matter of the proviso. In the words of Lord Macmillan (SCC Online PC) '... The proper function of a proviso is to except and to deal with a case which would otherwise fall within the general language of the main enactment, and its effect is confined to that case. The proviso may, as Lord Macnaghten laid down, be a qualification of the preceding enactment which is expressed in terms too general to be quite accurate (AC p. 62). The general rule has been stated by Hidayatullah, 1.2, in the following words: (AIR p. 1600, para 9) 9. As a general rule, a proviso is added to an enactment to qualify or create an exception to what is in the enactment, and ordinarily, a proviso is not interpreted as stating a general rule. And in the words of Kapur. J.2 (AIR p. 717, para 9) *9. ...The proper function of a proviso is that it qualifies the generality of the main enactment by providing an exception and taking out as it were, from the main enactment, a portion which, but for the proviso would fall within the main enactment....\"(emphasis supplied) 92. But then these principles are subject to other principles of statutory interpretation which may supplement or even substitute the above formula. These other rules which have been categorised by Justice G.P. Singh are summarised as follows: 92.1. A proviso is not construed as excluding or adding something by implication: \"Except as to cases dealt with by it. a proviso has no repercussion on the interpretation of the enacting portion of the section so as to exclude something by implication which is embraced by clear words in the enactment.\" 92.2. A proviso is construed in relation to the subject-matter of the statutory provision to which it is appended: \"The language of a proviso even if general is normally to be construed in relation to the subject-matter covered by the section to which the proviso is appended. In other words, Printed from counselvise.com 32 IT(TP)A No. 575/Coch/2018 Apollo Tyres Ltd. normally a proviso does not travel beyond the provision to which it is a proviso. It is a cardinal rule of interpretation\", observed Bhagwati, J., \"that a proviso to a particular provision of a statute only embraces the field which is covered by the main provision. It carves out an exception to the main provision to which it has been enacted as a proviso and to no other. \" 92.3. Where the substantive provision of a statute lacks clarity, a proviso may shed light on its true meaning: \"If the enacting portion of a section is not clear, a proviso appended to it may give an indication as its true meaning. As stated by Lord Herschell27: (AC p. 655) \"Of course a proviso may be used to guide you in the selection of one or other of two possible constructions of the words to be found in the enactment, and shew when there is doubt about its scope, when it may reasonably admit of doubt as to its having this scope or that, which is the proper view to take of it:\" 92.4. An effort should be made while construing a statute to give meaning both to the main enactment and its proviso bearing in mind that sometimes a proviso is inserted as a matter of abundant caution: \"The general rule in construing an enactment containing a proviso is to construe them together without making either of them redundant or otiose. Even if the enacting part is clear effort is to be made to give some meaning to the proviso and to justify its necessity. But a clause or a section worded as a proviso, may not be a true proviso and may have been placed by way of abundant caution.\" 92.5. While ordinarily, it would be unusual to interpret the proviso as an independent enacting clause, as distinct from its main enactment, this is true only of a real proviso and the draftsperson of the statute may have intended for the proviso to be, in substance, a fresh enactment: Printed from counselvise.com 33 IT(TP)A No. 575/Coch/2018 Apollo Tyres Ltd. \"... To read a proviso as providing something by way of an addendum or as dealing with a subject not covered by the main enactment or as stating a general rule as distinguished from an exception or qualification is ordinarily foreign to the proper function of a proviso. However, this is only true of a real proviso. The insertion of a proviso by the draftsman has not always strictly adhered to its legitimate use and at times a section worded as a proviso may wholly or partly be in substance a fresh enactment adding to and not merely excepting something out of or qualifying what goes before.\" 93. Perhaps the most comprehensive and oft-cited precedent governing the interpretation of a proviso is the decision of this Court in S. Sundaram Pillai v. V.R. Pattabiraman, S.Murtaza Fazal Ali, J. speaking for a three-Judge Bench of this Court held: (SCC p. 610, para 43) '43. ………….To sum up, a proviso may serve four different purposes: (1) qualifying or excepting certain provisions from the main enactment: (2) it may entirely change the very concept of the intendment of the enactment by insisting on certain mandatory conditions to be fulfilled in order to make the enactment workable: (3) it may be so embedded in the Act itself as to become an integral part of the enactment and thus acquire the tenor and colour of the substantive enactment itself; and (4) it may be used merely to act as an optional addenda to the enactment with the sole object of explaining the real intendment of the statutory provision.' 94. While enunciating the above principles, S. Sundaram Pillai\" took note of the decision in Hiralal Rattanlal v. State of U.P. where K.S. Hegde, J... speaking for a four-Judge Bench of this Court observed that while ordinarily, a proviso is in the nature of an exception, the precedents indicate that sometimes a proviso is in the nature of a separate provision, with a life of Printed from counselvise.com 34 IT(TP)A No. 575/Coch/2018 Apollo Tyres Ltd. its own. The Court held: (Hiralal Rattanlal case 2, SCC p. 224, para 22). (Emphasis supplied) \"22. ... Ordinarily a proviso to a section is intended to take out a part of the main section for special treatment. It is not expected to enlarge the scope of the main section. But cases have arisen in which this Court has held that despite the fact that a provision is called a proviso, it is really at separate provision and the so-called proviso has substantially altered the main section. In CIT v. Bipinchandra Maganlal & Co. Ltd. this Court held that by the fiction in section 10(2)(vii) second proviso read with. Section 2(6-C) of the Indian Income- tax Act. 1922 what is really not income is, for the purpose of computation of assessable income, made taxable income.\" (Emphasis supplied) Besides the decision in CIT v. Bipinchandra Maganlal & Co. Ltd. the Court in Hiralal Rattantal adverted to the earlier decisions in State of Rajasthan v. Leela Jain and Bihta Coop. Development Cane Mktg. Union Ltd. v. Bank of Bihar.\" 16. The first and foremost guiding canon is the rule of literal construction. The arguments on both sides apply the rule of literal construction to the explanation and to the proviso as the case may be. But different destinations are reached suiting respective stands. As a Court, we would prefer literal construction walk the path of language in understanding what Explanation 10 means and proviso. Interpreted so, we are of the view that Explanation 10 takes care of a situation where a portion of the cost of an asset acquired by the assessee has been met directly or indirectly by the Central/State Government Authority or any other person and such receipt is in the form of a subsidy or grant or reimbursement (by whatever name called) in such situation, so much of the cost as is relatable to such subsidy, or grant or reimbursement shall not be included in the actual cost of the asset to the assessee. Applying the above construction to circumstances in the case on hand, without much deliberation, this Court concludes that Printed from counselvise.com 35 IT(TP)A No. 575/Coch/2018 Apollo Tyres Ltd. the financial assistance received by the Assessee from the Government under the ASIDE scheme is not asset-specific. Therefore, Explanation 10 per se is not attracted to the case of the assessee. The said conclusion does not resolve the controversy on hand. For a definite view ought to be recorded after reading all the provisions applicable to the principle of determining the actual cost of the asset. 16.1 In VKC Footsteps (India) (P.) Ltd. (supra) case, in para 92.3, 92.4, laid down the use of a proviso may shed light on the true meaning of the section; as a matter of abundant caution; acquires the tenor and color of the substantive enactment. we are hence not agreeing with the argument of assessee that the proviso be read as a qualification alone. Such interpretation, in our considered view, goes against the text of the very proviso inserted with Explanation 10 by Finance (No.2) Bill, 1998. The proviso, however, as it stands, takes care of a situation where such subsidy or grant or reimbursement is of such nature but the subsidy or grant or reimbursement cannot be directly relatable to the asset acquired by the assessee. In such a situation, the proviso envisages that so much of the amount which bears to the total subsidy or reimbursement or grant, the same proportion as such asset bears to all the assets in respect of or with reference to which subsidy or grant or reimbursement is so received shall not be included in the actual cost of the asset to the assessee. The proviso enables adjustment of subsidy in all the assets of the assessee. The language of the proviso is clear that the subsidy received without specifics shall have to be adjusted from the assets of the assessee. The object is to limit depreciation only on the actual cost of the assets of the assessee. The proviso takes care of the general financial assistance i.e. without specific purpose, received and the actual cost is worked as per the proviso. We follow the precedent in S. Sundaram Pillai case (supra) on the point and hold that the proviso is an independent expression on working of actual cost of assets of assessee. The assessee, under the ASIDE, in the assessment year 2008-09 received Rs. Printed from counselvise.com 36 IT(TP)A No. 575/Coch/2018 Apollo Tyres Ltd. 3,75,00,885/- and for the assessment year 2009-10 though has not received any financial assistance, the actual cost of the asset has been reworked by deducting the financial assistance received up to the financial year 2000-01. Any other interpretation or construction of Explanation 10 and proviso would be contrary to the explicit words used by the parliament for achieving a particular object of granting depreciation on the actual cost incurred by the assessee. The Explanation and the proviso, in our understanding, are clear and do not suffer from ambiguity. This relates other substantial questions of law and would be considered independently. 17. Hence, we hold that financial assistance received without reference to specific purpose, still by application of proviso to Explanation 10 of section 43(1) of the Act the actual cost is apportioned and reduced from the cost of the assets of the assessee for the purpose of computing the depreciation. For the above reasons, the common question in both the appeals is answered in favour of Revenue and against the assessee.” In the result, the ground of appeal No. 11 stands allowed. 26. The ground of appeal No. 12 Challenges disallowance of claim for deduction u/s. 80-IA of the Act in respect of compensation received on account of shortfall in the production of power guaranteed in terms of the agreement by clause 3 with the contractor. The brief facts of the case are that the appellant company own two windmill units at Limda plant, the profits of which are stated to be eligible for deduction u/s. 80IA of the Act. The operation of the units was contracted out to independent contractors. In terms of the agreement entered into by the appellant with the contractors, the contractors were obliged to pay compensation for shortfall in production. During previous year relevant to the Printed from counselvise.com 37 IT(TP)A No. 575/Coch/2018 Apollo Tyres Ltd. assessment year under consideration the appellant company received such compensation to the extent of Rs. 57,14,791/-. The same was sought to be deducted u/s. 80IA of the Act. The AO had denied the claim for deduction u/s. 80IA by holding that there was no direct nexus with the windmill unit. Even DRP confirmed the action of the AO. 27. Being aggrieved, the appellant is in appeal before us. It is submitted that the appellant is eligible for deduction u/s. 80IA of the Act as held by the Mumbai Bench of this tribunal in the case of EA Infrastructure Operations Pvt. Ltd. 41 SOT 268 and the Jaipur Bench of this Tribunal in the case of Rajashtan State Mines & Minerals Ltd. 188 TTJ 137. 28. We heard the rival contentions and perused the material on record. Whether the compensation received from the contractors responsible for generation of power from windmills, for the failure to achieve the target forms part of eligible profits or not. The issue stands covered against the assessee by the decision of the Supreme Court Liberty India v. CIT 317 ITR 218 and Arisudana Spinning Mills Ltd. v. CIT [2012] 348 ITR 385 wherein it is held as under: - “15. Continuing our analysis of sections 80-IA/80-IB it may be mentioned that sub-section (13) of section 80-IB provides for applicability of the provisions of sub-section (5) and sub- sections (7) to (12) of section 80-IA, so far as may be, applicable to the eligible business under section 80-IB. Therefore, at the outset, we stated that one needs to read Printed from counselvise.com 38 IT(TP)A No. 575/Coch/2018 Apollo Tyres Ltd. sections 80-I, 80-IA and 80-IB as having a common Scheme. On perusal of sub-section(5) of section 80-IA, it is noticed that it provides for manner of computation of profits of an eligible business. Accordingly, such profits are to be computed as if such eligible business is the only source of income of the assessee. Therefore, the devices adopted to reduce or inflate the profits of eligible business has got to be rejected in view of the overriding provisions of sub-section (5) of section 80-IA, which are also required to be read into section 80-IB [see section 80-IB(13)]. We may reiterate that sections 80-I, 80-IA and 80-IB have a common scheme and if so read it is clear that the said sections provide for incentives in the form of deduction(s) which are linked to profits and not to investment. On analysis of sections 80-IA and 80-IB it becomes clear that any industrial undertaking, which becomes eligible on satisfying sub-section(2), would be entitled to deduction under sub-section (1) only to the extent of profits derived from such industrial undertaking after specified date(s). Hence, apart from eligibility, sub-section(1) purports to restrict the quantum of deduction to a specified percentage of profits. This is the importance of the words \"derived from industrial undertaking\" as against \"profits attributable to industrial undertaking\". “3. The assessee is aggrieved by denial of deduction which it claimed under Section 80IA of the Income Tax Act, 1961 ['Act', for short]. In this case, Return was filed by the assessee on 30th November, 1998, showing income of Rs. 36,27,866/- The said Return was processed under Section 143(1)(a) of the Act. The case was thereafter selected for scrutiny. Notice under Section 143(2) of the Act was, accordingly, issued. The Assessing Officer found that the assessee-Company was engaged in the business of manufacturing of yarn. The assessee derived, during the relevant assessment year, a gross total income of Rs. 51,82,666/- from what it called 'manufacturing activity'. It denied that it had undertaken any trading activity during the year in question. On the said sum of Rs. 51,82,666/-, the assessee claimed deduction at the rate of thirty per cent Printed from counselvise.com 39 IT(TP)A No. 575/Coch/2018 Apollo Tyres Ltd. under Section 80IA of the Act amounting to Rs. 15,54,800/-. The Assessing Officer found that the assessee had not maintained a separate trading and profit and loss account for the goods manufactured. In the assessment year in question, it appears that the assessee had sold raw wool, wool waste and textile and knitting cloths. When a query was raised, the assessee contended that, for certain business exigencies in the assessment year in question, it had sold the above items. However, according to the assessee, the sale of raw wool, wool waste, etc., would not disentitle it from claiming the benefit under Section 80IA of the Act on the total sum of Rs. 51,82,666/- at the rate of 30%. As stated above, the Department found that the assessee has not maintained the accounts for manufacture of yarn actually produced as a part of industrial undertaking. Consequently, the Assessing Officer worked out, on his own, the manufacturing account, as indicated in his Order, giving a bifurcation in terms of quantity of raw wool produced, which is indicated at page 32 of the S.L.P. paper book. Of course, the assessee challenged the preparation of separate trading account by the Assessing Officer in respect of manufacturing and trading activities before the Commissioner of Income Tax (Appeals) ['CIT(A)', for short]. The CIT(A), however, applying the rule of consistency, followed the decision of the earlier year and allowed the appeal. However, the Income Tax Appellate Tribunal has reversed the findings given by CIT(A), which view has been upheld by the High Court. Hence, the civil appeal has been filed by the assessee. 4. In our view, the findings given by ITAT and the High Court are findings of fact. In this case, we are not concerned with the interpretation of Section 80IA of the Act. On facts, we find that the assessee ought to have maintained a separate account in respect of raw material which it had sold during the assessment year. If the assessee had maintained a separate account, then, in that event, a clear picture would have emerged which would have indicated the income accrued from Printed from counselvise.com 40 IT(TP)A No. 575/Coch/2018 Apollo Tyres Ltd. the manufacturing activity and the income accrued on the sale of raw material. We do not know the reason why separate accounts were not maintained for the raw material sold and for the income derived from manufacture of yarn. For the above reasons, these civil appeals filed by the assessee are dismissed with no order as to costs.” The ratio of the decisions of the Hon'ble Supreme Court cited supra is squarely applicable to facts of the case. Accordingly, we uphold the decision of the action of the AO in denying the deduction u/s. 80IA in respect of the compensation amount received. Accordingly, this ground stands dismissed. 29. The ground appeal No. 13 challenges the Additions/ adjustments made to book profit for the purpose of computing tax liability u/s. 115JB of the Act. It is contended before u/s. that the capital subsidy received from Government of Tamil Nadu credited to Profit & Loss A/c. is required to be reduced from the book profit for the purpose of computing tax liability u/s. 115JB as the same is a capital receipt. In this connection the appellant relied on the following decisions: - i. Sutlej Cotton Mills 45 ITD 22 (SB Kolkata Tribunal) ii. Indo Rama Synthetics 330 ITR 363 (SC) iii. Kedarnath Jute Mfg. Co. Ltd. v. CIT 82 ITR 363 (SC) iv. Syndicate Bank [2006] 7 SOT 51 v. JSW Steel Ltd. [2017] 82 taxmann.com 210 (Mum-Trib) vi. Shree Cement Ltd. ITA No. 614/JP/2010 (Jaipur-Trib) Printed from counselvise.com 41 IT(TP)A No. 575/Coch/2018 Apollo Tyres Ltd. 30. On the other hand, the ld. DIT-CR submits that for the purpose of computing book profits u/s. 115JB of the Act the AO cannot tinker with the Profit & Loss A/c. In other words, AO is not entitled to go into the Profit & Loss A/c. prepared by the assessee as per the provisions of the Companies Act and the book profit so arrived at should be the basis for taxation u/s. 115JB of the Act. 31. We heard the rival submissions and perused the material on record. The issue that arises for our consideration is whether the AO was right in denying the claim for deduction of the capital subsidy received from the Government of Tamil Nadu while computing the book profits for the purpose of computing tax liability u/s. 115 JB of the Act. It is the contention of the appellant that the said subsidy received is in the nature of capital receipt and, therefore, notwithstanding the fact that the appellant had credited the said subsidy in the Profit & Loss A/c., the same is required to be reduced from the book profits for the purpose of determining the tax liability u/s. 115JB of the Act. The issue is squarely covered by the decision of Hon'ble Supreme Court in the case of Apollo Tyres Ltd. v. CIT 255 ITR 273 wherein it was held that the AO while computing the income under the provisions of section 115JB of the Act, the AO has no power to tinker with the profits as disclosed by Profit & Loss A/c. prepared under Companies Act except in the circumstances enumerated under explanation inserted to section 115J of the Act. The relevant portion of the order is extracted as under: - Printed from counselvise.com 42 IT(TP)A No. 575/Coch/2018 Apollo Tyres Ltd. \"It is only fair and proper that the prosperous should pay at least some tax. The phenomenon of so-called 'zero-tax' highly profitable companies deserves attention. In 1983, a new section 80VVA was inserted in the Act so that all profitable companies pay some tax. This does not seem to have helped and is being withdrawn. I now propose to introduce a provision whereby every company will have to pay a 'minimum corporate tax' on the profits declared by it in its own accounts. Under this new provision, a company will pay tax on at least 30 per cent of its book profit. In other words, a domestic widely held company will pay tax of at least 15 per cent of its book profit. This measure will yield a revenue gain of approximately Rs. 75 crores.\" The above Speech shows that the income-tax authorities were unable to bring certain companies within the net of income-tax because these companies were adjusting their accounts in such a manner as to attract no tax or very little tax. It is with a view to bring such of these companies within the tax net that section 115J was introduced in the Income-tax Act with a deeming provision which makes the company liable to pay tax on at least 30 per cent of its book profits as shown in its own accounts. For the said purpose, section 115J makes the income reflected in the companies' books of account as the deemed income for the purpose of assessing the tax. If we examine the said provision in the above background, we notice that the use of the words 'in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act' was made for the limited purpose of empowering the assessing authority to rely upon the authentic statement of accounts of the company. While so looking into the accounts of the company, an Assessing Officer under the Income-tax Act has to accept the authenticity of the accounts with reference to the provisions of the Companies Act which obligates the company to maintain its account in a manner provided by the Companies Act and the same to be scrutinised and certified by statutory auditors and will have to be approved by the company in its General Meeting and thereafter to be filed Printed from counselvise.com 43 IT(TP)A No. 575/Coch/2018 Apollo Tyres Ltd. before the Registrar of Companies who has a statutory obligation also to examine and satisfy that the accounts of the company are maintained in accordance with the requirements of the Companies Act. In spite of all these procedures contemplated under the provisions of the Companies Act, we find it difficult to accept the argument of the revenue that it is still open to the Assessing Officer to rescrutinise the accounts and satisfy himself that these accounts have been maintained in accordance with the provisions of the Companies Act. In our opinion, reliance placed by the revenue on sub-section (1A) of section 115J in support of the above contention is misplaced. Sub-section (1A) of section 115J does not empower the Assessing Officer to embark upon a fresh inquiry in regard to the entries made in the books of account of the company. The said sub-section, as a matter of fact, mandates the company to maintain its account in accordance with the requirements of the Companies Act which mandate, according to us, is bodily lifted from the Companies Act into the Income-tax Act for the limited purpose of making the said account so maintained as a basis for computing the company's income for levy of income- tax. Beyond that, we do not think that the said sub-section empowers the authority under the Income-tax Act to probe into the accounts accepted by the authorities under the Companies Act. If the statute mandates that income prepared in accordance with the Companies Act shall be deemed income for the purpose of section 115J, then it should be that income which is acceptable to the authorities under the Companies Act. There cannot be two incomes one for the purpose of Companies Act and another for the purpose of the Income-tax Act both maintained under the same Act. If the Legislature intended the Assessing Officer to reassess the company's income, then it would have stated in section 115J that 'income of the company as accepted by the Assessing Officer'. In the absence of the same and on the language of section 115J, it will have to held that view taken by the Tribunal is correct and the High Court has erred in reversing the said view of the Tribunal. Printed from counselvise.com 44 IT(TP)A No. 575/Coch/2018 Apollo Tyres Ltd. 32. The decision by Hon'ble Supreme Court in the case of Indo Rama Synthetics (I) Ltd. (supra) relied upon by the ld. Sr. Counsel have no application to the facts of the present case, inasmuch as, issue that arose before their Lordships is with regard to deduction of revaluation reserve credited to Profit & Loss A/c. under exclusionary clause (i) to explanation to section 115JB of the Act. The amount of subsidy received by the appellant company does not fall in any of the exclusion clauses enumerated under explanation to section 115JB of the Act. The ratio of the decision of the Hon'ble Supreme Court in the case Apollo Tyres Ltd. is squarely applicable to the facts of the present case. We are also fortified by the decision of Hon'ble Madras High Court in the case of AVT Natural Products Ltd. v. DCIT 330 ITR 360 and also CIT v. Rajanikant Schnelder and Associates P. Ltd. [2028] 302 ITR 22. 33. The reliance placed by the ld. Sr. Council on decisions of the coordinate Bench of the Tribunal referred supra cannot be followed in view of the dictum laid down by the Hon'ble Supreme Court in the case of Apollo Tyres and Indo Rama Synthetic referred supra. In the result, we do not find any merits in the ground of appeal of the assessee. Accordingly, this ground stands dismissed. 34. The ground of appeal No. 14 challenges the addition on account of transfer pricing adjustment of Rs. 33,94,918/- in respect of provision of Corporate IT services. This issue stands remitted Printed from counselvise.com 45 IT(TP)A No. 575/Coch/2018 Apollo Tyres Ltd. back to the file of the AO/TPO in terms of the passed by Tribunal on 10.01.2017 for AY 2011-12. 35. The ground of appeal No. 15 challenges TP addition on corporate guarantee of Rs. 2,78,47,806/-. This issue is also stands remanded back to the file of the AO/TPO vide para 20 of the order in ITA No. 609/Coch/2017 for AY 2013-14. Accordingly, this ground appeal stands partly allowed. 36. The grounds appeal Nos. 16, 17, 18, 19, 20 & 21 are dismissed as not pressed during the course of appeal. 30. In the result, the appeal filed by the assessee stands partly allowed for statistical purposes. Order pronounced in the open court on 12th September, 2025. Sd/- Sd/- (RAHUL CHAUDHARY) JUDICIAL MEMBER (INTURI RAMA RAO) ACCOUNTANT MEMBER Cochin, Dated: 12th September, 2025 n.p. Copy to: 1. The Appellant 2. The Respondent 3. The Pr. CIT concerned 4. The Sr. DR, ITAT, Cochin 5. Guard File Assistant Registrar ITAT, Cochin Printed from counselvise.com "