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TMI Blog2013 (9) TMI 567X X X X Extracts X X X X X X X X Extracts X X X X ..... essee had its own funds more than loans given to its subsidiaries and also in absence of any nexus establishing that interest bearing borrowed funds were given as interest free to its subsidiaries - dis-allowance of interest was not justified - interest was allowable u/s 36(1)(iii) of the Act. Disallowance of Administrative Expenses u/s 14A - Dis-allowance u/s 14A of estimated expenses out of administrative expenses being expenditure incurred in relation to earning the exempt income u/s 10(33) and 10(23G) - Held that:- Assessee's own funds were far in excess than the investments made by the assessee giving exempt income, dis-allowance of interest was not justified as it had to be presumed that investments had come from interest free funds available with assessee - assessee was allowed in part by restricting disallowance towards administrative and general expenses u/s 14A of Act towards earning of exempt income u/s 10(23G) while computing total taxable income under normal provisions of Act - However, no disallowance u/s 14A be considered while computing book profit u/s 115JB of the Act - Decided partly in favor of assessee. Disallowance u/s 80HHC – Deduction u/s 80HHC under pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in favor of assessee. Disallowance u/s 92C - Transfer pricing - Working of 'Cost plus' method followed by TPO was in dispute - Held that:- A perusal of workings clearly demonstrated that TPO had taken 50% of total cost and whereas the assessee had taken actual cost relating to charter hire activity - This had made a difference to the calculation of cost - Actuals have to be taken to arrive at the correct cost and only then cost plus method can be applied - Cost plus method does not contemplate estimation of cost - When actual figures were replaced in the calculation made by TPO, then, no adjustment was called for as the payment was at arm’s length price - Decided in favor of assessee. Pre-operative Expenses - Held that:- Pre-operative expenses in question have been incurred for the purpose of business of assessee and expenditure was incurred for expansion of its existing activities - these preoperative expenses represent revenue expenditure incurred for purpose of business and be allowed as deduction u/s 37. MAT - Disallowance by increasing the Book Orofit u/s 115JB - Revenue contending adding back of provision for doubtful debts while computing profits u/s 115JB - Hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u/s 115JB of the Act. AO has stated that tax under the normal provisions is more than the tax under the provisions of section 115JB of the Act, hence, assessee-company is assessed under normal provisions of Act, i.e. u/s 143(3) of the Act at Rs.2719,68,29,460. Being aggrieved, assessee filed appeal before the ld.CIT(A) disputing the various additions/disallowances made by AO while computing the income. Ld. CIT(A) vide impugned order dated 30.3.2007 has allowed the appeal of the assessee in part. Hence, assessee as well as department are in appeal before the Tribunal. 5. First we shall take up the appeal of assessee being I.T.A. No.4475/Mum/2007 for our consideration. I.T.A. No.4475/Mum/2007 Since there are certain grounds in the appeal of department connected with grounds of assessee's appeal, we shall also dispose off those grounds as well with the appeal of assessee. 6. Ground No.1 of appeal of assessee reads as under : "1. The ld. CIT(A) erred in rejecting the appellant's alternative plea that there is a deemed payment of sales tax and therefore the amount of Rs.1252,83,84,360/- is allowable as per the provisions of section 43B of the Income Tax Act, 1961, The appel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the claim of deduction of notional sales tax of Rs.1252,83,84,360/- is a capital receipt not liable to tax. It is relevant to state that assessee took alternative submissions before ld. CIT(A) that if the amount of subsidy is regarded as revenue receipt then such sales tax incentives received should be allowed as a deduction under section 43B of the Act while computing the total income of the assessee. It is relevant to state that the ld. CIT(A) has stated that the main contention of the assessee regarding notional sales tax being capital receipt not liable to tax has been allowed, it is not considered necessary to go into the alternative plea of the assessee claiming notional sales tax as deductible under section 43B of the Act. He has also stated that a similar alternative plea taken by the assessee in A.Y 2001-02 had been rejected by his predecessor for the reason that CBDT Circular No.496 dated 25/9/1987 clarified the position regarding applicability of the provisions of section 43B only to sales tax deferred scheme. This circular did not apply to the sales tax exemption scheme availed by the assessee. Hence, the assessee as well as department are in appeal before the Trib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the nature of operational subsidy intended and supplementing profit of the assessee nor it is in the nature of grant for meeting the cost of plant and machinery. Such subsidy is in the nature of capital receipt not liable to tax. It was contended that the said issue was considered by Special Bench of ITAT, Mumbai in assessee's own case for A.Y 1986-87 reported at 88 ITD 273(SB) and the Tribunal confirmed its earlier decision in assessee's own case for assessment years 1984-85 and 85-86 that the sales tax subsidy granted to the assessee is in the nature of capital receipt not liable to tax. It was contended that the Tribunal also considered the decision of the Hon'ble Apex Court in the case of Sahney Steel and Press Works Ltd.(supra). He submitted that the Special Bench while deciding the issue in favour of the assessee also considered the decision of another Bench of ITAT Mumbai in the case of Bajaj Auto Limited (supra) which had taken a contrary view that the subsidy is revenue receipt. It was contended that in subsequent assessment years ITAT has allowed similar claim of the assessee and even in the just preceding assessment year 2001-02 the claim for deduction of notional sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we hold that ld. CIT(A) has rightly held that it is not necessary to go into the alternative plea of the assessee as claiming the notional sales tax as deductible under section 43B of the Act. Therefore, ground No.1 of the appeal taken by the assessee is rejected." 6.6 In view of above we agree that issue involved and facts are identical and respectfully following the decision of the Special Bench of ITAT in assessee's own case and the order of Mumbai Bench of the Tribunal in assessee's own case for assessment year 2002-03 dated 28.5.2012 (supra), we uphold the order of ld. CIT(A) that the claim for treatment of notional sales tax is capital receipt. Hence, ground No.1 of the appeal taken by the department is rejected. Since ground No.1 in assessee's appeal is an alternative ground, we hold that ld. CIT(A) has rightly held that it is not necessary to go into the alternative plea of the assessee claiming the notional sales tax is deductible under section 43B of the Act. Therefore, ground No.1 of the appeal taken by the assessee is rejected. 7. In Ground No.2 of appeal, assessee has disputed the order of ld. CIT(A) in confirming the disallowance of interest of Rs.4,39,20,619/- be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rated or available with the company. It was held that if interest free funds were sufficient to meet the investments made, in that case a presumption is established that the borrowed capital was used for the purpose of business and the interest expenditure is deductible under section 36(1)(iii) of the Act. The similar view has also been considered by the Hon'ble Calcutta High Court in Wool Combers of India Ltd., 134 ITR 219 (Cal), wherein it was held that if there were sufficient profits available to meet the advance tax liability and the profits were deposited in the overdraft account of the assessee; in such a case it should be presumed that the taxes were paid out of profits of the year and not out of the overdraft account for the running of the business. Considering subsequent decision of the Hon'ble Jurisdictional High Court in the case of Reliance Utilities Power Ltd.(supra), wherein it was specifically held that if interest free funds available to an assessee is sufficient to meet its investment, it can be presumed that the investments were made from the interest free funds available with the assessee. Therefore, considering the fact that the assessee had its own funds mor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es being proportionate administrative and other expenses towards earning the exempt income and disallowed the same u/s 14A of the Act. Being aggrieved, assessee filed appeal before the First Appellate Authority. 9.3 On behalf of the assessee, it was contended that interest, administrative and other expenses were incurred by assessee in the normal course of carrying on its business activity and for maintaining its corporate status. It was also contended that assessee had not incurred any part of such interest, administrative and other expenses towards earning of exempt income. That such income was incidental to the investments made by the assessee-company out of its surplus funds. It was also contended that AO had not established any nexus between incurring of the expenses and the earning of exempt income. That the interest bearing borrowed funds were invested in the normal course of carrying on the business, and assessee's own funds being far greater than investment and interest free advances given. Hence, it could not be said that a part of borrowed funds had been utilized for making investments. That where the own funds including profit generated and borrowed funds are pooled t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crores. Ld.AR submitted that the assessee has net own funds of Rs.27638.60 crores besides net profit after tax and before depreciation stood at Rs.7565.40 crores. Hence, its investment cannot be said to be part of the borrowed funds which had been utilized for making investment. Ld. AR submitted that similar disallowance were made by AO in the preceding assessment year 2002-03. However, ld. CIT(A) deleted the disallowance made by AO u/s 14A of the Act being proportionate interest on borrowed funds. That the appeal filed by department before the Tribunal on this issue was dismissed vide para 7.7 of its order dated 28.5.2012 (supra) and confirmed the order of ld.CIT(A) after observing that assessee's own funds were far in excess than the investments made by the assessee giving exempt income and the disallowance of the interest made by the AO was not justified, as it has to be presumed that the investments had come from the interest free funds available with the assessee. He submitted that in regard to disallowance of administrative expenses u/s 14A of the Act, the Tribunal restricted the disallowance at 1% of exempt income after considering the disallowances made in the preceding ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear i.e. Assessment Year 2002-03, it will be fair and reasonable to restrict the disallowance to 1 % of the exempt income which works out to Rs.3,45,69,250/-. However, in regard to disallowance u/s 14A for computing book profit u/s 115JB of the Act, we observe that similar issue had come up before the Tribunal, Mumbai Bench in the case of Reliance Industrial Infrastructure Ltd V/s Addl. CIT in ITA Nos.69 and 70/Mum/2009 (AY-2005- 06 and 2006-07) and Tribunal vide order dated 5.4.2013 after following the decision of Delhi Bench of Tribunal in Goetze (India) Ltd (32 SOT 101) (Del) and the decision of Mumbai Bench of the Tribunal in M/s Bengal Finance and Investment P.Ltd. in ITA No.5620/Mum/2010, dated 31.7.2012 has held that while computing book profit u/s 115JB of the Act, provisions of section 14A cannot be imported. Therefore, amount disallowed u/s 14A of the Act cannot be considered while computing book profit u/s 115JB of the Act. Accordingly, the issue was decided in favour of the assessee. 9.8. In view of above Ground No.4 of the appeal taken by the assessee is allowed in part by restricting the disallowance to Rs.3,45,69,250/- towards administrative and general expenses u/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Miscellaneous income of Rs.51,67,11,270/- while computing deduction u/s 80HHC of the Act The appellant submits that on the facts and circumstances of the case the Miscellaneous income is in the nature of profit of business eligible for deduction u/s 80HHC of the Act. 10.3 AO did not accept the contention of the assessee that 90% of only net interest expenses should be considered while reducing from the profits of business for computing deduction u/s 80HHC of the Act. Ld. CIT(A) also confirmed action of AO. The ld. CIT(A) stated that deduction u/s 80HHC is allowable only on profits derived by the assessee on the export of goods or merchandise. That interest earned by the assessee is not derived from the export of goods or merchandise and therefore, immediate source of interest is the deposits and not the business or export. It is relevant to state that the ld. CIT(A) has also not agreed with the contention of the assessee that 90% of only of net interest received should be reduced from the profits of the business. Hence assessee has disputed the above order of ld. CIT(A) before the Tribunal in Ground No.5(b) and (c) as under: "5.(b) The ld. CIT(A) erred in confirming the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted by the ld. CIT(A) at page 27 of the impugned order. The ld. CIT(A) has stated that he agrees with the assessee that for computation of deduction u/s 80HHC with reference to the exporting unit, profits allowed as deduction u/s 80IA/80IB with reference to those exporting units allowed may be reduced and not entire claim u/s 80IA/80IB of the assessee in respect of all the units. The ld. CIT(A) has stated that from the information as submitted, it is clear that there is no unit in respect of which both the deduction u/s 80IA/80IB as well as under section 80HHC had been claimed. Therefore, the action of the AO in reducing deduction u/s 80IA/80IB from the profit of the business for computing the deduction u/s 80HHC is not in order and directed the AO to compute deduction u/s 80HHC without reducing deduction allowed u/s 80IA and 80IB to the assessee from the profit of business. In view of above order of ld. CIT(A), the department has filed the appeal before the Tribunal as ground No.6 of the appeal which reads as under : "6. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in directing the AO to exclude the profit allowed as deduction u/s 80IA/80IB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to compute the deduction u/s 80HHC under the provisions of section 115JB with reference to profit and per profit and loss account." 10.8 In respect of Ground No.5(a) taken by assessee, we have heard ld. Representatives of the parties and have carefully considered the orders of authorities below. During the course of hearing ld.AR submitted that Miscellaneous Income of Rs.51,67,11,000/-, details are given at page 23 of impugned order of ld. CIT(A), is a part of business income of assessee and therefore, assessee is entitled for deduction u/s 80HHC of the Act. We consider it prudent to reproduce the details of said miscellaneous income from page 23 of the impugned order of ld. CIT(A) which is as under :- Details of Miscellaneous Income Particulars Amount (Rs.) Nature Cash Discount Received 727502 Discount received on Purchase of cars etc. Lease Income Received 180596989 For assets given on lease. Commission Received 2017472 Royalty Income 25000 Recovery from GAIL for using infrastructural facilities 79683668 Infrastructure facility at Ja ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e excluded under Explanation (baa) to Section 80HHC of the Act for determining the profits of business. Ld. DR has not disputed above contention of ld. AR. 10.11 In view of above submissions and considering the decision of the Hon'ble Apex Court in the case of M/s ACG Associated Capsules (P.) Ltd. (supra) and also the fact that similar issue was also considered by ITAT, Mumbai Bench in assessee's own case for assessment year 2002-03 vide order dated 28.5.2012 (supra), we direct that 90% of net interest receipt after reducing interest expenditure having nexus with earning of interest income have to be reduced while computing the deduction u/s 80HHC of the Act. Therefore, Ground No.5(b) of the appeal is rejected and whereas alternative ground viz Ground ( c ) of the appeal is allowed. 10.12 In regard to Ground No.5(d) and 5( e ) of the Appeal taken by assessee. Ld. AR submitted that the said issue is covered in favour of assessee by the decision of the Hon'ble Apex Court in the case of Ajanta Pharma Ltd V/s CIT (2010) 327 ITR 305 (SC), wherein Their Lordships have held that section 115JB of the Act is a self- contained code, and reversed the order of the Hon'ble Bombay High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 80 HHC of the Act. Further the Hon'ble Jurisdictional High Court as held in the case of Sudarshan Chemical Industries Ltd.(supra) that sales tax is not to be included in the total turnover for computing deduction under section 80 HHC of the Act. Hence, we uphold the order of the ld. CIT(A) and reject Ground No.6 of the appeal taken by the department." 10.16. In view of above, we uphold the order of ld.CIT(A) and reject Ground No.5 of the appeal taken by department. 11. In respect of Ground No.6 of the appeal taken by the department, Ld. DR relied on the order of AO and whereas ld.AR submitted that above issue was considered by Tribunal vide its order dated 28.5.2012 for assessment year 2002-03 (supra) and confirmed the order of ld. CIT(A) by rejecting the ground of appeal taken by department. 11.1 We have considered the orders of authorities below and the submissions of ld. Representatives of the parties. We agree with ld. AR that the similar issue was considered by the Tribunal in the assessee's own case for assessment year 2002-03, dated 28.5.2012 (supra) vide para 8.16 and rejected the ground of appeal taken by the department by confirming the action of ld. CIT(A). The s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has not disputed the above contention of ld. A.R. 8.19 We agree with the ld. A.R that this issue is covered in favour of the assessee as the Hon'ble Apex Court in the case of Bhari Information Tex System Pvt. Ltd. (supra), after considering the decision of the Special Bench of ITAT, Mumbai in the case of DCIT vs. Syncome Formulations (India) Ltd. 108 TTJ 105 and has held that deduction under chapter VIA of I.T Act has to be worked out not on the basis of regular income tax profits but it has to be worked out on the basis of the adjusted book profits in a case where section 115JA is applicable. Since section 115JA is in para materia to section 115JB, we uphold the order of ld. CIT(A) of rejecting ground No.7 of the appeal taken by the department. " 11.5 In view of above, we uphold the order of ld.CIT(A) and reject Ground No.7 of the appeal taken by department. 12. Ground No.6 taken by assessee is in regard to disputing the order of ld. CIT(A) in confirming the disallowance of expenses on account of traveling of spouses of executives of assessee at Rs.23,80,628/-. 12.1 At the time of hearing, ld.AR conceded that above issue on similar facts had been considered by Tribunal in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ii) M/s Shree Durga Iron and Steel Pvt. Ltd. viii) M/s Agarwal Corporation AO has stated that aforesaid parties supplied material to assessee. Therefore, assessee vide questionnaire dated 11.8.2005, was asked to furnish details and supporting documents in support of genuineness of transactions with aforesaid P.K.Agarwal Group concerns during the year under consideration. AO has stated that meanwhile inquiries were also conducted with P.K.Agarwal Group of concerns to verify genuineness of transaction. That statements of Shri P.K.Agarwal were recorded on 6.1.2005 u/s 133A, on 23.12.2005, and 27.12.2005 u/s 131 of the Act. That the said concerns of P.K.Agarwal Group of Companies have shown purchases of steel material from M/s Laxmi Exports, whose proprietor is Mr. Kokate. That inquiries made with Regional Transport Office (RTO) and transporters who allegedly delivered goods purchased by group concerns of M/s P.K.Agarwal Group of Companies, it was found that many vehicles claimed to be trucks were actually scooters, motorcycles, Maruti 1000, Van, Cars etc. That many owners of trucks denied the movement of trucks from the places mentioned in the bills to the place of delivery. AO ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contended that the beneficiary of such payment is non other than vendor i.e. suppliers and vendors have confirmed having sold goods to the assessee and received payments against such purchases. That there is no allegation by any party to the transaction that money have been given back to the assessee. AO did not accept the contention of the assessee and treated the transaction non-genuine. AO disallowed the claim of depreciation, as claimed by the assessee. Assessee filed appeal before ld. CIT(A). 13.3 Ld. CIT(A) after considering the submissions of assessee made on the lines of submissions made before AO, has held that the said purchases are not genuine. He has stated that M/s Laxmi Exports was in the business of issuing bogus bills. That Shri P.K. Agarwal stated in his statement that he had dealt with one Shri Hiten K.Desai of M/s Laxmi Exports who supplied goods to the assessee and Telephone No. of Shri Hiten K.Desai referred as HKD was found recorded in the mobile of Shri Vinayak Kokate. That Shri P.K.Agarwal in his reply to question No.32 stated that at the time of loading of goods or unloading thereof his men or employees were never present at the site. Shri P.K.Agarwal sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upplied any material, the claim of Shri Agarwal of supplying material to the appellant company remains unsubstantiated. Moreover, some other companies of Shri P.K. Agarwal had also claimed to have supplied certain material to the appellant company in F.Y. 2004-05. This material was claimed to have been purchased by P.K. Agarwal Group of Companies from M/s Rashi International, another proprietary concern of Shri Kokate. However, when the department made enquiries regarding the transportation of these goods, it was found that most of the vehicles through which the material was claimed to have been transported to the appellant company were in fact autorickshaws or vans or scooters or cars or motor cycles. This proves that Shri Kokate is in fact engaged in the business of issuing only bills without delivering any corresponding material. In view of these facts, I uphold the action of the AO in treating the purchases made by the appellant from M/s Durga Iron Steel Co. Ltd and M/s Surajbhan to be in genuine. Out of the total purchases of Rs.8,95,13,227/-, the appellant has capitalized the amount of Rs. 2,56,29,005/ on which depreciation of Rs. 32,03,626/- has been claimed by the appella ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urchased from Durga ansd Surajbhan were dully accounted for in the books of account. Merely, that there was a denial by a third person, with whom assessee has no concerned, the purchases cannot be treated as non-genuine. AR submitted that the disallowance of depreciation should be deleted. 13.6 On the other hand, ld. DR made his submissions justifying the orders of authorities below. He referred to pages 324 to 356 of the paper book which is a copy of statement of Shri Vinayak M Kokate. He referred question No.12 of the statement (page 327 of the paper book) and submitted that Shri Kokate in his statement categorically stated that his three concerns viz M/s Laxmi Exports, M/s Swati International and M/s Rashi International are his concerns which were only providing accommodation entries and no genuine business was conducted in these concerns. Ld. DR submitted that Durga and Surajbhan purchased alleged steel from M/s Laxmi Exports to supply to assessee. Ld. DR referred to the assessment order and submitted that AO on an inquiry found that the trucks No. through which alleged supplies were made were not-genuine. He referred to para 18.13 of the assessment order and submitted that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upplied iron and steel goods to the assessee and his concern made bills on receipts of confirmation of dispatch /receipt of goods. AO made inquiries and found that the trucks through whom goods were supplied at the premises of assessee are the numbers of scooter, van, Maruti-800. The above findings of the AO validly raise doubt and create suspicion that the invoices/bills relied upon for transporting the goods at the assessee's premises are not genuine because steel admittedly could not be supplied through Van or scooters or motorcycles. It is a fact that the entire addition has been made on the basis of the statement of Shri Kokate and no opportunity was given by the department to Shri Kokate. Shri Kokate was not a person with whom the assessee was having any dealing. Assessee has dealt with concerns of Shri P.K.Agarwal for the purchase of alleged material and Shri P.K.Agarwal categorically stated that he had actually supplied goods to the assessee and raised bills. However, Shri P.K.Agarwal admitted that neither he nor any other representative of his concerns viz Durga and Surajbhan were present at the time of loading or unloading of material claimed to be supplied to the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earlier order of the Tribunal dated 28.5.2012 for assessment year 2002-03 and the Tribunal restored the matter to the file of the AO for his fresh adjudication. It was submitted that since facts are identical in this year, matter may be restored to AO. 14.4 We have considered orders of authorities below and submissions of ld. Representatives of both parties. We have considered order of the Tribunal dated 28.5.2012 (supra). We observe that the Tribunal in its order dated 28.5.2012 (supra) has held that neither the assessee, nor the TPO, nor the AO or the CIT(A) have followed any of the method prescribed in the Act and Rules for arriving at Arm's Length Price (ALP). The assessee's case was that the charter hire charges were approved by the D.G.(Shipping) and , hence, it is comparable under "CUP" method. That the TPO took average of the rate published by shipping Intelligence weekly and Drewry Monthly, the rates which are in the public domain and without making any adjustment for variation in capacity, cost, finance, risk etc. computed the ALP. That the ld. CIT(A) took mean of ALP determined by the TPO and the price actually paid by the assessee and determined ALP. Thus, the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee has paid commission in the range of 1.5% to 3% of FOB value of exports of other petrochemical products through its commission agents to unrelated parties. The TPO stated that in his view the average rate of commission 1.67 % can be considered as ALP of the commission payable by assessee to RIB and accordingly worked out the commission payable at ALP by the assessee to RIB at Rs.15,94,592/- and suggested the adjustment of Rs.12,69,944/- (Rs.2864536 - Rs.1594592). The assessee disputed the said adjustment before the First Appellate Authority. However, the ld. CIT(A) has confirmed the action of the AO for making the said adjustment of Rs.12,69,944/- made by AO. Hence this appeal by the assessee. 15.1(i) Ld. AR submitted that the assessee is paying commission to unrelated parties at the rate of 3% and referred pages 603 to 621 of the paper book which contain details of commission paid to various parties. He submitted that even the payment of commission to some of the unrelated parties is more than 3%. Hence, question of applying average rate of commission to consider ALP does not arise particularly when internal Comparable Uncontrolled Price (CUP) can be applied. He submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conceded that it is a fact that assessee has not made the claim of exempt income of interest of Rs.10,81,84,252 on investment of Rs.70 crores in the Deep Discount Bonds of Reliable Internet Services Limited before the AO as well as before the CIT(A). However, he submitted that all the relevant facts are on record and relevant Schedule "F" of Printed Account also proves that the assessee made investment of Rs.345.69 cr. on which interest income is exempt u/s 10(23G) of the Act. He also referred paragraph 12.2 of the assessment order to substantiate his above submissions. He further submitted that it was also certified by the Auditor of the assessee that assessee invested Rs.70 crores in Deep Discount Bonds issued by Reliable Internet Services Limited. The ld. AR relied on the decision of the Hon'ble Apex Court in the case of National Thermal Power Co. Ltd. V/s CIT(1998) 229 ITR 383 (SC) and the decision of Hon'ble Bombay High Court in the case of Pruthvi Brokers and Share Holders Pvt Ltd. (349 ITR 336) and submitted that when relevant facts are on record, and assessee has not made a claim which he could claim as per law, the said claim be considered and be allowed as per law. Ld. D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the assessee in earlier years and accordingly reduced written down value (WDV) of the said plants/units. During the assessment year under consideration, the assessee claimed depreciation on the said plants/units in view of amendment made of granting of depreciation compulsory in terms of Explanation-5 to Section 32 (1) of the Act. The depreciation so claimed was on the basis of WDV as per assessee's record i.e. WDV of the year after which the deprecation had not been claimed by assessee. However, AO allowed depreciation on the basis of reduced WDV arrived at after allowing depreciation to the assessee in the preceding years. Thus, the AO computed the amount of allowable depreciation of Rs.3903,53,90,481/- as against the claim of assessee of Rs.4977,74,24,949/-. The assessee filed appeal before the First Appellate Authority. 19.1 Ld. CIT(A) stated that the legal position as it stood prior to 1.4.2002 i.e. prior to assessment year 2002-03, the claim for depreciation was optional. The amendment made by insertion of Explanation 5 to section 32(1) of the Act is prospective whereby the statute made the granting of depreciation mandatory. Ld. CIT(A) has stated that in the earlier year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been incurred by assessee on expansion of the existing business of the assessee-company. Therefore, the said expenditure has to be considered as regular business expenditure of revenue in nature. He has stated that the various items of expenditure claimed are mainly on employee's cost, utilities, repairs and maintenance, travelling, printing and stationary and other administrative expenses. These expenses are primarily in the nature of revenue expenditure. He has further stated that the expenditure have not been incurred on altogether to a new business but were incurred on expansion /extension of the existing business where there is common management, common office and common control. He has further stated that identical issue was considered in the assessee's own case for preceding assessment year i.e. AY-2002-03 and after due consideration the claim for deduction for similar pre-operational expenses was allowed in the preceding assessment year. Therefore, the ld. CIT(A) has held that pre-operative expenses of Rs. 3,99,96,448/- are allowable as revenue expenditure. Hence, this appeal by the department. 20.3 During the course of hearing, ld. DR relied on the order of AO. However, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as unascertained liability and no adjustment was required to be made to the book profit on that account. Reliance was also placed on the decision of Hon'ble Bombay High Court in the case of CIT V/s Echjay Forgings Pvt. Ltd (251 ITR 15) wherein it was held that provision for doubtful debts did not constitute unascertained liability. Ld. CIT(A) after considering the submissions of assessee and the decision of Hon'ble jurisdictional High Court (supra) directed AO not to add back provision for doubtful debt amounting to Rs.475,50,260/- to the profit shown in the profits and loss account while computing the book profit u/s 115JB of the Act. Hence, this appeal by the department. 21.2 At the time of hearing, ld. DR submitted that above issue was considered by the Tribunal in the preceding assessment year i.e. assessment year 2002-03 and decided the issue in favour of department in view of amendment made by the Finance (No.2) Act 2009 with retrospective effect from 1/4/2001 by inserting clause (i) in Explanation -1 to section 115JB of the Act by reversing the order of ld. CIT(A) and confirmed the action of AO to make addition of the provision for doubtful debts while computing deductio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... net profit as shown in the profit and loss account for the purpose of computation of book profit. It is relevant to state that similar amendment was also made by the said Finance Act with retrospective effect from 1.4.1998 in section 115JA of the Act by inserting a new clause (g) in the Explanation after sub-section (2) of the said Section. Thus, the said amendment to add back the provisions for diminution in the value of any assets is to be added to the net profit as shown in the profit and loss account for the purpose of computation of book profit has been made retrospective from 1st Day of April, 1998 as per section 115JA and whereas as per section 115JB it is made effective retrospectively from 1.4.2001. Since in the assessment year under consideration Section 115JB of the Act is applicable, the said amendment made by inserting a new clause (i) in Explanation (1) to Sub- section (2) of Section 115JB will apply in relation to from the assessment year 2001-02 and for subsequent assessment years while computing book profit for levy of Minimum Alternate Tax. In view of the above amendment it is relevant to state that the decision of the Hon'ble Apex Court in the case of CIT V/s HCL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oubtful debts. On the one hand, the assessee has reduced the amount of Rs.75 Lakhs from the profit and loss account, but not write off/reduced the loans and advances in the Balance Sheet. Hence the decision of the Hon'ble Karnataka High Court does not apply to the case of the assessee before us. 12. In view of the Above, we hold that the decision of the ld. CIT(A) to place reliance on the decision of the ITAT, Mumbai Bench dated 12.2.2010 (supra) and to direct to AO to reduce the said amount by Rs.75 Lakhs while ascertaining the book profit for the purpose of levy of MAT is not justified and on the other hand, it is contrary to the provisions of Act. Moreover, the decision of the Mumbai Bench of the Tribunal dated 4.4.2012 as relied by the ld. DR in the case of M/s. Essar Steel Ltd. (supra), squarely apply to the case before us. Hence, we reverse the order of the ld. CIT(A) by allowing the ground of appeal taken by the Department." 21.4 We observe that recently, the Hon'ble Delhi High Court in the case of Whirlpool Of India Limited and another V/s Union of India (2013) 355 ITR 51(Delhi) has also considered the amendment made in section 115JB(2) by inserting Clause (i) to Explan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made by AO. Hence this appeal by the department. 22.3 At the time of hearing, ld. DR relied on the order of AO and whereas ld. AR submitted that the above issue is covered in the assessee's own case vide order of the Tribunal dated 30.4.2008 for the assessment year 2001-02 and referred pages 54 to 62 of the paper book at which copy of the said order is placed. 22.4 We have considered the submissions of the ld. Representatives of the parties and the orders of authorities below. We have also considered the Tribunal order dated 30.4.2008 in assessee's own case (supra) placed at pages 54 to 62 of the paper book. We observe that the Tribunal has held by following its decision in assessee's sister concern in the case of DCIT V/s M./s Reliance Industrial Infrastructural Ltd in ITA Nos.6111/Mum/2003 (AY-1999-2000) dated 12.3.2007 and the decision of Special Bench of ITAT (supra) that estimation of expenditure for earning dividend income cannot be a subject matter of disallowance. Respectfully following the said order in the assessee's own case (supra), we confirm the order of ld. CIT(A) and reject Ground No.9 of the appeal taken by the department. 23. In Ground No.11, the department ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the facts and in the circumstances of the case and in law, the learned CIT(A) erred in deleting the commission of Rs.8,12,24,327/- paid by the assessee company to its associate viz. Reliance Europe ltd. 24.1 Relevant facts giving rise to this ground of appeal are that the assessee exported Paraxylene and Orthoxylene amounting to Rs.486 crores to its associated entity. The assessee applied, in respect of this exports CUP method to determine ALP. The assessee stated that its associated entity exported these goods to third party at the same price and for this purpose back to back invoices raised by the associated entity on the third party has been provided. The assessee furnished to TPO the list of transactions entered into. The assessee stated that the associated entity is paid a commission at a rate which may be in the range of 2.75 % to 3.75% on the FOB value. Thus, total commission payable in this regard is Rs.14,59,11,966/-. The TPO stated that the assessee was directed to furnish the transaction-wise details of commission paid, working analysis, interest rate and advance payments to the assessee by the associated entity of US $ 115 million , the third party comparable of sal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AE had made an upfront interest free advance payment of USD 115 million, to the appellant to be adjusted against the value of the exports made by appellant to AE; ii) The AE had taken a loan of USD 115 million from Standard Chartered Bank, UK to provide the said export advance to the appellant and had incurred an interest cost @ 1.5% on the said loan taken; iii) The AE undertook the risk of collection of export proceeds from the ultimate customers. Rule 10B(1)(a)(ii) of the IT Rules provides that for determining the arm's length price of an international transaction using the Comparable Uncontrolled Price Method, the comparable uncontrolled price is to be adjusted to account for differences between the international transaction and the comparable uncontrolled transactions which could materially affect the price in the open market. In my considered opinion, the above factors do materially affect the rate of commission paid by appellant as the AE has to be compensated for the interest cost incurred by it exclusively for meeting the export obligation. The effective rate of commission payable to unrelated parties therefore comes at 3.12% (1.45% + 1.67%). Further, since all the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the financial year 31st December 2003, an interest cost of approximately USD 1.67 million was incurred by REL in respect of the said loan. This interest cost incurred by REL worked out to approximately 1.45% of the sales made by the appellant through REL. Since this interest cost was incurred by REL only for the purpose of providing export advance to the appellant under the Master Export contract dated 23rd January 2002, the said 1.45% should also be considered while examining reasonableness of the commission paid to REL vis-a-vis commission paid to unrelated parties. 20.2.1 According to the appellant, while determining the ALP of an international transaction using the Comparable Uncontrolled Price method the comparable uncontrolled price is to be adjusted to account for differences between the international transaction and the comparable uncontrolled transactions which could materially affect the price in the open market. It was urged that such adjusted price should be taken to be the arm's length price of the transaction. It was submitted that, in this way, the rate of commission to unrelated parties would come to 3.12% (1.45% + 1.67%). Further, since REL was also assuming the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee with its associated enterprises REL. Hence Ground No.12 of the appeal taken by department is rejected. 25. Now we take up appeals for assessment year 2004-05 being ITA No.884/Mum/2009 filed by assessee and ITA No.1724/Mum/2009 filed by department. 26. First we first take up the appeal of assessee for our consideration. 27. Ground No.1 of appeal of the assessee reads as under : "1. The ld. CIT(A) erred in rejecting the appellant's alternative plea that there is a deemed payment of sales tax and therefore the amount of Rs.1362,62,91,285/- is allowable as per the provisions of section 43B of the Income Tax Act, 1961, The appellant submits that there is a deemed payment of Sales tax which is allowable u/s 43B of the Act and the CIT(A) ought to have given a decision on this issue in favour of the appellant" 27.1 This ground of appeal is connected with Ground No.1 of appeal taken by department which reads as under : "1. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in deleting the notional sales tax of Rs.1362,62,91,285/- which has been treated as revenue receipt by the AO." 27.2 At the time of hearing, ld. Representatives of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of Rs.7121.94 crores to its subsidiaries as on 31.3.2004 out of its own funds and internal accruals except to the extent of Rs.65,10,77,116/- as per auditor's report filed. The amount of interest on the advances of Rs.65.11 crores works to Rs.3,21,079/-. Accordingly, AO disallowed the said interest. In the first appeal, the assessee contended that the assessee's own funds as on 31.3.2004 stood at Rs.31718.92 crores and the assessee had not taken any specific interest bearing loans for advancing interest free loans to its subsidiaries. The assessee's own funds being far in excess of interest free loans given to subsidiaries and such loans should be considered having been given out of its own funds. It was also contended that the net profit after tax and before depreciation stood at Rs.9197.16 crores. Thus, net profit for the year under consideration is exceeding not only the incremental loans given to the subsidiaries during the year but even far exceeding the total interest free loans of Rs.7121.94 crores given to the subsidiaries as on 31.3.2004. It was contended that in the absence of any direct nexus between the interest bearing borrowed funds and interest free loans given to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld vide para 9.6 that ld. CIT(A) is not justified to make proportionate disallowance of interest as assessee's own funds are far in excess interalia than the investment made which is giving exempt interest income to the assessee, and have held that the disallowance of interest as computed by ld. CIT(A) by applying Rule 8D read with section 14A of the Act is not justified. 29.4 In so far as disallowance of administrative expenses u/s 14A of the Act, we have held vide para 9.7 that it is fair and reasonable to restrict the disallowance to 1% of the exempt income. Since in the assessment year under consideration, the assessee has earned interest income of Rs.451,40,86,320/- which is exempt u/s 10(23G) of the Act and Rs.25,84,41,460/- being dividend income exempt u/s 10(34) of the Act aggregating to Rs.477,25,27,780/-, we restrict disallowance to 1% of the said exempt income which works out to Rs.4,77,25,280/- for the purpose of computing the total income under the normal provisions of Act. In regard to disallowance u/s 14A for computing the book profit u/s 115JB of the Act, we have held hereinabove in para 9.7 that while computing the book profit l u/s 115JB of the Act, the provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) without considering the provisions of sub-section (1B) of Section 80HHC of the Act; 4(f) The ld. CIT(A) erred in holding that all the provision of section 80HHC of the Act applied while reducing the book profits by eligible amount of export profit u/s 115JB of the Act." 30.1 However, these Grounds of appeal are also connected with Ground Nos.5 and 6 of the appeal taken by department. "5. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in directing the AO to exclude the profit allowed as deduction u/s 80IA/80IB in respect of three exporting units only for the purpose of computing deduction u/s 80HHC of the IT Act, 1961." "6. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in directing the AO not to exclude the net income from the telecommunication services from profits of business while computing deduction u/s 80HHC. 30.2 At the time of hearing, it was submitted by ld. Representatives of both the parties that Ground No.4(a) is similar to Ground No.5(a), Ground No.4(b) is similar to Ground No.5(b), Ground No.4( c ) is similar to Ground No.5( c ),Ground No.4(e) is similar to Ground No.5(d) and Ground 4(f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by following its order for assessment year 2002-03 dated 28.5.2012 in assessee's own case (supra) has held in para 11.1 hereinabove to exclude profits allowed as deduction under section 80 IA / 80 IB of the Act of those three exporting units only for the purpose of computing deduction under section 80 HHC of the Act and not to exclude the amount of deduction allowed under section 80 IA / 80 IB of the Act for all the units of the assessee by following the decision of the Hon'ble Jurisdictional High Court in the case of Associated Capsules Pvt. Ltd. vs. DCIT (332 ITR 42), wherein it has been held that section 80IA(9) is not applicable at the stage of computation of deduction u/s 80HHC (3) but is applicable at the stage of allowing deduction u/s 80HHC (1). Hence, the entire deduction allowed u/s 80IA/80IB should not be reduced while computing the deduction u/s 80HHC of the Act in proportionate of export turnover to total turnover. In view of above Ground No.4(d) of the appeal taken by the assessee is allowed and whereas Ground No.5 of the appeal taken by department is rejected. 31. In respect of Ground No.6 of the appeal taken by department, the relevant facts are that during the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... com Marketing Services has been considered as a part of total turnover. He has stated that Telecom Marketing Services is a business activity whereby handsets were procured and sold, various units were setup and full fledged selling activity was carried out for marketing such telecom services. These services by their nature were an organized business activity and their receipts are not similar to the nature of brokerage, commission, interest, rent, charges referred in explanation (baa) of section 80HHC of the Act. Therefore, the telecom services have to be treated as part of the total turnover and no reduction from the profits of the business on this account is required to be made. In view of above, ld. CIT(A) has directed the AO not to exclude the income from telecommunication services (Net) of Rs.40,44,65,878/- from the profit of the business and to include the turnover of Telecommunication services business of Rs.1510,19,78,149/- in total turnover while computing the deduction u/s 80HHC of the Act. Hence this appeal by department. 31.2 During the course of hearing, ld. DR relied on the order of AO and whereas ld. AR supported the order of ld. CIT(A). He submitted that the AO ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conceded that the facts are identical in the assessment year under consideration. 32.2 In view of above submissions of ld. AR and following the earlier order of the Tribunal in the preceding assessment years i.e. assessment year 2002-03 and 2003-04, we confirm the order of ld. CIT(A) by rejecting Ground No.5 taken by assessee. 33. Ground No.6 of the appeal taken by assessee is as under : "6 (a) The ld. CIT(A) erred in confirming the action of AO of treating purchase of goods by appellant from Durga Iron and Steel Ltd (Durga) and M/s Surajbhan Rajkumar Pvt Ltd. (Surajbhan) and M/s Singhal Brothers to the extent of Rs.26,19,32,855/- as non genuine on the basis that M/s Swati International who have supplied goods to them have denied having supplied any such goods. The Appellant submit that it has received goods supplied by the above parties duly supported by documentary evidence and hence on the facts and circumstances of the case purchase of goods from the above two parties cannot be termed as non-genuine. "6 (b) The ld. CIT(A) erred in confirming the disallowance of depreciation of Rs.56,05,345/- on the capitalized value of goods purchased from the above parties i.e. Durga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ives of both the parties submitted that this ground is similar to Ground No.8 of the appeal of assessee and Ground No.10 of the appeal of department for assessment year 2003-04 and whatever decision is taken therein will ipso facto apply to this assessment year as well. 34.3 We have considered the submissions of ld. Representatives of the parties and the orders of authorities below. We agree with ld. Representatives of the parties that the facts and issue are identical to the assessment year 2003-04. The Tribunal has considered this ground of appeal in paras 14.2 to 14.5 and following the order of the preceding assessment year i.e. 2002-2003 as mentioned in para 14.5 hereinabove, we have set aside the orders of authorities below for the reasons mentioned therein and restore the matter to the file of AO with a direction to make a reference to TPO to determine ALP in respect of hire charges of charter-vessels Relchem Isha by a speaking order, after considering such documents that may be filed by the assessee and after giving due opportunity of hearing to the assessee. Hence, Ground No.7 of the assessee's appeal and Ground No.3 taken by department are allowed for statistical purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nces of case and in law. The ld. CIT(A) erred in restricting the allowance of depreciation to Rs.3696,35,88,8236/- as against appellant's claim of Rs.4534,19,85,910/- and thus granting relief of Rs.8,37,83,97,084/-" 38.1 At the time of hearing, ld. Representatives of the parties submitted that this ground is similar to Ground No.2 of the appeal taken by department for assessment year 2003-04 and the decision taken therein will ipso facto apply to this ground of appeal. 38.2 We have considered the above submissions of ld. Representatives of the parties and the orders of authorities below. We observe that this issue has been considered in paras 19 to 19.2 hereinabove and the Tribunal has upheld the order of ld. CIT(A) by following its earlier order for Assessment year 2002-03 that claim of depreciation prior to insertion of Explanation 5 to section 32 (1) of the Act inserted w.e.f.1.4.2002 was optional. Therefore, for the reasons mentioned in para 19.2 hereinabove, we uphold the order of ld. CIT(A) and reject Ground No.2 of the appeal taken by department. 39. In Ground No.4, the department has disputed the order of ld. CIT(A) in deleting the adjustment of Rs.1,27,89,520/- made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is to be worked out not on the basis of regular income but has to be worked out on the basis of adjusted book profit u/s 115JB of the Act. Accordingly, we uphold the order of ld. CIT(A) and reject additional ground of appeal taken by the department. 42. Now we take up the appeals for our consideration for the assessment year 2005-06 being ITA No.885/Mum/2009 filed by assessee and ITA No.1725/Mum/2009 filed by department. 43. Firstly, we take up the appeal of the assessee being ITA No.885/Mum/2009 for our consideration. 44. Ground No.1 of the appeal taken by assessee is as under : "1. The ld. CIT(A) erred in rejecting the appellant's alternative plea that there is a deemed payment of sales tax and therefore the amount of Rs.2094,96,83,925/- is allowable as per the provisions of section 43B of the Income Tax Act, 1961, The appellant submits that there is a deemed payment of Sales tax which is allowable u/s 43B of the Act and the CIT(A) ought to have given a decision on this issue in favour of the appellant" 44.1 This Ground of appeal is connected with Ground No.1 of the appeal taken by department which reads as under : 1. On the facts and in the circumstances of the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subsidiaries during the year under consideration is to the extent of Rs.581.79 crores. AO has stated that, during the assessment proceedings the assessee stated that the assessee had given loans and advances of Rs.7703.73 crores to its subsidiaries as on 31.3.2005 out of its own funds and internal accruals except to the extent of Rs.570 crores/- as per auditor's report filed. The amount of interest on the advances of Rs.570 crores works to Rs.33,05,426/-. Accordingly, AO disallowed the said interest. In the first appeal, the assessee contended that the assessee's own funds as on 31.3.2005 stood at Rs.37673.44 crores and the assessee had not taken any specific interest bearing loans for advancing interest free loans to its subsidiaries. The assessee's own funds being far in excess of interest free loans given to subsidiaries and such loans should be considered having been given out of its own funds. It was also contended that the net profit after tax and before depreciation stood at Rs.12087.18 crores. Thus, net profit for the year under consideration is exceeding not only the incremental loans given to the subsidiaries during the year but even far exceeding the total interest free ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. 46.3 At the time of hearing, ld. Representatives of the parties have categorically stated the findings given in assessment year 2003-04 will be applicable for the assessment year 2004-05 as well. Since, we have held vide para 9.6 that ld. CIT(A) is not justified to make proportionate disallowance of interest as assessee's own funds are far in excess interalia than the investment made which is giving exempt income to the assessee, we have held that the disallowance of interest as computed by ld. CIT(A) by applying Rule 8D read with section 14A of the Act is not justified. 46.4 In so far as disallowance of administrative expenses u/s 14A of the Act, we have held vide para 9.7 that it is fair and reasonable to restrict the disallowance to 1% of the exempt income. Since in the assessment year under consideration, the assessee has earned interest income of Rs.207.36 crores which is exempt u/s 10(23G) of the Act and Rs.20.40 crores being dividend income exempt u/s 10(34) of the Act aggregating to Rs.227.76 crores. Therefore, we restrict disallowance to 1% of the said exempt income which works out to Rs.2,27,76,000/- for the purpose of computing the total income under the normal pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Explanation. Thus amount of profits eligible for deduction u/s 80HHC computed under clauses (a),(b) or (c) of Sub-section (3) or Sub-section (3A) of Section 80HHC as the case may be has to be reduced while computing the book profit of assessee u/s 115JB of the Act. That sub-section (1B) of section 80HHC in no manner curtails the eligible deduction to be reduced from the book profit u/s 115JB of the Act. 47.2 AO did not accept the contention of assessee and stated that operation of section 80HHC itself is suspended from 1.4.2005. Hence there can be no question of considering any eligible amount to be deducted for computing book profit u/s 115JB of the Act, because as per sub-section (1B) of section 80HHC of the Act no deduction shall be allowed in respect of assessment year beginning from 1.4.2005 and in subsequent assessment years. Being aggrieved, assessee filed before the First Appellate Authority. Ld. CIT(A) has also confirmed the action of AO. Hence this appeal before the Tribunal. 47.3 At the time of hearing, ld. Representatives of the parties submitted that above grounds are similar to Ground No.5(d) and 5(e) of the appeal for assessment year 2003- 04 of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The Appellant submits that the cost of the goods purchased from the above parties were capitalized as plant and machinery in AY 2003-04 and were usd during the year under consideration and hence depreciation u/s 32 of the IT Act on such capitalized values of the goods is allowable. 49.1 During the course of hearing, ld. Representatives of both the parties submitted that this ground is similar to Ground No.7 of the appeal of assessee for assessment year 2003-04 and whatever decision is taken in regard thereto, the same will ipso facto apply to this year for above ground. 49.2 We have considered the orders of authorities below and submissions of ld. Representatives of the parties in respect of above ground for assessment year 2003-04. The Tribunal after considering the facts and submissions of ld. Representatives of the parties as mentioned in paras 13.2 to 13.6 of this order, has confirmed vide para 13.7 hereinabove the order ld. CIT(A) that claim of Shri P.K.Agarwal of supplying material to the assessee-company remains unsubstantiated. Therefore the supply of material to the assessee could not be proved and consequently has confirmed disallowance of depreciation claimed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e allowed for statistical purposes. 51. Ground No.8 of appeal taken by the assessee is as under : "8. The ld. CIT(A) erred in confirming the disallowance u/s 92C of the Act of Rs.39,31,461/- in respect of the commission paid to its associate enterprises, Reliance Infocom B.V.(RIB) The appellant submits that it has rightly calculated the value of international transaction by applying the method prescribed u/s 92C(1) of the IT Act and supported by the documentary evidence and hence the disallowance made by AO shall be deleted" 51.1 At the time of hearing, ld. Representatives of both the parties submitted that this ground is similar to Ground No.9 of the appeal of assessee for assessment year 2003-04 and whatever decision is taken therein will ipso facto apply to this assessment year as well. 51.2 We have considered the above submissions of ld. Representatives of the parties and the orders of authorities below. We agree with ld. Representatives of the parties that similar issue has been considered by the Tribunal in preceding assessment year in paras 15.1 to 15.3 of the above order in respect of assessment year 2003-04. Since the facts are identical , we for the reasons ment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 The assessee cited an instance where it itself had paid guarantee commission of 0.25% per annum to ICICI in respect of guarantee provided to it. Without prejudice to the above contention, the assessee submitted to TPO that the same rate may be applied in the instant case also, as the above comparable relates to assessee's own loan transaction within India with the ICICI Bank, Mumbai. 52.5 TPO has stated that assessee has submitted only a comparable in which ICICI Bank, Mumbai granted loan to RIL which is a well established company with well established credentials in India. That the assessee's Associated Enterprises (AE) is based in Germany. That the details with regard to risk profile and the credit profile of its AE, Trevira GmbH with regard to the said loan transaction has not been submitted. Thus, TPO stated that assessee's contention that 0.25% guarantee fee should be applied cannot be accepted as it does not factor in certain essential variables such as place of the loan transaction and the normal range of guarantee fee charged there, the risk profile and the credit profile of the parties involved etc. Similarity of geographical region is one of the cardinal principles in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dustries Ltd 0.25% pa 2 6.08.2007 HDFC Bank Ltd Reliance Industries Ltd 0.35% pa 3 4.10.2007 ICICI Bank Ltd Reliance Gas Transportation Infrastructure Ltd 0.25% pa 4 10.12.2007 Canara Bank Reliance Gas Transportation Infrastructure Ltd 0.50% pa 5 11.12.2007 ABN AMRO Bank Reliance Industries Ltd 0.60% pa 6 12.03.2005 Standard Chartered Bank Reliance Industries Ltd 0.25% pa 7 27.4.2005 Bank of America Reliance Industries Ltd 0.25% pa 8 18.12.2004 HSBC Reliance Industries Ltd 0.25% pa 9 5.2.2008 Bank of America Trevira GmbH 0.50% pa 10 6.2.2008 Commerzbank Trevira GmbH 0.65% pa 52.6 It was also contended in the alternative that guarantee commission in the given set of facts cannot be considered more than 0.25% p.a. which is comparable with the rates prevailing in the market in similar kind of guarantees given by bank. 52.7 Ld. CIT(A) considered the submissions of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion is now considered to be "international transaction", the ld. AR submitted that if any adjustment is to be made the guarantee commission could be considered at the lowest rate paid by assessee i.e. 0.25% and Rule 10B(1)(a) does not permit for taking the average rate while applying CUP method for making any adjustment on account of transactions with associated enterprises. Ld. AR submitted that rate of guarantee of 2.5% as considered by TPO is in respect of the parties where both are outside India and relates to furnishing guarantee in case of a finance company. He submitted that charging of guarantee commission depends on various factors. Ld. AR submitted that business strategy should be taken into consideration while making any Transfer Pricing adjustment in respect of such transaction. Hence, said rate of 2.5% is not comparable and the ld. CIT(A) should have taken the rate of guarantee commission at 0.25% as ALP which is comparable for similar kind of guarantee given by bank in India. 52.9 On the other hand, ld. DR while supporting the order of TPO submitted that the transaction of giving guarantee by the assessee to its Associate Enterprise is "International Transaction" a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve charged a consideration for it by the assessee. Now, the question arises as to what should be the rate of guarantee commission at ALP. Ld. CIT(A) has given the details of guarantee commissions charged by bank in India for giving non-funded guarantees to third party and it varies from 0.25% to 0.6% per annum. On the other hand, TPO has compared the rate bearing risk at 2.5% by considering an external comparables of a finance company. However, it is a fact that while applying the external comparables, the TPO has not brought out any thing on record that under which terms and conditions and circumstances the said public company has charged 2.5% rate of guarantee commission for providing guarantee on behalf of the Finance Company. The charging of a guarantee commission depends upon transaction to transaction and mutual understanding between the parties. There may be a case where bank may not charge any guarantee commission, depending upon it's evaluation of relationship with a particular client. Therefore, universal application of rate of 2.5% for guarantee commission cannot be considered a market rate as it largely depends upon the terms and conditions on which loan has been given, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtment reads as under : "2. On the facts and in the circumstances of case and in law. The ld. CIT(A) erred in restricting the allowance of depreciation to Rs.30,39,12,73,741/- as against appellant's claim of Rs.36,80,84,20,643/- and thus granting relief of Rs.6,41,71,41,902/- 55.1 At the time of hearing, ld. Representatives of the parties submitted that this ground is similar to Ground No.2 of the appeal taken by department for assessment year 2003-04 and the decision taken therein will ipso facto apply to this ground of appeal. 55.2 We have considered the above submissions of ld. Representatives of the parties and the orders of authorities below. We observe that this issue has been considered in paras 19 to 19.2 hereinabove and the Tribunal has upheld the order of ld. CIT(A) by following its earlier order for Assessment year 2002-03 that claim of depreciation prior to insertion of Explanation 5 to section 32 (1) of the Act inserted w.e.f.1.4.2002 was optional. Therefore, for the reasons mentioned in para 19.2 hereinabove, we uphold the order of ld. CIT(A) and reject Ground No.2 of the appeal taken by department. 56. In Ground No.4, the department has disputed the order of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (A) and the said appeals were pending before the ITAT. Being aggrieved, the assessee filed appeal before the first appellate authority. 57.2 Learned CIT(A) after considering the submission of the assessee that learned CIT(A), Ahmedabad vide its two orders, both dated 9.5.2007 had held that transmission charges are incidental in the process of supplying goods and part of the purchase cost and not covered by section 194C of the Act. Accordingly the orders passed by ACIT, TDS Circle, Ahmedabad u/s. 201(1A) both dated 21.8.2006 were dismissed. Hence, learned CIT(A) directed the Assessing Officer to allow the payment made by the assessee of Rs. 1,59,62,782/- towards transportation of gas by GAIL (I) Ltd. as section 194C of the Act does not apply to the purchase of natural gas from GAIL (I) Ltd. by the assessee. Hence this ground of appeal by the department. 57.3 At the time of hearing learned Departmental Representative relied on the order of the Assessing Officer. Whereas learned AR supported the order of learned CIT(A). He submitted that on similar facts the identical issue in the case of Indian Petrochemicals Corporation Limited (Now merged with Reliance Industries Ltd.) Vs. Inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt. For this purpose, all statutory approvals shall be obtained by GAIL (I) Ltd. That the title to the gas shall pass from GAIL (I) Ltd. to the assessee at the point of delivery of gas to the assessee. The delivery point is explained in the Article to be at the downstream flange of the pipeline at the outlet of the Gas Metering Station. That the cost of the gas as well as the transportation charges are to be fixed or determined by the Government of India which is likely to be market related in accordance with the current policy of the liberalization and the assessee shall pay to GAIL the price and transportation charges as determined by the Government. 57.6 During the course of hearing it was submitted that similar agreement is applicable in the case before us i.e the agreement which had been considered by the Tribunal in its order dated 20.10.2010 (supra). 57.7 We observe that in the said case, the Assessing Officer took the view that the assessee ought to have deducted tax from the transmission charges in view of sub- clause (c) of Explanation (iv) below section 194C and since the assessee did not deduct the tax, the Assessing Officer treated the assessee in default u/s. 201( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the outlet of the Gas Metering Station in the assessee's premises), would become part of the amount for which the gas was sold by it to the assessee and would thus become price for the gas, from which no tax was deductible under section 194C of the Act. 57.8 In view of the above decision of the Tribunal (supra) and considering the facts of the case before us, we hold that the title to the gas has passed from GAIL to the assessee at the point of delivery of the gas to the assessee and the delivery point is at the downstream flange of the pipeline at the outlet of the Gas Metering Station and up to that point the entire risk in relation to the gas was on GAIL. Therefore the title passed to the assessee only after the gas crossed the downstream flange of the pipeline at the outlet of the Gas Metering Station. Hence transportation charges have to be incurred by GAIL in making the gas available to the assessee at the place of sale and that in the invoice the transmission charges are separately shown but it is an addition to the cost of the goods to GAIL. Hence transmission charges constitutes a component of the price of the gas to the assessee. 57.9 In view of the above and respe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /s 43B of the Act. Hence Ground No.1 of the appeal taken by assessee is also rejected. 61. Ground No.2 of assessee's appeal comprises of four parts vide which assessee has disputed the order of ld. CIT(A) in disallowing Rs. 56.88 crores u/s 14A read with Rule 8D of the Income Tax Rules, 1962 being expenditure incurred in relation to earning income exempt u/s 10(23G) and 10(34) of the Act while computing book profit as well as profit under the normal provisions of the Act. The assessee has also in the alternative ground disputed that the disallowance made by AO is excessive and unreasonable. 61.1 At the time of hearing, ld. Representatives of both the parties submitted that the above ground is similar to Ground No.4 of the appeal for assessment year 2003-04 and the submissions made in regard thereto and the decision that may be taken, will ipso facto apply to this ground of appeal. 61.2 We observe that the above ground has been considered by the Tribunal vide paras 9.1 to 9.8 hereinabove. The Tribunal vide para 9.6 by following its earlier order dated 28.5.2012 in assessee's own case for preceding assessment year 2002-03 on similar facts has held that proportionate disallowanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st the assessee in the preceding assessment year i.e. AY-2002-03 by the Tribunal in assessee's own case. Ld. AR also conceded that the facts are identical in the assessment year under consideration. 62.2 In view of above submissions of ld. AR and following the earlier order of the Tribunal in the preceding assessment years i.e. assessment years 2002-03 and 2003-04, we confirm the order of ld. CIT(A) by rejecting Ground No.3 of the appeal taken by assessee. 63. Ground No.4 of the appeal taken by assessee is as under : "4 The ld. CIT(A) erred in confirming the disallowance of depreciation of Rs.31,53,569/- on the capitalized value of goods purchased from Durga Iron and Steel Ltd and Surajbhan Rajkumar Pvt. Ltd. AY-2003-04. The Appellant submits that the cost of the goods purchased from the above parties were capitalized as plant and machinery in AY 2003-04 and were used during the year under consideration and hence depreciation u/s 32 of the IT Act on such capitalized values of the goods is allowable. 63.1 During the course of hearing, ld. Representatives of both the parties submitted that this ground is similar to Ground No.7 of the appeal of assessee for assessment year 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e above submissions of ld. Representatives of the parties and orders of authorities below. We agree with the ld. Representatives of the parties that similar issue has been considered by the Tribunal in preceding assessment year i.e. assessment year 2005-06 in paras 52.2 to 52.12 hereinabove. Since the facts and the issue in this assessment year i.e assessment year 2006-07 are identical to assessment year 2005-06, we for the reasons mentioned in paras 52.10 to 52.12 hereinabove uphold the order of ld. CIT(A) to charge guarantee commission at the rate of 0.385% being ALP for the guarantee given by the assessee to Bank of America on behalf of its AE Trivera GmbH. Hence Ground No.5 of the appeal taken by assessee as also Ground No.5 of the appeal taken by department, both are rejected. 65. Now we take up the appeal filed by the department being ITA No.2813/Mum/2009 to deal with the remaining grounds of appeal. 66. Ground No.2 taken by department reads as under :- "2. On the facts and in the circumstances of case and in law. The ld. CIT(A) erred in restricting the allowance of depreciation to Rs.26,38,22,32,233/- as against appellant's claim of Rs.29,43,27,07,267/- and thus granti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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