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TMI Blog2023 (10) TMI 1133X X X X Extracts X X X X X X X X Extracts X X X X ..... also not shown to us that the decision of the coordinate benches relied upon by the learned assessing officer is incorrect or upset by the decision of the honourable High Court. We are not inclined to set aside back to the file of the learned assessing officer because there is no purpose. Accordingly, we dismiss ground of the appeal confirming the action of AO that assessee has already been granted deduction while computing book profit under section 115JB of the act of lower of unabsorbed business losses or unabsorbed depreciation. Adjustment of the book profit u/s 115JB - addition on account of the foreclosure cost was made by AO - As assessee has debited capital expenditure and did not reduce it book profit - when company provides for premium on redemption out of the profits of the company whether it needs to be debited as expenses in the statement of profit and loss account or it is to be deducted from balance of surplus in the balance sheet? - HELD THAT:- In the present case, in form number 3CD, assessee has classified the above expenditure as capital expenditure. Form number 3CD is always prepared by the assessee. The report is given by an accountant in form number 3CA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... merely facilitates considers the price which has been charged or paid, or would have been charged or paid, for the same or similar uncontrolled transaction, with or between non-associated enterprises, under similar circumstances, considering all the relevant facts. As assessee has failed follow mandate of section 92CA (3) of the Act, the ld. TPO adopted the Uncontrolled Comparable price Method [CUP], adopted TIPS data base and held part of transaction of purchase and sale at Arm s length price and without respect of few transactions made the adjustment. The ld. DRP also upheld the TP approach of ld. TPO. TPO found the comparable prices of the transacted goods and then made adjustment wherever the prices are found not comparable. No infirmity pointed out in the transactions compared, timing of transactions and on any other parameter of transaction. Therefore, we do not have any hesitation in confirming the adjustment on account of Arm s length price of specified domestic transaction. It is not the case that TIPS database is not reliable. No evidence was produced before us that there is any infirmity in the database used by the TPO. Many coordinate bench decisions have held t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 25,00,000/- under the head 'share issue expenses'. That on the facts and circumstances of the case and in law, the Lower Authorities erred in confirming the action of the TPO in making an addition of Rs. 18,67,424/-under the head 'adjustment on account of sale of fuel stock'. That on the facts and circumstances of the case and in law, the Lower Authorities erred in confirming the action of the TPO in making an addition of Rs. 1,17,01,150/- under the head 'adjustment on account of purchase of fuel stock'. Re-working Book-Profit under section 115JB by adding Rs. 200 crores. 2. That on the facts and circumstances of the case and in law, the Lower Authorities erred in making an addition of Rs. 200 crores on account of 'foreclosure on account of early redemption of preference shares' to the book-profit of the Appellant and thereby re-computing the book profit at Rs. 155,43,34,549/-. 3. That on the facts and circumstances of the case and in law, the Lower Authorities have erred in recasting the profit and loss account which was duly prepared as per Schedule III of the Companies Act, 2013 and was duly audited and certified by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11. That on the facts and circumstances of the case and in law, the Lower Authorities erred in applying the ratio of Brooke Bond India Ltd (225 ITR 798) in relation to expenditure on issue of shares to other components of expenditure incurred by the Appellant, i.e., capital reduction and foreclosure on account of early redemption of preference shares. 12. Without prejudice to the above, assuming without admitting that share issue expenditure provides enduring benefit and is capital in nature, no enduring benefit was availed by the Appellant from incurring expenditure on account of capital reduction and foreclosure on account of early redemption of preference shares. Adjustment made by the TPO under section 92CA(3) 13. That on the facts and circumstances of the case and in law, the Lower Authorities erred in making an addition of Rs. 18,67,424/- on account of sale of fuel stock and an addition of Rs. 1,17,01,150/- on account of purchase of fuel stock by arbitrarily rejecting the 'Other Method' applied as Most Appropriate Method ( MAM ) as per Rule 10AB of the Income Tax Rules, 1962 ( Rules ). 14. That on the facts and circumstances of the case and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Income Tax Act, ii. form number 3CA audit report under section 44AB of the act as the accounts of the assessee are audited under the provisions of The Companies Act in which auditor stated that the particulars given in form number 3CD and its annexure along with the notes are true and correct and iii. Form number 29B report under section 115JB of the Act for computing the book profits of the assessee company wherein as per annexure Aregarding the computation of the book profit was stated to be the net loss as per the profit and loss account of ₹ 445,665,451. 5. This return of income [ROI] was picked up for limited scrutiny by issue of notice under section 143 (2) of the act on 12/4/2016. 6. Assessee has reported in Form No. 3CEB with its associated enterprises following Specified Domestic transactions [SDT] with its associated enterprise along with its benchmarking methodologies as under:- Serial number Name of the person Description of the transaction Total amount paid as per books of account Arm s-length price as computed by the assessee Method of accounting adopted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s sold coal of ₹ 101,244,722 its associated enterprises Vedanta limited to meet stock levels for plant of Vedanta limited. Further assessee company has purchased coal and sulphuric acid of ₹ 1,100,322,350 from its associated enterprises i.e. Vedanta limited to meet its plant stock level. Assessee discussed the most appropriate method adopted by it for purchase and sale of fuel stock to determine the arm s-length price and concluded that for determining the arm s-length price Comparable Uncontrolled Price method [CUP] method cannot be applied due to non-availability of transaction level data through both internal and external sources. Therefore, it adopted a new method i.e. Other method as the most appropriate method. It was submitted that goods have been supplied by order to the assessee at actual cost +1% as load factor. The additional amount of 1% charged over actual cost is for covering the custom duty paid by the respective transacting entities. Since the arithmetic mean of comparable prices is within 3% of the value of specified domestic transaction between the assessee and its related parties such transactions are at arm s-length price. 10. The learned TPO ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee that above expenditure is not allowable under section 37 (1) of the Act. In response to that, assessee submitted that above expenditure is allowable in view of the fact that decision in case of Brooke Bond Vs. CIT 225 ITR 795 (SC), was not applicable in the case of the assessee. The learned AO rejected the contention and held that the above expenditure cannot be allowed as revenue expenditure as per the normal computation of total income as section 37 (1) disallows any capital expenditure. LD AO cited three decisions of Honourable Supreme Court to support disallowance. Therefore, in normal computation of total income the Assessing Officer held that it is a capital expenditure. 15. While examining the computation of book profit u/s 115 JB of the Act, the ld. AO noted that :- i. Assessee has debited a sum of ₹ 200 crores to the profit and loss account as foreclosure cost on account of early redemption of preference shares. ii. In form number 3CD it is stated that these expenses are capital expenditure but debited to profit and loss account as disclosed in clause 21 (a) of Form no 3CD along with share reduction expenses. iii. It is also stated that assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the implicit waiver of the proportionate redemption premium by the preference shareholders. Such charges are not in the nature of redemption premium but in principle similar to the prepayment charges levied by banks for foreclosure of loans over and above the interest charges. Such charges are in the nature of expenses hence charged to the income statement. iii. The Companies Act 2013 does not specifically cover guidance on foreclosure costs. iv. Accounting standard 30 relating to financial instruments provides that difference between the redemption value and the issue consideration of redeemable preference shares should be recognized in the profit or loss statement. The above standard is though effective from 1 April 2009 and is recommendatory in nature, but the treatment given by the assessee following that standard is correct. v. Reference to form number 3CD wherein the tax audit report says that it is a capital expenditure does not have any bearing on the computation of book profit under section 115JB of the act. vi. Form number 29B has not made any adjustment, which is also certified by the tax auditor, which is relevant for computation of Book profit u/s 115JB o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ber 8.1 8.14 of his order. vi. As on 31/3/2015 the assessee had enough reserves available under the head security premium account but the assessee did not reduce the premium paid from it but debited it to the profit and loss account to avoid book profit tax u/s 115 JB of the Act. vii. Once the profit and loss account prepared by the assessee company is not as per The Companies Act, the AO has every right to adjust the book profit. He relied on the provisions of section 52 of The Companies Act. viii. Accordingly, he adjusted the book profit under section 115JB of the act at a loss of ₹ 445,665,451 to the revised the net profit of Rs. 155,43,34,549/-, thereby increasing book profit by Rs 200 Crores paid on redemption of preference shares debited to the profit and loss account despite assessee classifying it as capital expenditure. 19. Based on this, the draft assessment order was passed under section 144C (1) of the Act on 28 th December 2018 wherein the normal computation of total income was made at ₹ nil, and book profit under section 115JB of the Act was computed at ₹ 155,43,34,549/ . 20. Assessee objected to the same before the learned Disput ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustment of ₹ 200 crores was retained and revised book profit was computed at ₹ 1,554,334,549. Thus, the final assessment order dated 31 st October 2019 was made. 23. Assessee aggrieved with the same and is in appeal before us. The learned authorized representative argued the grounds of appeal at length and further submitted a written submission containing 22 pages and various other judicial precedents were cited compiled in a paper book containing 822 pages. Earlier two volumes of paper books were filed. Learned CIT DR also extensively argued the matter and submitted a written submission dated 16 th February 2023. In response to the submission of the learned CIT DR, the learned AR further submitted a written submission containing four pages supported with several judicial precedents. We have carefully perused those and also considered all the decision cited by the parties. 24. Ground number 1 of the appeal is general in nature wherein all the grounds of the addition/adjustment are contested. However, all those grounds of addition or adjustment with respect to the specified items are also covered by specific grounds later on and therefore, there is no requirement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the book profit. The assessee is not entitled to the benefit if the unabsorbed loss or the unabsorbed depreciation becomes Rs. Nil. 28. Only submission made by the learned AR in this case (as per written submission placed at page number 22 of the paper book in para number 5) is that the assessing officer may be directed to allow adjustment of brought forward business loss or unabsorbed depreciation, which is lower as per the direction of the DRP. 29. The learned departmental representative vehemently submitted that the learned assessing officer has followed the decision of the coordinate bench, lower of unabsorbed business loss and unabsorbed depreciation is nil for one of the years, therefore, assessee is entitled for deduction of Only Rs Nil. Therefore, the order of the learned assessing officer is in pursuance of the direction of the learned dispute resolution panel cannot be found fault with so there is no reason to set-aside it back to the file of the learned assessing officer. 30. We have carefully considered the rival contention and perused the orders of the lower authorities. In this case the learned assessing officer has passed the final assessment order on this i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee is entitled to follow Accounting Standard 30 financial instruments issued by the Institute of Chartered Accountants of India where it provides that difference between redemption value and the issue consideration should be recognized in the profit and loss account. Therefore, the above sum is required to be debited to the profit and loss account. iii. in computing the normal taxable income of the assessee, assessee has disallowed it but has not made adjustment in the book profit is the correct treatment. iv. learned assessing officer has cherry picked the tax auditor s report to hold that foreclosure cost paid by the assessee to its holding company for early redemption of preferential constitute a premium thus required to be set off against share premium available with the assessee on the date of payment of foreclosure cost. Ld. AO cannot go behind net profit shown in the profit and loss account except to the extent provided under the provisions of section 115JB of the Act. v. Reliance was placed on the decision of the honourable Supreme Court in case of Apollo tyres Ltd Vs. CIT (2002) 122 Taxman 562 and the decision of the honourable Bombay High Court in case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee considers it as a capital expenditure and while computing the book profit it says that it is not a capital expenditure. Thus, the stand of the assessee is contradictory for the same assessment year in the same computation of total income and therefore same should be rejected on this basis itself. (iv) Decision of honourable Bombay High Court in case of Aditya Prakash entertainment private limited in company petition number 404 of 2016 wherein the honourable Bombay High Court has categorically differentiated between the redeemable preference shares and the debentures. He further referred to the decision of the honourable Supreme Court in case of Anarkali sarabhai 224 ITR 422 wherein it has been held that when preference share is redeemed by a company then the shareholder transfers the shares to the company and capital gain is chargeable. SO, it is capital expenditure in the hands of the issuer company. (v) Decision of the honourable Supreme Court in case of Apollo tyres Limited (supra) relied upon by Assessee is in favour of the revenue as there is no ambiguity in the order of the honourable Supreme Court that the first assessing officer has power to examine wheth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s show that assessee has issued redeemable preference shares on 28th of March 2012 having a face value of Rs 100 Crores at a premium of ₹ 2900 crores. Therefore, the total issue consideration was ₹ 3000 crores. The tenure of the redeemable preference was determined at 10 years and the redemption due date accordingly was 28th of March 2022 at a premium of ₹ 6865 crores. Accordingly, the total redemption consideration was ₹ 6965 crores. 37. In 2015, assessee decided to revise the terms of the preference shares by reducing its tenure. The redemption date was decided on 30 March 2015 but at the foreclosure cost of ₹ 200 crores. Therefore, the total redemption price of the debentures was decided at ₹ 3200 crores (original issue consideration of ₹ 3000 crores plus premium of 200 crores). The assessee debited these Rs 200 crores as foreclosure cost to the profit and loss account. This expenditure was not claimed as deductible expenditure in normal computation of Total income. In fact, assessee in form no 3CD prepared by it specifically stated that this expenditure is capital expenditure debited to the profit and loss account. This form 3 CD was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; 200 crores, (2) expenses in relation to capital reduction, share issue and redemption of preference shares ₹ 25 lakhs. 40. The assessee also states that it is not debited any expenditure of capital nature to the statement of profit and loss during the current year other than as reported above. Therefore, assessee states in form number 3CD that foreclosure cost on account of early redemption of the preference shares and expenses in relation to capital reduction share issue in deduction of preference shares are the capital expenditure debited to the profit and loss account. 41. Form number 3CD is always prepared by the assessee and it is certified by the accountant in form number 3CA that details furnished in that form along with its annexure read together with and subject to the notes therein are true and correct. Therefore, form number 3CD prepared by the assessee, reports submitted by the accountant in form number 3CA also endorses the view of the assessee. It is interesting to note that form number 3CA certifying that the details in form number 3CD is true and correct is issued by the same person who issued another certificate in form number 29B being a report under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fits of the company or out of the company's securities premium account, before such shares are redeemed. (ii) in a case not falling under sub-clause (i) above, the premium, if any, payable on redemption shall be provided for out of the profits of the company or out of the company's securities premium account, before such shares are redeemed. 60 (3) Where a company is not in a position to redeem any preference shares or to pay dividend, if any, on such shares in accordance with the terms of issue (such shares hereinafter referred to as unredeemed preference shares), it may, with the consent of the holders of three-fourths in value of such preference shares and with the approval of the Tribunal on a petition 60a made by it in this behalf, issue further redeemable preference shares equal to the amount due, including the dividend thereon, in respect of the unredeemed preference shares, and on the issue of such further redeemable preference shares, the unredeemed preference shares shall be deemed to have been redeemed: Provided that the Tribunal shall, while giving approval under this sub-section, order the redemption forthwith of preference shares held by such person ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties, as per The Companies Act the difference between the preference shareholders and equity shareholders is that preference shareholders get preferential right over equity shareholders in distribution of assets at the time of liquidation. However, till the date of redemption of preference shares, preference shareholders do not have a right to ask for redemption. Hence, payment to preference shareholders can also be considered as an equity distribution. 46. Preference share capital is disclosed in Part I as Shareholders Funds in Schedule III of The Companies Act 2013 under balance sheet. In Part II only the expenses are required to be placed. The Foreclosure cost is neither an expenditure nor an extraordinary item of expenses as explained in Framework. Thus, the Profit and loss account prepared by the Assessee is not in accordance with the provision of the companies act . This is in violation of section 55 of The Companies Act 2013, Framework for preparation of financial statements issued by ICAI and Schedule III of The Companies Act 2013. 47. Under Guidance Note on Division 1 Non Ind As Schedule III to the Companies Act 2013 [Revised January 2023 Edition] clearly provides ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ainst the view taken by the assessee, Therefore, we are not in a position accept the propositions raised by assessee. 53. Decision of Honourable supreme court in case of Appollo Tyres Limited [2002] 255 ITR 273 (SC) will only apply if the accounts are prepared in accordance with the companies Act and relevant statutory pronouncements. It is held that the use of the words in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act in section 115J was made for the limited purpose of empowering the Assessing Officer to rely upon the authentic statement of accounts of the company. In this case the ld. AO referred to the provisions of the Companies Act and held that he has every right to disturb the audited accounts. Honorable supreme court decision does not prevent ld. AO to disturb profit and loss account when the Capital expenditure is debited to the profit and loss account for avoiding book profit tax and not permitted by the companies Act, relevant standards and Guidance notes. 54. The assessee has also raised an argument that foreclosure cost is just approximately 9 % payout of the preference shareholders. It also equated it with bank loans an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the coordinate bench where the penalty was levied under section 271 (1) (c) of the act. Coordinate bench held that tax audit report is an important document, but it cannot take place of evidence required for claiming the deduction. In the present case, in form number 3CD, assessee has classified the above expenditure as capital expenditure. Form number 3CD is always prepared by the assessee. The report is given by an accountant in form number 3CA or Form No. 3CB. Thus, there is a basic contradiction in the claim of the assessee that tax audit report (form number 3CD) cannot be used by the learned assessing officer for making adjustment under section 115JB. The fact shows that in form number 3CD assessee is stating that foreclosure cost is in the form of premium paid on redemption of redeemable preference shares and is capital expenditure, whereas while computing book profit, assessee pleads that it is a revenue expenditure which can be debited to the profit and loss account. 58. In the result we do not find any infirmity in the order of the lower authorities in making addition of Rs 200 crores to the book profit u/s 115 JB of The Act holding that it is statement of assessee th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecision of the honourable Supreme Court in case of Brooke Bond India private limited pertain to share capital issue, Punjab State industrial development Corporation Ltd pertain to amount paid to registrar of companies for an enhancement of capital base and decision of the Hindustan insecticide Ltd also pertain to the sum paid to registrar of companies for enhancement of capital base of the company. Therefore, the appellant s claim of treating the expenditure as revenue is correct. 63. The learned CIT DR submitted that in form number 3CD the assessee himself has classified the above expenditure as capital expenditure. The AO asked why this expenditure should not be disallowed relying on the decision of the honourable Supreme Court. Assessee in reply, only reliance was made with respect to the decision that MAT provisions are introduced much after the date of the decision and therefore it cannot be applied. 64. We have carefully considered the rival contentions and perused the order of the learned assessing officer as well as the direction of the learned dispute resolution panel. The learned assessing officer has noted that assessee has debited a sum of ₹ 25 lakhs being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncurred this expenditure only for the share issue and capital reduction. In view of this, we do not find any infirmity in the order of the lower authorities in holding that expense of ₹ 25 lakhs is capital in nature. Further in form number 3CD assessee itself is qualified it to be a capital expenditure and therefore now assessee cannot argue otherwise as form number 3CD is also prepared by the assessee. The claim of assessee is contradictory on the same issue. Therefore, we do not find any infirmity in the orders of the lower authorities in holding that expenditure of Rs 25 lakhs incurred by the assessee is a capital expenditure relying on assessee s own claim in Form no 3 CD. Accordingly ground number 10 12 of the appeal are dismissed. 65. Ground numbers 13 15 of the appeal are with respect to the transfer pricing adjustment of ₹ 1,867,424/ on account of sale of fuel stock and ₹ 11,701,150/ on account of purchase of fuel stock. During the year assessee has sold coal to Vedanta Limited of ₹ 101,244,720 and purchased same material from the same party amounting to Rs. 110,03,22,350. The reason for entering into such a transaction as stated in the tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an adjustment of ₹ 11,701,150/ . The learned dispute resolution panel held that CUP is the most appropriate method and for comparability analysis the TIPS data are correctly used by the learned transfer pricing officer. 67. The learned authorized representative submitted that the benchmarking made by the assessee applying the other method as the most appropriate method should be accepted and cannot be treated as held by the coordinate bench in case of Toll global versus DCIT 2014 [51 taxmann.com 342 (Delhi)] which has been confirmed by the honourable Delhi High Court. Therefore, the most appropriate method adopted by the assessee should be accepted as other method and not CUP. It was further stated that lower authorities are incorrect in applying reference index price from TIPS database which merely provides quotations. With respect to the applicability of CUP method, assessee relied upon the coordinate bench decision in case of Kohinoor foods Ltd versus ACIT (2014) [52 taxmann.com 454 (Delhi)] stating that in the absence of application of applicable parameters CUP method adopted by the TPO without citing cogent reason by unduly reviewing his own earlier transfer pric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. TPO. 71. The ld. TPO found the comparable prices of the transacted goods and then made adjustment wherever the prices are found not comparable. No infirmity pointed out in the transactions compared, timing of transactions and on any other parameter of transaction. Therefore, we do not have any hesitation in confirming the adjustment on account of Arm s length price of specified domestic transaction. 72. On the use of TIPS data base, assessee has relied upon decision of coordinate bench in case of Billion Wealth Minerals (P.) Ltd.*[2018] 90 taxmann.com 170 (Mumbai - Trib.), it dealt with this aspect as under :- 6.4 We would also like to mention that the cases relied upon by the DR are not relevant to decide the issue before us. In the case of Tilda Riceland (P.) Ltd. (supra) it was held that TIPS data can also be used for TP purposes. There is no doubt about it but the issue is how it should be utilised. The DRP had specifically pointed out as to how the TIPS data in the case under consideration was not applicable. It pointed out the deficiencies of the data and the factors that vitiated the comparability. Thus, facts of both the cases are totally different. In the case ..... X X X X Extracts X X X X X X X X Extracts X X X X
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