TMI Blog2012 (5) TMI 504X X X X Extracts X X X X X X X X Extracts X X X X ..... idiaries and also in the absence of any nexus establishing that the interest bearing borrowed funds were given as interest free to its subsidiaries, we hold that the dis-allowance of interest is not justified - Decided in favor of assessee. Dis-allowance u/s 14A of estimated expenses out of administrative expenses being expenditure incurred in relation to earning the exempt income u/s 10(33) and 10(23G) - Held that:- Assessee's own funds are far in excess than the investments made by the assessee giving exempt income, the dis-allowance of the interest is not justified as it has to be presumed that the investments had come from the interest free funds available with the assessee - Decided in favor of assessee. Deduction u/s 80HHC - exclusion of gross interest or net interest - Held that:- 90% of net interest expenses have to be considered while computing deduction u/s 80HHC. See ACG Associated Capsules Pvt. Ltd. vs. DCIT(2012 (2) TMI 101 (SC)) - Decided in favor of assessee. Exclusion of profit allowed as deduction u/s 80IA/ 80IB with reference to all(exporting and non-exporting) units while arriving at deduction u/s 80HHC - assessee contended that exclusion should be restr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and same is in the nature of capital receipt not taxable under the Act prior to AY 2003-04. Same has become taxable under clause (va) to section 28 w.e.f. 1/4/2003. Transfer pricing - dis-allowance u/s. 92C of ₹ 1.85 crores out of the charter hire charges paid to its associate enterprise - Held that:- Neither the assessee, nor the TPO, nor the AO, or the Commissioner (Appeals) has followed any of the method prescribed in the Act and Rules, for arriving at the ALP. However, both the parties agree that the “CUP” method should be followed. In absence of comparable transactions, we set aside the issue to the file of the AO for the limited purpose of re—computing the arm’s length price by taking the date available in the public domain. Transfer pricing - dispute regarding working of 'Cost plus' method followed by TPO - Held that:- A perusal of the workings clearly demonstrates that the TPO has taken 50% of total cost and whereas the assessee has taken the actual cost relating to charter hire activity. This has made a difference to the calculation of cost. Actuals have to be taken to arrive at the correct cost and only then cost plus method can be applied. Cost plus method do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trading of petrochemicals and fibres, textiles etc. The assessee filed the return of income on 31/10/2002 declaring total income of Rs. Nil under normal provisions of the Income Tax Act, 1961(the Act) and income of Rs.2429,04,33,473/- under section 115JB of the Act. Subsequently the assessee revised the return on 8/3/2004 declaring loss of Rs. 117.03 crores under the normal provisions and of Rs.2429,04,33,473/- under section 115JB of the Act. The AO completed the assessment under section 143(3) of the Act on 28/3/2005 determining taxable income at Rs. 475,83,23,696/- after deduction under Chapter VIA and set off of brought forward losses and income under section 115JB of the Act was computed at Rs. 3670,41,60,500/-. Being aggrieved the assessee filed an appeal before the ld. CIT(A) disputing the various additions/ disallowances made by the AO while computing the income. The ld. CIT(A) allowed the appeal of the assessee in part. Hence, the assessee as well as the department are in appeal before the Tribunal. 3. First we shall take up the appeal filed by the assessee being ITA No.3082/Mum/06 for our consideration. Since there are certain grounds in the appeal of the department con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enting profit of the assessee nor it is in the nature of grant for meeting the cost of plant and machinery. Such subsidy is in the nature of capital receipt not liable to tax. It was contended that the said issue was considered by Special Bench of ITAT, Mumbai in assessee s own case for A.Y 1986-87 reported at 88 ITD 273(SB) and the Tribunal confirmed its earlier decision in assessee s own case for assessment years 1984-85 and 85-86 that the sales tax subsidy granted to the assessee is in the nature of capital receipt not liable to tax. It was contended that the Tribunal also considered the decision of the Hon ble Apex Court in the case of Sahney Steel and Press Works Ltd.(supra). He submitted that the Special Bench while deciding the issue in favour of the assessee also considered the decision of another Bench of ITAT Mumbai in the case of Bajaj Auto Limited (supra) which had taken a contrary view that the subsidy is revenue receipt. It was contended that in subsequent assessment years ITAT has allowed similar claim of the assessee and even in the just preceding assessment year 2001-02 the claim for deduction of notional sales tax was held in the nature of capital receipt not liab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cessary to go into the alternative plea of the assessee as claiming the notional sales tax as deductible under section 43B of the Act. Therefore, ground No.1 of the appeal taken by the assessee is rejected. 5. In ground No.2 of the appeal of the assessee, the assessee has disputed the order of ld. CIT(A) in confirming the disallowance of interest of Rs.11,19,382/- being interest referable to interest free loans and advances given to subsidiary companies. 5.1 The AO has stated that assessee has advanced interest free loans to its subsidiary companies. The AO has stated that assessee was asked to prove the nexus between source of funds out of which advances were given to its subsidiary companies and interest free or own funds available with the assesse. The assessee filed details and stated that the assessee had given loans and advances of Rs.2988.98 crores to its subsidiaries as on 31/3/2002, out its own funds and internal accruals except to he extent of Rs.9,89,04,473/-. The amount of interest on the advances of Rs. 9.89 crores given out of other than own funds worked out to Rs. 11,19,382/-. The AO relying upon the decision of Hon ble Kerala High Court in the case of V.I. Bab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar more than the interest free loans and advances given to its subsidiary company. The ld. A.R relying on the decision of the Hon ble Bombay High Court in the case of Reliance Utilities Power Ltd., vs. CIT 313 ITR 340 submitted that no disallowance out of interest expenditure is to be made if interest free funds were sufficient to meet the investment made. He further submitted that the Hon ble Apex Court has also held in the case of S.A.Builders Ltd., vs. CIT, 288 ITR 1 that when loan to its subsidiary is given in the course and for the purpose of business of its business, no disallowance of interest has to be made. He submitted that in view of above decisions, the disallowance of interest is not justified and the same should be deleted. 5.5 On the other hand, ld. D.R relied on the orders of the authorities below. 5.6 We have carefully considered the submissions of the ld. representatives of the parties and orders of the authorities below. We have also considered the cases relied upon by the authorities below as well as the cases cited by ld. A.R (supra). There is no dispute to the fact that the assessee s own funds are far in excess of the interest free loans and advances ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that similar issue again came up before the Tribunal in assesssee s own case in A.Y 2001-02 and the Tribunal vide its order dated 30/4/2008 by following its earlier order decided the issue against the assessee by reversing the order of the ld. CIT(A). 6.2 In view of the above we reject Ground No.3 of the appeal taken by the assessee by confirming the order of the CIT(A). 7. In ground No.4 the assessee has disputed the order of the ld. CIT(A) in confirming the disallowance of an estimated expenses of Rs. 2,56,58,887/- out of administrative expenses under section 14A of the Act being expenditure incurred in relation to earning the dividend income exempt under section 10(33) and interest income exempt under section 10(23G) of the Act while computing book profit as well as under the normal provisions of the Act. 7.1 This ground of appeal of the assessee is connected with Ground No.4 of the appeal of the department which reads as under: 4. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in deleting the disallowance of expenditure incurred for earning exempt income from Rs. 66,71,05,360/- to 1% of the exempted income. 7.2 The relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he A.Y 2001-02, which works out to about 1% of the exempt income. Therefore, ld. CIT(A) on the same basis, has restricted the disallowance @1% of the exempt income of Rs.256,858,88,668/- which works out to Rs.2,56,58,887/-. Hence ld. CIT(A) restricted disallowance under section 14A to Rs. 2,56,58,887/- for the purpose of computation of income under normal provisions of the Act and also for computing book profit under section 115JB of the Act. Therefore, the assessee as well the department are in appeal before the Tribunal. 7.5 At the time of hearing ld. A.R submitted that ground No.4 of the appeal taken by it is not pressed for. However, in respect of the ground No.4 of the appeal taken by the Department, Ld. A.R made his submissions on the lines of the submissions made before the authorities below and also placed reliance on the decision of the Hon ble Jurisdictional High Court in the case of Reliance Utilities Power Ltd.(supra). 7.6 On the other hand, ld. D.R relied on the order of the A.O. 7.7 We have carefully considered the submissions of the ld. representatives of the parties. In respect of ground No.4 of the appeal taken by the assessee, ld. A.R submitted that this g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontended that interest income is earned in the normal course of business and it forms part of the business defined under section 80IA of the Act . It was also contended that interest income is to be set off against interest paid and only if there is surplus interest income, the same needs to be considered while working out the figure of profit of business in accordance with provisions of section 80 HHC of the Act. It was contended that interest paid exceeded the interest received and hence, no deduction @90% of interest received is required to be made while computing claim for deduction u/s. 80 HHC of the Act. 8.4 It was also contended that 90% of only net interest received should be considered for reducing from the profit of business for computing deduction under section 80 HHC of the Act. 8.5 Further AO considered on an adhoc basis 90% of Rs. 10 crores out of total miscellaneous income as disallowable under Explanation (baa) to section 80 HHC of the Act for computing deduction under section 80 HHC of the Act. 8.6 With reference to exclusion of profit under section 80IA/ 80IB the assessee contended that it should be restricted to only those units with reference to which u/s. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t as profits of the business and AO was not justified to hold that the amount of deduction under section 80 HHC be computed on the basis of profits of the business as per normal provisions of the Act and to allow the deduction while computing book profit under section 115JB of the Act. Hence, AO restricted the claim for deduction under section 80HHC for computing book profit at nil. 8.9 The ld. CIT(A) considered the submissions of the assessee and held as under: (a) AO has correctly excluded interest receipt from the profit of the business while considering deduction under section 80 HHC of the Act. He has further stated that AO has rightly reduced the profits of the business by 90% of the gross interest receipt. Therefore, ld. CIT(A) has not agreed with the contention of the assessee that interest received should be set off against the interest paid and 90% of only net interest receipt should be reduced from the profit of the business. (b) Action of AO to estimate to reduce 90% Rs. 10.00 crores from miscellaneous income is fair and reasonable while considering eligible deduction under section 80 HHC of the Act. The ld. CIT(A) has stated that assessee has not furnished comple ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stries Ltd. (supra). (e) The ld. CIT(A) has agreed with the contention of the assessee that for computing book profit under section 115JB of the Act, amount of deduction to be reduced under section 80 HHC is to be worked out on the basis of book profits and not on the basis of profits gains of business as computed under normal provisions of the Act. 8.10 In view of the above findings of ld. CIT(A), the assessee as well as department are in appeals before the Tribunal. 8.11 In respect of order of ld. CIT(A) to reduce 90% of the gross interest received while computing deduction under section 80 HHC of the Act, ld. A.R submitted that above issue is now covered by the decision of the Hon ble Apex Court in the case of M/s. ACG Associates Capsules Pvt. Ltd. vs. DCIT by order dated 8/2/2012 in Civil Appeal No.1914 of 2012 (arising out of SLP (c) No.32450 of 2010), copy filed at the time of hearing, in favour of the assessee. In the said case, Hon ble Apex Court has held that 90% of net receipts are to be excluded under Explanation (baa) to section 80 HHC of the Act for determining the profits of business The ld. D.R has not disputed the above contention of the ld. A.R. 8.12 In v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sub-section (9) of section 80 IA of the Act. Sub-section (9) of section 80 IA reads as under: where any amount of profits and gains of an undertaking or .. in the case of an assessee is claimed and allowed under this section for any assessment year, deduction to the extent of such profits and gains shall not be allowed under any other provisions of this Chapter under the heading C- Deductions in respect of certain income , and shall in no case exceed the profits and gains of such eligible business of undertaking or enterprise, as the case may be. On considering the above sub-section (9) of section 80 IA of the Act in the context of the claim to be allowed under section 80 HHC of the Act of the exporting unit we find merit in the contention of ld. A.R that deduction under section 80 HHC of the Act is computed in proportion of export turnover to total turnover. Further sub-section (9) of section 80 IA provides that when an amount of profits and gains of an undertaking is claimed and allowed as deduction under section 80 IA of the Act for any assessment year, deduction to the extent of such profits and gains shall not be allowed under any other provisions of this chapter under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purpose of computing deduction under section 80 HHC of the Act and not excluding the amount of deduction allowed under section 80 IA / 80 IB of the Act for all the units of the assessee, we hold that this issue is covered in favour of assessee by the decision of the Hon ble Jurisdictional High Court in the case of Associated Capsules Pvt. Ltd. vs. DCIT(supra) as discussed herein above and also the decision of ITAT Mumbai Benches in the case of ACIT vs. Grasim Industries Ltd., (2010) 35 SOT 249. Hence, we confirm the order of ld. CIT(A) and reject Ground No.5 of the appeal taken by the department. 8.17 In respect of Ground No.6 of the appeal of the department to dispute the order of ld. CIT(A) in deleting the inclusion of excise duty and sales tax in the total turnover for the purpose of computing deduction under section 80 HHC of the Act, it was conceded that above issue is covered in favour of the assessee not only by the decision of the Hon ble Jurisdictional High Court on which reliance has been placed by the ld. CIT(A) (supra) but is also covered by the decision of the Hon ble Apex Court in the case of CIT vs. Laxmi Machine Works, 290 ITR 667. The Hon ble Apex Court in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the year. The AO has stated that no commercial expediency or business prudence can be attributed to the traveling of spouses with the executives specially with the trip of the executive is purely in connection with the business affairs of the assessee company. The A.O made disallowance of Rs.80,57,477/- on the ground that the expenditure incurred on the wives who accompanied her husband on the foreign tour cannot be regarded as expenditure allowed wholly and exclusively for business purposes as the wife could not be said to have attributed directly to the business of the assessee concerned. In the first appeal ld. CIT(A) has confirmed the action of the AO. Hence, the assessee is in further appeal before the Tribunal. 9.2 During the course of hearing ld. A.R stated that similar issue was considered by the Tribunal in assessee s own case on identical facts and circumstances in assessment year 2001-02 vide order dated 30/04/2008 in ITA No.5971/M/04, copy placed at pages 221 to 229 of the paper book against the assessee and confirmed the disallowance made by the ld. CIT(A). 9.3. In view of the above submissions of ld. A.R and the fact that assessee has not been able to establish t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... they got crystallized. He submitted that the matter may be restored to the AO with direction to allow the expenditure in the year in which it has actually got crystallized. The ld. D.R submitted that he has not objection to restored the matter to the file of the AO with above direction. 10.4 After hearing the ld. representatives of the parties and respectfully following the earlier order of the Tribunal in the assessee s own case for assessment year 2001-02 (supra), we restore this issue back to the file of AO with a direction to allow the said expenditure as deduction in the year in which it got crystallized. Hence, ground No.7 of the appeal taken by the assessee is allowed for statistical purposes. 11. Ground No.8 of the appeal taken by the assessee is as under:- 8. The learned CIT(A) erred in confirming the action of the AO of taking the total consideration received on sale of shares of Larsen Toubro for computing Capital Gains. The Appellant submits that 25% of sale consideration pertaining to restrictive covenant as per the Sale Agreement signed with Grasim Industries Limited is in the nature of capital receipt not liable to tax. The Appellant submits that the AO s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ides voting rights. (d) That the assessee company will be obliged with these obligations to comply the same for a minimum period of 5 years from the date here of i.e. 18/11/2001. (e) That no separate consideration relatable to the restrictive covenant is specifically stated in the agreement dated 18/11/2001. However SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 1997 dealing with take over regulations in clause 20(8) provides the guidelines that 25% of the offer price may be considered to be attributable to the restrictive covenant accepted as part of the sale consideration. 11.2 The A.O has stated that this is universal restriction which has been considered by the company on sale of substantial number of shares held by it in L T. The restrictive covenant incorporated in the sale agreement does not in any way restrict or place any kind of restriction on the right to carry on normal business of the assessee. The AO stated that the assessee s reliance on clause 20(8) of SEBI Regulations 1997 is not correct. SEBI is the regulatory authority in dealing in shares and securities in stock exchanges. SEBI Regulations do not apply to the Income Tax Act either in it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng capital gain for Income Tax purposes also. On behalf of the assessee reliance was also placed before ld. CIT(A) on the following decisions: 1. Gillanders Arbuthnot Co. Ltd. vs. CIT (1964) (53 ITR 283 ) (SC) 2. CIT vs. Best Co. (Private) Ltd. (1966) 60 ITR 11 (SC) 3. CIT vs. Saraswathi Publicities 132 ITR 207 (Mad) 4. CIT vs. Late G.D.Naidu 165 ITR 63 (Mad) 5. CIT vs. Automobile Products of India Ltd. (140 ITR 159) (Bom) 6. Addl. CIT vs. Dr. K.P.Karanth ( 139 ITR 479)(AP) 7. M/s. Parry and Co. Ltd. vs. DCIT (269 ITR 177)(Mad) 8. K.S.S.Mani vs. ITO 54 ITD 76 (Mad) 9. M.N.Karani vs. ACIT, 64 ITD 119 (Bom) 11.4 The ld. CIT(A) after considering the submissions of the assessee has held that he agrees with the AO that the claim of the assesee is not tenable. He has further stated that the decisions cited by the assessee are mainly in the context of Non Compete Agreement. The ld. CIT(A) has stated that in the case of the assessee it has not been shown that the restrictive covenant involved a valuable right, the surrender of which by the assessee resulted in giving a real and enduring benefit to M/s. Grasim Industries Ltd., The mere acceptance of restriction canno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Finance Act 2002 w.e.f. 1/4/2003 to treat it as taxable business receipt. He, further, submitted that section 55(2)(a) of the Act was also amended by the Finance Act 2002 to include and provide that cost of a right to carry on business shall be nil. He submitted that prior to assessment year 2003-04 the Non Compete Fee or right to carry on business was neither a revenue receipt in the nature of business receipt nor was a capital receipt chargeable to tax as capital gain. The ld. A.R submitted that the sale consideration received by the assessee to the extent of 25% cannot be considered as capital gain in the assessment year under consideration as the same was towards restrictive covenant as per agreement dated 18/11/2001. To substantiate his submission ld. A.R referred to the decision of the Hon ble Apex Court in the case of Guffic Chem P. Ltd. vs. CIT 332 ITR 602 and submitted that it was held by Their Lordship that the Non Compete Fee received during the assessment year 1997-98 was a capital receipt and prior to April 2003 such payment was in the nature of capital receipt. The ld. A.R further submitted that the cases referred before the ld. CIT(A), mentioned herein above in p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... twenty five percent of the offer price arrived at under sub-regulations (4) or (5) or (6) shall be added to the offer price. On perusal of above clause of SEBI (Substantial Acquisition of Shares and Takeovers)Regulations 1997 it is evident that if there is substantial acquisition of share and there is a Non Compete Agreement, the payment made to the concerned persons could be considered to the extent of 25% of the sale consideration, towards consideration for accepting such restrictive covenant. In the case before us there is no dispute that the assessee entered into restrictive covenant not to deal in the shares of L T or any other L T instrument which would provide voting rights to the assessee and its subsidiary companies or to any person acting on its behest for a minimum period of 5 years. Therefore, the said sale of 2.5 crores equity shares of L T by the assessee to M/s. Grasim Industries Ltd. could not be considered as simple sale and if it is so, then there was no need to enter into any such kind of restrictive covenant. We are of the considered view that the said obligation in the nature of a restriction had been undertaken by the assessee with M/s. Grasim Industries ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther they constituted revenue receipt? The second question which arose before this court was whether the amount received by the assessee (compensation) on the condition not to carry on a competitive business was in the nature of capital receipt? It was held that the compensation received by the assessee for loss of agency was a revenue receipt whereas compensation received for refraining from carrying on competitive business was a capital receipt. This dichotomy has not been appreciated by the High Court in its impugned judgment. The High Court has misinterpreted the judgment of this court in Gillanders case (supra). In the present case, the Department has not impugned the genuineness of the transaction. In the present case, we are of the view that the High Court has erred in interfering with the concurrent findings of fact recorded by the Commissioner of Income-tax (Appeals) and the Tribunal. One more aspect needs to be highlighted. Payment received as non-competition fee under a negative covenant was always treated as a capital receipt till the assessment year 2003- 04. It is only vide Finance Act, 2002 with effect from April 2003 that the said capital receipt is now made taxabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wards receipt on account of restrictive covenant and same is in the nature of capital receipt. 11.12 The Hon ble Madras High Court in the case of CIT vs. G.D.Naidu (supra) also held that the compensation received by the assessee for the restrictive covenant is capital receipt not liable to tax. In the said case the assessee was a partner in a firm. He retired from the firm w.e.f. 1/4/1963 and agreed not to enter into the business for plying buses which was carried on by the firm in which he was a partner. Thus the assessee agreed not to enter into competition with firm for a period of five years to ply buses on the designated routes. The firm paid Rs. 15,95,000/- in consideration of this non-competition. The AO held that the compensation received is revenue in character. The first appellate authority also held it to be a revenue receipt. However, the Tribunal held that the compensation relatable to the restrictive covenant is capital receipt. The Hon ble High Court held that the compensation received by the assessee for the restrictive covenant was a capital receipt not liable to income tax. Further in the case of K.S.S.Mani (supra) the Tribunal held that the agreement contains p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee are that the assessee entered into a time charter party agreement (C/P) dated 20/10/1993 in terms of which Reliance Europe Ltd. ( hereinafter to be referred in short REL) gave its vessel, Relchem Isha to the assessee on time charter hire for carrying of cargos as per terms of the said C/P at US$ 6,000 PDR. Assessee holds more than 26% of the voting power in REL and thus an associated enterprises of the assessee. The vessel Relchem Isha is Semi-Refrigerated LPG/ Chemicals carrier and is equipped to carry liquefied gases at minus 48 degree Celsius temperature as well as chemical products. The capacity of such vessel is 3,256 DWT. It is fitted with two stainless steel tanks having total capacity of 2,242 cubic meters. The assessee paid to REL of Rs. 10,52,88,711/- The AO made a reference to TPO under section 92CA(1) of the Act for determination of Arm s Length Price(ALP). The TPO vide his order dated 25/3/2005 has stated that the assessee was requested to determine ALP of international transaction being charter hire charges in accordance with any one of the methods prescribed under Income Tax Act. The assessee was also requested to provide details of the cost incurred by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wry Monthly, April 2009- Issue published by the Drewry shipping Consultants Ltd. UK, and determined arms s length price by taking average therefrom. He adjusted the rate for the capacity and computed arm s length price of the charter hire charges at the rate of US$ 3819, as against the rate of US$ 6000 paid by the assessee. Thus the TPO vide his order dated 25/3/2005 suggested adjustment of Rs.3,78,13,087/-. Being aggrieved the assessee filed appeal before the first appellate authority. 12.3 Ld. CIT(A) after considering the submissions of the assessee has taken the mean of the ALP determined by the TPO and prices actually paid by the assessee. Thus out of the adjustment of Rs. 3,78,13,087/- made by TPO he confirmed the adjustment of Rs. 1,85,24,376/- and deleted the balance amount. Hence, the assessee is in appeal before the Tribunal. 12.4 Relevant facts in respect of the ground of appeal taken by the Department viz. ground No.9 are that the the TPO, in his order dated 25th March 2005, passed under section 92CA(3) of the Act, has dealt with the issue vide Para-12 at Page-6 of his order. The assessee paid consultancy charges of Rs.17,62,68,906, to REL. The assessee s claim has b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... zy Co., and The D Group have grater risk as they operate at global level and also that no foreign exchange fluctuation risk is involved; as for difference in the reasons such as basis of estimation, etc., by The D Group and Mackinzy Co. The TPO applied Cost Plus method with 5% mark-up. He made certain adjustments. 12.7 On appeal, the first appellate authority, vide Para-3.20/Page-61 of his order, accepted the contentions of the assessee. He held that in the absence of comparable instances, an estimate of reasonable mark-up can only be made after taking into account all material factors and indices. He held that the consideration paid by the assessee to REL during the year under consideration towards consultancy services is reasonable having regard to the net profit disclosed by REL and also the fact that the net profit of REL includes income from time charter of Relchem Isha where a transfer pricing adjustment had been made. The Commissioner (Appeals) has not applied any method prescribed under the Act and the Rules. He has not found fault with the methods employed by the assessee or T.P.O. Aggrieved, the Revenue is in appeal before the Tribunal. 12.8 During the cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... demobilization of such unique vessel. He further submitted that no consideration has been given towards repair and maintenance of such unique vessel, therefore, the adjustment of prevailing charter higher rates in proportion to carrying capacity of the vessel was misleading. The ld. A.R filed a chart at the time of hearing of the appeal giving the adjustment to ALP by stating that beside the interest cost per day towards capital expenditure incurred by REL, adjustment on account of following factors to the extent of 25% of charter rate per day have to be considered which comes to US$ 1190 . The assessee has listed out the following special factors to justify his submission for enhancement required to be made while determining ALP of the charter hire charges vis- -vis the market rate given in the two publication which are as under:- The ALP of charter hire charges is arrived at without considering the following factors for which an enhancement is required to the market rates given in the 2 publications to determine an arm s length consideration 1. Unique vessel: Charter hire rates is to be increased for vessel Relchem Isha carrying both liquefied gas as well as chemicals and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ime of hearing, as mentioned herein, above due to which an adjustment is required for determining the charter rate per day for the vessel Relchem Isha. 12.9 Neither the assessee, nor the TPO, nor the Assessing Officer or the Commissioner (Appeals) has followed any of the method prescribed in the Act and Rules, for arriving at the arm s length price. The assessee s case was that the charter hire charges were approved by the D.G. (Shipping) and, hence, it is a comparable under the CUP method. The TPO took the average of the rate published by the Shipping Intelligence Weekly and Drewry Monthly, which is the rates in the public domain and without making any adjustment for variation in capacity, cost, finance, risk, etc., computed the arm s length price. The Commissioner (Appeals) took the mean of the arm s length price determined by the TPO and price actually paid by the assessee and determined the arm s length price. Thus, the assessee as well as the authorities have not computed the arm s length price in accordance with law. Hence, we have to quash the arm s length price determined by all the parties. 12.10 Both the parties agreed before us that the CUP method should be follo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hand, submitted that the assessee is not disputing the application of Cost Plus method. He only says that the working is wrong. He filed a chart and submitted that if the correct figures were taken, then even under the Cost Plus method, no adjustment would be called for. 12.14 In reply, the learned Departmental Representative submitted that the working can always be verified if there is no dispute on the method applied. 12.15 After hearing rival contentions and on a careful consideration of the facts and circumstances of the case and on a perusal of the papers on record, we find that the TPO has rightly applied the Cost Plus method. The CIT(A) has granted relief for reasons which cannot be sustained. No method was followed. Any how, the TPO has committed an error in computing cost under the Cost Plus method. The working of the TPO as well as the assessee, are as follows: Working by the TPO Particulars U.S. Dollar Rupees Total cost 45,22,947 Less: Cost in respect of activities other than consultancy services 22,61,474 Cost relating to charter hire activity (estimated @ 50% of total ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is called for as the payment is at arm s length price. As we are convinced with the working of the assessee, we hold that no adjustment is called for under the transfer pricing provisions. Consequently, we uphold the conclusions of ld. CIT(A) on this issue for different reasons as mentioned above and dismiss ground No.9 of the appeal raised by the revenue. 13. Now we take up ground No.2 of the appeal of the department disputing the order of ld. CIT(A) in restricting the allowance of depreciation of Rs. 4331,32,16,746/- as against assessee s claim of Rs. 5798,16,03,243/- and accordingly disallowing Rs. 1446,83,86,497/-. 13.1 In the return filed, the assessee had not been claiming depreciation on the power plant at Hazira, STG, GTG- V VI at Patalganga and CPP-II. The assessee had also not been claiming depreciation at Cracker Unit at Hazira, Oil Gas division, SBM Polypropylene Paraxylene complex at Jamnagar. The AO allowed depreciation in the earlier year however, ld. CIT(A) deleted the said allowance of depreciation of the earlier years but department filed appeals before the Tribunal. Accordingly the AO considered the claim of depreciation by considering the written do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incurred for the erection of plant and machinery in units which had not been commissioned during the year under consideration. Therefore, these expenses were not laid out or expended for the purpose of business operation of the existing units. He further stated that in the books of account expenses in the nature of salary, travelling etc. were capitalized as cost of assets on the basis that these expenses had been incurred on those assets which went into the erection of plant and machinery. The AO relied on various decisions, as mentioned at pages 38 to 41 of the assessment order in para 10.11 and 10.12 including the decision of the Hon ble Supreme Court in the case of Chellapally Sugar Mills Ltd., 98 ITR 167, wherein it was held that accounting standards and accounting practice regarding accounting of income and expenditure etc. have to be followed and accepted so long as same are not contrary to any law. Accordingly AO disallowed the expenses of Rs. 1,81,48,738/- and held that it is a capital expenditure. Being aggrieved, the assessee filed appeal before the first appellate authority. 14.2 On behalf of the assessee it was contended that though the said expenditure aggregating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T (ITA No.1523/Mum/97) (xi) Tata Chemicals Ltd. vs. DCIT (72 ITD 01)Mum 14.3 It was contended that pre-operative expenses in question have been incurred for the purpose of business of the assessee and the expenditure was incurred for expansion of its existing activities. Hence, these preoperative expenses represent revenue expenditure incurred for the purpose of business and be allowed as deduction under section 37 of the Act. Ld. CIT(A) considered the submissions of the assessee and also considering that similar issue had been considered in the assessee s own case in the preceding assessment year and held that the pre-operative expenses of Rs.1,81,48,738/- are allowable as revenue expenditure. It is also relevant to state that ld. CIT(A) has also considered specifically the case of ITAT Pune Bench in the case of Kalyani Steel Ltd., vs. DCIT, 62 ITD 233. He has held that where there is common management, common office and common control, then expenditure incurred on expansion / extension of the existing business is of revenue nature. Hence, department is in appeal before the Tribunal. 14.4 At the time of hearing ld. D.R relied on the order of the AO, whereas ld. A.R besides s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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