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2017 (10) TMI 588

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..... lly following the Special Bench decision, we hold that no separate disallowance should be made under section 14A in the computation of book profits under section 115JB of the Act. Additional depreciation under section 32(1)(iia) - Held that:- The word “shall” is not always conclusive of the mandatory nature and can be read as the word “may” in certain circumstances. However, when we consider the text and the context of the word “shall” as employed in clause (iia), there remains no doubt whatsoever that the grant of additional claim at the rate of 20% has necessarily to be allowed as deduction under clause (ii). Once the claim of additional depreciation under clause (iia) is to be allowed as deduction under clause (ii), a fortiori, the command of Explanation 5 which applies to clause (ii) automatically becomes applicable to such a claim of additional depreciation. Once we hold that the claim for additional depreciation is allowable as deduction under Section 32(1)(ii), the writ of Explanation 5 providing for allowing depreciation mandatorily, gets magnetized. Explanation 5, even if placed under clause (ii), applies to sub-section (1) of section 32, which also covers clause (iia). .....

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..... and production of oil and such services are not duplicate in nature. When the fact of the assessee having received the services, which are not duplicate in nature, is proved, the authorities cannot determine nil ALP of the payment made for such services. Determination of the ALP of the international transaction of ‘Receipt of services’ - assessee aggregated the international transactions and determined ALP on the basis of TNMM - Held that:- By now, it is fairly settled through a catena of decisions that the CUP is the most appropriate method to determine the ALP of an international transaction because it seeks to compare the price charged or paid for property transferred or services rendered, provided proper comparables are available. It is under this method alone that the price charged or paid is directly compared with the price charged or paid in an uncontrolled comparable transaction. The remaining four specific methods seek to make comparison of the price charged or paid indirectly through the medium of normal profit arising in a comparable uncontrolled transaction. Further, the CUP method is a transaction specific method which strives to determine the ALP of an internation .....

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..... rity for the preceding year, available before them at the time of decision. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such proceedings. Not allowing credit for tax deducted at source and advance tax as claimed in the return of income - Held that:- AO is directed to allow necessary credit for the advance tax paid by the assessee and TDS paid on its behalf, after necessary verification. - ITA No.1459/Del/2016 - - - Dated:- 9-10-2017 - SHRI R.S. SYAL, VICE PRESIDENT AND SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER For The Assessee : Shri Ajay Vohra, Sr. Advocate, Shri Ravi Sharma, Advocate, Shri Piyush Ahuja, CA Ms Poonam Ahuja, CA For The Department : Shri Amrendra Kumar, CIT, DR, Shri Neeraj Kumar, Sr. DR Shri Kumar Pranav, Sr. DR ORDER PER R.S. SYAL, VP: This appeal by the assessee arises out of the final assessment order dated 12.01.2016 passed by the Assessing Officer (AO) under section 143(3) read with section 144C of the Income-tax Act, 1961 (hereinafter also called the Act ) in relation to the assessment year 2011-12. 2. First issue raised in this appeal is against the disallowance made un .....

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..... 9,63,25,777/- and under rule 8D(2)(iii) towards expenses at ₹ 5,89,98,005/-. Thus, total disallowance under Section 14A read with Rule 8D was worked out at ₹ 15,53,23,782/-. The assessee remained unsuccessful before the Dispute Resolution Panel (DRP). The amount of disallowance was added in the computation of income under normal provisions as well as under MAT provisions under section 115JB of the Act. The assessee is aggrieved against this disallowance. 3. We have heard both sides and perused the relevant material on record. The first major issue taken by the learned Authorized Representative is against the non-recording of satisfaction by the Assessing Officer in terms of section 14A(2) of the Act. The learned Authorized Representative relied on certain decisions in support of such argument. Without discussing such decisions, we are in full agreement with the contention that the recording of satisfaction is a pre-condition and sine qua non for making any disallowance under Section 14A. Sub-section (2) of section 14A clearly stipulates that the Assessing Officer shall determine the amount of expenditure incurred in relation to exempt income as per Rule 8D if he, hav .....

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..... Abhishek Industries [2006] 156 Taxman 257. In that decision, the Hon ble Court had observed that the monies received as, share capital, as term loans, as working capital loans, as sale proceeds etc do not have any different colour. Whatever are the receipts in business that have the colour of business receipts and have no separate identification. Thus, while borrowed fund and own fund were existing simultaneously with the company, there was no way that the assessee could reach the conclusion that while making the said investment, only part of own funds was picked and borrowed funds were left untouched. Monies from different sources merge into a common pool. Just like upon picking wafer in a bucket from a pool, it is not possible to determine whether its source is rain or an inflowing stream, similarly it is not possible to pinpoint whether money for the said investment was picked from one specific source only, to the exclusion of other sources. Since own funds and borrowed funds existed simultaneously, part of the invested money can be attributed to have been sourced from borrowed interest bearing funds. 5. On going through the above extraction from the assessment order, it i .....

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..... m and substance of disallowance under Rule 8D(2)(ii) is that the interest relatable to investments/securities yielding exempt income is to be disallowed. 8. At this juncture, it is relevant to note that section 36(1)(iii) provides for deduction of interest of the amount of interest paid in respect of capital borrowed for the purpose of business or profession. The essence of this provision is that the interest should be allowed so long as the capital borrowed, on which such interest is paid, is used for the purpose of business or profession. If, however, an assessee is having its own interest free surplus funds and such funds are utilised as interest free advances even for a non-business purpose, there cannot be any disallowance of interest paid on interest bearing loans. The Hon'ble Bombay High Court in CIT vs. Reliance Utilities and Power Ltd. (2009) 313 ITR 340 (Bom) , has held that where an assessee possessed sufficient interest free funds of its own which were generated in the course of relevant financial year, apart from substantial shareholders funds, presumption stands established that the investments in sister concerns were made by the assessee out of interest free .....

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..... funds available to an assessee sufficient to meet its investment and at the same time the assessee had raised a loan, it can be presumed that the investments were from the interest free funds available . Thereafter, the judgment of the Hon ble Supreme Court in the case of East India Pharmaceutical Works Ltd. Vs. CIT (1997) 224 ITR 627 (SC) and also the judgment of the Hon ble Calcutta High Court in Woolcombers of India Ltd. Vs. CIT (1981) 134 ITR 219 (Cal) were considered. It was finally concluded that: The principle, therefore, would be that if there are funds available both interest free and overdraft and/or loans taken, then a presumption would arise that the investments would be out of interest free funds generated or available with the company, if the interest free funds were sufficient to meet the investment . Consequently the interest was held to be deductible in full. From the above judgment, it is manifest that there can be no presumption that the shareholders fund of a company was utilized for the purchase of fixed assets. If an assessee has interest free funds as well as interest bearing funds at its disposal, then the presumption would be that investments wer .....

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..... been mentioned that part of the investments were also financed from IPO. Be that as it may, we are not so much concerned with the question as to whether or not proceeds from IPO were utilized for the purposes of making investments in securities yielding exempt income. Since the investments in securities fetching exempt income is far less than the amount of Shareholders funds not only at the end of the Financial year 2010-11 under consideration but even in the earlier years, whose Annual reports have been placed on record, as the sequitur, such securities are held to have been purchased from the interest-free Shareholders fund. Ergo, we are satisfied that the disallowance under rule 8D(2)(ii) at ₹ 9.63 crore is not sustainable. The same is directed to be deleted. 12. Now, we turn to the last part of the disallowance made under rule 8D(2)(iii). This part of the Rule provides that an amount equal to 1/2 % of the average of the value of investment, income from which does not or shall not form part of the total income, shall be disallowed. The Assessing Officer has computed this amount of disallowance at ₹ 5,89,98,005/-. We have noticed above that the assessee furnished .....

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..... amount of ₹ 217.17 crore. This amount has been divided with 244, being, number of employees for working out the Cost per employee at ₹ 89.00 lakh. Thereafter, 15% of the Cost of one employee has been attributed to disallowance under section 14A at ₹ 13,35,108/-. We find that there are several inconsistencies in the above calculation made by the assessee. The Assessing Officer has also held such calculation as incorrect: as it has not considered various aspects of indirect expenses in the shape of establishment in addition to direct expenses. There are a lot of cost factors involved in investments in shares/mutual funds . Turning to the above computation, it is seen that the assessee has reduced Directors salary from the base figure, implying, that the directors were nowhere involved in taking any decisions or handling the investments. This is an absurd proposition. The assessee is a limited company and all the relevant decisions of the company are taken by the Board of Directors. Here is a case in which the assessee is holding investments to the tune of ₹ 1179.96 crore and has earned exempt income of ₹ 64.76 crore and there is a contention that Boar .....

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..... by the assessee in respect of the expenditure incurred to earn exempt income ought to have applied Rule 8D which he did not.......Where an Assessing Officer is not satisfied with the correctness of the claim of the assessee, in this regard, he is bound by the provisions of sub section (2) of section 14A to follow the prescribed method which at the relevant time was Rule 8D . It is clear from the judgment of the Hon ble jurisdictional High Court that where the Assessing Officer has rejected the assessee s claim of disallowance under section 14A of the Act, then such disallowance has necessarily to be computed in terms of rule 8D to the relevant extent. 16. Adverting to the facts of the instant case, we find that the Assessing Officer, on being dissatisfied with the assessee s computation of disallowance, embarked on his own computation under rule 8D(2)(iii) at ₹ 5,89,98,005/-. The assessee has not disputed any part of the calculation of such disallowance. This computation of disallowance, having been made in terms of rule 8D(2)(iii), is held to have rightly made. The assessment order making disallowance of ₹ 5.89 crore u/s 14A under the normal provisions of the Act i .....

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..... ut such decision does not affect the powers of the appellate authorities in entertaining such a claim if it is legally sustainable. However, we find that the on the facts and in the circumstances of the case, the assessee does not deserve any relief on this score. 21. The Hon ble Supreme Court in the case of Commissioner of Income Tax Vs. Mahendra Mills (2000) 243 ITR 56 (SC), has held that if an assessee does not claim the depreciation and does not furnish particulars for claiming depreciation, as prescribed, depreciation cannot thrust upon him . To remedy the situation flowing from such judgment, the Legislature brought in Explanation 5 to section 32(1)(ii) through the Finance Act, 2001 w.e.f. 01.04.2002. The Explanation provides that the provisions of this sub-section shall apply whether or not the assessee has claimed deduction in respect of depreciation in computing his total income . The effect of this Explanation is that deduction on account of depreciation has to be mandatorily allowed under section 32(1)(ii) of the Act notwithstanding the fact that assessee claims or does not claim it in the computation of its total income. 22. The ld. Authorized Representa .....

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..... . Then there are clauses (i), (ii), (iia) and (iii). This shows that the deduction on account of depreciation is relevant to all the clauses including clauses (ii) and (iia). Thus, it is not correct to contend that relief provided u/s 32(1)(iia) is a separate incentive de hors depreciation. 25. A cursory look at clause (iia) divulges that the assessee is entitled to deduction equal to 20% of the actual cost of such machinery or plant, which shall be allowed as a deduction under clause (ii). Contention of the ld. Authorized Representative that the mandate of Explanation 5 does not apply to relief under clause (iia) as the same has been placed under clause (ii), in our view, is far-fetched. It is no doubt clear that Explanation 5 granting mandatory depreciation is placed in clause (ii) of Section 32(1) of the Act, but when we consider the language of clause (iia) providing further deduction for depreciation @ 20%, it becomes vivid that such further claim shall be allowed as deduction under clause (ii) . It ergo becomes overt that the claim for additional depreciation as provided under clause (iia) has to be allowed as deduction under clause (ii). So, for all practical purposes, .....

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..... F. No. 45/12/2000-CL.III dated 21.2.2003 prohibiting claiming depreciation under the UOP method. He further held that such a method is not permissible under the Companies Act, 1956 (hereinafter also called the Companies Act ). The assessee was called upon to explain as to why the book profit u/s 115JB be not computed by allowing depreciation under straight line method as prescribed under Schedule XIV of the Companies Act instead of UOP method followed by it. The assessee submitted that it has followed this method of accounting for oil and gas assets as set out by the Guidance Note issued by the Institute of Chartered Accountants of India (hereinafter also called the Institute ) on Accounting for oil and Gas producing activities and accordingly the expenditure on producing properties has been depleted by ₹ 332.65 crore on UOP basis. The assessee further relied on the industry practice for charging Depletion to the Profit and Loss account under UOP basis. It also furnished extracts from the Annual Reports of ONGC and Oil India Ltd., which have been reproduced on page 15 of the assessment order. The Assessing Officer observed that there are two stages in the production of mi .....

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..... ack the excess Depletion (Depreciation) claim of ₹ 2,53,87,76,138/-, being, the difference between 22.32% (claim of the assessee as per UOP method) and 5.28% (as allowable under Schedule XIV to the Companies Act). The assessee is aggrieved against this addition to the book profit u/s 115JB of the Act. 29. We have heard the rival submissions and perused the relevant material on record. It is seen that the AO has recomputed the amount of book profit u/s 115JB by disallowing excess depreciation under UOP method at ₹ 253,87,76,138/-. Firstly, let us understand how this figure was determined by him. The AO noticed that the assessee claimed Depletion amounting to ₹ 332.65 crore in its Profit Loss Account under the UOP method. Rate of 22.32 % was worked out by dividing the above amount of Depletion with a sum of ₹ 1489.89 crore, being the total cost of Production facilities before the amount of Depletion written off. These two figures can be better appreciated from Schedules 8A and 8B to the Financial statements of the assessee for the year under consideration, a copy of which is available at page 145 of the paper book, as under:- .....

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..... h any of the figures from Schedule 8-B. Now, we espouse Schedule 8-A in which a sum of ₹ 927.52 crore, representing costs incurred in respect of successful exploration and development, has been transferred from Schedule 8-B. After adding this amount to the opening balance and additions, a gross figure of ₹ 1489.89 crore has been determined. From this amount, the assessee has reduced the amount of Depletion to the tune of ₹ 332.65 crore for determining the closing balance of ₹ 1157.23 crore. The amount of Depletion at ₹ 332.65 crore is in dispute, which was worked by apportioning the gross amount of Cost of producing facilities in the ratio of Production during the year vis-a-vis the opening reserves of oil. This, in the opinion of the assessee, is the corresponding cost of producing facilities, which has been produced during the year. Working of depletion as given by the assessee is captured as under:- Cairn India Limited Assessment Year 2011-12 Working of Depletion Block RJ-ON-90/1 S. No. Particulars Production facilities Cost (other than Site Restoration Cost) CIL s Shar .....

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..... 4,875,654 4,875,654 D Production 1,630,719 1,630,719 E UOP (A/D) 199.14 5.74 F Depletion Charge for 2010-11 (C*E) 324,744,450 9,357,661 334,102,111 Net amount to be depleted Total for all Blocks (Total of sr no.A) 9,149,633,058 5,749,287,852 4,898,920,910 Depletion charge Total for all Blocks (Total of sr. No. F) 2,175,949,119 1,150,631,538 3,326,580,657 31. The AO computed the rate of Depletion (Depreciation) under the straight line method at 22.32% by dividing the amount of Depletion amounting to ₹ 332.65 crore with the Gross amount of cost of producing facilities before such Depletion at ₹ 1489.89 crore. It can be noticed from the above Table that the amount of Depletion charges for all the three blocks totaling ₹ 3 .....

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..... Note on Accounting for Oil and Gas Producing Activities issued by the Institute of Chartered Accountants on 04.02.2003, a copy of which has been placed on pages 803 onwards of the paper book. The Guidance note states that Depreciation also includes Depletion of natural resources through the process of extraction or use. It recognizes two methods for calculating the amount of Depletion viz., Unit of production (UOP) method or Successful Efforts Method and Full cost method. Under the former, only those costs that lead directly to the discovery, acquisition or development of specific, discrete oil and gas reserves are capitalized and become part of the capitalized costs of the costs centre. Costs that are known at the time of incurrence to fail to meet this criterion are generally charged to expense in the period they are incurred. Amount of depreciation/depletion is calculated on the basis of the number of production or similar units expected to be obtained from the asset by the enterprise. Paras 40 to 43 of the Guidance note provides the mechanism for calculating the amount of depreciation/depletion under the UOP method. Paras 41 and 42 of the Note, which are more relevant for .....

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..... . It is, ergo, patent that the Institute has also recommended the following of UOP method in preference to the Full cost method. 36. It is a matter of record that the assessee has been consistently charging the amount of Depletion in its annual accounts under UOP basis. No such disallowance on this score has been made in the past. For the immediately preceding year, the AO did raise a specific query on the amount of Depletion charged in accounts, which was responded by the assessee. No adverse inference has been drawn on this issue in the assessment made u/s 143(3) of the Act. The assessee also relied before the AO on the industry practice in charging Depletion in the accounts on UOP basis, which has been reproduced on pages 14 and 15 of the assessment order. This has not been controverted by the AO in any manner. Rule of consistency requires that a stand consistently followed by the assessee and accepted by the Revenue should not be called in question in later years in the absence of any change in factual or legal position. Once the Revenue has throughout accepted the calculation of Depletion by the assessee under the UOP method in the earlier years, there was no logic in devi .....

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..... which the Institute has given an enabling provision of following the UOP method in contrast to a disabling provision in the Guidance note and the assessee has religiously followed the same, as is being done by the other players in the same industry. In such circumstances, we find it difficult to accept the argument of the ld. DR that the assessee should not have followed such recommended method of Depletion. A fortiori , there is nothing wrong with the assessee following UOP for recording Depletion in its Annual accounts. Thus the judgment in the case of Krishak Baharti (supra) does not bail out the case of the Revenue as the action of the assessee in following the UOP method is not contrary either to the statutory provisions of the Companies Act, 1956 or the Guidance Note. 39. It is significant to note that the Assessing Officer has not pointed out any infirmity in the amount of Depletion calculated by the assessee at ₹ 334.10 crore in accordance with the Guidance Note. Alteration to such amount has been made only in the computation of book profit u/s 115JB by noticing that the amount of Depletion calculated by the assessee under the UOP method gives rate of deprecia .....

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..... urther, this Circular has been issued for depreciation u/s 205 of the Companies Act. It will be seen infra that section 205 of the Companies Act is relevant for preparing Profit and Loss account for the limited purpose of payment of dividend and has no bearing on the preparation of Profit and Loss account in accordance with Parts II and III of the Schedule VI to the Companies Act, which is the requirement of section 115JB of the Act. 43. Even if this Circular is presumed to be operating to Parts II and III of Schedule VI of the Companies Act, it will still not come in the way of granting higher depreciation for calculating profit u/s 115JB of the Act. The reason is that Circular No. 2 of 1989 dt. 7th March, 1989 issued by the Company Law Department permits charging depreciation at rates higher than those prescribed under Schedule XIV to the Companies Act. Para 1 of the said circular reads as under: 1. Can higher rates of depreciation be charged ?-It is stated that Sch. XIV clearly states that a company should disclose depreciation rates if they are different from the principal rates specified in the Schedule. On this basis, it is suggested that a company can charge depr .....

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..... t that the Hon ble Supreme Court did record its respectful dissent with Malayala Manorama (SC)(supra) to the effect that depreciation need not be computed as per Schedule XIV of the Companies Act in computing profits for the purpose of section 115J. However, what is significant to note is that the Hon ble Supreme Court made these observations while directing the Registry to place the civil appeal before the Hon ble Chief Justice of India for appropriate directions as the matter needs reconsideration by a larger bench. In other words, this is simply a referral order for consideration of the issue by a larger bench and not an enunciation of law by the Apex Court. The ld. AR placed on record a report pointing out that the above appeal referred to a larger bench in Dynamic Orthopaedics is still pending before the Hon ble Supreme Court. The position, which therefore, emerges is that the decision in the case of Malayala Manorama (SC)(supra) cannot be construed as overruled. It still holds the field as a binding precedent. 47. Once higher rates of depreciation are permissible and the fact that the AO converted the amount of Depletion charged by the assessee under the UOP method t .....

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..... adopted for preparing such accounts including profit and loss account; ( iii) the method and rates adopted for calculating the depreciation, shall correspond to the accounting policies, accounting standards and the method and rates for calculating the depreciation which have been adopted for preparing such accounts including profit and loss account for such financial year or part of such financial year falling within the relevant previous year. Explanation 1.-For the purposes of this section, book profit means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (2), as increased by- ( a) to (i) if any amount referred to in clauses (a) to (i) is debited to the profit and loss account, and as reduced by,- ( i) to (viii) ( emphasis supplied by us) 49. Sub-section (2) of section 115JB of the Act provides that every company shall, for the purposes of this section, prepare its Profit Loss Account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act. Explanation 1 to this sub-section provides modus operand .....

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..... has a statutory obligation also to examine and satisfy that the accounts of the company are maintained in accordance with the requirements of the Companies Act.. There cannot be two incomes one for the purpose of Companies Act and another for the purpose of income-tax both maintained under the same Act. . Therefore, the AO while computing the income under s. 115J has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The AO thereafter has the limited power of making increases and reductions as provided for in the Explanation to the said section. To put it differently, the AO does not have the jurisdiction to go behind the net profit shown in the P L a/c except to the extent provided in the Explanation to s. 115J. 51. The Hon ble Apex Court dealt with section 115JA in CIT vs. HCL Comnet Systems and Services Ltd. (2008) 305 ITR 409 . It reproduced and relied on the relevant parts of its earlier decision in Apollo Tyres (supra) delivered in the context of section 115J of the Act. In the later judgment, their Lordships held that : the AO has .....

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..... o s. 115JB does not provide for any deduction in terms of s. 47(iv). This decision relied by the ld. DR, rather supports the view point of the assessee that the AO can albeit alter the amount of the net profit for the purposes of section 115JB, but such alteration is limited to bringing it in conformity with Parts II and III of Schedule VI of the Companies Act. Natural corollary, which, therefore, follows is that the Profit and loss account has to be necessarily drawn in accordance with Parts II and III of Schedule VI and if it does not accord with the same, then the AO can definitely bring it in line with the same. Once net profit has been so determined, then the AO has no power to make adjustments to such profit, other than those set out in the Explanation. 54. When we consider the ratio decidendi of the above referred three judgments of the Hon ble Supreme Court and also the Special Bench, it is found that a common thread which runs through sections 115J, 115JA and 115JB is that the AO cannot tinker with the amount of net profit declared by the assessee in its Profit and loss account as a starting point for calculating book-profit , once the statutory auditors have certifi .....

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..... April, 1991(hereafter in this section referred to as the relevant previous year), is less than thirty per cent of its book profit, the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to thirty per cent of such book profit. (1A) Every assessee, being a company, shall, for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 (1 of 1956).] Explanation. -For the purposes of this section, book profit means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (1A)], as increased by- (2) . Deemed income relating to certain companies. 115JA. (1) Notwithstanding anything contained in any other provisions of this Act, where in the case of an assessee, being a company, the total income, as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1997 but before the 1st day of April, 2001 (hereafter in this section .....

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..... 5JA that while preparing Profit Loss Account, depreciation shall be calculated on the same method and rates which have been adopted for calculating the depreciation for the purpose of preparing the Profit Loss Account laid before the company at its Annual General Meeting in accordance with the provisions of section 210 of the Companies Act, 1956. When we consider the language of first proviso to section 115JB(2), it clearly emerges that except for addition of (i) the accounting policies and (ii) the accounting standards adopted for preparing such accounts including profit and loss account , there is no material difference between first proviso to section 115JA(2) and first proviso to section 115JB(2). First proviso to section 115JB also provides that while preparing the Profit Loss Account, not only the methods and rates adopted for calculating the depreciation, but also the accounting policies and accounting standards etc. shall also be the same as have been adopted for the purpose of preparing such accounts including profit and loss account as laid before the company at its Annual General Meeting in accordance with the provisions of section 210 of the Companies Act. The .....

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..... roviso simply provides that the method and rates for calculating depreciation while preparing the Profit Loss Account u/s 115JB shall be the same as have been adopted for preparing Profit Loss Account to be laid before the company at its Annual General Meeting. 58. At this juncture, it is relevant to note the relevant parts of section 210 of the Companies Act, as under:- 210. Annual accounts and balance sheet ( 1) At every annual general meeting of a company held in pursuance of section 166, the Board of directors of the company shall lay before the company- ( a) a balance sheet as at the end of the period specified in sub-section ( 3); and ( b) a profit and loss account for that period. ( 2) In the case of a company not carrying on business for profit, an income and expenditure account shall be laid before the company at its annual general meeting instead of a profit and loss account, and all references to profit and loss account , profit and loss in this section and elsewhere in this Act, shall be construed, in relation to such a company, as references respectively to the income and expenditure account , the excess of in .....

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..... for the purpose of adapting them to the circumstances of the company. ( 5) to (8) . 60. Sub-section (2) of section 211 clearly provides that the Profit Loss Account of a company shall comply with the requirements of Part II of Schedule VI. In turn, Part II of Schedule VI to the Companies Act contains Requirements as to Profit Loss Account. Clause 1 of Part II provides that the provisions of this Part shall apply to the income and expenditure account referred to in sub-section (2) of section 210 of the Act. Clause 2 of Part II states that the Profit Loss Account shall disclose the result of the working of the company and also every material feature. Clause 3 of Part II provides that the Profit Loss Account shall set out various items relating to the income and expenditure of the company arranged under the most convenient heads, and, in particular, shall disclose the following information in respect of the period covered by the account. There are (i) to (xv) subclauses of clause 3 of Part II. Sub-clause (iv), which is relevant for our purpose, reads as under:- ( iv) The amount provided for depreciation, renewals or diminution in value of fixed assets. .....

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..... Act have to be considered for the purpose of preparing Profit Loss Account u/s 115JB of the Act. We find ourselves unable to concur with this submission. Section 205 of the Companies Act deals only with the payment of dividend as is manifest from its heading: Dividend to be paid only out of profits . Sub-section (1) of section 205 of the Companies Act clearly provides that: No dividend shall be declared or paid by a company for any financial year except out of the profits of a company for that year arrived at after providing for depreciation in accordance with the provisions of sub-section (2). Sub-section (2) states that the depreciation shall be provided, inter alia, to the extent specified in section 350. It, therefore, becomes clear that section 205 of the Companies Act, providing for charging depreciation in accordance with rates given in Schedule XIV of the Companies Act, is meant only for determining the availability of profits for paying dividend. Thus, to say that the mandate of section 205 applies to the pan Companies Act, is not acceptable. It can be noticed that there are other provisions in the Companies Act as well which require the calculation of net profit i .....

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..... ompany at the rates specified in Schedule XIV. An overview of the afore discussed provisions of the Companies Act reveals that the charging of depreciation in accordance with Schedule XIV of the Companies Act, is meant for specific provisions, such as, section 205 (payment of dividend), section 198 (overall maximum managerial remuneration), section 387 (remuneration of manager) and sections 293 293A (imposing certain restriction on the powers of the Board). Whenever profit is required to be determined for the above sections, it becomes incumbent to charge depreciation at the rates given in Schedule XIV of the Companies Act. Such requirement of charging depreciation in terms of section 350 or Schedule XIV of the Companies Act is not a part of the scheme under Parts II and III of Schedule VI. As section 115JB of the Act requires that for the purpose of this section, Profit Loss Account of a company shall be prepared in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, the command of Schedule XIV of the Companies Act, requiring the charging depreciation at the prescribed rates, does not, therefore, get attracted. In the absence of the prescrip .....

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..... not forbidden in Parts II and III to Schedule VI of the Companies Act. It is further found that the audit report issued by the auditors of the assessee company is unqualified. The Annual accounts as prepared by the auditors are stated to have been approved by the company in its AGM and then registered by the Registrar of companies without any objection. Such a contention put forth on behalf of the assessee has not been disputed by the Revenue. When position is so, we fail to comprehend as to how the action of the AO in adding the alleged excess depreciation can be sustained. The impugned order is set aside pro tanto and the enhancement to the amount of net profit to the tune of ₹ 2,53,87,76,183/- made for the purposes of section 115JB of the Act is hereby deleted. 66. Next dispute in this appeal is against the addition of ₹ 14,36,18,797/- on account of transfer pricing adjustment from the international transaction of payment for intra group services in the nature of business planning and project review board. 67. Briefly stated, the facts of this issue are that the assessee reported 22 international transactions clubbed under convenient heads, including Receipt .....

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..... Pvt. Ltd. were transferred and vested in the assessee on going concern basis w.e.f. 01.01.2010 in pursuance of the scheme of demerger approved by the Hon ble Bombay High Court vide its order dated 22.06.2010. After considering the assessee s reply and other relevant material available on record, the TPO held that there was no evidence that the AEs actually provided some services and, further, the assessee failed to demonstrate any need for them. He further noticed that the assessee failed to establish any direct nexus between the services received from its AE and its business operations. In this backdrop, the TPO held that the assessee did not receive any intra group services and if at all some services were there, these were merely duplicate in nature and no benefit was derived. Such services were also held to be in the nature of shareholders services requiring no payment of consideration. The TPO required the assessee to state if the AE has rendered such services to others as well and if yes, then the basis of allocation amongst various entities be furnished. The assessee did not furnish such information by stating that it was not privy to the information whether the AEs render .....

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..... Richard Heaton @ US $ 1303 per hour, Tom Morris @ US $ 293 per hour. Clause 2 of the Agreement dealing with Object and Scope is relevant for our purpose, whose material part is reproduced as under:- 2.1 The object of this Agreement is to set out the terms and conditions for the non-exclusive provision by CAIRN of the Services to CEIL and Its Affiliates In support of, and In connection with, the Operations. 2.2 CEIL or any Affiliate of CEIL from time to time, engages CAIRN to provide such Services to CEIL or the relevant Affiliate as it may request, provided always that CAIRN shall not render any such Services to CEIL or any Affiliate if to do so would in the opinion of CAIRN (acting reasonably) have a material adverse effect on CAlRN s existing and future operations and/or business. 2.3 CAIRN shall perform the Services under this Agreement ( i) With such skill and care as could reasonably be expected of an experienced international company operating in the oil and gas industry but in any event to a standard which is at least equivalent to, and not lower than, that to which such services are provided to CAIRN or its Affiliates; ( ii) in accordance wi .....

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..... at page 371 onwards of the paper book, that oil and gas industry is a highly technical, capital intensive and risky industry and, as such, international knowledge and experience for operations like exploration, development and production is always required. The assessee further explained that it started production of crude oil in Rajasthan and for that purpose two committees viz., Business Plan Committee and Project Review Board were formed also consisting of highly technical professionals from AEs. Overview of the Business Plan Committee and the Project Review Board was set out in detail. Certain copies of e-mails exchanged between experts of AEs and the assessee s employees were also placed before the AO which are available at pages 436 onwards of the paper book. In such e-mail communications, planning, actual conduct of the operations and connected matters have been discussed. Then, there is a copy of Debit note on page 455 of the paper book which records the amount billed at US $ 611172.57, being, charges for business planning on the basis of hourly rates of the experts. Pages 456 to 459 are the details of such billed amount which record name of the employee of the AE, number .....

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..... tors as the Board may prescribe . Five specific methods have been enshrined in this provision apart from one general method, being : Such other method as may be prescribed by the Board. Out of the five specific methods, the first one is Comparable uncontrolled price (CUP) method and the fourth one is Transactional net margin method (TNMM). A bare reading of section 92C(1) brings out that: (i) the ALP is required to be determined of an international transaction; and (ii) the ALP of such an international transaction is to be determined by applying the most appropriate method out of the prescribed methods which, inter alia , include CUP and TNMM. 72. The first ingredient is that the ALP should be determined in relation to an international transaction. The term international transaction has been defined in section 92B to mean : a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, .. . It .....

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..... income. It does not mean that an actual more income from an international transaction vis-a-vis its arm s length income should be combined with another unrelated transaction which gives actual income less than the arm s length income and then both be processed together under this Chapter so as to set off the income (Transacted income minus arm s length income) from the first transaction with the potential income arising from the second transaction (arm s length income minus transacted value income). When we consider more than one separate transaction under the combined umbrella of TNMM on an entity level, it is quite possible that a probable addition on account of transfer pricing adjustment arising from one international transaction may be grabbed by the income from the other international transaction giving higher income on transacted value. 74. The Hon ble jurisdictional High Court in Knorr Bremse India (P) Ltd. Vs. ACIT (2016) 380 ITR 307 (P H) considered the question of aggregation of international transactions. Their Lordships held that several transactions between two or more AEs can form a single composite transaction if they are closely linked transactions and the o .....

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..... dent international transactions to be at ALP. Since the international transaction of Receipt of services has been held above to be separate, the determination of its ALP also needs to be done distinctly. 77. Now let us examine if the application of the CUP method, as employed by the TPO, is in order for determining the ALP of Receipt of services . By now, it is fairly settled through a catena of decisions that the CUP is the most appropriate method to determine the ALP of an international transaction because it seeks to compare the price charged or paid for property transferred or services rendered, provided proper comparables are available. It is under this method alone that the price charged or paid is directly compared with the price charged or paid in an uncontrolled comparable transaction. The remaining four specific methods seek to make comparison of the price charged or paid indirectly through the medium of normal profit arising in a comparable uncontrolled transaction. Further, the CUP method is a transaction specific method which strives to determine the ALP of an international transaction on a micro level, thereby lending more credibility to the ALP of a transaction .....

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..... re-characterised transaction. Resultantly, a transfer pricing adjustment of ₹ 84,36,33,259/- was made in the preceding year. 80. Adopting the view taken for the immediately preceding assessment year, the TPO for the instant year also charged interest @ 11.69% on the re-characterised investment in redeemable preference shares as deemed loan. This resulted into the instant transfer pricing addition. The assessee remained unsuccessful before the DRP and the AO made such addition in the computation of income under the normal provisions. The assessee is aggrieved against such addition. 81. We have heard both the sides and perused the relevant material on record. It is noticed that the origin of the instant addition is from the proceedings for the immediately preceding year, in which the transaction of investment in redeemable preference shares in the assessee s 100% subsidiary company was re-characterised as loan. On a specific query, it was stated that the order of the AO making such addition for the preceding assessment year is still pending in appeal before the CIT(A) and there is no finality to the issue. Since the instant transfer pricing addition has its foundation in .....

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