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TMI Blog2023 (10) TMI 1135X X X X Extracts X X X X X X X X Extracts X X X X ..... o be charged, the decision of the Ahmedabad Bench in the case of Micro Inks Ltd. is not applicable to the assessee - Decided against assessee. Disallowance u/s 14A - strategic investment made in SPV - HELD THAT:- As relying on own case for A.Y. 2012- 13 [ 2022 (7) TMI 888 - ITAT AHMEDABAD ] assessee seeking exclusion of strategic investments while computing disallowance as per Rule 8D of the Rules is dismissed. TP Adjustment on Liason Support Services - company has benchmarked the transaction by applying CUP as MAM using US Census Bureau annual data relating to commission on sales made by agents, wherein the rate determined was at 4.1% - TPO made downward adjustment by applying rate of 2% instead of 3% following the order for A.Y. 2012-13 - HELD THAT:- The issue is decided in favour of the assessee in A.Y. 2012-13 [ 2022 (7) TMI 888 - ITAT AHMEDABAD ] wherein it is held that the assessee has applied appropriate comparables for determining the ALP and benchmarking the transaction. TPO has selected the comparables which are functionally different from the assessee. Decided against revenue. Nature of receipt - profit on sale of carbon credit - capital receipt or revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 14A(2) of the Act. 6. The learned CIT(A) has erred in law and in facts to the extent of confirming the disallowance made by the learned AO by restoring to provisions of Rule 8D r.w.s. 14A without satisfying mandatory requisite conditions as provided under Rule 8D r.w.s. 14A for invocation thereof. Without prejudice Computation of Disallomance u/s. 14A: 7. The learned CIT(A) erred in fact and in law in firming the action of the learned AO in considering average value of investments of Rs. 283,04,05,000 being investments made for strategic purpose for computing disallowances 14A rwr 8D. 8. The learned CIT(A) erred in fact and in law in confirming the action of the learned AO in considering average value of investments of Rs. 28,50,50,000 being investments domestic companies and mutual funds from which no income exempt from tax was earned for the purpose of computing disallowance u/s 14A rwr 8D 9. The learned CIT(A) erred in fact and in law in confirming the action of the learned AO in considering average value of investment made in respect of Gestamp Kalpataru Solar Steel Structures Pvt. Ltd of Rs. 15,00,50,000 instead of Rs 12,96,50,000 being the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Counsel fairly submitted before us that the issue has already been decided against the assessee for A.Y. 2012-13 holding that advances were not in the nature of quasi capital. Hence, a copy of the order passed by the Tribunal has also been filed before us. It appears that while dealing with the issue the Coordinate Bench was pleased to observe as follows:- 4. Ground no. 1 and 1.1 relate to the same issue of transfer pricing adjustment made on account of short term advances made by the assessee to its associated enterprises, levying notional interest of Rs. 2,52,319/- thereon. The said grounds read as under: 1 The learned CIT(A) has erred in confirming the addition made by the learned Assessing Officer and the learned Transfer Pricing Officer to the total income of the appellant u/s 92C to the extent of Rs. 2,52,319. 1.1 The learned CIT(A) has erred in confirming the order of the AO and TPO levying notional interest of Rs. 2,52,319 on short term advance made to its overseas subsidiaries being Kalpataru Power Transmission (Mauritius) Ltd and Kalpataru Power Transmission (Nigeria) Ltd. It is submitted that the learned CIT(A), AO and TPO failed to appreciate the reasons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment order and submission made by the appellant. The facts of the case are squarely covered by the Hon'ble Ahmedabad ITAT's decision in Soma Textile Industries V/s. Addl. CIT - ITA No. 262/Ahd/2012 pertaining to A.Y. 2007-08. The relevant portion of the findings of the Hon'ble ITAT in para 11 of the order is reproduced hereunder:- 11. We are unable to see any merits in his line of reasoning. As the learned counsel himself accepts, on a conceptual note, several types of debts, particularly long term unsecured debts, and revenue participation investments could be termed as 'quasi capital . So far as arm's length price of such transactions are concerned, this cannot be 'nil' because, under the comparable uncontrolled price method, such other transactions between the independent enterprises cannot be at 'nil' consideration either. Nobody would advance loan, in arm's length situation, at a nil rate of interest. The comparable uncontrolled price of quasi capital loan, unless it is only for a transitory period and the de facto reward for this value of money is the opportunity for capital investment or such other benefit, cannot be nil. As for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ITAT Ahmedabad Bench in the case of Micro Inks Ltd. vs. ACIT (2013) 144 ITD 610. Our attention was drawn to the contents of the said decision which was placed before us at Paper Book page no. 400 to 436. Taking us to Para 14 15 of the said decision, it was pointed out that in the case of Perot System TSI (India) Ltd vs Dy. CIT (2010) 37 SOT 358 (Delhi) identical issue was discussed and it was pointed out that the argument of loan being quasi capital in nature was rejected on facts since there was no material on record to establish so. From Para 15 of the order, it was pointed out that the Bench noted that in the facts of the case before it,(Micro Inks) ,it had been demonstrated that the loan was given in place of capital contribution which required the RBI permission. When the RBI permission was ultimately obtained the loan was converted into shares effective from the date when the loan was given. It was also noted by the Bench that the entity which received the interest free advance was not only wholly owned subsidiary of the assessee but also played a significant role in its sales and distribution chain. That in this backdrop the Bench noted that lending of money could not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iate adjustments must be allowed as per Rule 10B(3)(ii) If differences mentioned in Rule 10B(2) are not removed by way of adjustments under Rule 10B(3), then such ALP determined is bad in law Reliance placed on CLSA India (P.) Ltd. vs. DCIT [2019] 101 taxmann.com 388 wherein it is held that ALP would be on adhoc basis and void if appropriate adjustments not made for removing the differences. Reliance is placed also on Gulbrandsen Chemicals (P.) Ltd. vs. DCIT [2019] 104 taxmann.com 253 (Ahmedabad) 10. At this juncture, Ld. Counsel for the assessee was asked at bar to demonstrate with evidence as to how the loan given in the present case would qualify as quasi capital and or given for commercial expediency of the assessee as were the facts in the case of Micro Inks Ltd. (supra) referred to by the ld. Counsel for the assessee before us. Ld. Counsel was unable to convincingly demonstrate the same except for reiterating his contention before the A.O, that the advances were given to its wholly owned subsidiary newly formed for the purpose of procuring work/business of the assessee in the respective countries where they were set up i.e. Mauritius and Nigeria resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14A as per Rule 8D of the Act. However, the assessee itself disallowed an amount of Rs. 70,000/- in its return of income. Thus, an amount of Rs. 1,79,97,598/- is hereby disallowed by the Assessing Officer under Section 14A of the Act and added to the total income of the assessee. 10. Ld. CIT(A) placing reliance on the decision of the Ahmedabad Tribunal in ITA No. 2471 2853/Ahd/2017 2472/Ahd/2017 for A.Y. 2012-13 and 2013-14 in assessee s own case and the order of Hon ble High Court of Gujarat in the case of Suzlon Energy Ltd., reported in 33 taxmann.com 151 for the purpose of computing disallowance excluded investment in foreign subsidiary. 11. We have heard the rival submission made by the respective parties, and perused the relevant materials available on record. 12. At the time of hearing of the instant appeal the Ld. Counsel fairly submitted that in assessee s case the disallowance under Section 14A of the Act for A.Y. 2014-15 in respect of strategic investment made in SPV and on which the dividend income is not earned by the assessee during the year under consideration has been upheld. A copy of the order passed by the Tribunal has also been filed before us. It appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hould be revised Investments in SPVs (Jhajjar KT Transco Pvt Ltd) should be excluded while applying Rule 8D since the investment was mandatory requirement for executing the EPC contract awarded. Hence, the investment in SPV should be excluded from the value of total investments while computing disallowance under Rule 8D Reliance is placed on decision of ACIT, Circle 13(1) vs M/s Oriental Structural Engineers (P) Limited ITA No.4245/Del/2011 CIT vs Oriental Structural Engineers (P.) Ltd 216 Taxman 92 (Delhi HC) [2013] Ram Infrastructure Limited vs JCIT ITA No. 746/PN/2013 L T Infrastructure Development Projects Ltd vs ITO [2015] 58 taxmann.com 165 Only those investments on which dividend income is earned during the year should be considered for applying Rule 8D ACIT vs Vireet Investments (P.) Ltd [2017] 82 taxmann.com 415 (Special Bench Delhi) Adani Enterprise Ltd. Vs ACIT [2019] 111 taxmann.com 196 (ITAT Ahmedabad) Aditya Medisales Ltd vs DCIT [2019] 105 taxmann.com 209 (ITAT Ahmedabad) 24. Ld. D.R. countered by stating that the issue of investment in SPVs already stood decided against the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of expenses comes into play as that is the principle which is engrained in Section 14A of the Act. This is so held in Walfort Share and Stock Brokers P Ltd., relevant passage whereof is already reproduced above, for the sake of continuity of discussion, we would like to quote the following few lines therefrom. The next phrase is, in relation to income which does not form part of total income under the Act . It means that if an income does not form part of total income, then the related expenditure is outside the ambit of the applicability of section 14A.. xxx xxx xxx The theory of apportionment of expenditure between taxable and non-taxable has, in principle, been now widened under section 14 A. 35. The Delhi High Court, therefore, correctly observed that prior to introduction of Section 14A of the Act, the law was that when an assessee had a composite and indivisible business which had elements of both taxable and non-taxable income, the entire expenditure in respect of said business was deductible and, in such a case, the principle of apportionment of the expenditure relating to the non-taxable income did not apply. The principle of apportionment was made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4. It is, therefore prayed that the order of the Ld. Commissioner of Income tax(Appeals) may be set aside and that of the Assessing Officer be restored. 5. The appellant prays for leave, to amend or alter any ground or add a new ground which may be necessary. 18. Ground No. 1:- This ground is relates to TP Adjustment on Liason Support Services. 19. The brief facts of the case is this that the company has paid liason fees to AE Kalpataru Power Transmission Inc. USA at the rate of 3% of order value. The company has benchmarked the transaction by applying CUP as MAM using US Census Bureau annual data relating to commission on sales made by agents, wherein the rate determined was at 4.1%. Further, the TPO made downward adjustment by applying rate of 2% instead of 3% following the order for A.Y. 2012-13. 20. During the course of appellate proceedings the appellant had contended that the Assessing Officer made addition to value of international transaction entered into by the assessee company with AE being Kalpatary Power Transmission Inc. USA without satisfying the requirements of Section 92C(3) of the Act and the TPO and the AO made downward adjustment in value of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In respect of these services the AE charges a monthly sum of USD 15000 plus 3% success fee on the net invoice. During the year under consideration the AE was successful in generating business for the Appellant and a success fee of 3% was paid for securing the order from Isoluv Ingenieria, SA. The Appellant has benchmarked the above transaction applying comparable uncontrolled price method. In all the submissions before the TPO the appellant has submitted that 3% success fee is nothing but the commission paid to its foreign AE, This transaction is being benchmarked using the US Census Bureau published annual data relating to sales .made by agents on behalf of and commission earned by such agents as part of annual economic census. As per the said data agents derived 4.1% commission on sales generated by them. Against this 4.1% the AE has charged a success fee of 3% which is approximately 30% lower. However, the TPO has summarily rejected the above benchmarking process and held that the aforesaid data encompasses commission of electronics market broker which may not involve same or similar products. Accordingly he rejected CUP as the most appropriate method. The TPO thereafter procee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted. .Relevant grounds of appeal are therefore, allowed. 34. Ld. D.R. relied on the order of the A.O. while the Ld. Counsel for the CIT(A). 35. We have gone through the order of the Ld. CIT(A). We find that the Ld.CIT(A) considered all the facts before him relating to the issue and thereafter gave a well reasoned and detailed finding that the comparable selected by the assessee for determining the ALP of the transaction was correct while that by the Revenue was not appropriate. The Ld.CIT(A) noted the nature of activities conducted by the AE for the assessee as being identifying projects ,collecting project data and technical specification and transmitting the same to India for analysis. He noted that a success fee of 3% was agreed to be paid to the AE for securing orders and during the impugned year had paid the fee for securing order from Isoluv Ingenieria, SA. He noted that the assessee had benchmarked the transaction using US Census Bureau published annual data relating to sales made by agents on behalf of others and commission earned by such agents as part of annual economic census. He noted that as per the data such agents derived 4.1 % commission while the AE had c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecifically held that income from sale of CERs is capital receipt and not chargeable to tax and deleted the addition. 28. At the time of hearing the Counsel submitted before us that the issue is decided in favour of the assessee in A.Y. 2012-13 2013-14. We find that the Coordinate Bench on the identical issue disposed of the ground by dismissing the same on the following observation:- 40. The issue relates to taxability of Carbon Credit i.e. CER certificate (Carbon Credits) issued to the assessee for saving emission of carbon. The assessee had two biomass based power generation plant using agricultural waste as fuel at Padampur and Tonk in Rajasthan State. The assessee had earned the following income/incurred expenditure in relation to the CER Certificates earned in the impugned year. Particulars Padampur Tonk Total CERs 94,64,058 4,15,34,675 5,09,98,733 Exchange Gain on CERs 20,63,672 57,07,462 77,71,134 Expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... follows: 19, Adverting to the additional ground No.l in respect of income from realization-of carbon credits, which is taxed as Revenue receipt. The ld. Counsel for the appellant, at the outset, contends that the Hon'ble Karnataka High Court in the case of CIT vs. SubhashKabini Power Corporation Ltd, [2016] 69 taxmann.com 394 (Karnataka).dealt with the issue at length and relied on various judicial pronouncements, holding income received from realization of carbon credits as capital in nature. The Hon'ble Karnataka High Court in paragraph 6 of its order (supra) has dealt with the issue at length and square held that the carbon credits are generated out of environmental concerns which does not have any character of trading activity; therefore, any receipt from an activity which is not a trading activity is capital in nature by following observation:- 19.1 The Hon'ble High Court further relied on the judgment of Hon'ble Andhra Pradesh High Court in the case of CIT vs. My Home Power Ltd [2014] 46 taxmann.com 314/365 ITR 82 and the judgment of Hon'ble Karnataka High Court in the case of CIT vs. D.G. Gopala Gowda, [2013] 354 ITR 501, which have taken the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITR 592 (Karn) and Andhra Pradesh High Court in case of Commissioner of Income tax v. My Home Power Limited reported in (2014) 365 ITR 82 (AP) have held that receipts of carbon credit are in 'nature of revenue receipts. Following the decision of said two High Courts, this question is also not considered. It is observed that entire legal issue involved.in present case has been decided in favour of Assessee by Hon'ble Ahmedabad ITAT and Gujarat High Court. '8.3.5 It is further observed that while passing Assessment Order for A.Y. 2009- 10 in case of Appellant, AO has taxed CERs on accrual basis even though there was no sale of such CERs. The said addition was deleted by CIT (Appeals) and Hon'ble Ahmedabad ITAT confirmed he order of CIT(A) deleting the addition, however, on a different ground that no income on account of CERs accrued during the relevant year. As regards characterization of CERs as capital or revenue receipts, the Hon'ble ITAT made certain observations. However, upon appeal filed by the Appellant, Hon'ble Gujarat High Court (TAXAP/73/2017) has quashed the observations made by ITAT in respect of taxability of the CERs and observed as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... received. It is observed that Hon'ble Ahmedabad ITAT in the case of Alembic Limited referred supra, has on identical facts has held that income from sale of CERs is capital receipt and said decision is upheld by Hon'ble Gujarat High Court referred supra, which has settled entire controversy as discussed herein above. 8.3.6 During the course of Appellate proceedings Appellant has also relied upon following decisions which are also in favour of Assessee: (i) Decision of Hon'ble Andhra Pradesh High court in the case of CIT v. My Home Power Ltd 1720141 365 ITR 82]: Section 28(1) of the Income-tax Act, 1961 - Business income -Chargeable as (Carbon credits) - Assessment year 2007-08 - Appellant-company was 'engaged in business of power generation through biomass power generation unit It received carbon credits, namely, carbon Emission Reduction Certificates for its project activity of switching off fossil fuel from naptha and diesel to biomass It transferred said carbon credits and offered receipt from said transfer : as capital receipt - However/ Assessing Officer treated said receipt as business income and brought same to tax - Tribunal held that carb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ] [In favour of appellant]. Considering the facts discussed Herein above it is held that income from sale of CERs is capital receipt and AO is not justified in treating such income as revenue receipt. It is also held that AO is not justified in reducing deduction under Section 80-IA claimed by Appellant by reducing expenditure incurred for sale of CERs from profit derived from industrial undertaking. Thus, both the grounds of appeal are allowed. 43. We have gone through the order of the ld. CIT(A) and we have noted that the Ld. CIT(A) relied on a plethora of decisions both of the ITAT and the Hon ble High Courts of Karnataka and Andhra Pradesh holding CER receipts as capital in nature and income earned there from also being capital receipt. The Ld. D.R. unable to distinguish the case laws. 44. In view of the above, we see no reason to interfere in the order passed by the Ld. CIT(A) deleting the addition made on profit of sale of Carbon Credits of Rs. 5,25,41,076/-. 29. Keeping in view of the entire aspect of the matter we do not find any reason to deviate from the stand taken by the Coordinate Bench and respectfully relying upon the same for A.Y. 2012-13 we reje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1962 holding that the dividend earned from the said foreign investment was not exempt from tax. 52. The ld. D.R. was unable to controvert the above findings of the ld. CIT(A). 53. In view of the above, we see no reason to interfere in the order passed by the Ld. CIT(A) deleting the disallowance made u/s. 14A read with Rule 8D of the Rules with respect to foreign investment made by the assessee. 35. Keeping in view of the entire aspect of the matter we do not find any reason to deviate from the stand taken by the Coordinate Bench and respectfully relying upon the same for A.Y. 2012-13 we reject this ground of appeal preferred by the Revenue. 36. In the result, this ground of appeal preferred by the Revenue is dismissed. ITA No. 245/Ahd/2020 (A.Y. 2015-16)(Assessee s Appeal):- 37. The assessee has raised the following grounds of appeal:- Disallowance u/s 14A r.w. Rule 8D Invocation of Section 14A: 1. The learned CIT(A) erred in fact and in law in confirming the action of the learned AO in invoking section 14A of the Act without satisfying the mandatory conditions of section 14A(2) of the Act. 2. The learned CIT(A) has erred in la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of section 234C of the Act. Accordingly, such levy of excessive interest prayed to be deleted. Your appellant prays for leave to add, alter and/or to amend any of the grounds before the final hearing of the appeal. 38. Ground No.1:- Disallowance under Section 14A r.w.r. 8D of the Act. 39. This ground has already been dealt with by us in ITA No. 244/Ahd/2020 for A.Y. 2014-15 and in the absence of any changed circumstances the same shall apply mutatis mutandis. Hence, this ground preferred by the assessee is dismissed. 40. In the result, this ground of appeal preferred by the assessee in ITA No. 245/Ahd/2020 for A.Y. 2015-16 is dismissed. 41. Ground No. 2:- Since this ground is consequential in nature hence, no order needs to be passed separately. ITA No. 279/Ahd/2020 (A.Y. 2015-16)(Revenue s Appeal) :- 42. The Revenue has taken the following grounds of appeal:- 1. Whether the ld.CIT(A) has erred in law and on facts in deleting the addition on receipt of CER amounting to Rs. 5,94,18,494/- and treating it as Capital Receipt instead of Revenue Receipt. 2. Whether the ld.CIT(A) has erred in law and on facts in deleting the disallowance mad ..... X X X X Extracts X X X X X X X X Extracts X X X X
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