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TMI Blog2023 (11) TMI 738X X X X Extracts X X X X X X X X Extracts X X X X ..... market rate to be considered in the market where electricity sold to the consumers. Here the assessee has paid the purchase power to DISCOMs at the same rate which it has paid to its captive power plants. Thus, this contention raised by the Revenue is dismissed. Application of safe harbour rules - As held that there is no application of safe harbor rules to Clause (i) of the Explanation to Section 80IA and accordingly, the decision of the Hon ble Jurisdictional High Court in the case of Reliance Industries Ltd. [ 2019 (2) TMI 178 - BOMBAY HIGH COURT ] would clearly apply. Can rate of supply of power by the DISCOMS can be held to comparable with the captive power plants unit of the assessee? - As average market value in Indian Energy Exchange platform is less than Rs. 7.64 and Rs. 8.46 adopted by the assessee and therefore, the rate of purchase of power by DISCOMs is more than fair, however, there is no such data which has been provided to us and apart from that, the rates on which power is available through Indian Energy Exchange cannot be applied, because these are not the rates to the consumers but rates to the DSICOMs. Thus, our same reasoning given in the decision of M/s. Tata ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the year and the same has to be allowed. Disallowance u/s 14A r.w.r 8D - computation and allocation of particulars of expenses - assessee has given the entire basis of computation of disallowance which was based on allocation of administrative and management expenses which included employee cost, rent expenses, electricity charges, maintenance expenses and other office overheads and other allocable expenses - HELD THAT:- From the perusal of the allocation of expenses, it is seen that assessee has classified cadre of employees involved in investments functions, their roles and responsibilities, their functions, designations, salary and time allocated to investment activity. Apart from that, assessee has also taken proportionate disallowance of rent, electricity, maintenance expenses and other office overheads. On such details and analysis of expenditure and allocation, nowhere ld. AO has rebutted or recorded his satisfaction as to what was the defect in any such allocation having regard to the accounts maintained by the assessee and has given his general remark, like investments cannot be managed without monitoring and research, etc. and has given various observations of the kind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for deduction u/s. 80IA to non-eligible unit of the assessee.). (ii) (Ground No.3-3.11) Disallowance of interest paid on perpetual non-convertible debentures of Rs. 266,12,54,846/-. (iii) (Ground No.4-4.4)- Disallowance of expenditure incurred on compensatory afforestation of Rs. 126,19,08,529/-. (iv) (Ground No.5-5.4)- Disallowance of provision for leave encashment of Rs. 151,18,79,819/- (v) (Ground No.6-6.3)- Disallowance u/s. 14A of the Act r.w.r.8D of Rs. 7,09,74,178/- (vi) (Ground No.7-7.2)- Addition of disallowance u/s. 14A of the Act to book profits u/s. 115JB of the Act of Rs. 7,09,74,178/- (vii) (Ground No.8-8.3)- Claim of deduction of interest on PNCD amounting to Rs. 266,12,54,846/- in computing book profit u/s. 115JB of the Act not granted. (viii) (Ground No.9-9.2)- Disallowance of interest on PNCD amounting to Rs. 266,12,54,846/- in computing book profit u/s. 115JB of the Act. (ix) (Ground No.10-10.1)- AO has not correctly computed book profit u/s. 115JB (x) (Ground No.11-11.1)- AO has not given grant of available MAT credit (xi) (Ground No.12-12.1)- Lastly, AO has erred in not considering the interest u/s. 244A correctly. 3. The assessee is a company engaged in the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unit (KWH) Rate at which power sold to non-eligible unit Kalinga Nagar Power Undertaking-I 9,12,73,329 7.64 Jamshedpur Power Undertaking H 10,44,54,865 8.46 Jamshedpur Power Undertaking I 8,89,89,942 8.46 7. The ld. TPO to whom the matter was referred to determine the price of sale of power to eligible unit non-eligible unit, held that the Distribution Companies, (DISCOMs), viz. NESCO and JBVNL in the present case, cannot be regarded as functionally comparable to the Captive Power Plants and therefore, the price at which the State Electricity Distribution Companies sold power cannot be taken as comparable. The TPO however, proceeded to hold that the price at which DISCOMs, viz. NESCO and JBVNL, purchased power at the price determined by the relevant state's electricity regulatory commission as increased by certain other costs incurred by the DISCOMS to be the market value. In working out the costs to be added to the cost of power purchased, the TPO reduced the employee cost to 20% of that incurred by the DISCOMs, denied inclusion of provision for doubtful debts, and denied inclusion of transmission cost. He therefore, computed the price at which the CPPs sold power as under a. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... captive unit of the assessee which is manufacturing power i.e. the rate at which power generating undertaking companies sell to the grid as an applicable CUP tariff rate for recommendation of revenue of eligible units of M/s. Tata Steel Ltd. 9. TPO further observed that considering the facts and circumstances, the difference between the captive power plants and DISCOMs and the consequent effect on the pricing of the power, the composite nature of the power unit as described by the assessee catering to specific need can be kept to certain extent but with suitable modifications. Thereafter, he has incorporated the power of cost as submitted by the assessee for various units as discussed by him in detail in the impugned order and made determined ALP per unit at Rs. 4.91/- for Jamshedpur location and Rs. 4.25/- for Kalinga Nagar. 10. The ld. DRP agreed with the ld. AO / TPO that DISCOM cannot be compared to captive power units and therefore, purchase price of electricity is adjusted by certain costs of DISCOM had to be considered as ALP. 11. Before us ld. Counsel has made elaborate submissions which in sum and substance can be summarized as under:- a. It was submitted that Section 80I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld. Counsel has drew our attention to the similarity of facts between the case of M/s. Tata Chemicals Ltd (supra) and that of the assessee and submitted that exactly similar facts are permeating in the case of the assessee. The TP adjustment made by the ld. AO is to be deleted. 12. On the other hand, ld. DR had given his counter submissions / arguments and also with respect to our various queries raised by the Tribunal which for the sake of ready reference is reproduced hereunder:- 2. It is humbly submitted that the crux of the issue in the instant appeal is with respect to the MAM applied to arrive at ALP of power supplied by eligible unit to non-eligible unit. During the hearing on 19.10 2023 before the Hon'ble Bench certain issues came out on which Hon'ble Bench sought written submission. 2.1 Firstly, Hon'ble Bench sought submission with respect to Tested Party selection Assessee has taken non-eligible unit as tested party and has compared the rate at which power is purchased from eligible unit with that of power purchased by non-eligible unit from third party Le, distribution companies. On the other hand AO/TPO, while rejecting the approach of assessee, has taken el ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to TPO u/s 92CA for determining ALP of a given Specified Domestic Transaction. Therefore, action of TPO of applying relevant provisions and Rules for determining ALP cannot be faulted with. Further, without prejudice to whatever stated in paras herein above, even if it is assumed that first leg of explanation applies in the instant case, the meaning of first leg, as drawn by assessee is that, the price that such goods or services would ordinarily fetch in open market' means the price at which the non-eligible unit is buying its power from open market. In this regard it is stated that this self serving meaning drawn by appellant assessee is total improper and out of place. The price that such goods or services would ordinarily fetch in open market' necessarily means the price which the power producing company can get for its product, i.e. power, in open market. The logical meaning, as can be understood from plain reading of text in the context of whole basis of the Section, is as explained above. Therefore, it is humbly submitted that argument of the appellant assessee in this regard should not be accepted. 2.4 The TPO has rightly relied on second leg of explanation and dete ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cause. Without prejudice to whatever stated herein above, even if it is assumed that the tariffs determined by respective Commissions are tainted, then the price charged by distribution companies in open market are based on these tainted tariffs only. Typically, distribution companies add their costs and margin on the purchase cost of power (Tariff as determined by respective Commissions) and resultantly the said tariffs are further increased. Therefore, the resultant price i.e. price charged by distribution companies in open market is further inflated which cannot be taken as benchmark for ALP determination of eligible power producing units. 2.6 Further, after considering the submission of assessee in response to the show cause, the TPO has gone further and has considered the distribution function in limited manner. The purchase cost of power by distribution companies is further increased by adding certain applicable costs. And the said resultant price is taken as ALP. Thus, TPO has already applied very liberal estimates of prices going beyond the fair tariff determined by respective Commission. Therefore, it is humbly submitted that the ALP determined by TPO and consequent adjust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertaking - I 8,89,89,942 8.46 4.91 37,08,14,771 Total adjustments 99,61,45,650 14. It is matter of record that non-eligible manufacturing units have not only purchased electricity from the aforesaid three captive power units but also purchased electricity from three DISCOM companies (supra). Thus, the case of the assessee was that this is the price available in the open market which has been paid by the assessee at the same rate on which it has procured power from its three captive power plants. Thus, this is a fair market rate of the electricity. This precise issue and the submissions which has been raised by the ld. DR and also the reasoning given by the ld. TPO has been dealt by this Co-ordinate Bench in the group cases of the assessee in the case of Tata Chemicals Ltd. vs. DCIT in ITA No.468/Mum/2022. Before us a chart has been submitted to show the similarity between two cases in the following manner:- TATA Chemicals Ltd. TATA Steels Ltd. 1 Goods transacted and transaction Electricity produced by CPP sold to non- eligible unit of the Assessee. Electricity produced by CPP sold to non-eligible` unit of the Assessee 2 Price considered by Assessee as market value for the purposes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or deduction u/s. 80IA which has supplied 5,23,42,000 KWH units of electricity to the manufacturing unit of TCL at Mithapur at transaction price of Rs. 36,09,44,480/- at the rate of Rs. 6.90/- per unit is at market value or not. In so far as determining market value in terms of Section 80 IA (8), the premise of the ld. TPO is that, firstly, it is a specific domestic transaction u/s. 92BA and therefore, the market value of the electricity supply has to be determined in terms of transfer pricing provisions so as to determine the correct market value and the profits of eligible unit as per ALP within the scope and ambit of Section 80IA (8). Secondly, the ld. TPO has held that since the eligible unit is captive power generation unit and therefore, the price at which it has sold the electricity should be benchmarked with the comparables who are generating electricity and supplying it to the State Electricity Board which here in this case is GEB. Another point which has been raised by the ld. TPO is that, what is to be benchmarked is the profits of the eligible unit and therefore, eligible unit alone should be taken as a tested party and the FAR analysis has to be done of the eligible un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch transfer as recorded in the accounts of the eligible business does not correspond to the market value of such goods or services as on the date of the transfer, then, for the purposes of the deduction under this section, the profits and gains of such eligible business shall be computed as if the transfer, in either case, had been made at the market value of such goods or services as on that date: Provided that where, in the opinion of the Assessing Officer, the computation of the profits and gains of the eligible business in the manner hereinbefore specified presents exceptional difficulties, the Assessing Officer may compute such profits and gains on such reasonable basis as he may deem fit. Explanation- For the purposes of this sub-section, market value , in relation to any goods or services, means- (i)the price that such goods or services would ordinarily fetch in the open market; or (ii) the arm's length price as defined in clause (ii) of section 92F, where the transfer of such goods or services is a specified domestic transaction referred to in section 92BA. 13. Thus, the aforesaid provision provides that goods and services provided by the eligible business which is bei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g power, which here in this case one comparable has been chosen i.e. M/s. Torrent Power Ltd. (TPL). In our opinion it will be too myopic view to give an interpretation that all the transaction covered u/s. 80IA(8) has to be compulsorily determined under transfer pricing provision, cannot be accepted. Because, the statute has clearly provided two options or two manner in which market value of the goods and services can be determined. The phrase or does not give mean that the second mechanism provided in clause (ii) of Explanation alone can be applied after introduction of SDT from 01.04.2013. The use of the word or can be interpreted as, firstly, both manner are available with the assessee to demonstrate that market value of the goods and services has to be either by showing that the price of such goods and services is in consonance with the price available in the open market; or if assessee is not able to establish the price available in the open market, then the price of goods and services has to be established through arm s length principle. Secondly, if the price of the transfer of goods and services is in consonance with the price available in the open market then the profits o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e same should correspond to market value of such goods and services. The market value has to be seen qua the price in which such goods or services would ordinarily be fetched in the open market, i.e., whether in the open market the price of such goods and services are available or not? Here assessee is a captive service provider for generating electricity and to supply and distribute to the manufacturing unit which otherwise would have bought from the open market. The price has to be seen what the manufacturing unit is paying in the open market. This precisely has been dealt by the Hon ble Gujarat High Court in the case of PCIT vs. Gujarat Fluorochemicals Ltd., and also by the Hon ble Jurisdictional High Court in the case of CIT vs. Reliance Industries Ltd., wherein the Courts had held that if the assessee had set up a captive power generating unit and provided electricity to its another unit and claimed deduction under section 80-IA in respect of profits arising out of such activity, then violation of electricity provided to another unit should be at the rate at which electricity distribution companies were allowed to supply electricity to the consumers. This judgment has been dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... value in Indian Energy Exchange platform is less than Rs. 7.64 and Rs. 8.46 adopted by the assessee and therefore, the rate of purchase of power by DISCOMs is more than fair, however, there is no such data which has been provided to us and apart from that, the rates on which power is available through Indian Energy Exchange cannot be applied, because these are not the rates to the consumers but rates to the DSICOMs. Thus, our same reasoning given in the decision of M/s. Tata Chemicals Ltd. will apply to the case of the assessee. Accordingly, following the ratio in the decision of M/s. Tata Chemicals, this issue is decided in favour of the assessee and consequently the entire adjustment made by the ld. TPO is directed to be deleted. 21. The next issue relates to disallowance of interest paid on Perpetual Non-Convertible Debentures (PNCDs). 22. The brief facts are that during the previous year ending 31/03/2011 on private placement basis issued unsecured perpetual hybrid securities in the form of non-convertible debentures in two tranches of Rs. 1,500 Crores in March 2011 and Rs. 775 Crores in May 2011, each carrying for the first 10 years, coupon rates of return of 11.80% and 11.50 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 22 for AY 2011- 12 and in ITA No.1316/MUM/2022 for AY 2012-13. The Tribunal vide common order dated 23/12/2022 held that interest paid on debentures is allowable deduction u/s 36(1)(iii) of the Act. The debentures under reference are the same that were subject to matter of dispute in proceedings u/s 263 in AYs 2011-12 and 2012-13 . 25. Since this precise issue is covered in favour of the assessee on similar facts and reasoning by the ITAT orders of the earlier years, therefore, same is followed in this year also. Accordingly this issue is decided in favour of the assessee. 26. Next issue relates to disallowance of expenditure incurred on compensatory aforestation. During the previous year relevant to A.Y. 2019-20 assessee has incurred Rs. 1,81,26,02,521/- towards compensatory aforestation for carrying out planting operation. The case of the assessee was that, whenever an authorised land is required to be diverted for non-forest purposes, i.e. industry or mining etc., the forest clearance is required to be obtained by lessee or user agency in accordance with the applicable provisions of Forest Conservation Act, 1980 and various guidelines issued by the Ministry of Environment, as fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies is clearly set out in page 39of the Information Memorandum wherein it specifies that utilisation of funds proposed to be raised through this private placement will be for general corporate purposes, however, excluding specifically acquisition or purchase of land, investment in equity/capital markets. The main case of the Revenue is only that the perpetual debentures issued are akin to equity and hence, it does not fall under the ambit of borrowing and accordingly, no interest would become allowable on the said alleged borrowing. In this regard, we find that assessee had already explained the very same query before the Id. AO at the time of assessment proceedings itself which is evident from the reply filed by the assessee which is reproduced hereinabove at the beginning of the order. Moreover, we also find that these bonds were indeed repaid by the assessee on 18/03/2021 with interest and on 11/05/2021 with interest. The evidences in this regard are enclosed in pages 254 and 255 of the paper book filed before us and the fact of repayment of these borrowings with interest had also been duly notified by the assessee to BSE Ltd. and NSE Ltd as per the requirement of SEBI regulatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot exceed the amount paid by it as contemplated under section 43B(f) of the Act, i.e., upto the date of filing of the return of income for AY 2019-20. 33. Before us ld. Counsel for the assessee drew our attention to page 13 of the paper book which is Appendix VI to the tax audit report giving information of all amounts covered under section 43B of the Act which have remained payable as on the date of filing of the return of income for AY 19-20. Item 26 of the table at Page 13 is the amount of provision for leave encashment made in the books of accounts. The aggregate of all such amounts is Rs 1141,49,25,122/-. Further, in the computation of income for the year under consideration, assessee had disallowed that is added back a sum of Rs. 816,68,51,587/-. The said disallowance has been computed as under:- Sr. No. Particulars Amount i. Aggregate of items falling under section 43(b) - this includes the claim for leave encashment on provision basis of Rs. 292,12,33,381 (Item 26 on Page 13 of the Paper book) 1141,49,25,122 ii. Less Items not forming a part of profit as per P L A/c and therefore not considered for disallowance - Stamp Duty (Item 16 at Page 13 read with Note 1) 53,27,028 Am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the year and the same has to be allowed. This issue has also been decided by the Tribunal in A.Y. 2016-17 and 2017-18 which reads as under:- 10. We have heard the submissions made by rival sides on the issue of disallowance of provisions for leave encashment. A perusal of the draft assessment order reveals that the AO in para 10.2 of the draft assessment order has observed that the assessee s claim for allowability of the provision for leave encashment in excess of the amounts actually paid till the date of filing of return of income cannot be entertained. Whereas, the case of the assessee is that claim has been made only on the basis of actual payments. The AR of the assessee has also drawn our attention to Note no.4 to the accounts, the same reads as under: 4) The Company contends that the provision for leave encashment is not disallowable under section 43B in view of the decision of the Hon ble High Court of Calcutta in the case of Exide Industries Limited vs. Union of India (2007) 292 ITR 470 (Cal.) and the Hon ble Kerala High Court in the case of CIT vs. M/s Hindustan latex Ltd. (ITA No. 64 of 2012) (Ker.). The assessee changed the practice of claiming allowance with respec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses 2 Employee Cost 2.94,20,726 Allocation as per para 4 A 3 Rent Expenses 86.16,473 Allocation as per para 4 B 4 Electricity Charges 6,71,897 Allocation as per para 4 C 5 Maintenance Expenses and Other Office Overheads 58.03,978 Allocation as per para 4 D 6 Other Allocable Expenses on Travelling. Telephone/Mobile. Stationery etc. 20,00,000 Allocation as per para 4 E Total Allocated Expenses 4,72,25,937 39. From the perusal of the allocation of expenses, it is seen that assessee has classified cadre of employees involved in investments functions, their roles and responsibilities, their functions, designations, salary and time allocated to investment activity. Apart from that, assessee has also taken proportionate disallowance of rent, electricity, maintenance expenses and other office overheads. On such details and analysis of expenditure and allocation, nowhere ld. AO has rebutted or recorded his satisfaction as to what was the defect in any such allocation having regard to the accounts maintained by the assessee and has given his general remark, like investments cannot be managed without monitoring and research, etc. and has given various observations of the kind of cost wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nding. He thus requested that direction to be given to the ld. AO to dispose of the rectification application. Accordingly, we direct the ld.AO to dispose of the rectification application filed by the assessee. 33. In the result, appeal of the assessee is treated as allowed. Order pronounced on 7th November, 2023. CORRIGENDUM ORDER Dated : 18-01-2024 ORDER PER PADMAVATHY S, ACCOUNTANT MEMBER AND AMIT SHUKLA, JUDICIAL MEMBER In relation to the order passed in aforesaid ITA No. 509/Mum/2023 vide order 07/11/2023, a letter has been submitted for a request of corrigendum which reads hereunder:- The above referred appeal was heard by your Honours on 19 October 2023 and the order was pronounced on 07 November 2023. We have attached a copy of the order as Annexure 1 for your ready reference. In this regard, we would like to state as under 1. Background: TSL is a public limited company incorporated in India with its registered office in Mumbai The Company has presence across the entire value chain of steel manufacturing from mining and processing iron ore and coal to producing and distributing finished products 2 Typographical or inadvertent error in the order passed: The Appellant had int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee and had passed order about the first issue ie contribution to CAF We further find that identical issue was decided in favour of the assessee in various Benches of the Tribunal. In case of the sister concerns, the Tribunal had decided the issue in their favour. We would like to refer to the case of Ramgad Minerals and Mining Pvt. Ld. (supra) and it reads as under: 3. The Commissioner of income tax vide order at Annexure B confirmed the order of the Assessing Authority. The appellate Tribunal vide annexure-a has made the following observation. We find force in the submission of the learned counsel that pavements to the Government are to be paid once the mining lease is obtained and such payments are governed by various acts along with the Apex Court making a ruling for State Governments to participate in the granting of mining lease by recovering compensation when their forests are uprooted Therefore, for this purpose, the funds are used for a natural regeneration which the assessee participates indirectly Therefore, at no point of time could it be said that the assessee had incurred capital expenditure giving the assessee a benefit of enduring nature for the purpose of earning se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to Ground No. 3 with respect to issue of disallowance of interest paid on perpetual nonconvertible debentures in the captioned order dated 07 November 2023. We hope your Honour will accept our request and oblige. Further, in case your Honours require any clarification, request you to kindly let us know so that we can address the same. 2. We have gone through the said letter and find substance in the same and admit that there are typographical errors for which this corrigendum is hereby issued. 3. In the captioned order dated 07/11/2023 in para 26, page 26 Tribunal had erroneously mentioned the actual claim of Rs.181,26,02,521/- instead of 126,19,08,529/-. This error has been rightly pointed out by the assessee and it is hereby modified that the actual claim will be read as Rs.126,19,08,529/- 4. It was stated that in para 28, this Tribunal had inadvertently reproduce the relevant extracts of the decision of the ITAT for A.Y.2016-17 and A.Y.2017-18 in relation to allowability of compensatory afforestation. We here agree with the contention of the assessee and modify paragraph 28 as under: 28. We find that this issue has been decided in A.Y.2016-17 and 2017-18. The relevant portion o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s sound and proper Appeal is dismissed. Considering the above we hold that the CIT-2 was not justified in invoking the provisions of section 263 of the Act with regard to any of the three issues Effective Ground of appeal is decided in favour of the assessee. In support of his claim the learned AR of the assessee has inter alia placed reliance on the decisions of Dr. Prafulla R. Hedge in ITA No. 15 of 2012 (Bombay), Ramgad Minerals and Mining Pvt. Ltd. in ITA No. 5021/2009 (Kar) and Essel Mining And Industries Ltd. in ITA NO. 352/KOL/2011 No contrary material was placed before us by the Department. Thus, following the decision of Co-ordinate Bench in assessee's own case in AY 2006- 07, we hold that contribution towards Compensatory Afforestation Fund by the assessee during the impugned AY is allowable. We hold and direct, accordingly. Thus ground no. 5 of the appeal is allowed. 5. As has been claimed by the assessee in the corrigendum application, paragraph 28 of the Tribunal order dated 07/11/2023 may be read as paragraph 25 and the paragraphs thereafter in the Tribunal order may be re-serialled in seriatim i.e. 26,27 etc. 4. All the other contents in the said order shall stan ..... X X X X Extracts X X X X X X X X Extracts X X X X
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