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TMI Blog2024 (3) TMI 878X X X X Extracts X X X X X X X X Extracts X X X X ..... non-interest bearing funds larger than the investment made in tax free securities, in such cases, disallowance u/s. 14A of the Act, cannot be made. AO directed to delete the additions made towards disallowance of expenditure u/s. 14A of the Act r.w.r.8D of the Income Tax Rules, 1962 on interest expenditure. Computation of book profit u/s. 115JB resorting to the computation as contemplated u/s. 14A of the Act r.w.r.8D - As decided Vireet Investment (P.) Ltd [ 2017 (6) TMI 1124 - ITAT DELHI] computation under Clause (f) to Section 115JB of the Act, is to be made without resorting to the computation as contemplated u/s. 14A of the Act r.w.r.8D of the Income Tax Rules, 1962. Thus CIT(A) is erred in upholding the reasons given by the AO to recompute book profit u/s. 115JB of the Act, by making additions towards disallowance of expenditure relatable to exempt income u/s. 14A of the Act, r.w.r.8D of the Income Tax Rules, 1962. Thus, direct the AO to delete additions made towards disallowance u/s. 14A of the Act r.w.r.8D of the Income Tax Rules, 1962, to book profit computed u/s. 115JB. Assessment of interest income during pre-commencement period under the head income from other sources&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngineer order of Central Electricity Regulation Commission and project appraisal report of project financiers, M/s Power Finance Corporation Limited and M/s Rural Electrification Corporation Limited and the balance loan from nationalised banks and financial institutions to be accepted as it is. If you go by logic adopted by the Ld.TPO and Ld.CIT(A) that the assessee has almost paid more than 50% excess consideration for import of capital equipment from AE, it appears that the project approved by the CERC and financed by various state Financial Institutions under power sector and their appraisal of project is flawed appears to be totally incorrect, absurd and illogical. Therefore, we are of the considered view that the method followed by the assessee to bench mark import of capital goods from AE under any other method is perfectly in accordance with prescribed method for bench marking this kind of transactions between an assessee and its AE. TPO is erred in making downward adjustment towards cost of equipment imported from AE, including enhancement of downward adjustment by the Ld.CIT(A). Hence, we approve the TP study conducted by the assessee including selection of other method as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... project purposes is erroneous and if so assessed, the interest paid on loans obtained for making such deposits ought to be allowed as a deduction. 3. The downward adjustment by the TPO was erroneous and excessive, particularly by adopting a different method from the earlier years when the transactions in these years were in fulfillment of the same contracts. 4. The reliance on a single page unaudited statements of the AE was erroneous particularly when a copy was not even furnished to the Appellant. 5. The reliance on a copy of a survey report was erroneous particularly when a copy was not even furnished to the Appellant. 6. The arm's length price had to be fixed in accordance with the norms and findings of the Electricity Regulatory Commissions, which are statutory and specialized bodies manned by experts. 7. The enhancement made by the learned CIT (Appeals) to the downward adjustment made by the TPO by adopting safe harbor provisions is unjustified since the Associated Enterprises was rendering complex services and the Appellant had not opted for the safe harbor provisions. 8. The learned CIT (Appeals) erred in making an enhancement by directing disallowance of interest. 9. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laimed that its transactions with its AEs are at arm s Length Price and for this purpose, it has relied upon the comparable information from M/s. Power Finance Corporation Information Memorandum in respect of Thermal Power Project, Suratgarh, which has been chosen as a comparable project. The assessee had obtained a Valuation Report from Chartered Engineer dated 11.11.2013 and as per the report of Chartered Engineer, per MW cost incurred by the assessee for setting up of power project is lesser than per MW cost incurred by the Thermal Power Projects at Suratgarh. 5. The case was selected for scrutiny and during the course of assessment proceedings; a reference was made to the TPO for determining ALP of international transactions of the assessee company with its AEs, M/s.MIPPIL, in respect of import of mechanical and electrical plant machinery for setting up of Coal Based Power Plant at Chhattisgarh. During the proceedings before the TPO, the assessee furnished information and documents called for. The assessee submitted that there was a standard per MW cost for large Coal Based Power Plants that was well-known and served as a benchmark and that its original project cost was well wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s/capital work-in-progress, since, the business of the assessee is not commenced. The AO further stated that when the business of the assessee is commenced, the depreciation to the extent of downward adjustment to be disallowed. The AO had also made addition of Rs. 25,93,58,803/- towards interest income earned from fixed deposit with banks on the ground that any income earned like interest income, dividend, etc., should be assessed under the head income from other sources irrespective of source of fund. The AO had also made additions of Rs. 1,70,83,176/- u/s. 14A r.w.r.8D of the Income Tax Rules, 1962, towards expenses relatable to exempt income and disallowed interest on borrowings u/r.8D(ii) and other expenses u/r.8D(iii) of the Income Tax Rules, 1962. 8. Being aggrieved by the assessment order, the assessee preferred an appeal before the Ld.CIT(A). Before the Ld.CIT(A), the assessee has filed detailed written submissions on the issue which has been reproduced at Para No.6 on pages 11 to 48 of the Ld.CIT(A) s order. The assessee has challenged downward adjustment made by the TPO towards import of capital goods from AE, M/s.MIPPIL and also challenged additions made by the AO towar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt paid to AEs for import of capital goods on the ground that downward adjustment suggested towards import of capital goods is nothing but payment of amount to AEs, which is nothing but diversion of interest bearing funds. The Ld.CIT(A) had also directed the AO to reduce interest disallowances from the capital work-in-progress for AY 2014-15. Thus, the Ld.CIT(A) dismissed the appeal filed by the assessee with enhancement. Aggrieved by the order of the Ld.CIT(A), the assessee is in appeal before us. 10. The first issue that came up for our consideration from Ground No.1 of the assessee appeal is disallowance of expenditure relatable to exempt income u/s. 14A of the Act r.w.r.8D of the Income Tax Rules, 1962. The facts with regard to impugned dispute are that the assessee has earned exempt dividend income of Rs. 5,31,21,556/-. The assessee has disallowed an amount of Rs. 8,79,013/- u/s. 14A of the Act. The AO has determined total disallowance of Rs. 1,70,83,176/- u/s. 14A of the Act, by invoking Rule 8D of the Income Tax Rules, 1962, which includes interest on borrowings, disallowance u/r.8D(ii) of the Income Tax Rules, 1962, of Rs. 82,93,040/-, and disallowance of other expenses @ 0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore, Ld.CIT(A) has rightly sustained additions made by the AO u/s. 14A of the Act r.w.r.8D of the Income Tax Rules, 1962, and their orders should be upheld. He further submitted that disallowance contemplated u/s. 14A of the Act, should be added back to the book profit computed u/s. 115JB of the Act. As per Clause (f) of Explanation-1 to Sec.115JB of the Act, any amount of expenditure relatable to any income referred to in Sections 10, 11 or 12 should be added back. Therefore, there is no error in the reasons given by the AO to make additions, and thus, the order of the Ld.CIT(A) should be upheld. 13. We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. The assessee has not challenged the disallowance of other expenses @ 0.5% on average value of investment u/r.8D(iii) of the Income Tax Rules, 1962, amounting to Rs. 87,90,136/-, and thus, we are inclined to upheld the findings of the Ld.CIT(A). In so far as disallowance of interest on borrowings u/r.8D(ii) of the Income Tax Rules, 1962, the assessee has filed necessary details to prove availability of sufficient own funds in excess of investments made in sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In the above context, it would be apposite to refer to a similar decision in CITv. Reliance Industries Ltd. [2019] 102 taxmann,com 52/261 Taxman 165/410ITR 466 (SC). { where a Division Bench of this Court expressly held that where there is finding of fact that interest free funds available to assessee were sufficient to meet its investment it will be presumed that investments were made from such interest free funds. 19. In HDFC Bank Ltd. v. Dy. CIT[2016] 67 taxmann.com 42/383 ITR 529 (Bom.), the assessee was a Scheduled Bank and the issue therein also pertained to disallowance under section 14A. In this case, the Bombay High Court even while remanding the case back to Tribunal for adjudicating afresh observed (relying on its own previous judgment in same assessee's case for a different Assessment Year) that, if assessee possesses sufficient interest free funds. as against investment in tax-free securities then, there is a presumption that investment which has been made in tax-free securities, has come out of interest free funds available with assessee. In such situation section 14A of the Act would not be applicable. Similar views have been expressed by other High Courts in C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r.8D of the Income Tax Rules, 1962. Thus, we reverse the findings of the Ld.CIT(A) on this issue and direct the AO to delete additions made towards disallowance u/s. 14A of the Act r.w.r.8D of the Income Tax Rules, 1962, to book profit computed u/s. 115JB of the Act. 16. The next issue that came up for our consideration from Ground No.2 of the assessee appeal is assessment of interest income during pre-commencement period under the head income from other sources amounting to Rs. 25,93,58,803/-. The facts with regard to impugned dispute are that during the FY 2012-13 relevant to AY 2013-14, the assessee has earned interest on Short Term Fixed Deposits with bank amounting to Rs. 25,93,58,803/-. The assessee has reduced interest income from capital work-in-progress on the ground that interest earned on Fixed Deposits with banks is inextricably linked to project, and thus, during pre-commencement period any income, including interest income earned by the assessee should be reduced from capital work-in-progress. The AO assessed interest income earned on Short Term Fixed Deposits under the head income from other sources by following the decision of the Hon ble Supreme Court in the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom other sources then, expenses incurred in relation to earning such income being interest paid on borrowed capital, should be allowed as deduction. In this regard, he relied upon the decision of the Hon ble Madras High Court in the case of CIT v. VGR Foundation reported in [2008] 298 ITR 132. 18. The Ld.DR, on the other hand, supporting the order of the Ld.CIT(A) submitted that interest income is taxable under the head income from other sources , whether such interest income is earned out of funds earmarked for specific purpose or surplus funds available with the assessee. This position has been reiterated by the Hon ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT (supra). The Ld.CIT(A) after considering relevant facts has rightly upheld assessment of interest income under the head income from other sources . The ITAT Chennai Bench also in assessee own case in ITA Nos.577 to 579/Chny/2022 order dated 14.07.2023, has held that once business is set-up income arising after would be Revenue in nature and assessable to tax. Thus, the order of the AO should be upheld. 19. We have heard both the parties, perused the materials available on record a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he business of the assessee has been set up or not. In the present case, admittedly, the AO has recorded categorical findings that the business of the assessee has not been set up and it is in pre-operative stage. Further, in our considered view when business can be said to have set up or commenced its business is important to decide the controversy. There is a distinction between setting up and commencement of business. When a business is established and it is ready to commence the business, it can be said that the business is set-up. The stage of set up of business is different in different cases. In case of manufacturing entity, the business can be said to have set up, in case, the installation of plant and machinery is complete and is ready for trial run or commercial production. In the present case, admittedly, the assessee is into setting up of power plant which is under construction for the impugned assessment year. When the plant was under construction, it cannot be said that the business of the assessee is set-up and is ready for commencement. If business is not set up and it is in pre-operative stage, then, as held by the coordinate Bench in the assessee own case and also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od as most appropriate method for bench marking international transactions with its AE for import of capital goods, because, the import of capital goods is an entity specific without there being any comparable of similar nature. Further, the assessee company has justified its transactions with its AE under other method as per rule 10AB of the Income Tax Rules, 1962, by comparing per MW cost of similar power project implemented by other companies, where per MW cost incurred by the assessee company is less than the per MW cost incurred by other costs. The Ld.Counsel for the assessee further referring to TP order passed by the TPO submitted that the TPO has rejected TP study without assigning proper reasons and also selected TNMM as most appropriate method by considering M/s.Sicagen India Ltd., which is engaged in the business of trading in construction materials as comparable, even though, the assessee has strongly raised its objection for selecting TNMM as most appropriate method and selection of M/s.Sicagen India Ltd., as comparable company. The Ld.Counsel for the assessee further submitted that M/s.Sicagen India Ltd., is engaged in various lines of business such as building materi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the basis of survey conducted by the Department in the case of the assessee for the subsequent period which is not applicable for the impugned assessment year and further, said report has been used against the assessee without providing copy of Survey Report to the assessee in contravention of principles of natural justice. The Ld.Counsel for the assessee further submitted that although, the Ld.CIT(A) has relied upon the findings of the Survey Report to take an adverse inference against the assessee to classify the AE as low risk trader based on the involvement of the assessee company and their staff in the process of import of capital goods, but, fact remains that said findings alone cannot be a reason to make a downward adjustment of import of capital goods that too, to the extent of more that 50% of cost of equipment imported by the assessee. Therefore, he submitted that the TPO and the Ld.CIT(A) are completely erred in making downward adjustment to cost of capital goods imported by the assessee company from its AE. 24. The Ld. DR Shri. R Mohan Reddy, CIT, supporting the order of the TPO and the Ld.CIT(A) submitted that there was a survey u/s. 133A of the Act, in the case of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... venture between M/s RK Powergen Pvt. Ltd. (RKPPL) with 74% share capital and M/s Mudajaya Corporation Berhad, Malasiya. ( MJC or Mudajaya ), a listed Malaysian company holding 26% of the share capital of the Appellant during this year. The Appellant sourced the majority of the plant and equipment for the Project from M/s MIPP International Limited ( MIPP or AE ), a subsidiary of Mudajaya Corporation Berhad. The imports were made pursuant to two Equipment Purchase Agreements dated 18.07.2007 and 20.02.2009. The appellant has conducted TP study and has adopted Other Method as per Rule 10AB of The Income tax Rules, 1962 as most appropriate method. The appellant claimed that transactions with its AE are at Arm s length price. For this, purpose, the appellant has obtained independent valuation report from Chartered Engineer, where he has worked out per MW cost of coal based power project and then compared with similar power projects in India and as per valuation report, the per MW cost of the appellant Company is lesser than per MW cost of similar other power projects in India. 26. The TPO made a downward adjustment of Rs. 407.25 crores on the cost of power project equipment imported fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nced to Rs 744.03 crores. It may be noted that the percentage of downward adjustment thus amounts to 50.5% when even according to the TPO the profit margin of the AE was around 30%. 28. In light of above factual background, we have considered the reason given by the ld. TPO and ld. CIT(A) to make downward adjustment to the value of import of cost of capital equipments from AE and we, find that the TPO and CIT(A) breached the rule of consistency. Admittedly, the appellant entered into equipment supply contract with AE, M/s MIPP International Limited dated 18-07-2007 and 20-02-2009. The contract for supply of capital equipment is spread over the period of more than one year. The appellant had also imported similar capital goods from AE for Asst. years 2011-12 and 2012-13. The TPO has accepted Other method adopted by the assessee in their TP report for benchmarking import of capital goods from AE in light of valuation report obtained from Chartered Engineer, where he has compared per MV cost of power project of the appellant with similar other power projects in India. The appellant has furnished copies of TPO orders for Asst. year 2011-12 dated 21-01-2015 and Asst. year 2012-13 dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing at the cost to the Appellant or costs or profits of AE. In this regard, it is necessary to read Rule 10AB of The Income Tax Rules, 1962 which reads as follows:- 10AB . For the purposes of clause (f) of sub-section (1) of section 92C, the other method for determination of the arm's length price in relation to an international transaction or a specified domestic transaction shall be any method which takes into account 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. The wording of Other method is akin to that of the CUP method. In other words, the methods applying margins of profits are ruled out and the cost that would have been paid to a Non AE become significant. The TPO does not seriously dispute the Appellant's contention that the cost of equipment is on par with other power plants. The TPO case is that the AE has made excessive profits. This is not the correct approach to determine the ALP, since Rule 10AB would require the determination of the cost that the Appellant would have in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciples of evidence and not furnishing copies to the Appellant contravenes principles of natural justice. The data contained in these statements cannot be said to be reliable on the face of it. Moreover, the profits disclosed by a company which is in a tax haven cannot be relied upon, particularly when it is violently opposed to external comparables as explained later. It is also to be appreciated that the AE is a subsidiary of Mudajaya Corporation Malaysia, and it is possible that most of the expenses were booked by the holding company. The financial statements extracted in the SCN do not show any line item for foreign exchange fluctuation, inspection charges, foreign travel, etc. The undesirability of using the values in such cases is codified in Rule 10TF and as per said rules Nothing contained in rules 10TA, 10TB, 10TC, 10TD or rule 10TE shall apply in respect of eligible international transactions entered into with an associated enterprise located in any country or territory notified under section 94A or in a no tax or low tax country or territory. Therefore, in our considered view, the ld. TPO and ld. CIT(A) are completely erred in considering foreign AE as tested party and fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he National Electricity Policy and Tariff Policy. The Central Government in exercise of its power under section 3, notified the Tariff Policy on 6 January 2006. The Tariff Policy provides that while allowing the total capital cost of the project, the Appropriate Commission would ensure that these are reasonable and to achieve this objective, requisite benchmarks on capital costs should be evolved by the Regulatory Commission . Further, the first proviso to clause (2) of Regulation 7 of the 2009 Tariff Policy provides that in case of the thermal generating station and the transmission system, prudence check of capital cost may be carried out based on the benchmarks norms to be specified by the Commission from time to time . From the CERC regulations, it is very clear that there is a check and balance for capital cost of power project and further, the CERC would undertake such exercise. The CERC vide order dated 4 June 2012 has fixed the benchmark hard cost for thermal power stations of capacities 500 megawatts and above. The Regulatory Commission has fixed the benchmark cost for a 500 MW unit as between Rs. 4.34 crores and 5.08 crores per MW (page 116 of paper book). This benchmark ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .06.2012 determining the benchmark hard cost of thermal power plants after extensive consultation with industry bodies, experts and other stakeholders. This finding must be read along with the hard cost per MW of the Appellant which can be readily seen from the CA certificate dated 15.02.2019. The most important criterion for using any method to fix the ALP is availability of reliable comparable data. The most reliable comparable data is that fixed by a statutory body. By an order in the public domain, CERC has fixed the price of hard cost at Rs. 4.34 crores per megawatt (page 116 of the paper book). The cost after completion of the power project was Rs. 3.44 crores per megawatt in the case of the Appellant (Page 345 of the paper book). Therefore, we are of the considered view that the method followed by the appellant to bench mark hard cost of equipment imported from AE is in accordance with Rule 10AB and as per said rule, for the purposes of clause (f) of sub-section (1) of section 92C, the other method for determination of the arm's length price in relation to an international transaction or a specified domestic transaction shall be any method which takes into account the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owner visiting the construction site. If he were to visit every day would the architect, civil contractor and the interior decorator and the structural engineers be termed low level service providers. Therefore, the reasons given by the ld. CIT(A) to classify M/s MIPP, an AE as low value service provider and to be classified as low risk trader and margin of 5% on overhead cost is alone to considered for bench marking imports of capital goods from AE is totally devoid of merits and thus, rejected. 34. The consequence of these downward adjustments would be that the total equipment cost would be reduced to a level at which no power plant has been built in India during this period. As submitted earlier the benchmark power plant cost has been statutorily fixed by the Central Electricity Regulatory Commission and if the result of these downward adjustments would be to reduce the cost of power plant below these norms by 50%, which is absurd and impossible. It must be noted that the power plant is functioning and generating power at full load and that its technical excellence has been vouchsafed by NTPC. Further, the contract had been duly appraised by the project lenders who were well ve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... totally erred in rejecting other method as prescribed u/r.10AB of the IT Rules, 1962, by assigning improper and incorrect reasons. The Ld.TPO also erred in adopting TNMM as most appropriate method, which is further fortified by the observation of the Ld.CIT(A), where the Ld.CIT(A) rightly rejected TNMM as most appropriate method for the detailed reasons given in their order and said findings of the Ld.CIT(A) is final and not challenged by the Revenue. Further, once it is accepted position in the given facts and circumstances of the case that only other method is suitable to bench mark import of capital goods from the AE, then the method followed by the assessee to compare per MW cost of power project with similar other power projects in India along with the valuation report from Chartered Engineer order of Central Electricity Regulation Commission and project appraisal report of project financiers, M/s Power Finance Corporation Limited and M/s Rural Electrification Corporation Limited and the balance loan from nationalised banks and financial institutions to be accepted as it is. If you go by logic adopted by the Ld.TPO and Ld.CIT(A) that the assessee has almost paid more than 50% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... direct the AO/TPO to delete downward adjustment made towards cost of capital equipment imported from AE and consequent reduction of downward adjustment to capital work in progress. 36. The next issue that came up for our consideration is enhancement of assessment in respect of disallowance of interest u/s. 36(1)(iii) of the Act, amounting to Rs. 108,03,37,425/-. The assessee has paid Rs. 1471.30 Crs. towards the cost of equipment imported from AE, M/s.MIPPIL. The TPO Ld.CIT(A) has made downward adjustment of Rs. 744.03 Crs. towards price paid for import of capital goods from AE. Thus, essentially after downward adjustment to the cost of equipment, the net price of equipment imported by the assessee got reduced to Rs. 727.27 Crs. The Ld.CIT(A) was of the opinion that the amount paid by the assessee to the AE for import of capital goods to the extent of downward adjustment of Rs. 744.043 Crs. is diversion of interest bearing funds to AE for non-business purpose. Therefore, the Ld.CIT(A) disallowed proportionate interest on borrowings as per P L A/c of the assessee and capitalized to work in progress u/s. 36(1)(iii) of the Act, by adopting average rate of interest @14.52% on Rs. 744. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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