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TMI Blog2017 (10) TMI 588X X X X Extracts X X X X X X X X Extracts X X X X ..... contemplated u/s 14A read with Rule 8D of the Income tax Rules 1962. Respectfully following the Special Bench decision, we hold that no separate disallowance should be made under section 14A in the computation of book profits under section 115JB of the Act. Additional depreciation under section 32(1)(iia) - Held that:- The word “shall” is not always conclusive of the mandatory nature and can be read as the word “may” in certain circumstances. However, when we consider the text and the context of the word “shall” as employed in clause (iia), there remains no doubt whatsoever that the grant of additional claim at the rate of 20% has necessarily to be allowed as deduction under clause (ii). Once the claim of additional depreciation under clause (iia) is to be allowed as deduction under clause (ii), a fortiori, the command of Explanation 5 which applies to clause (ii) automatically becomes applicable to such a claim of additional depreciation. Once we hold that the claim for additional depreciation is allowable as deduction under Section 32(1)(ii), the writ of Explanation 5 providing for allowing depreciation mandatorily, gets magnetized. Explanation 5, even if placed under clause (ii) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... receive services from its AE in the exploration, development and production of oil and such services are not duplicate in nature. When the fact of the assessee having received the services, which are not duplicate in nature, is proved, the authorities cannot determine nil ALP of the payment made for such services. Determination of the ALP of the international transaction of ‘Receipt of services’ - assessee aggregated the international transactions and determined ALP on the basis of TNMM - Held that:- By now, it is fairly settled through a catena of decisions that the CUP is the most appropriate method to determine the ALP of an international transaction because it seeks to compare the price charged or paid for property transferred or services rendered, provided proper comparables are available. It is under this method alone that the price charged or paid is directly compared with the price charged or paid in an uncontrolled comparable transaction. The remaining four specific methods seek to make comparison of the price charged or paid indirectly through the medium of normal profit arising in a comparable uncontrolled transaction. Further, the CUP method is a transaction specific me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ormity with the view of the higher appellate authority for the preceding year, available before them at the time of decision. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such proceedings. Not allowing credit for tax deducted at source and advance tax as claimed in the return of income - Held that:- AO is directed to allow necessary credit for the advance tax paid by the assessee and TDS paid on its behalf, after necessary verification. X X X X Extracts X X X X X X X X Extracts X X X X ..... 8D(2)(iii) towards expenses at ₹ 5,89,98,005/-. Thus, total disallowance under Section 14A read with Rule 8D was worked out at ₹ 15,53,23,782/-. The assessee remained unsuccessful before the Dispute Resolution Panel (DRP). The amount of disallowance was added in the computation of income under normal provisions as well as under MAT provisions under section 115JB of the Act. The assessee is aggrieved against this disallowance. 3. We have heard both sides and perused the relevant material on record. The first major issue taken by the learned Authorized Representative is against the non-recording of satisfaction by the Assessing Officer in terms of section 14A(2) of the Act. The learned Authorized Representative relied on certain decisions in support of such argument. Without discussing such decisions, we are in full agreement with the contention that the recording of satisfaction is a pre-condition and sine qua non for making any disallowance under Section 14A. Sub-section (2) of section 14A clearly stipulates that the Assessing Officer shall determine the amount of expenditure incurred in relation to exempt income as per Rule 8D if he, having regard to the accounts of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7. In that decision, the Hon'ble Court had observed that the monies received as, share capital, as term loans, as working capital loans, as sale proceeds etc do not have any different colour. Whatever are the receipts in business that have the colour of business receipts and have no separate identification. Thus, while borrowed fund and own fund were existing simultaneously with the company, there was no way that the assessee could reach the conclusion that while making the said investment, only part of own funds was picked and borrowed funds were left untouched. Monies from different sources merge into a common pool. Just like upon picking wafer in a bucket from a pool, it is not possible to determine whether its source is rain or an inflowing stream, similarly it is not possible to pinpoint whether money for the said investment was picked from one specific source only, to the exclusion of other sources. Since own funds and borrowed funds existed simultaneously, part of the invested money can be attributed to have been sourced from borrowed interest bearing funds." 5. On going through the above extraction from the assessment order, it is abundantly clear that the Assessing Offic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ii) is that the interest relatable to investments/securities yielding exempt income is to be disallowed. 8. At this juncture, it is relevant to note that section 36(1)(iii) provides for deduction of interest of the amount of interest paid in respect of capital borrowed for the purpose of business or profession. The essence of this provision is that the interest should be allowed so long as the capital borrowed, on which such interest is paid, is used for the purpose of business or profession. If, however, an assessee is having its own interest free surplus funds and such funds are utilised as interest free advances even for a non-business purpose, there cannot be any disallowance of interest paid on interest bearing loans. The Hon'ble Bombay High Court in CIT vs. Reliance Utilities and Power Ltd. (2009) 313 ITR 340 (Bom), has held that where an assessee possessed sufficient interest free funds of its own which were generated in the course of relevant financial year, apart from substantial shareholders' funds, presumption stands established that the investments in sister concerns were made by the assessee out of interest free funds and, therefore, no part of interest on borrowi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vestment and at the same time the assessee had raised a loan, it can be presumed that the investments were from the interest free funds available". Thereafter, the judgment of the Hon'ble Supreme Court in the case of East India Pharmaceutical Works Ltd. Vs. CIT (1997) 224 ITR 627 (SC) and also the judgment of the Hon'ble Calcutta High Court in Woolcombers of India Ltd. Vs. CIT (1981) 134 ITR 219 (Cal) were considered. It was finally concluded that: "The principle, therefore, would be that if there are funds available both interest free and overdraft and/or loans taken, then a presumption would arise that the investments would be out of interest free funds generated or available with the company, if the interest free funds were sufficient to meet the investment". Consequently the interest was held to be deductible in full. From the above judgment, it is manifest that there can be no presumption that the shareholders' fund of a company was utilized for the purchase of fixed assets. If an assessee has interest free funds as well as interest bearing funds at its disposal, then the presumption would be that investments were made from interest free funds at the disposal of the assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as it may, we are not so much concerned with the question as to whether or not proceeds from IPO were utilized for the purposes of making investments in securities yielding exempt income. Since the investments in securities fetching exempt income is far less than the amount of Shareholders' funds not only at the end of the Financial year 2010-11 under consideration but even in the earlier years, whose Annual reports have been placed on record, as the sequitur, such securities are held to have been purchased from the interest-free Shareholders' fund. Ergo, we are satisfied that the disallowance under rule 8D(2)(ii) at ₹ 9.63 crore is not sustainable. The same is directed to be deleted. 12. Now, we turn to the last part of the disallowance made under rule 8D(2)(iii). This part of the Rule provides that an amount equal to 1/2 % of the average of the value of investment, income from which does not or shall not form part of the total income, shall be disallowed. The Assessing Officer has computed this amount of disallowance at ₹ 5,89,98,005/-. We have noticed above that the assessee furnished quotation from JM Financial Services stating fee of ₹ 18 lakh as a basis of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny and all the relevant decisions of the company are taken by the Board of Directors. Here is a case in which the assessee is holding investments to the tune of ₹ 1179.96 crore and has earned exempt income of ₹ 64.76 crore and there is a contention that Board of Directors was not involved in any of the decisions qua such Investments. This contention is obviously not acceptable. Further, the assessee determined cost per employee at ₹ 89.00 lakh and the amount disallowable under Section 14A at ₹ 13.35 lakh, being, 15% of the cost of one employee. This means that the claim of the assessee is that out of its 244 employees, only one person was involved in the investments and dividend income and that too, only 15% of the time of that single person was utilized in such activity. In other words, out of 244 employees, 243 employees in full and 85% of the remaining employee were looking after the regular operations of the business and only 0.15% of one employee was attending to such huge investments in terms of value and volume. In our considered opinion, this computation of disallowance made by the assessee at ₹ 13.35 lakh is absolutely devoid of any merit and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... culation of such disallowance. This computation of disallowance, having been made in terms of rule 8D(2)(iii), is held to have rightly made. The assessment order making disallowance of ₹ 5.89 crore u/s 14A under the normal provisions of the Act is upheld pro tanto. 17. As regards the adding back of the amount of disallowance under section 14A in the calculation of 'book profit' under section 115JB of the Act, we find that the issue is no more res integra in view of the decision of the Special Bench of the Delhi tribunal in ACIT Vs. Vireet Investments (P) Ltd. dated 16.6.2017 holding that the computation under clause (f) of Explanation 1 to section 115JB(2) is to be made without resorting to the computation as contemplated u/s 14A read with Rule 8D of the Income tax Rules 1962. Respectfully following the Special Bench decision, we hold that no separate disallowance should be made under section 14A in the computation of book profits under section 115JB of the Act. The impugned order is set aside to this extent. 18. Next issue raised in this appeal is against the forcefully allowing of claim of additional depreciation amounting to ₹ 538,66,55,780/- under section 32(1)(ii ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account of depreciation has to be mandatorily allowed under section 32(1)(ii) of the Act notwithstanding the fact that assessee claims or does not claim it in the computation of its total income. 22. The ld. Authorized Representative contended that the Explanation does not cover the assessee's case inasmuch as the amount of additional depreciation originally claimed but subsequently withdrawn by the assessee is an incentive and not depreciation, and the same is admissible under section 32(1)(iia). It was submitted that Explanation 5 operates only for the purposes of section 32(1)(ii) and not section 32(1)(iia) of the Act. 23. In order to appreciate the contention, it will be significant to note the prescription of the relevant parts of section 32 as under : - "Depreciation. 32. (1) In respect of depreciation of- (i) buildings, machinery, plant or furniture, being tangible assets; (ii) know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998, owned, wholly or partly, by the assessee and used for the purposes of the business or pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s deduction under clause (ii)". It ergo becomes overt that the claim for additional depreciation as provided under clause (iia) has to be allowed as deduction under clause (ii). So, for all practical purposes, the claim for additional depreciation has to be considered and allowed as deduction only under clause (ii) and there is no separate provision for allowing additional depreciation under clause (iia) so as to make the prescription of Explanation 5 inoperative. 26. We agree with the ld. Authorized Representative that the word "shall" is not always conclusive of the mandatory nature and can be read as the word "may" in certain circumstances. However, when we consider the text and the context of the word "shall" as employed in clause (iia), there remains no doubt whatsoever that the grant of additional claim at the rate of 20% has necessarily to be allowed as deduction under clause (ii). Once the claim of additional depreciation under clause (iia) is to be allowed as deduction under clause (ii), a fortiori, the command of Explanation 5 which applies to clause (ii) automatically becomes applicable to such a claim of additional depreciation. Once we hold that the claim for addition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xtracts from the Annual Reports of ONGC and Oil India Ltd., which have been reproduced on page 15 of the assessment order. The Assessing Officer observed that there are two stages in the production of mineral oils, where capital expenditure is incurred, namely, Exploration and Development. He identified costs on activities of Geological and Geophysical studies; and Dry Well contribution under the Exploration stage, as chargeable to Profit and loss account. On the other hand, Costs on drilling and equipping exploratory and appraisal wells; and Cost of Drilling Exploratory type Stratigraphic test wells under the Exploration stage were held to be a part of capital work in progress. All the activities of the Development stage, such as, Gaining access/preparing for well locations for Drilling; Drilling and Equipping development wells, cost of platforms, well material and equipments etc.; and Construction/installation of production facilities, flow line, separators and heaters etc. were found to be part of capital work in progress. He opined that under the "Successful efforts method" in respect of a cost centre, capital work in progress is to be capitalized when the well is ready to comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted from Schedules 8A and 8B to the Financial statements of the assessee for the year under consideration, a copy of which is available at page 145 of the paper book, as under:- (Amounts in Rs.'000) As at March 31, 2011 As at March 31, 2010 Schedule - 8A Cost of Producing facilities (net) Opening Balance 5,060,388 Net Balance acquired on implementation of the Scheme 4,696,093 Add: Transferred from exploration, development and capital work in progress Add: Additions 563,302 234,402 14,898,921 5,386,039 Less: Depletion (3,326,581) (325,650) (Amounts in Rs.'000) As at March 31, 2011 As at March 31, 2010 Schedule-8B Exploration, development and capital work in progress Opening balance 42,788,683 540,299 Net balance acquired on implementation of the Scheme - 39,748,148 Add: Additions 17,657,095 4,756,902 Less: Transferred to cost of producing properties (9,275,231) (455,544) Less: Transferred to fixed assets (30,902,650) (259,542) Less: Unsuccessful exploration costs (1,510,447) (1,621,581) Closing Balance 18,647,450 42,708,682 30. It can be seen from Schedule 8-B that the assessee incurred exploration and development costs during the year am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 692,514,047 Block CB S No. Particulars Production facilities Cost (other than Site Restoration Cost) - CIL's Share (INR) Site Restoration Cost -CIL's Share (INR) Total (INR) A Net Amount to be depleted 970,946,854 27,978,281 998,925,136 B Opening Reserve 4,875,654 4,875,654 D Production 1,630,719 1,630,719 E UOP (A/D) 199.14 5.74 F Depletion Charge for 2010-11 (C*E) 324,744,450 9,357,661 334,102,111 Net amount to be depleted Total for all Blocks (Total of sr no.A) 9,149,633,058 5,749,287,852 4,898,920,910 Depletion charge Total for all Blocks (Total of sr. No. F) 2,175,949,119 1,150,631,538 3,326,580,657 31. The AO computed the rate of Depletion (Depreciation) under the straight line method at 22.32% by dividing the amount of Depletion amounting to ₹ 332.65 crore with the Gross amount of cost of producing facilities before such Depletion at ₹ 1489.89 crore. It can be noticed from the above Table that the amount of Depletion charges for all the three blocks totaling ₹ 332.65 crore has been worked out from the Production facilities costs and Site restoration costs. For example, closing Production facilities cost in respect of Bl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onwards of the paper book. The Guidance note states that 'Depreciation' also includes 'Depletion of natural resources' through the process of extraction or use. It recognizes two methods for calculating the amount of Depletion viz., Unit of production (UOP) method or Successful Efforts Method and Full cost method. Under the former, only those costs that lead directly to the discovery, acquisition or development of specific, discrete oil and gas reserves are capitalized and become part of the capitalized costs of the costs centre. Costs that are known at the time of incurrence to fail to meet this criterion are generally charged to expense in the period they are incurred. Amount of depreciation/depletion is calculated on the basis of the number of production or similar units expected to be obtained from the asset by the enterprise. Paras 40 to 43 of the Guidance note provides the mechanism for calculating the amount of depreciation/depletion under the UOP method. Paras 41 and 42 of the Note, which are more relevant for our purpose, read as under:- "41. The depreciation charge or the UOP charge for the acquisition cost within a cost centre is calculated as under: UOP charge for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tently charging the amount of Depletion in its annual accounts under UOP basis. No such disallowance on this score has been made in the past. For the immediately preceding year, the AO did raise a specific query on the amount of Depletion charged in accounts, which was responded by the assessee. No adverse inference has been drawn on this issue in the assessment made u/s 143(3) of the Act. The assessee also relied before the AO on the industry practice in charging Depletion in the accounts on UOP basis, which has been reproduced on pages 14 and 15 of the assessment order. This has not been controverted by the AO in any manner. Rule of consistency requires that a stand consistently followed by the assessee and accepted by the Revenue should not be called in question in later years in the absence of any change in factual or legal position. Once the Revenue has throughout accepted the calculation of Depletion by the assessee under the UOP method in the earlier years, there was no logic in deviating from the same in the instant year. 37. The ld. DR vehemently relied on the judgment of the Hon'ble Delhi High Court in Krishak Bharati Cooperative Ltd. VS. DCIT (2013) 350 ITR 24 (Del) in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... done by the other players in the same industry. In such circumstances, we find it difficult to accept the argument of the ld. DR that the assessee should not have followed such recommended method of Depletion. A fortiori, there is nothing wrong with the assessee following UOP for recording Depletion in its Annual accounts. Thus the judgment in the case of Krishak Baharti (supra) does not bail out the case of the Revenue as the action of the assessee in following the UOP method is not contrary either to the statutory provisions of the Companies Act, 1956 or the Guidance Note. 39. It is significant to note that the Assessing Officer has not pointed out any infirmity in the amount of Depletion calculated by the assessee at ₹ 334.10 crore in accordance with the Guidance Note. Alteration to such amount has been made only in the computation of 'book profit' u/s 115JB by noticing that the amount of Depletion calculated by the assessee under the UOP method gives rate of depreciation of 22.32%, whereas Schedule XIV to the Companies Act provides rate of depreciation under the SLM at 5.28%. In other words, the AO disputed the percentage of Depletion at 22.32% without questioning the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of payment of dividend and has no bearing on the preparation of Profit and Loss account in accordance with Parts II and III of the Schedule VI to the Companies Act, which is the requirement of section 115JB of the Act. 43. Even if this Circular is presumed to be operating to Parts II and III of Schedule VI of the Companies Act, it will still not come in the way of granting higher depreciation for calculating profit u/s 115JB of the Act. The reason is that Circular No. 2 of 1989 dt. 7th March, 1989 issued by the Company Law Department permits charging depreciation at rates higher than those prescribed under Schedule XIV to the Companies Act. Para 1 of the said circular reads as under: "1. Can higher rates of depreciation be charged ?-It is stated that Sch. XIV clearly states that a company should disclose depreciation rates if they are different from the principal rates specified in the Schedule. On this basis, it is suggested that a company can charge depreciation at rates which are lower or higher than those specified in Sch. XIV. It may be clarified that the rates as contained in Sch. XIV should be viewed as the minimum rates and, therefore, a company shall not be permitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . However, what is significant to note is that the Hon'ble Supreme Court made these observations while directing the Registry to place the civil appeal before the Hon'ble Chief Justice of India for appropriate directions as the matter needs reconsideration by a larger bench. In other words, this is simply a referral order for consideration of the issue by a larger bench and not an enunciation of law by the Apex Court. The ld. AR placed on record a report pointing out that the above appeal referred to a larger bench in Dynamic Orthopaedics is still pending before the Hon'ble Supreme Court. The position, which therefore, emerges is that the decision in the case of Malayala Manorama (SC)(supra) cannot be construed as overruled. It still holds the field as a binding precedent. 47. Once higher rates of depreciation are permissible and the fact that the AO converted the amount of Depletion charged by the assessee under the UOP method to the rate under Straight line method, which turned out to be a rate higher than that prescribed under Schedule XIV, Circular dated 7.3.1989 will regularize the claim of depreciation at higher rate under the straight line method. Thus the reliance of the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounts including profit and loss account for such financial year or part of such financial year falling within the relevant previous year. Explanation 1.-For the purposes of this section, "book profit" means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (2), as increased by- (a) to (i) if any amount referred to in clauses (a) to (i) is debited to the profit and loss account, and as reduced by,- (i) to (viii)' (emphasis supplied by us) 49. Sub-section (2) of section 115JB of the Act provides that every company shall, for the purposes of this section, prepare its Profit & Loss Account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act. Explanation 1 to this sub-section provides modus operandi for calculating 'book profit.' It states that 'book profit' means 'the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (2) as increased by' certain items given in the Explanation, if any of them has been considered in the Profit & Loss Account, and as reduced by certain items set out in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the income under s. 115J has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The AO thereafter has the limited power of making increases and reductions as provided for in the Explanation to the said section. To put it differently, the AO does not have the jurisdiction to go behind the net profit shown in the P&L a/c except to the extent provided in the Explanation to s. 115J. 51. The Hon'ble Apex Court dealt with section 115JA in CIT vs. HCL Comnet Systems and Services Ltd. (2008) 305 ITR 409. It reproduced and relied on the relevant parts of its earlier decision in Apollo Tyres (supra) delivered in the context of section 115J of the Act. In the later judgment, their Lordships held that : 'the AO has to accept the authenticity of the accounts maintained in accordance with the provisions of Part II and Part III of Sch. VI to the Companies Act, which are certified by the auditors and passed by the company in the general meeting. ……The AO does not have the jurisdiction to go beyond the net profit shown in the P&L a/c except to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le VI of the Companies Act. Natural corollary, which, therefore, follows is that the Profit and loss account has to be necessarily drawn in accordance with Parts II and III of Schedule VI and if it does not accord with the same, then the AO can definitely bring it in line with the same. Once net profit has been so determined, then the AO has no power to make adjustments to such profit, other than those set out in the Explanation. 54. When we consider the ratio decidendi of the above referred three judgments of the Hon'ble Supreme Court and also the Special Bench, it is found that a common thread which runs through sections 115J, 115JA and 115JB is that the AO cannot tinker with the amount of net profit declared by the assessee in its Profit and loss account as a starting point for calculating 'book-profit', once the statutory auditors have certified it to be in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act and such accounts have been approved by the company in its general meeting and thereafter accepted and registered by the Registrar of Companies. However, such amount of net profit as determined in a uniform manner in all the three section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 (1 of 1956).] Explanation.-For the purposes of this section, "book profit" means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (1A)], as increased by- ……………… (2)…………….' 'Deemed income relating to certain companies. 115JA. (1) Notwithstanding anything contained in any other provisions of this Act, where in the case of an assessee, being a company, the total income, as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1997 but before the 1st day of April, 2001 (hereafter in this section referred to as the relevant previous year) is less than thirty per cent of its book profit, the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to thirty per cent of such book profit. (2) Every assessee, being a company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 210 of the Companies Act, 1956. When we consider the language of first proviso to section 115JB(2), it clearly emerges that except for addition of '(i) the accounting policies' and '(ii) the accounting standards adopted for preparing such accounts including profit and loss account', there is no material difference between first proviso to section 115JA(2) and first proviso to section 115JB(2). First proviso to section 115JB also provides that while preparing the Profit & Loss Account, not only the methods and rates adopted for calculating the depreciation, but also the accounting policies and accounting standards etc. shall also be the same as have been adopted for the purpose of preparing such accounts including profit and loss account as laid before the company at its Annual General Meeting in accordance with the provisions of section 210 of the Companies Act. The second proviso to section 115JA is not material for our purpose which deals with a situation in which a company adopts financial year under the Companies Act, which is different from the previous year under the Income-tax Act, 1961. Be that as it may, even the language of second proviso under section 115JA is si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... levant parts of section 210 of the Companies Act, as under:- '210. Annual accounts and balance sheet (1) At every annual general meeting of a company held in pursuance of section 166, the Board of directors of the company shall lay before the company- (a) a balance sheet as at the end of the period specified in sub-section (3); and (b) a profit and loss account for that period. (2) In the case of a company not carrying on business for profit, an income and expenditure account shall be laid before the company at its annual general meeting instead of a profit and loss account, and all references to "profit and loss account", "profit" and "loss" in this section and elsewhere in this Act, shall be construed, in relation to such a company, as references respectively to the "income and expenditure account", "the excess of income over expenditure", and "the excess of expenditure over income". (3) to (6) ………' 59. It is clear from the language of sub-section (1) of section 210 of the Companies Act that a Profit & Loss Account shall be prepared and placed before a company at every Annual General Meeting. The relevant part of section 211 of the Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the provisions of this Part shall apply to the income and expenditure account referred to in sub-section (2) of section 210 of the Act. Clause 2 of Part II states that the Profit & Loss Account shall disclose the result of the working of the company and also every material feature. Clause 3 of Part II provides that the Profit & Loss Account shall set out various items relating to the income and expenditure of the company arranged under the most convenient heads, and, in particular, shall disclose the following information in respect of the period covered by the account. There are (i) to (xv) subclauses of clause 3 of Part II. Sub-clause (iv), which is relevant for our purpose, reads as under:- "(iv) The amount provided for depreciation, renewals or diminution in value of fixed assets. If such provision is not made by means of a depreciation charge, the method adopted for making such provision. If no provision is made for depreciation, the fact that no provision has been made shall be stated and the quantum of arrears of depreciation computed in accordance with section 205(2) of the Act shall be disclosed by way of a note." 61. Then, there are other clauses of Part II of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red or paid by a company for any financial year except out of the profits of a company for that year arrived at after providing for depreciation in accordance with the provisions of sub-section (2).' Sub-section (2) states that the depreciation shall be provided, inter alia, to the extent specified in section 350. It, therefore, becomes clear that section 205 of the Companies Act, providing for charging depreciation in accordance with rates given in Schedule XIV of the Companies Act, is meant only for determining the availability of profits for paying dividend. Thus, to say that the mandate of section 205 applies to the pan Companies Act, is not acceptable. It can be noticed that there are other provisions in the Companies Act as well which require the calculation of net profit in the manner laid down in sections 349 and 350 of the Companies Act. Section 350, in turn, provides for calculating depreciation in terms of Schedule XIV of the Act. For example, section 198 of the Companies Act deals with overall maximum managerial remuneration payable in case of absence or inadequacy of profits. Sub-section (1) of section 198 provides that in case of absence or inadequacy of profits, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng certain restriction on the powers of the Board). Whenever profit is required to be determined for the above sections, it becomes incumbent to charge depreciation at the rates given in Schedule XIV of the Companies Act. Such requirement of charging depreciation in terms of section 350 or Schedule XIV of the Companies Act is not a part of the scheme under Parts II and III of Schedule VI. As section 115JB of the Act requires that for the purpose of this section, Profit & Loss Account of a company shall be prepared in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, the command of Schedule XIV of the Companies Act, requiring the charging depreciation at the prescribed rates, does not, therefore, get attracted. In the absence of the prescription of any rates of depreciation in Parts II and III of Schedule VI, and further section 115JB of the Act mandating every company to prepare its Profit and Loss account in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, we are unable to restrict the rate of Depletion to the rate specified in Schedule XIV to the Companies Act. If the intention of the legislature had bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t been disputed by the Revenue. When position is so, we fail to comprehend as to how the action of the AO in adding the alleged excess depreciation can be sustained. The impugned order is set aside pro tanto and the enhancement to the amount of net profit to the tune of ₹ 2,53,87,76,183/- made for the purposes of section 115JB of the Act is hereby deleted. 66. Next dispute in this appeal is against the addition of ₹ 14,36,18,797/- on account of transfer pricing adjustment from the international transaction of payment for intra group services in the nature of business planning and project review board. 67. Briefly stated, the facts of this issue are that the assessee reported 22 international transactions clubbed under convenient heads, including Receipt of services, Recovery of expenses, Consideration for bank guarantee (received), Recovery of expenses from UJVs and Reimbursement of expenses to UJVs. The AO made reference to the Transfer Pricing Officer (TPO) for determining the arm's length price (ALP) of the international transactions. The TPO has tabled all the international transactions at page 2 of his order. The instant dispute relates to the three international ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... monstrate any need for them. He further noticed that the assessee failed to establish any direct nexus between the services received from its AE and its business operations. In this backdrop, the TPO held that the assessee did not receive any intra group services and if at all some services were there, these were merely duplicate in nature and no benefit was derived. Such services were also held to be in the nature of shareholders' services requiring no payment of consideration. The TPO required the assessee to state if the AE has rendered such services to others as well and if yes, then the basis of allocation amongst various entities be furnished. The assessee did not furnish such information by stating that it was not privy to the information whether the AEs render such services to any other AEs/third parties. Further, the assessee failed to give justification of the rate of fee paid by it for the services rendered. In such circumstances, the TPO rejected the assessee's approach of aggregation and application of the TNMM as the most appropriate method. He selected Comparable uncontrolled price (CUP) method as the most appropriate method. In the absence of any demonstrable benefi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or any Affiliate of CEIL from time to time, engages CAIRN to provide such Services to CEIL or the relevant Affiliate as it may request, provided always that CAIRN shall not render any such Services to CEIL or any Affiliate if to do so would in the opinion of CAIRN (acting reasonably) have a material adverse effect on CAlRN's existing and future operations and/or business. 2.3 CAIRN shall perform the Services under this Agreement (i) With such skill and care as could reasonably be expected of an experienced international company operating in the oil and gas industry but in any event to a standard which is at least equivalent to, and not lower than, that to which such services are provided to CAIRN or its Affiliates; (ii) in accordance with good and prudent practice in the international oil and gas industry; (iii) in compliance with all applicable laws; and (iv) in conformity with all descriptions and specifications provided by CEIL and its Affiliates to CAIRN. 2.4 CAIRN shall undertake its obligations under this Agreement as an independent contractor and shall not be the agent of, nor have any authority to bind or commit, CEIL or any Affiliate of CEIL to any Third ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... technical professionals from AEs. Overview of the Business Plan Committee and the Project Review Board was set out in detail. Certain copies of e-mails exchanged between experts of AEs and the assessee's employees were also placed before the AO which are available at pages 436 onwards of the paper book. In such e-mail communications, planning, actual conduct of the operations and connected matters have been discussed. Then, there is a copy of Debit note on page 455 of the paper book which records the amount billed at US $ 611172.57, being, charges for business planning on the basis of hourly rates of the experts. Pages 456 to 459 are the details of such billed amount which record name of the employee of the AE, number of hours, hourly rate and total amount in US Dollars. Similarly, page 460 is a copy of another Invoice dated 31.10.2010 with value of US $ 103795.69. This also talks of charges for business planning time writing. Subsequent pages contain similar details of employees who worked for the assessee, number of hours spent, rate per hour and the total amount. Factum of the assessee having received services from its AE is clearly evidenced from these documents. The view point ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i) the ALP of such an international transaction is to be determined by applying the most appropriate method out of the prescribed methods which, inter alia, include CUP and TNMM. 72. The first ingredient is that the ALP should be determined in relation to an international transaction. The term 'international transaction' has been defined in section 92B to mean : 'a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, …..'. It is discernible from the above definition of international transaction given in section 92B that it refers to 'a transaction' between two or more associated enterprises. The term 'transaction' has been defined in section 92F(v) and also in Rule 10A(d) of the Income-tax Rules, 1962. The Rule defines the term 'transaction' to include: 'a number of closely linked transactions.' On going through the above provisions, it becomes palpable that the arm's length price is essentially ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed value income). When we consider more than one separate transaction under the combined umbrella of TNMM on an entity level, it is quite possible that a probable addition on account of transfer pricing adjustment arising from one international transaction may be grabbed by the income from the other international transaction giving higher income on transacted value. 74. The Hon'ble jurisdictional High Court in Knorr Bremse India (P) Ltd. Vs. ACIT (2016) 380 ITR 307 (P&H) considered the question of aggregation of international transactions. Their Lordships held that several transactions between two or more AEs can form a single composite transaction if they are closely linked transactions and the onus is always on the assessee to establish that such transactions are part of an international transaction pursuant to an understanding between various members of a group. The Hon'ble High Court observed that in case of a package deal where each item is not separately valued but all are given a composite price, these are one international transaction. It went on to hold that where a number of transactions are priced differently but on the understanding that the pricing was dependent upon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransaction because it seeks to compare the price charged or paid for property transferred or services rendered, provided proper comparables are available. It is under this method alone that the price charged or paid is directly compared with the price charged or paid in an uncontrolled comparable transaction. The remaining four specific methods seek to make comparison of the price charged or paid indirectly through the medium of normal profit arising in a comparable uncontrolled transaction. Further, the CUP method is a transaction specific method which strives to determine the ALP of an international transaction on a micro level, thereby lending more credibility to the ALP of a transaction. As such, we hold that the CUP is the most appropriate method for determining the ALP of the international transaction under the present circumstances and the TPO was fully justified in applying the CUP as the most appropriate method. 78. Turning to the methodology adopted, we find that the TPO though applied CUP method but determined Nil ALP without making reference to any comparable uncontrolled transactions. It was on account of his having canvassed a view that either the services were not r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of income under the normal provisions. The assessee is aggrieved against such addition. 81. We have heard both the sides and perused the relevant material on record. It is noticed that the origin of the instant addition is from the proceedings for the immediately preceding year, in which the transaction of investment in redeemable preference shares in the assessee's 100% subsidiary company was re-characterised as loan. On a specific query, it was stated that the order of the AO making such addition for the preceding assessment year is still pending in appeal before the CIT(A) and there is no finality to the issue. Since the instant transfer pricing addition has its foundation in the immediately preceding assessment year in which re-characterisation of the transaction of investment in Redeemable preference shares was done, we are handicapped to independently decide the issue before us unless the preceding year on the same issue is decided. It is for the reason that if the re-characterization is held to be valid, then the addition will be required to be made in this year as well. If on the other hand, the re-characterization is held to be invalid, this addition will have to be de ..... X X X X Extracts X X X X X X X X Extracts X X X X
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