Case Law Details

Case Name : Reliance Industries Ltd. Vs ACIT (ITAT Mumbai)
Appeal Number : I.T.A. No. 7299/Mum/2017
Date of Judgement/Order : 10/11/2020
Related Assessment Year : 2013-14
Courts : All ITAT (7471) ITAT Mumbai (2139)

Reliance Industries Ltd. Vs ACIT (ITAT Mumbai)

The issue under consideration is whether deletion of addition of sales tax incentive/ subsidy as capital in nature is justified in law?

In the present case, the assessee in this case is engaged in the business of oil and gas exploration, refining of crude oil, manufacturing of and trading in petrochemicals, polyester, fiber intermediates, textiles, generation & distribution of power, operation of jetties and related infrastructure, retail marketing of petroleum products and investments. The assessee filed its original return of income declaring total income of Rs. 1,49,12,6 1,56,700/- under normal provisions and Rs.2,62,07,76,56,848/- under section 115JB of the Income tax Act,1961. The assessee subsequently revised its return of income and filed revised return on 31/03/2015 declaring total income of Rs.1,49,56,85,42,970/- under normal provisions and Rs.2,62,07,76,56,848/-under section 115JB of the Income tax Act, 1961. Assessment was completed at total income of Rs.1,92,23,66,55,142/- under the normal provisions of the Act and book profit of Rs.2,64,85,46,16,823/- under section 115JB of the Act. Against the assessment made, assessee raised several grounds of appeal before the learned CIT(A). The learned CIT(A) gave part relief to the assessee. One issue on which addition was made by the Assessing Officer was bringing to tax sales tax incentive receipt which was claimed by the assessee as capital receipt not liable to tax. Learned CIT(A) had allowed the appeal on this issue by referring to several case laws from ITAT in assessee’s own case from A.Y. 2007-08 to 2012-13. Against this order Revenue has filed appeal before us.

ITAT states that, at the outset, learned Counsel of the assessee submitted that this issue is covered in favour of the assessee by a catena of decisions of ITAT in assessee’s own case as well as several other decisions. He further referred that ITAT Special Bench in assessee’s own case reported in 88 ITD 273 decided the issue in favour of assessee. Learned Departmental Representative on the other hand could not dispute the above said proposition. The ITAT in assessee’s own case in a number of orders for preceding years has decided the issue in favour of the assessee and the same order has not been reversed by Hon’ble Jurisdictional High Court. Accordingly, ITAT follow the doctrine of stare-decisis and uphold the order of learned CIT(A). Hence, Revenue’s appeal on this issue stands dismissed.

FULL TEXT OF THE ITAT JUDGEMENT

These are appeals by the assessee and Revenue arising out of order of learned CIT(A) dated 9.10.2017 and pertains to A.Y. 2013-14.

2. Grounds raised in assessee’s appeal read as under :-

1. The learned Commissioner of Income-tax-(Appeals-57) [hereinafter referred to as CIT(A)] erred in rejecting the Appellant’s alternative plea that there is a deemed payment of sales tax and therefore the amount of Rs.266,72,89,043/- is allowable as per the provisions of Section 43B of the Income-tax Act, 1961

2. The Appellant submits that there is a deemed payment of Sales tax which is allowable u/s.43B of the Act and the CIT(A) ought to have given a decision on this issue in favour of the Appellant.

2. The CIT(A) erred in confirming the disallowance of depreciation of Rs.5,35,215/-on the capitalized value of goods purchased from Durga Iron & Steel Ltd. and Surajbhan Rajkumar Pvt. Ltd. in A.Y. 2003-2004.

The Appellants submits that the cost of the goods purchased from the above parties were capitalised as plant and machinery in A.Y. 2003-04 and were used during the year under consideration and hence depreciation u/s. 32 of the Act on such capitalised value of the goods is allowable.

3. The CIT(A) erred in remanding back the appellant’s claim of depreciation on office equipment’s @ 15%, to the file of the assessing officer for verifying the correctness of classification vis-a-vis the law.

The appellant submits that it had submitted complete details of additions to the assets viz. office equipment’s which are in the nature of Plant & Machinery and hence the depreciation u/s.32 of the I T Act ought to have been allowed @ 15%.

4. The CIT(A) erred in confirming the disallowance of deduction u/s 80IB(9) of the Act of Rs. 698,07,88,5197- in respect of Refinery SEZ Undertaking by holding that once claim u/s 10AA of the Act has been made on profits of Refinery SEZ Undertaking, no deduction u/s 80IB(9) of the Act be allowed to the appellant.

The appellant submits that on the facts and circumstance of the case and as per the provision of the Act, the appellant is eligible to claim deduction u/s 80IB(9) of the Act of Rs. 698,07,88,519/- being non-export profit of SEZ refinery unit, since the deduction under u/s 10AA and u/s 80IB(9) of the Act has not exceeded the profit of the undertaking of Rs.7530,26,45,346/-.

The appellant further submits that the CIT(A) has wrongly interpreted the provisions of the Act and misplaced reliance on various judicial pronouncements which are distinguishable in law and on facts.

5. The CIT(A) erred in confirming the action of the AO that the appellant was not entitled to claim the total cost incurred in respect of KG-DWN-98/3 (‘KGD’) assets as “intangible asset” eligible for deprecation u/s. 32 of the Act.

The Appellant submits that, on the facts and circumstances of the case, the total cost incurred by the Appellant in respect of KGD constitutes cost of acquisition of “intangible assets” eligible for depreciation u/s 32 of the IT. Act.

6. The CIT(A) erred in disallowing deduction of Rs 206,22,11,0007- u/s 37(1) of the Act, being expenses incurred on corporate social responsibility (CSR) on the ground that it does not fall under business expenditure.

The CIT(A) failed to appreciate that the amendment in the scheme of section 37(1) of the Act has been effective from 1st April 2015 and the same cannot be constructed as disadvantage to the assessee in the period prior to this amendment.

7. Reference to the Transfer Pricing Officer (‘TPO’) under section 92CA of the Act.

7.1 On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming the action of Assessing Officer (‘AO’) in making a reference of the Appellant’s case to the TPO, without applying his mind and without recording his satisfaction, thereby making the entire process of referring the matter to the TPO as invalid;

7.2 On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming the action of the learned AO in not stating reasons to show that any of the conditions mentioned in clauses (a) to (d) of Section 920(3) of the Act were satisfied before making an adjustment to the total income of the Appellant;

7.3 On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming the action of AO of not demonstrating the motive of the Appellant to shift profits outside of India by manipulating the prices charged in its international transaction, either at the stage of invoking or initiating the assessment or at the stage of framing the assessment;

7.4 On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming the action of the learned AO in not demonstrating that the course of business between the Appellant and the closely connected person was so arranged that it produces to the Appellant more than ordinary profits which might be expected to arise in its eligible business;

7.5 On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming the action of the learned AO in not demonstrating the motive of the Appellant, to carry out transactions between an eligible business and other business, to reduce the taxable profits by manipulating the prices of its Specified Domestic transactions, either at the stage of invoking or initiating the assessment or at the stage of framing the assessment. :

8 Guarantee Commission charged in respect of corporate guarantee provided on behalf of Associated Enterprises

8.1 The learned CIT(A) erred in confirming the order of the AO/ TPO in treating the guarantee given by Appellant to banks for giving loan to its Associated Enterprises as International Transaction within the meaning of Section 92B r.w.s 92(1) of the Act.

8.2 The learned CIT(A) erred in determining the ALP of guarantee commission at 0.38% p.a. in case of short term guarantees given by the Appellant on behalf of its Associated Enterprises instead of 0.30% determined by the Appellant for the period of January to March 2013 even after accepting the yield spread approach adopted by the Appellant

9. Availing of Business Support Services (‘BSS’) from RCITPL:

9.1 On the facts and in the circumstances of the case and in law, the learned AO erred in making and the learned CIT(A) erred in determining the arm’s length mark-up of 8.20% on the cost of the services without considering the mark-up of 5.90% as determined by the Appellant and proposing the transfer pricing adjustment of INR 3,40,64,984/-;

9.2   The learned CIT(A) erred in rejecting the comparable companies namely Cameo Corporate Services Limited, Neilsoft Limited and Goldmine Advertising Limited without providing any cogent reasons.

9.3 On the facts and in the circumstances of the case, the learned CIT(A) erred in confirming the action of the learned AO in cherry picking the comparable company namely Asian Business Exhibition & Conference Limited.

10. Inter-unit transfer of Power:

10.1 On the facts and in the circumstances of the case and in law, the learned AO erred in making and the learned CIT(A) erred in confirming the transfer pricing adjustment of INR 32,45,02,729 in relation to the transaction of inter-unit transfer of Power from the Captive Power Plant (‘CPP’) to Other Manufacturing Division (‘OMD’) by computing the arm’s length rate at INR 6.155 per KHW without considering INR 6.45 per KHW as determined by the Appellant;

10.2 On the facts and in the circumstances of the case and in law, the learned AO erred in reducing and the learned CIT(A) erred in confirming the reduction of deduction by INR 17,52,72,214 claimed under section 80IA of the Act;

10.3 On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming the action of the learned AO in rejecting the economic analysis or the benchmarking analysis of the Appellant, on the application of internal Comparable Uncontrolled Price Method by the Appellant, without providing any cogent reasons;

10.4 On the facts and in the circumstances of the case, the learned CIT(A) erred in confirming the action of the learned AO in accepting the economic analysis of the learned TPO without providing cogent reasons and specifically:

The learned AO and CIT(A) failed to appreciate that the turnover of the comparable company is more than 10 times that of the tested transaction;

The learned AO and CIT(A) failed to appreciate that the level of market of the comparable transaction adopted by the learned TPO, is different as compared

with the level of market in which appellant (manufacturing units) operate;

The learned AO and CIT(A) erred by relying on non-contemporaneous data, order dated 29 April 2014, to determine the arm’s length rate.

11. Each of the above Grounds of Appeal are without prejudice to each other.

The Appellant craves leave to add, amend, delete, rectify, substitute, modify, or otherwise, all or any of the aforesaid grounds or add a new ground(s) at any time before or during the hearing of the above appeal.”

3. Grounds raised in the Revenue’s appeal read as under :-

1. “On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of sales tax incentives/subsidy ofRs 266,72,89,043’/- holding it as capital in nature.”

2. “On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in allowing depreciation as claimed by the assessee by holding that the claim of depreciation for the year was optional in nature.”

3. “On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in restricting the disallowance u/s 14A of the Act r. w. Rule 8D(2)(iii) to 0.5% by taking average value of that investment which have yielded dividend during the year under consideration”

4. “On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in restricting the disallowance u/s 14A of the Act r. w. Rule 8D(2)(iii) to 0.5% by taking average value of that investment which have yielded dividend during the year under consideration while adding the same for the purpose of income u/s 115JB of the Act.”

5. “On the facts and in the circumstances of the case and in law, the Id CIT(A) erred in deleting the disallowance of Rs. 791.19 Crores incurred by the assessee on aborted blocks of other contract areas under Production Sharing contracts other than KGD.”

6. “On the facts and in the circumstances of the case and in law, the Id CIT(A) erred in allowing deduction u/s 80IB(9)(ii) of the Act at Rs. 3041,36,90,094/- instead of Rs. 375,50,57,395/- as held by the Assessing Officer.”

7. “On the facts and circumstances of the case and law, the Ld. CIT(A) has erred in deleting the addition of Rs. 2,70,91,704/- with regard to transfer pricing adjustment on provision of support services to REP DMCC.”

8. “On the facts and circumstances of the case and law, the Ld. CIT(A) has erred in deleting the TP adjustment on support services by simply relying on her orders for AY 2011-12 and 2012-13 without demonstrating as to how the facts of those years are similar to the impugned year.”

9. “On the facts and circumstances of the case and law, the Ld. CIT(A) has erred in deleting the TP adjustment on support services without appreciating the import of rule 10B(2)(d) as there is no government order against arriving at arm’s length price.”

10. “On the facts and circumstances of the case and law, the Ld. CIT(A) has erred in relying the agreement between the AE and Khurdish government as it would only serve as evidence for cost incurred and there is no binding bilateral treaty between India and Iraq for not charging mark up on cost.”

11. “On the facts and circumstances of the case and law, the Ld. CIT(A) has erred in deleting the mark up on the cost without appreciating the fact that it would lead to base erosion for India.”

12. “On the facts and circumstances of the case and law, the Ld. CIT(A) has erred in not appreciating the fact that no party would render support services to an unrelated party at cost without mark up, the concept being very basis of transfer pricing.”

13. “On the facts and circumstances of the case and law, the Ld. CIT(A) has erred in deleting the addition of Rs. 39,77,60,683/- in respect of debts receivable from AE made by the TPO by holding that recharacterisation of such transaction is not permissible under the law even when the TPO had not recharacterised the debtors as loan and held the same as receivable.

14. “On the facts and circumstances of the case and law, the Ld. CIT(A) has erred in deleting the addition of Rs. 39,77,60,683/- in respect of debts receivable from AE made by the TPO without appreciating the fact that the quotes relied upon by the assessee for benchmarking the transaction are not actual transaction are not actual transactions and thus the same cannot be used for benchmarking.”

15. “On the facts and circumstances of the case and law, the Ld. CIT(A) has erred in not appreciating the method of weighted average of cost of borrowing plus 3% mark up followed by the TPO factoring in various risks involved.”

16. “On the facts and circumstances of the case and law, the Ld. CIT(A) has erred in not giving any valid reasons for adopting the rate as it is as followed by the assessee for charging the interest on debts receivables.”

17. “On the facts and circumstances of the case and law, the Ld. CIT(A) has failed to appreciate the fact that LIBOR + spread is adopted for finance transactions like loans whereas recovery of trade receipts intends to recover the cost of production which includes cost of borrowings. “

18. “On the facts and circumstances of the case and law, the Ld. CIT(A) has erred in not giving any reason for dismissing the method followed by the TPO to arrive at the rate chargeable on debt receivables.”

19. “On the facts and circumstances of the case and law, the Ld. CIT(A) failed to appreciate the provisions of Rule 10B(4) as CUP adopted for AYs 2010-11, 2011-12 and 2012-13 based on bank rate cannot be taken as it is for AY 2013-14 also as application of contemporaneous data is mandatory.”

20. “On the facts and circumstances of the case and law, the Ld. CIT(A) has erred in deleting the TP adjustment of Rs. 1,04,60,29,112/- being interest on investment in preference stock of AEs by relying on the decision of Bombay High Court in case of DIT vs. Besix Kier Dhabol SA (210 Taxman 151) holding that recharaterisaction of subscription amount as loan is not permitted without appreciating the difference in the facts of the case involved and the case law quoted as the amount involved was not share application money and the decision quoted is on share application money.”

21. “On the facts and circumstances of the case and law, the Ld. CIT(A) failed to see that the assessee has not demonstrated any rationale in investing in the preference stock of AEs in spite of the fact that AEs are loss making and are not declaring dividends, which no unrelated third party would do so at arm’s length which is the very essence of transfer pricing.”

22. “On the facts and circumstances of the case and law, the Ld. CIT(A) has erred in not appreciating the fact that assessee which is bound to earn income at fixed coupon rate on preference stock has not received any income in this regard with huge investment which will not be the case in any third party scenario as envisaged in section 92F(ii).”

23. “On the facts and circumstances of the case and law, the Ld. CIT(A) has failed to see the fact even when the AE- RGBV had profits of Rs. 33,31,606/-euro in FY 2009-10, the mandatory fixed income at the coupon rate of 5% on the preference stock was not paid to the assessee.”

24. “On the facts and circumstances of the case and law, the Ld. CIT(A) has failed to see the fact even when the AF- RIME had profits of 11,494,125 UAE Dirhams, 5188402 UAE Dirhams and the 742,069 dollars during calendar year 2007, 2008 and 2010 respectively, assessee has not received the fixed 5% coupon rat income.

25. “On the facts and circumstances of the case and law, the Ld. CIT(A) has failed to “look through” the “substance” of transaction and instead “looked at” the superficial nomenclature of the transaction to arrive at the decision that the investment is quasi-equity in nature whereas in substance it is “loan” in nature and that the nomenclature of preference stock was used to avoid taxation of interest leading to base erosion in India.”

26. “On the facts and circumstances of the case and law, the Ld. CIT(A) has erred in ignoring the para 1,36 of OECD commentary which provides for recharacterisation of a transaction in the circumstances as that of assesses by looking through the substance of the transaction.”

27. “On the facts and circumstances of the case and law, the Ld. CIT(A) has erred in ignoring the decision of Hon’ble Delhi High Court in the case of CIT v/s EKL Appliances Ltd., wherein it has been held that recharacterisation of transaction is permissible in circumstances as that of assessee.”

28. “On the facts and circumstances of the case and law, the Ld. C1T(A) has erred in deleting the rate of 1.5% charged by the TPOI arriving at corporate guarantee fee chargeable on the assessee.”

29. “On the facts and circumstances of the case and law, the Ld. C1T(A) contradicted himself instating in one place that he accepted the yield spread method as followed by assessee for AYs 2011-12 & 2012-13 and at another place relying on the Hon’ble ITAT’s decision for AY 2005-06 to 2009-10 wherein assessee followed CUP method.”

30. “On the facts and circumstances of the case and law, the Ld. CIT(A) has failed to appreciate the mandatory provisions of Rule 10B(4) to use contemporary data to arrive at ALP.”

31. “On the facts and circumstances of the case and law, the Ld. CIT(A) has erred in relying on the rate arrived at for earlier years without appreciating the fact that the corporate guarantee rate would vary year on year based on credit rating of assessee and AE, interest rates prevailing and various credit risks.”

32. “On the facts and circumstances of the case and law, the Ld. CIT(A) failed to demonstrate as to how the rates were arrived at by the assessee based on yield spread method followed by assessee for the impugned AY and has erred on simply accepting the rates adopted by assessee without looking into actual working of the yield spread methodology of assessee.”

33. “On the facts and circumstances of the case and law, the Ld. CIT(A) has failed to show as to how assessee followed yield spread method correctly for impugned AY.”

34. “On the facts and circumstances of the case and law, the Ld. CIT(A) has failed to give any reason for rejecting the CUP rate adopted by the TPO.”

35. “On the facts and circumstances of the case and law, the Ld. CIT(A) has erred in including the comparable M/s Allsec Technologies Ltd. without appreciating the fact that company is loss making in earlier years as well as in subsequent year.”

36. “On the facts and circumstances of the case and law, the Ld. CIT(A) has erred in excluding the comparable M/s Axis Integrated Systems Limited without appreciating the fact that Business Support Services and Management Services are highly skill-based services and by no stretch of imagination BSS and MSS can be treated as low-end services.”

37. On the facts and circumstances of the case ld. CIT(A) has erred in including comparable M/s. Empire Industries Ltd. without appreciating that comparable is functionally dissimilar.

38. “On the facts and circumstances of the case and law, the Ld. CIT(A) has erred in excluding comparable M/s BVG India Ltd. without appreciating that comparable is functionally similar.”

39. The appellant prays that the order of the Id. CIT(A) on the above ground be set aside and that of the Assessing Officer restored.

40. The Appellant craves leave to amend or alter any ground or add a new ground which may be necessary.”

4. Assessee has also filed additional grounds which read as under :-

1. The learned Commissioner of Income Tax-(Appeals-57)(hereinafter referred to as the CIT(A)] erred in not allowing exemption u/s 10(15)(iv)(h) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) in respect of interest amounting to Rs.112,26,74,490/- on Tax Free Bonds while computing total income under the Normal Provisions of the Act and Book Profit u/s 115JB of the Act

The appellant submits that CIT(A) ought to have allowed exemption u/s 10(15)(iv)(h) of the Act while computing total income under the normal provisions of the Act and book profit u/s 115JB of the Act.

2. The learned CIT(A) Mumbai, erred in not excluding notional sales tax incentive of Rs. 266,72,89,043/- held as capital receipt not liable to tax [while computing income under the normal provisions of the Income-tax Act, 1961 (‘Act’)], from the Book profit computed u/s 115 JB of the Act.

The Appellant submits that notional Sales Tax incentive is not an “Income” liable to tax under the Act, and hence the same shall be directed to be excluded while computing the Books profit u/s 115 JB of the Act.

3. The learned CIT(A) Mumbai, erred in confirming the disallowance while computing book profit u/s.115JB of the Act, by applying provisions of Section 14A read with Rule 8D and erred in directing to re-compute the said disallowance @ 0.5% by taking average value of those investment which have yielded dividend during the year under consideration. .

The appellant submits that the provisions of Section 14A of the Act r.w.r. 8D is not applicable while computing book profits u/s. 115JB of the Act, and therefore no disallowance should be made while computing book profit u/s. 115JB of the Act.

4. The learned CIT(A) Mumbai erred in not allowing weighted deduction u/s. 35(l)(ii) of the Act while computing total income under the normal provisions, in respect of amount of Rs.42,36,570/- contributed to Indian Institute of Technology, Mumbai vide receipt dated 09.10.2012. The appellant submits that CIT(A) ought to have allowed weighted deduction u/s. 35(l)(ii) of the Act while computing total income under the normal provisions.

5. The learned CIT(A) Mumbai erred in allowing the deduction in respect of export profits of SEZ unit u/s 10AA of the Act with reference to the income computed under the head ‘profits and gains of business or profession’ of the SEZ unit instead of ‘gross profits and gains’ of SEZ unit, as interpreted by Supreme Court in the recent judgement in the case of Vijay Industries.

The Apex court while interpreting the provisions of section 80HH relevant to AY 1979-80 and 1980-81 has held that phrase “profits and gains” means gross profits of the business i.e. before computing income as specified in section 30 to 43D of the Act in para (18) and (19) as under:-

“It is most humbly submitted that the concept ‘profits and gains’ is a wider concept than the concept of ‘income’. The profits and gains/loss are arrived at after making actual expenses incurred from the figure of sales by the assesses. It does not include any depreciation and investment allowance, as admittedly these are not the expenses actually incurred by the assessee. However, the term ‘income’ does take into consideration the deductions on account of depreciation and investment allowance. Therefore, the term profits and gains are not synonymous with the term ‘income’

Reading of Section 80HH along with Section 80A would clearly signify that such a deduction has to be of gross profits and gains, i.e., before computing the income as specified in Sections 30 to 43D of the Act.”

5. For the admission of additional grounds assessee has also filed addition evidence with respect to Ground No. 4.

Revenue’s appeal

6. Apropos ground No.1 deletion of addition of sales tax incentive/subsidy of Rs. 2,66,72,89,043/- holding it as capital in nature.

7. Brief facts of the case are that the assessee in this case is engaged in the business of oil and gas exploration, refining of crude oil, manufacturing of and trading in petrochemicals, polyester, fiber intermediates, textiles, generation & distribution of power, operation of jetties and related infrastructure, retail marketing of petroleum products and investments. The assessee filed its original return of income declaring total income of Rs. 1,49,12,6 1,56,700/- under normal provisions and Rs.2,62,07,76,56,848/- under section 115JB of the Income tax Act,1961. The assessee subsequently revised its return of income and filed revised return on 31/03/2015 declaring total income of Rs.1,49,56,85,42,970/- under normal provisions and Rs.2,62,07,76,56,848/-under section 115JB of the Income tax Act, 1961. Assessment was completed at total income of Rs.1,92,23,66,55,142/- under the normal provisions of the Act and book profit of Rs.2,64,85,46,16,823/- under section 115 JB of the Act. Against the assessment made, assessee raised several grounds of appeal before the learned CIT(A). The learned CIT(A) gave part relief to the assessee. Now Revneue and assessee both are in appeal before us.

8. One issue on which addition was made by the Assessing Officer was bringing to tax sales tax incentive receipt which was claimed by the assessee as capital receipt not liable to tax. Learned CIT(A) had allowed the appeal on this issue by referring to several case laws from ITAT in assessee’s own case from A.Y. 2007-08 to 2012-13.

9. Against this order Revenue has filed appeal before us.

10. At the outset, learned Counsel of the assessee submitted that this issue is covered in favour of the assessee by a catena of decisions of ITAT in assessee’s own case as well as several other decisions. He further referred that ITAT Special Bench in assessee’s own case reported in 88 ITD 273 decided the issue in favour of assessee.

11. Learned Departmental Representative on the other hand could not dispute the above said proposition. The ITAT in assessee’s own case in a number of orders for preceding years has decided the issue in favour of the assessee and the same order has not been reversed by Hon’ble Jurisdictional High Court. Accordingly, we follow the doctrine of stare-decisis and uphold the order of learned CIT(A). Hence, Revenue’s appeal on this issue stands dismissed.

12. Apropos ground No. 2 is relating to allowance of depreciation as claimed by the assessee by holding that the claim of depreciation for the year was optional in nature.

13. This ground of appeal pertains to restricting the allowance of depreciation to Rs.64,47,59,69,037/- as against the assessee’s claim of Rs.65,18,82,98,4587- and disallowing Rs.71,23,29,421/- (Rs.6518,82,98,458-Rs.6447,59,69,037) being depreciation on power plants at Hazira, Patalganga, Cracker Unit at Hazira, Oil & Gas division, SBM Refinery and Polypropylene and Paraxylene complex at Jamnagar and technical know-how fees and consequential change of claim of deduction u/s.80IA of the Act.

14. Assessee had not claimed depreciation in earlier years on the aforesaid plant/units on the ground that the claim for depreciation was optional as laid down by Hon’ble Apex Court in the case of Mahindra Mills case (243 ITR 56). The Assessing Officer, however, thrust depreciation relating to said plant/units upon the assessee in earlier years so reduced the WDV of the said plant/unit. The assessee has during the year under consideration claimed depreciation on the said plant/units as law was amended prospectively making granting of depreciation compulsory in terms of Explanation 5 to section 32(1) of the I.T. Act. Depreciation so claimed was on the basis of WDV as per WDV of the year after which depreciation had not been claimed by the assessee. The Assessing Officer, however, allowed depreciation on the basis of reduced WDV arrived at after thrusting depreciation upon the assessee in preceding year. Accordingly, Assessing Officer allowed depreciation of Rs.64,47,59,69,037/- as against claim of Rs. 65,18,82,98,458/-. The learned CIT(A) decided the issue in favour of the assessee by observing as under :-

“5.3 Decision

I have carefully considered the matter. The only issue for consideration is whether the claim for depreciation for the year under consideration is to be computed on the basis of the WDV as per the WDV of the year after which depreciation had not been claimed by the assessee or on the basis of the reduced WDV arrived at by the AO after thrusting depreciation upon the Appellant in earlier years. This issue has been considered by the Hon’ble ITAT upto AY 2009-10 and my ld. predecessors in this Appellant’s own case in the preceding years including A.Y. 2001-2002 to A.Y. 2012-2013 wherein a view has been taken that the claim for depreciation cannot be thrust upon the Appellant. Nevertheless, the AO has consistently rejected the claim of the Appellant based on the stand taken at the assessment stage in the earlier years. As far as the current year is concerned, the issue is of consequential nature. The issue as to whether the assessee has option not to claim depreciation does not arise for adjudication for this year. In earlier years, this issue has been decided in favour of the Appellant. In this year, the issue relates to the amount of WDV to be taken as on 01.04.2012. Following the decisions of my predecessors in the Appellant’s case in the preceding years and also the decision of the Hon’ble ITAT upto AY 2009-10, the AO is directed to adopt the WDV of the assets as on 01.04.2012 on the basis of effects given to the orders of CIT(A) for the preceding years. The Appellant has worked out the amount of depreciation allowable on the basis of these orders at Rs.6518,82,98458/-.

Similar issue was decided by my predecessors in favour of the appellant. Consequently following the earlier year’s decision of my predecessors this ground of appeal 2(a) is therefore, allowed.

Since Ground no. 2(b) is not pressed by the appellant (as stated above), the same is disposed off.”

15. Against the above order, Revenue is in appeal before us.

16. At the outset, learned Counsel of the assessee submitted that this issue is squarely covered in favour of the assessee by decision of ITAT in assessee’s own case in order for A.Y. 2007-08, 2009-10 & 2010-11 to 2012-13.

17. We find that learned CIT(A) has granted relief following earlier orders of ITAT. He had noted that it was held that the claim for depreciation cannot be thrust upon the assessee. Nevertheless, the Assessing Officer has consistently rejected the claim of the assessee based on the stand taken at assessment stage in earlier year. Learned CIT(A) noted that current year issue is consequential. Accordingly, following earlier orders of ITAT in assessee’s own case, he decided the issue in favour of the assessee. It is not the case that earlier years decision of ITAT has been reversed by Hon’ble High Court.

Learned Departmental Representative also did not dispute that this issue is covered in favour of the assessee. Hence, we uphold the order of learned CIT(A). The Revenue’s ground is dismissed.

18. Apropos ground nos. 3 & 4 relating to restricting disallowance u/s. 14A of the I.T. Act read with Rule 8D(2)(iii) to 5% by taking average value of investment which have yielded dividend during the year under consideration and also under the provisions of Sec. 115JB of the Act.

19. Brief facts on this are as under :-

During the year under consideration assessee has received dividend of Rs. 76,62,32,7857- and same was claimed exempt u/s 10(34) of the I. T. Act in its computation of total income. The assessee had identified the expenditure of Rs. 5,35,34,181/- being salary, administrative & IT cost of employees working in the treasury department and disallowed the same U/S.14A of the Act being expenditure relatable for earning the exempt income.

20. The AO however did not accept the disallowance made by the assessee and disallowed an amount of Rs.272,74,88,313/-being expenditure relatable for earning the exempt income U/S.14A of the Act, i.e. proportionate disallowance out of interest on borrowed funds of Rs 61.16 crores and Rs.211.59 crores being 0.5% of the average value of investments i.e. proportionate administrative and other expenses towards earning of exempt income relying upon rule 8D of the Income Tax Rules which has been inserted w.e.f. 24.03.2008 r.w.s. 14A of the Act.

21. Upon assessee’s appeal as regards issue of disallowance on account of interest expenditure learned CIT(A) relied upon the decision of Hon’ble Bombay High Court in the case of CIT Vs. Reliance Utilities and Power Ltd. (313 ITR 340) for the proposition that when assessee’s own fund far more exceeded investments made on which exempt income has been earned no disallowance for interest is to be done. So learned CIT(A) directed for deletion of addition on this account.

22. As regards disallowance for other expenses learned CIT(A) referred to several judgements relied upon by the assessee and directed that disallowance should be computed @ 0.5% by taking average value of those investments which have yielded dividend during the year under consideration or the expenses disallowed by the assessee whichever is higher, both in normal provisions as well as book profit u/s. 115JB of the Act. Learned CIT(A) also noted that identical issue was similarly decided by the ITAT in earlier years.

23. Against this order, Revenue is in appeal before us.

24. Learned Counsel of the assessee in this regard has submitted that the issue is covered in favour of the assessee by earlier year orders of the ITAT. He also referred to following further case laws :-

25. Upon careful consideration, we find that the direction of learned CIT(A) is in consonance with earlier year ITAT order as regards disallowance u/s 14A is concerned. Hence, in this regard, we uphold the order of CIT(A). As regards importing disallowance u/s 14A to Section 115JB of the Act is concerned, we are dealing with the same in assessee’s appeal.

26. Apropos ground No. 5, deleting disallowance of Rs. 791.19 cores on aborted blocks.

27. Brief facts on this issue are as under :-

During the year under consideration the assessee was engaged in the business of exploration and production of mineral oil. The assessee was awarded 30 contract areas under separate production sharing contracts (PSC) signed with the Government of India. The above contract areas were awarded on bidding in separate auction for each contract area. For the purpose of claiming deduction u/s.80IB (9) of the Act each contract area constituted separate undertaking. The assessee had claimed deduction of Rs.791.20 crores in the computation of income as per the provision of section 42 of the Act, being the abortive cost incurred in contract areas other than KGD which were surrendered during the year under consideration. However, the unsuccessful exploration cost incurred in contract area other than KGD was not reduced from the profits of KGD undertaking while computing deduction u/s. 80IB(9) of the Act, since while computing deduction under the said section the provisions of section 80IA(5) were applicable, which provided that for the purposes of the quantum of deduction, the profits and gains of the eligible business be computed as if such eligible business were the only source of income of the assessee. Moreover, as per Article 17.2.2 of the PSC the assessee company as a whole was entitled to claim such expenses. Therefore, the claim in respect of the unsuccessful exploration cost incurred in contract area other than KGD has been made in the computation of income u/s 42(l)(a) against the entire income of the assessee company while computing the business income. Thus, the unsuccessful exploration expenses of other blocks were not reduced while working out profits and gains of the eligible undertaking i.e. contract area KGD.

28. The AO has however, rejected the above claim of the assessee and has reduced the amount of Rs.791.20 crores being the abortive cost of wells incurred in contract areas other than KGD while computing deduction u/s.80IB(9) of the Act in respect of KGD undertaking.

29. Upon assessee’s appeal learned CIT(A) decided the issue in favour of the assessee by observing that similar issue has been allowed to the assessee in the immediately preceding assessment year i.e. A.Y. 2012-13. The learned CIT(A) held as under :-

“13.3 Decision

I have considered the facts of the case and the submissions made by the assessee. The issue for consideration is whether cost of abortive/unsuccessful blocks (other independent undertakings) are be reduced while computing the profits of a successful block (KGD in the assessee’s case which is independent undertaking) for the purpose of claiming deduction u/s 80-IB(9).

The assessee was engaged in the business of exploration and production of mineral oil. The assessee was awarded 30contract areas under separate production sharing contracts (PSC) signed with the Government of India. The above contract areas were awarded on bidding in separate auction for each contract area. There is no dispute that for the purpose of claiming deduction u/s.80IB(9) of the Act each contract area constituted an independent undertaking. Since the assessee had complied with the conditions specified u/s 80IB(9) of the Act, it claimed deduction of the profits and gains of KGD undertaking u/s 80-IB(9) of the Act. While computing the profits and gains of KGD undertaking for the purpose of claiming deduction under the section 80IB(9) of the Act, the provisions of section 80IA(5) are applicable, which provide that for the purposes of determining the quantum of deduction, the profits and gains of the eligible business shall be computed as if such eligible business were the only source of income of the assessee.

Accordingly, the assessee has correctly not reduced the unsuccessful exploration cost incurred in contract area other than KGD, which has been made in the computation of income u/s 42(1)(a) against the entire income of the assessee company while computing the business income.

The AO has however, rejected the above claim of the assessee and has reduced the amount of Rs. 791.20 crores being the abortive cost of wells incurred in contract areas other than KGD while computing deduction u/s.80IB(9) of the Act in respect of KGD undertaking. In doing so, he has relied on the provisions of Article 17.2.2. of the Production Sharing Contract (PSC).

However, on harmonious reading of the provisions of Article 17 of the PSC, it can be concluded that the deduction under Article 17.2.2 in respect of abortive/unsuccessful blocks is to be allowed to a Company while computing its profits and gains from the business of Petroleum Operations. Thus, the same are not be reduced for the purpose of computing the profits of an ‘Undertaking’ eligible for deduction u/s 80IB.

Similar issue has been allowed to appellant in the immediately preceding assessment i.e. for AY 2012-13.

Thus, this ground of appeal is allowed and AO is directed to compute the profits of KGD undertaking on a standalone basis as per the provisions of 80IA(5), for the purpose of claiming deduction under the section 80IB(9) of the Act. The AO is accordingly, directed that cost in respect of abortive/unsuccessful blocks are not be reduced while computing the profits of the undertaking viz; KGD which is eligible for deduction u/s 80IB(9). This ground of appeal is accordingly allowed.”

30. Against this order, Revenue is in appeal before us.

31. At the outset on this issue learned Counsel of the assessee submitted that the issue is covered in favour of the assessee by the ITAT on this issue for A.Y. 2011-12 to 2012-13 as under :-

“107. We have heard rival contentions on this issue. We have noticed earlier that the Ld CIT(A) has decided this issue in favour of the assessee by holding that each contract is a separate undertaking and hence the expenses relating to aborted blocks of different contracts cannot be reduced from the profit from sale of mineral oil obtained from another contract. The operative portion of CIT(A) on this issue are extracted below:-

“49. Decision:

I have considered the facts of the case and the submissions made by assessee. The issue for consideration is whether cost of abortive/ unsuccessful blocks (other independent undertakings) are be reduced while computing the profits of a successful block (KGD in the assessee’s case which is independent undertaking) for the purpose of claiming deduction u/s 80-IB(9).

The assessee was engaged in the business of exploration and production of mineral oil. The assessee was awarded 31 contract areas under separate production sharing contracts (PSC) signed with the Government of India. The above contract areas were awarded on bidding in separate auction for each contract area. There is no dispute that for the purpose of claiming deduction u/s. 80IB(9) of the Act each contract area constituted an independent undertaking. Since the assessee had complied with the conditions specified u/s. 80IB(9) of the Act, it claimed deduction of the profits and gains of KGD undertaking u/s. 80-IB(9) of the Act. While computing the profits and gains of KGD undertaking for the purpose of claiming deduction under the section 80IB(9) of the Act, the provisions of section 80IA(5) are applicable, which provide that for the purposes of determining the quantum of deduction, the profits and gains of the eligible business shall be computed as if such eligible business were the only source of income of the assessee.

Accordingly, the assessee has correctly not reduced the unsuccessful exploration cost incurred in contract area other than KGD, which has been made in the computation of income u/s 42(l)(a) against the entire income of the assessee company while computing the business income.

The AO has however, rejected the above claim of the assessee and has reduced the amount of Rs.2042.69 crores being the abortive cost of wells incurred in contract areas other than KGD while computing deduction u/s. 80IB(9) of the Act in respect of KGD undertaking. In doing so, he has relied on the provisions of Article 17.2.2. of the Production Sharing Contract (PSC).

However, on harmonious reading of the provisions of Article 17 of the PSC, it can be concluded that the deduction under Article 17.2.2 in respect of abortive/unsuccessful blocks is to be allowed to a Company while computing its profits and gains from the business of Petroleum Operations. Thus, the same are not be reduced for the purpose of computing the profits of an ‘Undertaking’ eligible for deduction u/s. 80IB.

Thus, this ground of appeal is allowed and AO is directed to compute the profits of KGD undertaking on a standalone basis as per the provisions of 80IA(5), for the purpose of claiming deduction under the section 80IB(9) of the Act. The AO is accordingly, directed that cost in respect of abortive/unsuccessful blocks are not be reduced while computing the profits of the undertaking viz. KGD which is eligible for deduction u/s. 80IB(9). This ground of appeal is accordingly allowed.”

108. We notice that the article/clause 17.2.2 of PSC allows deduction of expenses relating to aborted blocks against the profit arising from other blocks. In our view, the assessee was right in contending that the article/ clause 17.2.2 was concerned with the computation of income at entity level in terms of sec. 42 of the Act. The article/clause 17.2.5 of PSC states that all other provisions of Income tax Act shall apply. The PSC does not deal with the deduction given u/s 80IB(9) of the Act and hence the provisions of the Act shall apply. Hence the deduction u/s 80IB(9) of the Act has to be computed in terms of sec. 80IB of the Act. Sec. 80IB(13) of the Act provides that the provisions of sec. 80IA(5) shall apply and under the provisions of sec. 80IA(5) of the Act, the profits and gains of eligible business, for the purposes of sec. 80IB, shall be computed as if such eligible business were the only source of income of the assessee. In view of these provisions, the deduction u/s 80IB(9) has to be computed after ascertaining profits and gains of eligible business in terms of sec. 80IA(5) of the Act. Hence there is no scope to adjust expenses relating to other “undertaking” while computing deduction u/s 80IB(9) of the Act. Hence, we are of the view that the decision rendered by Ld CIT(A) does not call for any interference and accordingly we uphold the same.

32. Since facts are identical and it is not the case that above decision of ITAT has been reversed by Hon’ble Jurisdictional High Court, we uphold the order of learned CIT(A).

33. Apropos Ground no. 6 issue relating to allowance of deduction u/s. 80IB(9)(ii) of the Act at Rs.30,41,36,90,094/- instead of Rs. 3,75,50,57,395/-.

34. Brief facts of this issue and AO’s order are summarized as under :-

“This ground of Appeal pertains to disallowance of deduction u/s 80IB (9) of the Act of in respect of KG-DWN-98/3 (‘KGD’) undertaking relatable to natural gas and condensate. The assessee company is engaged in the business of extraction of natural resources including Petroleum and gas, refining of petroleum products etc. Government of India formulated a policy called New Exploration Licensing Policy (NELP) in 1997. The main objective was to attract significant risk capital from Indian and Foreign companies, state of art technologies, new geological concepts and best management practices to explore oil and gas resources in the country to meet rising demands of oil and gas. This policy, NELP was approved in 1997 and it became effective on 10th February, 1999. Under NELP, the Central Government invited offers for exploration of mineral oil for every block and commenced the process of entering into a PSC with the successful bidders who is nomenclatured as the contractor under the PSC. On 12.04.2000 the assessee alongwith M/s Niko Resources Limited entered into a PSC with the Government of India [‘GOI’] for obtaining a Petroleum Mining Lease in respect of Development area specified therein namely Block KGD for extraction and exploration of mineral oil i.e. ‘Petroleum’. Article 1.73 of the PSC entered into with the GOI defines the term ‘Petroleum’ as, “Petroleum means crude Oil and/or Natural Gas existing in their natural condition but excluding helium occurring in association with Petroleum or shale.” Thus as per the PSC the term ‘petroleum’ includes crude oil and natural gas. Among other things, the NELP stated that a seven year tax holiday from the date of commercial production would be available to the contractors under NELP. The NELP also stated that a separate Petroleum Tax Guide would be in place to facilitate the investors. This Petroleum Tax Guide is a compilation of the laws relating to Income Tax, Custom Duties, Central Excise and other laws, as applicable to activities connected with prospecting for or extraction and production of petroleum in the upstream sector under PSC entered into on or after 1st January 1999. Paragraph 5 of the guide deals with the Income Tax provisions in relation to PSC participants. Sub­paragraph 5 (11) reads as under:-

“Under Section 80-IA of the Income Tax Act, 1961, PSC Participants who begin Commercial Production of Petroleum in any part of India on or after 1st April 1997 shall be entitled to claim deduction of 100% of their profits and gains derived from such business for initial seven years commencing from the first year of Commercial Production.”

The term “Commercial Production” is defined as under in the Petroleum Tax Guide :-

“Commercial Production” means production of Petroleum (excluding any production for testing purposes) from a field and delivery of the same at the relevant delivery point under a programme of regular production and sale. The date of commencement of commercial production will be the date when commercial production commences from a field and the date of commencement of commercial production shall be intimated by the contractor to the Government of India in writing.’

The company started commercial production of petroleum i.e. mineral oil from the above specified development area/ undertaking from 01.05.2009 i.e. from F.Y.2009-10 relevant to A.Y.2010-11. During the year under consideration, the company has made total sales of petroleum i.e. mineral oil of Rs.5482,48,12,401/- and derived profit & gains of Rs. 2280,55,52,522/-. After adding back depreciation as per profit and loss account of Rs. 1448,16,16,707/- and adjusting there from depreciation claim of Rs. 687,34,79,135/- made under the Income Tax Act, the company claimed deduction u/s 80IB(9) of the Act of Rs.3041,36,90,094/- in its return of income. Section 80IB of the Act provides ‘Deduction in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings’.

Sub section (1) of section 80IB specifies that, profits and gains derived from the eligible businesses referred to in sub section (3) to (11B) of the section are eligible for deduction from such profit and gains of an amount equal to such percentage and for such number of assessment years as specified in those sections. Further, sub section (2) of section 80IB specifies four conditions which are common and applicable to all type of businesses for which deduction u/s 80IB is applicable. The assessee company has fulfilled all the four conditions specified in sub-section (2) of section 80IB of the Act. The assessee’s business of production of petroleum products i.e. mineral oil, is specified as eligible business under sub section (9) of section 80IB for the purpose of deduction under that section.

The relevant portion of sub-section (9) reads as under:

“(9) The amount of deduction to an undertaking shall be hundred per cent of the profits for a period of seven consecutive assessment years, including the initial assessment year, if such undertaking fulfils any of the following, namely:-

(i) is located in North-Eastern Region and has begun or begins commercial production of mineral oil before the 1st day of April, 1997;

(ii) is located in any part of India and has begun or begins commercial production of mineral oil on or after 1st day of April, 1997:

[Provided that the provisions of this clause shall not apply to blocks licensed under a contract awarded after the 31st day of March, 2011 under the New Exploration Licencing Policy announced by the Government of India vide Resolution No. O-19018/22/95-ONG.DO.VL, dated the 10th February, 1999 or in pursuance of any law for the time being in force or by the Central or a State Government in any other manner;]

(iii) is engaged in refining of mineral oil and begins such refining on or after the 1st day of October, 1998 3 [but not later than the 31st day of March, 2012];”

As can be observed from the above, deduction under 80IB(9)(ii) is available to an undertaking which ‘is located in any part of India and has begun or begins commercial production of mineral oil on or after the 1st day of April, 1997’.

The undertaking namely KGD6 block belonging to the assessee company, is located in India i.e. at Tallerevu Mandal, East Godavari District, Gadimoga – 533 463, Andhra Pradesh, India and has begun commercial production of mineral oil after the 1st day of April, 1997 i.e. on 01.05.2009. Hence the assessee company duly fulfills the eligibility criteria/conditions specified under sub-section (9)(ii) of section 80IB of the Act.

The accounts of the undertaking are audited by an Accountant as defined in the Explanation to sub section (2) of section 288 of the Act and the company has furnished alongwith its return of income Audit Report in Form 10CCB wherein the auditor has certified that the assessee company is eligible for deduction of Rs. 3041,36,90,094/- u/s 80IB(9) of the Act. Accordingly, it is submitted that the assessee company has duly fulfilled all the conditions specified u/s 80IB of the Act and is eligible for deduction of Rs. 3041,36,90,094/- u/s 80IB(9)(ii) of the Act as claimed in its return of income.

The deduction claimed of Rs. 3041,36,90,094/- interalia includes deduction of profit and gains derived from the sale of natural gas and condensate, as the same also falls within the meaning of mineral oil.

However, the AO did not consider the assessee’s submissions, the AO therefore concluded as under:

“14.14 From the above facts and discussion, it is clear that the deduction of entire profits derived by the assessee company cannot be allowed U/s 801B(9) of the Act. However the profits derived on account of production and sale of “mineral oil” computed in the ration of turnover of mineral oil which is 18.26% (value wise) to the total turnover of the undertaking namely KG-DWN-98/3 as below:-

Profit of the undertaking namely KG-DWN-98/3 computed as per para 14.7 is Rs.2056,43,88,802/-.

Accordingly, profits of mineral oil sales @ 18.26% of “Rs.2070,62,16,966/-comes to Rs.375,50,57,395/- and the same shall be allowed as deduction U/s 80IB(9) of the Act.”

35. Upon assessee’s appeal, learned CIT(A), inter alia, decided the issue by holding that similar issue has been allowed to the assessee in the immediately preceding year i.e. A.Y. 2012-13 and held that mineral oil for the purpose of claiming deduction u/s. 80IB(9) of the Act include natural gas condensate. He held as under :-

“I have considered the facts of the case and submissions made by the assessee. The issue for consideration is whether the term ‘mineral oil’ u/s 80-IB(9) includes natural gas and condensate. The assessee company is engaged in the business of extraction of natural resources including Petroleum and gas, refining of petroleum products etc. On 12.04.2000 the assessee alongwith M/s Niko Resources Limited entered into a PSC with the Government of India [‘GOI’] for obtaining a Petroleum Mining Lease in respect of Development area specified therein namely Block KG-DWN-98/3 (KGD) for extraction and exploration of mineral oil i.e. ‘Petroleum’. Although the term ‘mineral oil’ is defined in section 42, 44BB and 293A of the Act, the same is not defined in Section 80-IB of the Act. When one refers to following statutes dealing with mineral oil, petroleum and natural gas etc, natural gas is treated as a part of ‘mineral oil’ viz:

a) The Oilfields (Regulation Development) Act, 1948

b) The Mines and Minerals (Development and Regulation) Act, 1959

c) The Oil industry (development) Act, 1974

d) The Regulation for foreign direct investment in India

e) Notification issued (No GSR 304(E) dated March 31, 1983 for extending the applicability of the Act to the continental shelf of India

f) New Exploration Licensing Policy

g) Petroleum Tax Guide published by the Ministry of Petroleum and Natural Gas, Government of India

The issue whether natural gas is a mineral oil and is eligible for deduction u/s. 80IB(9) of the Act has already been considered by the Hon’ble Income Tax Appellate Tribunal, Ahmedabad Bench in the case of NIKO Resources Limited Vs. DCIT [22 DTR 225] and held that natural gas is mineral oil eligible for deduction u/s 80IB(9) of the Act. The above decision of the ITAT has been further confirmed by the Honourable Gujarat High Court (reported in 374 ITR 369) by placing reliance upon the decision of the Supreme Court in the case of Association of Natural Gas & Ors. Vs Union of India & Ors. (2004) 4 SCC 489.

The Honourable Gujarat High Court has also held that the insertion of sub-clause (iv) to Section 80-IB(9) does not mitigate against meaning attributed to the expression “mineral oil” by the Apex Court, Entry 53 of List I does not refer to Natural Gas separately. Further, Honourable Gujarat High Court has also rejected the contention raised by the Department, that petroleum products and natural gas have been made part of mineral oil only through inclusive provisions contained in Sections 42, 44BB and 293A and its conspicuous absence in section 80-IB has to be inferred that the purpose of Section 80-IB, mineral oil would include petroleum products and natural gas.

Similar issue has been allowed to appellant in the immediately preceding assessment year i.e. for AY 2012-13.

On perusal of the aforesaid facts and following the decision of the Gujarat High Court (supra), I hold that the term ‘mineral oil’, for the purpose of claiming deduction u/s 80-IB(9) of the Act includes natural gas and condensate and therefore the assessee claim for deduction u/s 80IB(9) of the Act in respect of both natural gas and condensate is accordingly allowed. Accordingly, this ground of appeal is accordingly allowed.”

36. At the outset learned Counsel of the assessee contended that this issue is covered in favour of the assessee by the order of the ITAT for A.Y. 2010-11 to 2012-13. He further submitted that similar issues have been decided in favour of the assessee in following decisions :-

(i) Niko Resources Ltd. vs. Union of India (55 com 455)(Gujarat High Court)

(ii) Association of Natural Gas vs. Union of India (Spl. Ref. No. 1/2001)(Supreme Court)

37. We note that ITAT in its order for A.Y. 2010-12 to 2012-13 has decided the issue in favour of assessee as under :-

“109. The next issue urged by the revenue in ground no. 7 is relating to the decision of the AO in restricting the deduction u/s 80IB(9) of the Act to the proportionate profit relating to sale of Crude oil. We noticed earlier that the AO did not allow deduction on the profit arising on sale of Natural gas and condensate by holding that the “natural gas” shall not fall under the category of “Mineral Oil” for allowing deduction u/s 80IB(9) of the Act. The Ld. CIT(A), however, held that the mineral oil shall include “natural gas” also and accordingly directed the AO. The revenue is aggrieved by the said decision of Ld. CIT(A).

110. We heard the parties on this issue and perused the record. We notice that the question as to whether “natural gas” shall fall under “mineral oil” or not was examined by the Ahmedabad bench of ITAT in the case of “NIKO Resources Ltd vs. DCIT (22 DTR 225) and it has been held that the natural gas shall fall under “mineral oil” in terms of sec. 80IB(9) of the Act. The said decision of Tribunal has since been affirmed by Hon’ble Gujarat High Court in the same case reported in 374 ITR 369.

111. The AO had taken support of sub-clause (iv) inserted in sec. 80IB(9) by Finance (No. 2) Act, 2009 w.e.f. 1.4.2010, whereby the commercial production of natural gas in blocks licensed under the VIII round of bidding award was made eligible for deduction u/s 80IB(9) of the Act. Since the impugned license was allotted to the assessee prior to VIII round, the AO held that the deduction u/s 80IB(9) shall not be available for natural gas. The AO had also taken support of speech made by the Hon’ble Finance Minister in 2008, wherein he has stated that the impugned issue shall be decided by the Courts for allotments made in the rounds earlier to round VIII. However, the Hon’ble Gujarat High Court has held that the insertion of sub-clause (iv) in sec. 80IB(9) does not mitigate against meaning attributed to the expression “mineral oil” by the Hon’ble Apex Court in the case of Association of Natural Gas & Ors. Vs. Union of India & Ors. (2004) (4 SCC 489), wherein it was noticed that Entry 53 of List I does not refer to Natural Gas separately. The Ld. CIT(A) has further noticed that the Hon’ble Gujarat High Court has also rejected the contention raised by the Department that petroleum products and natural gas have been made part of “mineral oil” only through inclusive provisions contained in sections 42, 44BB and 293A and its conspicuous absence in section 80-IB(9) has to be inferred that the natural gas and condensate should not be included in “mineral oil” for the purpose of sec. 80IB(9) of the Act. Accordingly the ld CIT(A) has held that the deduction shall be available on the profit arising from sale of natural gas and condensate also u/s 80IB(9) of the Act.

112. Since identical issue has been decided by Hon’ble Gujarat High Court in favour of the assessee in the case of NIKO Resources Ltd (which holds 10% share in the block) and since the Ld. CIT(A) has followed the same, we do not find any infirmity in the order passed by Ld CIT(A) on this issue.”

38. Since facts are identical, following the precedent, we uphold the order of learned CIT(A).

39. Ground No. 7 to 12 urged by the Revenue relate to transfer pricing adjustment of Rs. 2,70,91,004/- on provision of support services to Associated Enterprise-REPDMCC.

40. Brief facts and AO’s observation on the issue are as under :-

“It is submitted by the Appellant that AE REP DMCC is an operator in various oil and gas exploration blocks in overseas destinations. The AE has entered into Production Sharing Contracts (‘PSC) with foreign government for the exploration and development of petroleum in the contract area (as defined in the PSC).

In relation to the exploration and development of petroleum contract executed by AE, the Appellant has rendered support services for drilling operations. Pursuant to the various service agreement entered between the Appellant and the AE, in relation to international blocks, the Appellant had undertaken the following transaction with the AE during FY 2012-13 :-

Particulars Amount (in USD) Amount (in Rs.)
Provision of support services to AE for drilling operations 30,89,554 16,74,39,458

The Appellant has submitted copies of specimen service agreements entered with REP DMCC for all the international blocks, a statement which provides the details of invoice raised on REP DMCC towards provision of support services for drilling operations, alongwith copy of the invoices, before the TPO and this office.

It is also submitted that as per the PSC entered by the AE, the cost of professional and administrative services and scientific or technical services provided by an affiliate for the direct benefit of petroleum operations shall be charged on cost of service basis and shall not include any element of profit. Accordingly, the Appellant has provided administrative, technical or scientific personnel on cost to cost basis in accordance with the provisions of PSC. Relevant extract of PSC entered between REP DMCC and The Kurdistan Regional Government of Iraq for Rovi Block and Satra block was submitted before the TPO and this office. Accordingly, in terms of Rule 10B(2)(d), the Appellant has rendered the services on cost to cost basis and the price charged from the AE for provision of support service was determined to have been entered at arm’s length price and in compliance with the transfer pricing provisions of the Act.

The TPO did not accept the arguments of the Appellant and determined the ALP of the transaction by applying a mark-up of 16.18% (comparable mark­up determined by the TPO for management services) on the cost incurred by the Appellant in rendering services. Hence, the TPO arrived at the ALP of provision of support services at INR 19,45,31,162 and made an adjustment of INR 2,70,91,704.”

41. Upon assessee’s appeal, learned CIT(A) deleted the addition by referring to CIT(A) order in earlier year and gave a finding that facts are identical.

42. Against this order assessee is in appeal before us.

43. We note that this issue has been decided by the learned CIT(A) in favour of the assessee by noting that identical issue was decided in assessee’s favour in earlier years. It transpires that the same issue was decided by the ITAT in assessee’s favour for A.Y. 2011-12 to 2012-13, wherein the ITAT referred to earlier order for A.Y. 2011-12, in which it was observed as under :-

“We heard the parties on this issue. We notice that the assessee has collected for the supply of materials/equipments and also for providing services in accordance with the PSC entered with foreign governments. The said decision of the assessee is supported by the provisions of Rule 10B(2)(d) of I.T Rules. We further noticed that the TPO did not bring any other comparable to prove that the amount charged by the assessee is not at arm’s length. Instead, he has simply marked up the transactions by 12.50%, which is not supported by material. Since the decision taken by the assessee is supported by Rule 10B(2)(d) of I T Rules, the Learned CIT(A) has deleted the impugned addition. Before us, the Ld A.R also placed reliance on the following decisions, wherein the PSC entered with foreign governments were given due importance:-

(a) Bharti Airtel Limited (ITA No.5636/Del/2011)(Delhi Trib.)

(b) Cotton Naturals (I) Pvt. Ltd (ITA No.233/2014)(Delhi HC)

Under these set of facts, we do not find any reason to interfere with the decision taken by Ld CIT(A) on this issue.”

Referring to this, the ITAT held as under :-

“We have heard both the counsel on this issue. We notice that the assessee has collected for the supply of materials and equipments and also for providing services in accordance with the PSC entered with foreign governments. Said decision of assessee is supported by the provisions of Rule 10B(2)(d) of the I.T. Rules. We further noticed that the TPO did not bring any other comparable to prove that the amount charged by the assessee is not at arm’s length. Instead, he had simply marked up the transactions by 12.50%. Following the same, we uphold the order passed by learned CIT(A) on this issue.”

44. Since it has not been disputed by the Revenue that facts are not identical, respectfully following the precedent as above we uphold the learned CIT(A)’s order.

45. Ground No. 13 to 19 relate to transfer pricing adjustment of Rs. 39,77,60,683/- in respect of debts receivable from AE.

46. Brief facts and TPO’s action on this issue are as under :-

The Appellant had sold petroleum products to its AE RIL USA Inc. in respect of certain sales made, the proceeds were received beyond the agreed credit period. Accordingly, in respect of such sales, the Appellant has raised debit notes on the AE towards interest on delayed receipts beyond the normal credit period agreed upon.

The details of interest charged to RIL USA Inc is as under:

AE Interest
USD INR
Interest on delayed receipts 41,91,616 22,74,23,850

The said interest has been charged at the prevailing short term interest rates, which were in the range of 1 month Libor plus spread of 200 basis points. Depending upon the Libor rates prevailing during FY 2012-13, the effective interest rate worked out at the rate of 2.20% to 2.25% p.a. The working was submitted with the TPO vide letter dated 2 September 2016.

The Appellant has benchmarked the transaction using CUP as the most appropriate method. To benchmark the aforesaid rate at which interest was charged from the AE, the Appellant submitted copies of letters issued by various banks which have provided buyers/suppliers credit facility (i.e. short term loans to finance imports of crude oil and/or petroleum products) to the Appellant during FY 2012-13. The average rate at which such credit facility were available from banks worked to LIBOR plus 0.75% p.a. to 0.95% p.a. Thus, it was submitted by the Appellant that since the interest charged from AEs was higher than the market rate, the transaction was at arm’s length.

The TPO issued a show-cause notice and the Appellant filed a detailed submission. The TPO did not accept the arguments of the Appellant on the following grounds:

    • As the invoices are payable in fixed tenure, it partakes the character of loan if not paid within the due date
    • Bank letters are mere quotations

Thus, the TPO treated the delayed receipts (outstanding from the AE) as loan to AE, instead of treating the same as a short term credit facility provided in the normal course of business and determined the ALP rate of interest at 6.51% p.a., by adopting the Appellant’s weighted cost of total borrowings @ 3.51% p.a. plus an arbitrary mark-up of 3% p.a. for various factors such as currency risk, entity risk and country specific risk. Thus, the TPO made adjustment as under:

Name of AE Transaction value (INR) ALP (INR) TP Adjustment
RIL USA 22,74,23,850 62,51,84,533 39,77,60,683

47. On this issue learned CIT(A) has decided the issue by referring to earlier years order in assessee’s own case, wherein the arm’s length rate of interest in respect of delayed realization of receivable was determined at Libor plus 1.05%. Therefore learned CIT(A) deleted the adjustment done by TPO, by holding that benchmarking done by assessee is accepted.

48. Learned Counsel of the assessee submitted that the addition is to be deleted following the ITAT order in assessee’s own case for A.Y. 2010-11 to 2012-13 and it is a covered issue. It is further submitted that ground No. 14 to 19 are infructuous in as much as CUP submitted by assessee are actual transaction undertaken by the assessee during the financial year.

49. We note that identical issue was decided by this Tribunal in favour of the assessee by order for A.Y. 2011-12 to 2012-13. In this order the Tribunal has held as under :-

“44. We heard the parties on this issue and perused the record. It is the submission of the assessee that it has availed short term loans from M/s BNP Paribas and M/s Intesa Sanpaola at Libor plus 45 bps. The assessee has charged interest at the rate of Libor plus 125 bps for the delayed payments. Since the benchmarking done by the assessee could not be controverted by TPO, in our view, the T.P adjustments made by TPO is devoid of any reasoning as held by Ld CIT(A). Accordingly we are of the view that the Ld CIT(A) was justified in deleting the addition of Rs.10.79 crores made by AO/TPO.”

50. Since the ITAT has already accepted the interest charged at the rate Libor plus 125 bps for delayed payment in earlier years, we do not find any reason to interfere with the delayed realization of receivable at Libor plus 1.50%. Accordingly, we uphold the order of learned CIT(A) deleting the addition.

51. Ground No. 20 to 27 relate to transfer pricing adjustment of Rs.1,04,60,29,112/- being interest on investment in preference stock of associated enterprises. Brief facts and AO’s observation in this issue are as under :-

“The Appellant has submitted that it had invested in the 5% NCCCPS of the AEs REP DMCC, Reliance Industries (Middle East) DMCC (‘RIME’), Reliance Netherlands BV (‘RNBV’) and Reliance Global Business BV (‘RGBV’) during the earlier years. The details of investments/redemption in preference shares during FY 2012-13 is given below :

Sr. Name of AE Opening as on 1 April 2012 Allotted
in FY
2012-
13
Redeemed/sold during the year Closing
No of Shares Value in AED No of
Shares
No Value in AED No of Shares Value in
AED
1 REP
DMCC
24,82,316 2,48,23, 16,000 0 24,82,316 2,48,23, 16,000 0 0
2 RIME
DMCC
3,54,156 35,41, 56,000 0 2,90,720 2,90,72, 00,000 63,436 6,34, 36,000
3 RGBV 6,60,77, 27,511 6,60,77,275 0 68,08, 96,400 68,06,964 5,92,7 0,31,111 5,92, 70,311
4 RNBV 1,99,000 1,44,200 0 1,99, 000 1,44,200 0 0

The Appellant submitted that no fresh investment was made during the FY 2012-13 and that the respective AEs had issued and allotted corresponding preference shares prior to 31 March 2012. Thus, there was no amount outstanding with the AEs as ‘share application money’ on 31 March 2012, against which the AEs had not issued preference shares.

The Appellant also submitted that as per the terms of the issue, the Class A shares issued by the AEs M/s. RGBV and M/s. RNBV has a tenure of 10 years. These Class A shares can be converted into equity shares at any time during the first 5 years at fair value of the equity shares at the conversion date and at any time after 5 years till 10 years at 10% discount on the fair value of the equity shares at the conversion date. At the end of 10 years, the Class A shares shall be mandatorily converted into ordinary shares at a discount of 10% to the fair value of ordinary shares.

Similarly, as per the terms of issue, the NCCCPS allotted by RIME and REP DMCC carries dividend rate of 5% p.a. Further, the Class A shares issued by the AEs M/s. RGBV and M/s. RNBV would be entitled to dividend @ 5% of the nominal value of share out of the profits realized in a financial year. However, no dividend was declared in respect of NCCCPS subscribed in earlier years since no sufficient profit was earned by the AEs to declare the dividend.

The TPO issued a show-cause to the Appellant that in respect of outstanding balances of preference shares issued in earlier years to AEs, the transactions being in the nature of loan financing, the ALP rate of interest chargeable on such preference shares was proposed to be determined on the basis of the benchmarking done from Bloomberg. The Appellant filed detailed response which was not accepted by the TPO.

The TPO determined the ALP rate by adopting the benchmarking done from Bloomberg, on the amount remitted to the AEs from the date of remittance till 31 March 2013 and made an adjustment of INR 1,04,60,29,112.”

52. On this issue learned CIT(A) has decided the issue in favour of the assessee by referring his own order in assessee’s own case for earlier years. He gave a finding that facts are identical.

53. Against this order, Revenue is in appeal before us. The learned Counsel of assessee submits that ITAT in assessee’s own case for A.Ys 2010-11 to 2012-13 has deleted the addition and facts for this year are identical. He further referred that no fresh investment was made during the year. That shares were allotted in earlier years. He further submitted that the ground No.20, raised by the Revenue, wherein reliance upon Hon’ble Bombay High Court decision relied by the ITAT decision challenged is identical to the ground raised in the earlier year. He further submitted that the TPO has not brought anything on record to show that an unrelated preference shareholder was to be paid any return for the period between making the remittance and close of the year. The very foundation of impugned ALP adjustment is devoid of any legal substance. That AE’s making profits in a particular year do not pertain to this year. That each year is separate for the purpose of transfer pricing. He further referred to Hon’ble Bombay High Court decision in the case of M/s. Aegis Ltd. (ITA No. 1248 of 2016) and ITAT decision in Pr. CIT Vs. Auto Components Pvt. Ltd. ( ITA No. 1213/Mum/2014)

54. It is noted that that this Tribunal in assessee’s own case in A.Y. 2010-11 to 2012-13 has decided the identical issue as under :-

“48. We heard the parties on this issue and perused the record. The Ld D.R strongly supported the order passed by AO, while the Ld A.R supported the order passed by Ld CIT(A). We notice that the Ld CIT(A) has followed the decision rendered by Hon’ble jurisdictional High Court in the case of Besix Kier Dabhol (supra) in order to hold that re-characterisation of transaction is not permissible. In the case of Bharti Airtel Ltd (supra), the Delhi ITAT has held that it is not open to the TPO to recharacterise transaction under Income tax Act, unless it is found to be sham or bogus. It was further held that, even under judge-made law, recharacterisation is possibly only if transactions are found to be substantially at variance with the stated form. In the absence of any such finding and also in the absence of anything on record to show that unrelated applicant was to be paid interest for the period ending till the date of allotment of shares, the ITAT deleted the addition. In the case of Bharti Airtel Ltd (supra), there was delay in allotment of shares and still, the Tribunal held that re-characterisation is not permissible. In the instant case, it is seen that the preference shares have been allotted within the year itself. The AO/TPO has not shown that the transactions are sham or bogus nor it was shown that the apparent is not real. It was also not shown that the unrelated share applicant has been paid any interest for the period commencing from date of subscription to the date of allotment of shares. It has been held that the amendment made by Finance Act 2012 including capital financing transactions as international transactions cannot be applied retrospectively.

The Ld A.R further submitted that the Preference shares carry coupon rate of 5%, which is higher than the 6 months Libor plus 300 bps.”

55. We further note that it has been submitted before us that the above decision is squarely applicable in as much as no fresh investment has been done during the A.Y. 2013-14. Furthermore, as pointed out by learned Counsel of the assessee from Hon’ble Bombay High Court decision in the case of Pr. CIT Vs. M/s. Aegis Limited (supra) supports the above proposition. We may refer the Hon’ble High Court decision as under :-

“The respondent-assessee is a Company registered under the Companies Act. For the Assessment Year 2009-10, the assessee was subjected to transfer pricing regime. Question no.1 arises out of the action of the Revenue to tax notional interest in the hands of the assessee through transfer pricing. The facts are that, during the period relevant to the assessment year in question, the assessee had subscribed to redeemable preferential shares of its Associated Enterprises (“AE” for short) and redeemed some of its shares at par. The Transfer Pricing Officer (“TPO” for short) held that the preference shares were equivalent to interest free loans advanced by the assessee and accordingly charged the interest on notional basis. The Tribunal by the impugned judgment, deleted the addition by observing that the TPO had re-characterised the transaction of subscription of shares into advancing of unsecured loans. The Tribunal did not accept such conclusion, inter-alia on the grounds that the TPO cannot disregard the apparent transaction and substitute the same without any material of exceptional circumstances pointing out that the assessee had tried to conceal the real transaction or that the transaction in question was sham. The Tribunal observed that the TPO cannot question the commercial expediency of the assessee entered into such transaction.

3. We are broadly in agreement with the view of the Tribunal. The facts on record would suggest that the assessee had entered into a transaction of purchase and sale of shares of an AE. Nothing is brought on record by the Revenue to suggest that the transaction was sham. In absence of any material on record, the TPO could not have treated such transaction as a loan and charged interest thereon on notional basis. No question of law arises.”

56. Furthermore, we note that as submitted no fresh investment is made during the year. That the shares were allotted in earlier years. The new issue raised by Revenue on the theory of preponderance are not sustainable as nothing has been cogently brought on record. As pointed out by the learned Counsel of the assessee the examples mentioned in the grounds above do not relate to current year and it is trite that every year is different for transfer pricing purpose. Subsequent year instances cannot give a carte blanche to the Assessing Officer to make adjustment and render the Tribunal decision ceasing to be a precedent. Accordingly in the background of the aforesaid decision and precedent we uphold the order of learned CIT(A).

57. Ground 28 to 34 relate to deletion of learned CIT(A) ALP at 1.5% charged by the TPO in arriving at corporate guarantee fees.

58. During the Financial year 2012-13, the assessee has provided corporate guarantee to the bank in connection with loan taken by the AEs. The assessee stated that guarantees provided by the assessee on behalf of its AEs are not an international transactions. However, out of abundant caution a corporate guarantee was reported as an international transaction. The same was benchmarked and arm’s length price of the guarantee fees has been recorded from the AEs in respect of short term guarantee @ .38% per annum (from 1.4.2012 up to 31.12.2012) and .30% (from 1.1.2013). Further, in respect of long term guarantee provided on behalf of the Reliance Holdings USA Inc. in respect of bond issue made by Reliance Holding USA Inc. to investors @ 0.60% per annum from 1.4.2012 up to 31.12.2012 and @ 1.20% per annum from 1.1.2013. The TPO in his order has determined arm’s length price @ 1.5% based on rates quote by SBI and made adjustment of Indian rupees 20,30,967/-.

59. Upon assessee’s appeal learned CIT(A) noted the submissions that the issue was covered in favour of the assessee by the ITAT order in assessee’s own case for earlier year. Learned CIT(A) held that the yield spread approach has to be accepted. He further held that the ITAT in assessee’s own case for A.Y. 2005-06 to A.Y. 2009-10 the ITAT has restricted the arm’s length price at the rate of commission or guarantee to 0.38%. Considering these facts learned CIT(A) held that the arm’s length price or rate of commission determined at 0.38% for share term guarantees long term guarantee learned CIT(A) upheld the yield spread approach based upon the ITAT order in A.Y. 2011-12 & 2012­13. We may refer to the learned CIT(A) order as under :-

“I have carefully perused the order of the TPO and the submissions made by the Appellant during the course of the Appellate proceedings. I have also perused the orders of Tribunal and the then CIT (A) for earlier years, it is relevant to highlight that there are two types of guarantees- Short term and Long term.

Short term guarantees

The Appellant adopted yield spread approach for the first time in AY 2011­12, it has been accepted by the then CIT (A) by a speaking order for AY 2011­12 which has been followed in appellate order for AY 2012-13. Yield spread approach is internationally accepted methodology for benchmarking the guarantee commission. The contentions of the TPO in respect of rejection of quotes obtained by the Appellant to find out the differential interest is not found to be acceptable considering the Jurisdictional Tribunal decisions in case of Gulf Energy Maritime. Following the orders of AY 2011-12 and AY 2012-13, the benchmarking done by the Appellant by following the yield spread approach in AY 2013-14 in respect of short term guarantee is accepted. It is further seen that in the orders of the IT AT in Appellant’s own case for AY 2005-06 to AY 2009-10, the ITAT has restricted the ALP rate of commission for guarantee to 0.38%. After considering the order of ITAT and the facts of the case, the then CIT (A) in AY 2011-12, has also restricted the ALP rate of commission to 0.38%. Same stand is adopted by the then CIT (A) in order for AY 2012-13.

On perusing the facts for AY 2013-14, it is found that the guarantees from AY 2011-12 and AY 2012-13 are flowing in AY 2013-14. The guarantee commission rates are ranging from 0.3% to 0.38%. Considering the totality of facts and following the orders of ITAT for AY 2005-06 to AY 2009-10 and the order passed by the then CIT (A) in AY 2011-12 and AY 2012-13, the ALP rate of commission for guarantee is determined to be 0.38%.

Long term guarantees

Similar to short term guarantees, the Appellant adopted yield spread approach for benchmarking long term guarantees for the first time in AY 2011-12 which has been accepted by the then CIT (A) by a speaking order in AY 2011-12 and the ALP rate of guarantee commission was accepted at 1.8% as determined by the Appellant based on the yield spread approach adopted for that year.

The then CIT (A)in AY 2012-13 has followed the order for AY 2011-12, however, restricted the rate of commission to 1.8% though the Appellant had determined 1.8% for the period April to December 2011 and 0.6% for the period January to March 2012. On perusing the facts for AY 2013-14, it is found that the guarantees from AY 2011-12 and AY 2012-13 are flowing in AY 2013-14. Further, the undersigned is of a considered opinion that, once the yield spread approach adopted by the appellant has been accepted in principle, then the results for the arm’s length guarantee fees flowing out of the benchmarking also should be accepted.

As stated above, yield spread approach is internationally accepted methodology for benchmarking the guarantee commission. The contentions of the TPO in respect of rejection of the approach followed by the Appellant to find out the differential interest is not found to be acceptable considering the jurisdictional Tribunal decisions in case of Gulf Energy Maritime. Following the orders of AY 2011-12 and AY 2012-13, the benchmarking done by the Appellant by following the yield spread approach in AY 2013-14 in respect of long term guarantee is accepted and the rates determined by the Appellant based on quotes for the year are held to be at ALP. Thus, the appeal of the Appellant on this issue is partly allowed.

60. Against this order, the Revenue is in appeal.

61. Learned Counsel of the assessee stated that the issue is covered in favour of the assessee by the ITAT decision in assessee’s own case for A.Y. 2011-12 and A.Y. 2012-13 and the facts are identical. He submitted that issue has further been clarified in M.A. order for A.Y. 2011-12 & 2012-13. It is further submitted that yield spread approach adopted considering letter of bank issued for F.Y. 2012-13, hence ground No. 30 to 33 is infructuous. In this connection assessee has also drawn support from the following decisions of Hon’ble Bombay High Court :-

  • CIT Vs. Glenmark Pharmaceuticals Ltd. (ITA No. 1302 of 2014)
  • CIT Vs. M/S Everest Kento Cylinders Ltd. (ITA No. 1165 of 2013)

62. It has been further submitted that Hon’ble Bombay High Court decision in the case of Glenmark Pharmaceuticals Ltd. (supra) has been upheld by Hon’ble Apex Court in CIT Vs. Glenmark Pharmaceuticals Ltd. It has further been submitted that Hon’ble Bombay High Court in the case of Everest Kento Cylinders Ltd. (supra) the Tribunal decision which rejected naked bank quotes.

63. We have carefully considered the submission and perused the record. As regards the issue of short term guarantee is concerned the issue is covered ITAT decision as referred above. Moreover, the decision of Hon’ble Bombay High Court quoted above also supports the proposition.

64. As regards the long term guarantee is concerned, the ITAT in M.A. No. 736/Mum/2018 for A.Y. 2012-13 has observed that the ITAT has upheld the yield spread approach adopted by the assessee for A.Y. 2011-12 and has remanded the matter observing as under :-

“We heard Ld D.R and perused the record. We notice that the Tribunal has upheld the order passed by Ld CIT(A) in AY 2011-12 on an identical issue, wherein the Ld CIT(A) has upheld the yield spread approach/interest saving approach adopted by the assessee, meaning thereby, the change in methodology for benchmarking the guarantee commission was upheld by the Tribunal. When the assessee is following the yield spread approach/interest saving approach, the guarantee commission would depend upon the interest rate charged by the banks. We notice that the Tribunal has omitted to consider this important point. Accordingly, we find merit in the contentions of the assessee that there is mistake apparent from record on this issue. Accordingly, the paragraph 141 of the order is replaced by this paragraph:-

“141 In AY 2011-12, we have considered an identical issue and upheld the view taken by Ld CIT(A). However, we notice that the Ld CIT(A) has failed to appreciate the methodology of the yield spread approach/interest saving approach. We also notice that the above said methodology has been upheld by Ld CIT(A) as well as by us in AY 2011-12. It is the contention of the assessee that under the yield spread approach/interest saving approach, the guarantee commission cannot be static and it would keep changing depending upon the interest spread. We find merit in the said contention. We notice that the said claim of the assessee has not been examined by the tax authorities. Accordingly we are of the view that the contentions of the assessee require examination at the end of the AO. Accordingly we set aside the order passed by Ld CIT(A) on this issue and restore the same to the file of the AO for examining it afresh under the yield spread approach/interest saving approach.”

65. Thus from the above decision it is amply clear that the assessee yield base approach has been upheld by the ITAT. Further the yield based approach is adopted considering the letter of bank issued for year 2012-13. Hence, the objections of the Revenue are not sustainable. Accordingly, we uphold the order of learned CIT(A).

66. The Revenue’s ground No. 35,36 &37are related to ground No. 9 in assessee’s appeal. We are dealing with these grounds in ground No. 9 of the assessee dealt with in assessee’s appeal.

Assessee’s appeal:

67. Domestic Issue

68. Ground No.1:

“1. The learned Commissioner of Income-tax – (Appeals – 57) {hereinafter referred to as CIT(A)} erred in rejecting the Appellant’s alternative plea that there is a deemed payment of sales tax and therefore the amount of Rs.266,72,89,043/- is allowable as per the provisions of Section 43B of the Income-tax Act, 1961

The Appellant submits that there is a deemed payment of Sales tax which is allowable u/s.43B of the Act and the CIT(A) ought to have given a decision on this issue in favour of the Appellant.”

69. At the outset, the Ld. Counsel of the assessee fairly accepted that this issue is covered against the assessee. In this regard, he also referred to ITAT order for earlier year in assessee’s own case. Accordingly, this ground raised by the assessee stands dismissed.

70. Ground No. 2:

2. The CIT(A) erred in confirming the disallowance of depreciation of Rs.5,35,215/-on the capitalized value of goods purchased from Durga Iron & Steel Ltd. and Surajbhan Rajkumar Pvt. Ltd. in A.Y. 2003-2004.

The Appellants submits that the cost of the goods purchased from the above parties were capitalised as plant and machinery in A.Y. 2003-04 and were used during the year under consideration and hence depreciation u/s. 32 of the Act on such capitalised value of the goods is allowable.

71. At the outset, the Ld. Counsel of the assessee fairly accepted that this issue is covered against the assessee. In this regard, he also referred to ITAT order for earlier year in assessee’s own case. Accordingly, this ground raised by the assessee stands dismissed.

72. Ground No.3:

3. The CIT(A) erred in remanding back the appellant’s claim of depreciation on office equipment’s @ 15%, to the file of the assessing officer for verifying the correctness of classification vis-a-vis the law.

The appellant submits that it had submitted complete details of additions to the assets viz. office equipment’s which are in the nature of Plant & Machinery and hence the depreciation u/s.32 of the I T Act ought to have been allowed @ 15%.

73. At the outset, the ld. Ld. Counsel of the assessee submitted that he shall not be pressing this ground. Hence, this ground is dismissed as not pressed.

74. Ground No.4:

4. The CIT(A) erred in confirming the disallowance of deduction u/s 80IB(9) of the Act of Rs. 698,07,88,5197- in respect of Refinery SEZ Undertaking by holding that once claim u/s 10AA of the Act has been made on profits of Refinery SEZ Undertaking, no deduction u/s 80IB(9) of the Act be allowed to the appellant.

The appellant submits that on the facts and circumstance of the case and as per the provision of the Act, the appellant is eligible to claim deduction u/s 80IB(9) of the Act of Rs.698,07,88,519/- being non-export profit of SEZ refinery unit, since the deduction under u/s 10AA and u/s 80IB(9) of the Act has not exceeded the profit of the undertaking of Rs.7530,26,45,346/-.

The appellant further submits that the CIT(A) has wrongly interpreted the provisions of the Act and misplaced reliance on various judicial pronouncements which are distinguishable in law and on facts.

75. At the outset, the Ld. Counsel of the assessee submitted that this ground is covered in favour of the assessee by the ITAT order in assessee’s own case for A.Y. 2011-12 to 2012-13.

76. Brief facts on this case and A.O.’s observation are as under:

This ground of appeal pertains to disallowance of deduction u/s.80IB(9) of the Act of Rs.6,98,07,88,519/- in respect of Refinery SEZ Unit. The assessee company is engaged in the business of extraction of natural resources including Petroleum and gas, refining of petroleum products, etc. The Company has set up a refinery at Motikhavdi, P. O. Digvijaygram, Jamnagar-361130 in the Special Economic Zone (SEZ) area for refining of mineral oil. The refinery commenced commercia! production on 01/04/2009.

During the year under consideration, the appellant earned profit and gains of Rs. 7530,26,45,346/- (after making adjustment towards Depreciation as per Income Tax Act, 1961, profit/loss on sale of assets and disallowance u/s 43B) from its above eligible unit. This very fact has been verified and confirmed by the AO at para 13.8.lof his order. As the refinery is situated in the Special Economic Zone, company claimed deduction of Rs. 6832,18,56,826/- u/s 10AA of the IT. Act, as per Form 56F(Revised) submitted by the appellant on its export turnover.

Section 10AA of the Act allows to a unit, deduction of profits and gains derived from the export of article or things or services for a specified period if the assessee fulfils certain conditions specified under that section. Since the assessee had complied with the conditions specified u/s 10AA, it claimed 100% deduction of profit and gains earned in respect of export turnover from its Jamnagar Refinery SEZ undertaking u/s. 10AA of the Act. The Form 56F (Revised) filed by the assessee, has been verified by the AO and there is no dispute as regards the quantum of deduction worked out therein. Since the deduction allowable u/s 10AA is restricted to export profit, the assessee claimed deduction of Rs.6832,18,56,826/- out of the total profit of Rs.7530,26,45,346/- of the eligible undertaking.

Further a deduction of Rs.698,07,88,519/- [i.e. Rs.7530,26,45,346 profit of the undertaking – (less) Rs. 6832,18,56,826/-] is claimed as deduction u/s. 801B(9) of the Act as per Form 10CCB submitted by the appellant. The appellant’s claim of deduction of eligible profit u/s 10AA and 80IB{9) of the Act has not exceeded the profit of the undertaking in respect of SEZ refinery unit.

Section 80IB(9) of the Act provides deduction in respect of profit and gains derived from an undertaking for specified period if the undertaking is engaged in refining of mineral oil and begins such refining process on or after the 1st day of October, 1998. Accordingly, the assessee submitted that it had complied with the conditions specified u/s 80IB(9J of the Act and it claimed deduction of the balance profits and gains u/s 80-18(9) of the Act. The Form 10CCB (Revised) filed by the assessee/ has been verified by the AO and there is no dispute as regards the quantum of deduction worked out therein.

The assessee’s claim of deduction of eligible profit u/s 10AA and 80IB(9) of the Act was based on various judgments and as per the provisions of law. The assessee during the course of assessment proceedings has furnished detailed submission to the AO on the above issue vide its letter no. RIL/ASPRQ/12-13/13, which was not accepted by the AO. The AO has disallowed the assessee’s claim of deduction u/s 80IB(9) of the Act of Rs.698,07,58,520/-, discussed this issue in para 13 of the assessment order. The conclusion of the AO is as under:

“13.9 However the assessee has sought to make a claim of further deduction of Rs.698,07,88,520/- (vide Form No.10CCB) u/s.80IB(9) of the Act, probably by having misconceived notion that profits of undertaking to the extent of Rs.6832,18,56,826/-only have been claimed and allowed as deduction u/s.10AA of the Act, and the balance (Rs.7530,26,45,346 MINUS Rs.6832,18,56,826/-) can further be claimed u/s.80IB(9) of the Act Whereas the fact remains that entire profits of Rs.7530,26,45,346/- have been claimed and allowed for deduction u/s.10AA, and accordingly no further deduction under any other sections of the Act can be allowed or entertained in respect of the profits of the unit of Rs.7530,26,45,346/-.

“13.10 For the reasons mentioned above in detail, I am of the view that deduction U/s.10AA as claimed by assessee and computed on the basis of “entire profit of the unit”, subject to the provisions of the Act such as section 10AA(7), has to be allowed at Rs.6832,18,56,826/-and in view of the scheme and provisions of the Act, no deduction can be allowed to the assessee u,/s80IB of the Act. Therefore, claim of deduction u/s.80IB of the Act of Rs.698,07,88,519/- disallowed and the same is added back to the income of the assessee company.”

77. Upon the assessee’s appeal, the ld. CIT(A) discussed the submission of the assessee and the provision of the Act. He was not convinced with the assessee’s submission. He rejected the case laws relied upon by the assessee and placed reliance upon several decisions of Hon’ble Delhi High Court and Hon’ble Karnataka High Court and rejected the assessee’s ground in this regard.

78. Against the above, the assessee is in appeal before us. We note that identical issue was decided by this tribunal in assessee’s own case vide order dated 28.09.2018 for A.Y. 2010-11 to 2012-13 as under:

76. We have heard rival contentions and perused the record. The dispute between the parties revolve around sec. 80A(4) and sec.80IA(9) of the Act, For the sake of convenience, we extract below both the provisions:-

“80A(4) Notwithstanding anything to the contrary contained in section 10A or section 10AA or section 10B or section 10BA or in any provisions of this Chapter under the heading “C-Deductions in respect of certain incomes”, where, in the case of an assessee, any amount of profits and gains of an undertaking or unit or enterprise or eligible business is claimed and allowed as a deduction under any of those provisions for any assessment year, deduction in respect of, and to the extent of, such profits and gains shall not be allowed under any other provisions of this Act for such assessment year and shall in no case exceed the profits and gains of such undertaking or unit or enterprise or eligible business, as the case may be.”

“80IA(9) Where any amount of profits and gains of an undertaking or of an Enterprise 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 incomes”, and shall in no case exceed the profits and gains of such eligible business of undertaking or enterprise, as the case may be.”

The provisions of sec. 80A(4) uses the expression “where any amount of profits ……  of undertaking …. is claimed and allowed as deduction under any of those provisions for any assessment year… deduction in respect of, and to the extent of, such profits shall not be allowed under any other provisions of this Act for such assessment year and shall in no case exceed the profits and gains of such undertaking…”. The expressions “any amount of profits…”, “claimed and allowed” and “deduction in respect of and to the extent of such profits” are, in our view, crucial words that need to be understood while interpreting this provision. The expression “any amount of profits….”, in our view, would also mean “a portion of profit”. The expression “claimed and allowed”, in our view, would mean that the deduction actually allowed on the portion of profit. The expression “in respect of and to the extent of such profits”, in our view, would mean the portion of profit so allowed as deduction (under sec. 10A or 10AA or 10B or 10BA or any provisions of Chapter VI under the heading “C-deductions in respect of certain incomes”) is not eligible for deduction under any other provisions of the Act to the extent so allowed. In the instant case, the assessee has been allowed deduction u/s 10AA of the Act only to the extent of Rs. Rs.4379.1.3 crores against the profit of Rs.5036.35 crores. The above said amount is the amount claimed and allowed u/s 10AA of the Act. Hence the deduction in respect of such profits and to the extent of Rs.4379.13 crores shall not be allowed under any other provisions of the Act. Had the expression “to the extent of not been there in sec. 80A(4), there is a possibility to say that the expression “in respect, of refers to the entire profit of Rs.5036.35 crores. Accordingly we are of the view that there is merit in the contentions of the assessee. Our view is further fortified by the expression “shall in no case exceed the profits and gains of such undertaking…. as the case may be”. The above said expression visualises the situation that an assessee may be claiming deduction under different provisions of the Act for the profits derived from the same undertaking. Hence the provisions of sec. 80A(4) visualises that the deduction in respect of profits and gains of an undertaking may be claimed under different provisions and hence the restriction is only for that portion of profit claimed and allowed as deduction under setc. 10A or 10AA or 10B or 10BA or any provisions of Chapter VI under heading “C – deductions in respect, of certain incomes” shall not be eligible for deduction under any other provisions of the Act. For the remaining portion of profit, the assessee is eligible to claim deduction under any other section.

77. The Id CIT(A) has referred to the decision rendered by Hon’ble Delhi High Court in the case of TEI Technologies P Ltd (supra). Following observations made by Hon’ble High Court, which has been extracted by Ld CIT(A) at page 84 of his order, in fact, support our view:-

“This section seems to indicate, as contended by the Revenue, that Section 10A or Section 10B are only deduction provisions. No doubt, the assumption underlying the sub-section is that Section 10A and Section 10B are deduction provisions and once a deduction is allowed to the assessee under those sections, the same profits shall not be allowed as a deduction under any other provision of this Act for the same assessment year and that in any case the deduction shall not exceed the profits and gains of the eligible undertaking or unit or enterprise or business, as the case may be. Even if Section 10A/Section 10B are construed as exemption provisions, sub-section (4) of Section 80A cannot defeat such construction. The sole object of the sub-section is to ensure that double benefit does not result to an assessee in respect of the same income, once under Section 10A or Section 10B or under any of the provisions of Chapter-VIA and again under any other provisions of the Act.

The Hon’ble Delhi High Court has explained that the objective of sec. 80A(4) of the Act is to ensure that double benefit does not result to an assessee in respect of same income.

78. The decision rendered by Hon’ble Karnataka High Court in the case of Sasken Communication Technologies Ltd (supra) is with regard to the deduction claimed u/s. 10A/10AA and u/s 80HHE of the Act. Both these deductions are related to income derived on export of computer software. The question that was considered was – whether the “export turnover” considered for deduction u/s. 10A/10AA can be included in the total turnover for computing deduction u/s 80HHE of the Act. However the facts of the present case is different. The decision rendered by Hon’ble Delhi High Court in the & of Revicra Home Furnishings (supra), relied upon by Ld CIT(A), also deal with claim for deduction under two different Section of the Act for “same income”. The decision rendered by Hon’ble Delhi High Court in the case of KEI Industries Ltd (supra) proceeds on the view that the deductions provided u/s 10A/10B/10AA in Chapter EII arc “exemption” provisions and the deductions provided under Chapter VIA (801A, 80IB etc) are deduction provision. Though the above said interpretation is contrary to the decision rendered by Hon’ble Bombay High Court in the case of Black & Veath Consulting P Ltd (251 CTR 265), yet the ratio of the decision rendered by Hon’ble Delhi High Court is that the double benefit is not available in respect of same income.

79. The assessee has relied upon the decision rendered by Hon’ble Bombay High Court in the case of Associated Capsules (P) Ltd (supra). The High Court was concerned with the eligibility of the assessee to claim deduction u/s 80IA and 80HHC of the Act. The provisions of sec. 80IA(9) provided that where any amount of profits and gains of an undertaking is claimed and allowed under sec. 80IA(1) for any assessment year, deduction to the extent of such profits and gains shall not be allowed under any other provisions of Chapter VIA and shall in no case exceed the profits and gains of such eligible business or undertaking. The Hon’ble Bombay High Court held that the provisions of sec. 80IA(9) affects only allowability of deduction and not computation of deduction. This decision rendered by Hon’ble Bombay High Court supports the case of the assessee that sec. 80A(4) and sec. 801A(9) restricts only allowability of deduction and not “computation of deduction”.

80. The ld CIT(A) has expressed the view that the assessee has adopted two different parameters for computing deductions u/s 10AA and u/s 80IB(9) of the Income Tax Act, 1961. We have noticed earlier that, during the year under consideration, the assessee earned profit of Rs.5036.35 crores from this unit. As per the formula prescribed in scc. 10AA of the Act, the deduction allowable u/s 10AA on the above said profit worked out to Rs.4379.13 crores. Against the profit of Rs.5036.35 crores arid the deduction actually allowed u/s 10AA of the Act was Rs.4379.13 crores. The difference between the two figures was Rs.657.22 crores. The assessee claimed deduction of Rs.421,39 crores u/s 80IB(9) of the Act, which was over and above the amount of Rs.4379.13 crores claimed u/s.10AA of the Act. The amount of deduction of Rs.421.38 crores u/s. 80IB(9) of the Act was arrived at by the assessee as under:

Profit from Refinery in SEZ 5036.35 crores
Less: Set off brought forward 4614.96 crores
421.39 crores

The assessee was constrained to restrict the deduction u/s. 80IB(9) of the Act to Rs.421.39 crores on account of the specific provisions contained in sec. 80IA(5), which mandates that the quantum of deduction u/s.80IB of the Act shall be computed as if such eligible business were the only source of income of the assessee. Since the Act provided different methodologies to compute deduction u/s.10AA and u/s.80IB(9) of the Act, the assessee was required to adopt different parameters for computing deduction.

81. In view of the foregoing discussions, we are of the view that the assessee shall be eligible to claim deduction u/s. 80IB(9) of the Act in respect of profits “ not allowed as deduction u/s. 10AA” of the Income Tax Act, 1961. Accordingly, we set aside the vide taken by ld. CIT(A) and A.O. on this issue.”

79. Since the above decisions is in assessee’s own case, and it has not been brought before us that this has been reversed by the Hon’ble Jurisdictional High Court, respectfully following the principle of stare decisis, we set aside the order of the authorities below and decide this issue in favour of the assessee.

80. Ground No.5

5. The CIT(A) erred in confirming the action .of the AO that the appellant was not entitled to claim the total cost incurred in respect of KG-DWN-98/3 (‘KGD’) assets as “intangible asset” eligible for deprecation u/s. 32 of the Act.

The Appellant submits that, on the facts and circumstances of the case, the total cost incurred by the Appellant in respect of KGD constitutes cost of acquisition of “intangible assets” eligible for depreciation u/s 32 of the IT. Act.

81. At the outset, the ld. Ld. Counsel of the assessee submitted that he shall not be pressing this ground. Hence, this ground is dismissed as not pressed.

82. Ground no.6

6. The CIT(A) erred in disallowing deduction of Rs 206,22,11,0007- u/s 37(1) of the Act, being expenses incurred on corporate social responsibility (CSR) on the ground that it does not fall under business expenditure.

The CIT(A) failed to appreciate that the amendment in the scheme of section 37(1) of the Act has been effective from 1st April 2015 and the same cannot be constructed as disadvantage to the assessee in the period prior to this amendment.

83. The assessee has incurred expenditure towards CSR expenditure. AO has disallowed this claim under section 37(1)1 of the IT act but allowed the same under section 80G (50%) of the Act. When the Assessing Officer proposed to disallow the CSR expenditure, the assessee made elaborate submissions. On this issue the assessing officer elaborately noted the submissions of the assessee. However he opined that the expenditure incurred on corporate social responsibility was not allowable under section 37(1). He referred to the provisions of section 37(1) and held that CSR expenditure were not allowable under section 37(1). He referred to honourable Bombay High Court decision in the case of Ramanand Sagar vs DCIT 256 ITR 134 and referred that in that case assessee has not been able to discharge the onus cast to substantiate that the expenditure was laid out only and exclusively for the business . He observed that it was also noted that assessee has paid the sums to various trusts and claimed that they have performed the CSR activities on assessee’s behalf. The assessing officer took adverse inference that the trusts execute activities that are meant for public at large and not specific to any individual or corporate et cetera. Accordingly he concluded that the sums are not incurred for the purpose of business under section 37(1). However the assessing officer allowed 50% of the expenditure under section 80 G of the act by holding that he has considered the respective documents and verified and found them correct.

84. Upon assessee’s appeal learned CIT appeals referred to the order of assessing officer and agreed that the expenditure was not incurred wholly and exclusively for the purpose of business to be allowable under section 37 of the IT Act.

85. Against this order, the assessee is in appeal before us.

86. We have heard both the Counsel and perused the records. Learned counsel of the assessee submitted that this issue is also covered in favour of the assessee. He submitted that exclusion of CSR expenditure from allowance u/s. 37(1) by explanation 2 thereof was brought into Statute with effect from 01.04.2015. Hence, it cannot be disallowed in this A.Y. In this regard he referred to the decision of Hon’ble Supreme Court in the case of CIT vs. Vatika Townships Pvt. Ltd. (supra) and the decision of ITAT Raipur bench in the case of Jindal Power. He submitted that these decisions were also referred in submission before the learned CIT(appeals), who has also reproduced these decisions and submissions in his appellate order. But learned CIT(A) has not at all dealt with the submissions and the case laws. Further learned counsel of the assessee placed reliance upon the decision of Delhi tribunal in the case of the National Small Industries Corporation Ltd vs DCIT (in ITA no 1367/del/16 vide order dated 25.02.2019).

87. Per contra, the learned departmental representative relied upon the orders of authorities below.

88. Upon careful consideration we note that assessee’s expenditure on corporate social responsibility has been rejected by the authorities below in the ground that these expenditure are not wholly and exclusively laid out for the purpose of the business and hence are not allowable under section 37(1). In this regard, we note that following submission was noted by the learned CIT(A) on behalf of the assessee in his appellate order which has not been dealt with by him:-

The appellant also relied on the decision of the ITAT Raipur Bench in the case of ACIT vs. Jindal Power Ltd. (ITA No. 99/BLPR/2012 A.Y. 2008-09), wherein on an identical issue of allowability of CSR expenditure, the learned ITAT had held that”

“16. We have noted that fundamental objection of the Assessing Officer is that the expenses is voluntary, not mandatory and not for business purposes. As for the contention that the expenses being in the nature of voluntary expenses, which are not mandatory, and which the assessee was not statutorily required to incur, are not admissible deduction in computation of business income, we ore of the considered view that as long as expenses are incurred wholly and exclusively for the purposes of earning the income from business or profession, merely because some of these expenses are incurred voluntarily, i.e. without there being any legal or contractual obligation to incur the same, those expenses do not cease to be deductible in nature. In other words, it is not necessary that every expense that could be allowed as a deduction should be such as a hardnosed, and perhaps devoid of senses of compassion, businessman alone would incur in furtherance of his business pursuits.

19. …………. This disallowance is restricted to the expenses incurred by the assessee under a statutory obligation under section 135 of Companies Act 2013, and there is thus now a line of demarcation between the expenses incurred by the assessee on discharging corporate social responsibility under such a statutory obligation and under a voluntary assumption of responsibility. As for the former, the disallowance under Explanation 2 to Section 37(1) comes into play, but, as for latter, there is no such disabling provision as long as the expenses, even in discharge of corporate social responsibility on voluntary basis, can be said to be “wholly and exclusively for the purposes of business”. There is no dispute that the expenses in question are not incurred under the aforesaid statutory obligation. For this reason also, as also for the basic reason that the Explanation 2 to Section 37(1) comes into play with effect from 1st April 2015, we hold that the disabling provision of Explanation 2 to Section 37(1) does not apply on the facts of this case”,

Further, at this juncture the appellant also pointed out that the amendment in the scheme of Section 37(1), which has been introduced with effect from 1st April 2015, cannot be construed as to disadvantage to the appellant in the period prior to this amendment. This disabling provision, as set out in Explanation 2 to Section 37(1), refers only to such corporate social responsibility expenses as under Section 135 of the Companies Act, 2013, and, as such, it cannot have any application for the period not covered by this statutory provision which itself came into existence in 2013. Explanation 2 to Section 37(1} is, therefore, inherently incapable of retrospective application any further. Reliance in this regard was placed on the decision of the Hon’ble Supreme Court’s five judge constitutional bench’s landmark judgment, in the case of CIT Vs Vatika Townships Pvt. Ltd. [(2014) 367 ITR 466 (SC)], which held that “Of the various rules guiding how legislation has to be interpreted, one established rule is that unless a contrary intention appears, legislation is presumed not to be intended to have a retrospective operation.”

Thus it can be noted that the since the amendment in the scheme of Section 37(1) is not specifically stated to be retrospective and the said Explanation is inserted only with effect from 1st April 2015 there is no reason to hold this provision to be retrospective in application.

Therefore, in light of the aforesaid discussions and judicial pronouncements, it was submitted that the said expenses incurred towards CSR activities are allowable as a deduction u/s 37(1) of the Act.

15.3. Decision:

The submissions of the appellant have been considered and found to be not acceptable. Section 37 of the Act specifically provides for deduction of expenses incurred wholly and exclusively for the purpose of business, I agree with the AO that on perusal of the provisions of section 37 of the Act, it can be observed that the intent of the legislature was to allow the deduction for only those expenses which are incurred wholly and exclusively for the business purpose. The AO has discussed in the assessment order that the assessee has paid the above sum to various trusts and claimed that the trusts have performed CST activities on assessees behalf. It is seen that these trusts are separate legal entities with their own trust deeds etc and are required to perform their activities commensurating the deal. These trust as such execute their activities that art meant for public at large and are not specific to any individual or corporate etc, Assessee has failed to produce any contract, agreement etc which can establish that the payment made by assessee was utilised by them on activities which are directly related to assessee’s business. The onus of proof to substantiate the claim, that the expense were laid out wholly and exclusively for the business purpose, is upon the appellant. Since the appellant had failed to establish that the payments made by it were directly related to the appellant’s business, the same was rightly disallowed by the AO. Accordingly, this ground of appeal is dismissed.

89. From the above it is evident that ITAT in the case of Jindal Power (Supra) has clearly held that CSR expenditure are allowable under section 37(1)of the IT act and that explanation (2) to section 37 (1) came into effect with from 1st April 2015 and hence the same is not applicable in present assessment year. The learned CIT(A) has not at all distinguished the above submission. No contrary decision has been produce before us. Hence the view of the authorities below that the corporate social responsibility expenditure is not allowable under section 37(1) is not sustainable. Furthermore as noted by the ITAT in Jindal Power (supra) Explanation (2) to section 37 which was specifically brought in with effect from 1/4/2015 and the same is not applicable for the assessment year under appeal. This explanation specifically provided that any expenditure incurred by an assessee in the activity relating to corporate social responsibility shall not be deemed to be an expenditure incurred by the assessee for the purpose of business or profession, and the same is not applicable for this assessment year.

90. Hence from the above discussion it is evident that assessee has incurred expenditure on the activities relating to corporate social responsibility. The act specifically debars such expenditure from under section 37(1) with effect from 1/04/2015. The ITAT in Jindal Power (supra) has taken exactly this view. On the facts and circumstances of the case it cannot be said that the expenditure incurred by the assessee is not relating to corporate social responsibility. Another reason for adverse inference by the authorities below for disallowance under section 37(1) is that assessee has incurred these expenditures through trusts. We find that there is no bar in the act in this regard. No cogent case has been made out that these expenditures are not covered under the statutory obligation under section 135 of the companies Act. It is also not the case that relevant authorities in this regard have rejected them as not meeting the statutory obligation u/s. 135 of the Companies Act. Moreover, AO has himself noted that he has verified the respective document and found them to be correct in connection with allowance under section 80G of the Act. Hence, the veracity is not in doubt. Accordingly we set aside the orders of authorities below and allow the ground raised by the assessee.

91. Additional ground

1. The learned Commissioner of Income Tax-(Appeals-57) (hereinafter referred to as the CIT(A)] erred in not allowing exemption u/s 10(15)(iv)(h) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) in respect of interest amounting to Rs.112,26,74,490/- on Tax Free Bonds while computing total income under the Normal Provisions of the Act and Book Profit u/s 115JB of the Act.

The appellant submits that CIT(A) ought to have allowed exemption u/s 10(15)(iv)(h) of the Act while computing total income under the normal provisions of the Act and book profit u/s 115JB of the Act.

92. The learned counsel of the assessee submits that this issue is covered in favour of the assessee by ITAT decision in assessee’s own case for assessment year 2003-04 and 2012-13.

93. We note that identical ground was dealt with by the ITAT in assessee’s own case in its order for assessment year 10-11 to 12-13 as under:

142. The next issue urged by the assessee in Additional Ground no. 1 relates to the exemption u/s.10(15)(iv)(h) of the Act claimed by the assessee on the interest income of Rs.21.79 crores earned on tax free bonds. The ld. AR submitted that the assessee has inadvertently failed to claim exemption of the above said income in the return of income as well as before the tax authorities. He submitted that the above said income is otherwise exempt u/s.10(15)(iv)(h) of the Act and hence the same is not includible both under normal provisions of the Act as well as for the purposes of sec. 115JB of the Act also.

143. We heard the ld. DR on this issue. The claim of the assessee is that the above said interest income of Rs.21.79 crores was earned on tax free bonds and the same is exempt u/s.10(15)(iv)(h) of the Act . In any case, an item of income, which is exempt under the Act cannot be brought to tax by the A.O. Since the claim of the assessee requires verification, we restore this issue to the file of the A.O. for examining the same both for the purpose of computing total income under normal provisions of the Act as well as under sec. 115JB of the Act.

94. We note that it is not the case of the revenue that honourable jurisdictional High Court has reversed this decision. Hence, we respectfully follow the precedent as above. Hence following the aforesaid decision we direct the assessing officer accordingly.

95. Additional ground No. 2

2. The learned CIT(A) Mumbai, erred in not excluding notional sales tax incentive of Rs. 266,72,89,043/- held as capital receipt not liable to tax [while computing income under the normal provisions of the Income-tax Act, 1961 (‘Act’)], from the Book profit computed u/s 115 JB of the Act.

The Appellant submits that notional Sales Tax incentive is not an “Income” liable to tax under the Act, and hence the same shall be directed to be excluded while computing the Books profit u/s 115 JB of the Act.”

96. The assessee submits that this issue is covered in favour of the assessee by the ITAT decision in assessee on case for assessment year 10-11 to 12-13. We note that identical ground was dealt with by the ITAT in its order as referred above. The tribunal has referred to the decision of ITAT in the case of DCIT vs. M/s. Alok Industries Limited (in ITA Nos. 900 to 906/Mum/2019 vide order dated 16.07.2020) and quoted there from. Thereafter, the ITAT has concluded that “consistent with the view taken by the coordinate benches on an identical issue we direct the assessing officer to exclude the amount of sales tax incentive from the net profit for the purpose of computed book profit under section 115 JB of the act as the same is capital in nature.”

97. We find that in the case of DCIT vs. M/s. Alok Industries Limited (supra), in a subsequent decision for A.Ys. 2006-07 to 2011-12 dated 16.07.2020, this tribunal has adjudicated the same issue as under:

“5. Another common issue raised in these appeals is that learned CIT(A) erred in directing the Assessing Officer to exclude the interest subsidy while calculating the income under Section 115 JB of the Act.

6. This issue relates to the treatment of subsidy received under TUF for the purpose of computation of book profit under Section 115JB of the Act. The Assessing Officer having noted that the aforesaid sum was duly credited in the Profit and Loss Account of the assessee, has included the same in the computation of book profit. The learned CIT(A) by referring to ITAT order in assessee’s own case has directed that the said sum should be excluded while computing the income under Section 115JB of the Act. Against this order, Revenue has filed appeal before us.

7. We have heard both the Counsel and perused the records. Learned counsel of the assessee submitted that the issue is decided in favour of the assessee by the ITAT decisions in assessee’s own case, as referred above.

8. Per contra, learned Departmental Representative submitted that this issue has already been dealt with by Hon’ble Jurisdictional High Court in several decisions. He submitted that in those decisions the Hon’ble Jurisdictional High Court held that such income have to be taken into account for computation of book profit. In this regard, learned Departmental Representative referred to the judgment of Hon’ble Bombay High Court in the case of CIT vs Veekaylal Investment Co. (P.) Ltd., 249 ITR 597 (Bom.)

9. The Learned Departmental Representative further submitted that ITAT, Hyderabad Special Bench in Rain Commodities Ltd. vs DOT, 131 TTJ 514 (Hyderabad) (SB) has duly taken note of these decisions and has held that in view of these decisions such exempt capital gain have to be computed and taken into account for the purpose of application of book profit.

10. The learned Departmental Representative further submitted that the ITAT decision in assessee’s own case has a mistake apparent from record is in as much as it has not considered the Hon’ble Jurisdictional High Court order as well as the Special Bench decision.

11. In rejoinder, the learned counsel of the assessee submitted that the Hon’ble Bombay High Court decision in the cases referred by learned Departmental Representative have been duly considered and distinguished by the Hon’ble Madras High Court in the case of C/T vs. Metal & Chromium Plater (P.) Ltd., 415 ITR 123 (Madras). He also submitted that ITAT decision in assessee’s own case should be assumed to have considered this decision.

12. Upon careful consideration, we find ourselves in agreement with the submission of the learned Departmental Representative that the ITAT orders relied upon by the learned counsel of the assessee do not consider aforesaid Hon’ble Jurisdictional High Court decision. It is without any doubt that the decision of Hon’ble Jurisdictional High Court is exactly on the same subject as is being discussed hereunder. Furthermore, the proposition that book profit is not to be tinkered with is duly supported by Hon’ble Jurisdictional High Court decision in further following decisions: –

“1. Pr. CIT vs. Bhagwan Industries Ltd in ITA No. 436 of 2015 vide order dated 18.07. 2017.

2. CIT vs. Akshay Textile Trading & Agencies Pvt. Ltd. 304 ITR 401 (Bom).

3. CIT vs. Adbhut Trading Co. Pvt. Ltd. (2011) 338 ITR 94 (Bom)”

Furthermore, we note that Hon’ble Supreme Court in the case of ACIT vs. Saurashtra Kutch Stock Exchange Ltd., 305 ITR 227 (SC) has expounded that non-consideration of jurisdictional High Court decision can render a decision of the Tribunal suffering from mistake apparent from record.

13. Furthermore, we note that honourable Supreme Court in the case of Kapurchand Shrimal vs. CIT, 131 ITR 451 (SC) had expounded that it is the duty of the appellate authority to correct the errors in the orders of the authorities below and remit the matter, with or without directions for their consideration, unless prohibited by law.

14. Considering this present issue on the conspectus of aforesaid discussion and case laws, in our considered opinion, this issue needs to be remitted to the file of learned CIT(A). The learned CIT(A) is directed to consider this issue de novo after taking into account the aforesaid Hon’ble Jurisdictional High Court decisions. Needless to add, the assessee should be granted adequate opportunity of being heard.

98. When confronted in this regard, the learned counsel of the assessee referred to the honourable High Court decisions in the case of Principal Commissioner of income tax vs. Ankit metals & Power Ltd 416 ITR 591(Calcutta) and CIT vs. Metal and Chromium Plater Private Limited 415 ITR 123(Madras). He further submitted that the decision of honourable Bombay High Court in the case of Veekaylal Investment Co. (P.) Ltd., (supra) was not with reference 115JB of the IT Act. He submitted that the said decision was with reference to section 115J of the IT Act. He submitted that section 115JB provides in clause-5 that save as otherwise provided in this section all other provisions of this act shall apply to every assessee being a company mentioned in this section. He submitted that this was duly taken note of by the honourable High Court of Calcutta and Madras as referred above and such receipts exempt under the act were held to be not includable in book profit under section 115JB.

99. We note that ITAT in the above order of Alok Industries has discussed the issue with reference to honourable Bombay High Court decisions and remitted the same to the file of assessing officer. As this is an additional ground and in light of the subsequent order of the Alok Industries (supra) (to which one of us was a party), we are not inclined to deviate from the aforesaid order of the ITAT in Alok Industries (supra) in remitting the issue to the file of assessing officer to consider in accordance with the discussion there in. However we direct the assessing officer consider the aforesaid case laws and submissions referred by the learned counsel of the assessee also in this regard. The assessee is also free to make the necessary submissions as it deems fit in this regard. Accordingly this issue stands remitted to the file of assessing officer to consider the same afresh in light of our observations as above.

100. Additional ground no 3:

3. The learned CIT(A) Mumbai, erred in confirming the disallowance while computing book profit u/s.115JB of the Act, by applying provisions of Section 14A rwr 8D and erred in directing to re-compute the said disallowance @ 0.5% by taking average value of those investment which have yielded dividend during the year under consideration. .

The appellant submits that the provisions of Section 14A of the Act r.w.r. 8D is not applicable while computing book profits u/s. 115JB of the Act, and therefore no disallowance should be made while computing book profit u/s. 115JB of the Act.

101. On this issue the subject matter is whether for the purpose of computation of book profit under section 115 JB disallowance under section 14A have to be taken into account or not. The learned counsel of the assessee this regard has referred to ITAT decision in assessee’s own case. We note that this issue is covered in favour of the assessee by the decision of honourable Bombay High Court in the case of Commissioner of income tax vs Bengal finance and investment private limited, wherein the honourable High Court by the order dated 5/1/18 held that disallowance under section 14A cannot be added under section 115JB. Respectfully following the precedent from honourable jurisdictional High Court, we decide this issue in favour of the assessee.

102. Additional ground No. 4

The learned CIT(A) Mumbai erred in not allowing weighted deduction u/s. 35(l)(ii) of the Act while computing total income under the normal provisions, in respect of amount of Rs.42,36,570/- contributed to Indian Institute of Technology, Mumbai vide receipt dated 09.10.2012. The appellant submits that CIT(A) ought to have allowed weighted deduction u/s. 35(l)(ii) of the Act while computing total income under the normal provisions.

103. On this issue learned counsel of the assessee is also praying for admission of additional evidence. It has been stated that by way of this ground assessee is seeking allowance of weighted deduction under section 35(1)(ii) of the act in respect of an amount of Rs.42,36,570/- contributed to Indian Institute of technology Mumbai vide receipt dated 9/10/2012. It has further been urged that due to oversight the said deduction was not claimed while filing the return of income nor was it raised during the course of assessment proceeding before the assessing officer or the appellate proceeding before the learned CIT appeals. It has been pleaded that the receipt dated 9/10/2012 filed at page No. 14 constitute additional evidence.

104. Upon hearing both the counsel and perusing the records we admit the additional ground as well as additional evidence in the substantial interest of justice. In doing so we draw support from the decision of honourable Supreme Court in the case of Goetze (India) Ltd. v. CIT [2006] 284 ITR 323 (SC) wherein in the concluding portion the Hon’ble Supreme Court has held that the decision in that case would not impinge upon the ITAT jurisdiction to admit additional ground otherwise than filing revised return of income. Accordingly we admit the aforesaid additional ground and additional evidence . As agreed by the learned counsel of the assessee the issue stands remitted to the file of assessing officer to decide the issue in light of the submissions of the assessee. Needless to add assessee should be granted adequate opportunity of being heard.

105. Additional ground 5

“5. The learned CIT(A) Mumbai erred in allowing the deduction in respect of export profits of SEZ unit u/s 10AA of the Act with reference to the income computed under the head ‘profits and gains of business or profession’ of the SEZ unit instead of ‘gross profits and gains’ of SEZ unit, as interpreted by Supreme Court in the recent judgement in the case of Vijay Industries.

The Apex court while interpreting the provisions of section 80HH relevant to AY 1979-80 and 1980-81 has held that phrase “profits and gains” means gross profits of the business i.e. before computing income as specified in section 30 to 43D of the Act in para (18) and (19) as under:-

“It is most humbly submitted that the concept ‘profits and gains’ is a wider concept than the concept of ‘income’. The profits and gains/loss are arrived at after making actual expenses incurred from the figure of sales by the assesses. It does not include any depreciation and investment allowance, as admittedly these are not the expenses actually incurred by the assessee. However, the term ‘income’ does take into consideration the deductions on account of depreciation and investment allowance. Therefore, the term profits and gains are not synonymous with the term ‘income’ Reading of Section 80HH along with Section 80A would clearly signify that such a deduction has to be of gross profits and gains, i.e., before computing the income as specified in Sections 30 to 43D of the Act.”

106. Thus, it has been urged by the assessee by way of the additional ground that the ld. CIT(A), Mumbai erred in allowing the deduction in respect of export profits of SEZ units u/s.10AA of the Act with reference to the income computed under the head ‘profits and gains of business’ or profession of the SEZ unit instead of gross profit and gains of SEZ unit as interpreted by the Hon’ble Supreme Court in the recent judgment in the case of Vijay Industries vs. CIT(SC) in Civil Appeal No.1581/1582 of 2005. Referring to the above additional ground, ld. Counsel of the assessee contended that the above is a pure legal ground and the assessee seeks the same to be admitted as it does not require investigation of any new fact. He submitted that the ground has been raised in view of the interpretation of the term ‘profit and gains’ in the recent decision of the Hon’ble Supreme Court in the case of Vijay Industries Ltd. vs CIT supra. Therefore, the assessee contends that in view of the Hon’ble Supreme Court decision in the case of National Thermal Power Corporation 229 ITR 383, the additional ground ought to be admitted and adjudicated.

107. The ld. Counsel of the assessee submitted that assessee has set up a refinery at Motikhavadi, P.O. Digvijayagram, Jamnagar in the Special Economic Zone (SEZ) area for refining of mineral oil. Since the assessee had complied with the conditions as specified u/s.10AA of the Act, he claimed 100% deduction of profit and gains erred in respect of export turn over from its refinery at SEZ u/s.10AA of the Act. It has been further submitted that since the refinery began refining of mineral oil on or after the first day of October 1998, and since the assessee has complied with the conditions as specified u/s.80IB(9) of the Act, he claimed deduction of the balance profits and gains u/s.80IB(9) of the Act. Though both the AO and CIT(A) had disallowed the deduction u/s.80IB(9) of the Act for A.Y. 2013-14, similar claims in earlier year was decided in favour of the assessee by the ITAT for A.Y.2012-13 and hence, the appeal raised by the assessee for A.Y.2013-14 on this ground i.e. ground No.4 in ITA No.7299/Mum/2017 is covered.

108. Now, the assessee contends that in light of the Apex Court decision in the case of Vijay Industries, dated 01/03/2019 the term ‘profit and gains’ in respect of export profit u/s.10AA of the Act ought to be interpreted as gross profit and gains of SEZ units i.e. before computing income as specified in Section 30 to 43 D of the Act. Since it is purely a legal ground we admit the same.

109. The elaborate submission of the assessee in this regard reads as under:-

“The issue before the Apex Court relates to the interpretation to section 80HH relevant to AY 1979-80 and 1980-81. The relevant section is reproduced hereunder:-

“80HH. Deduction in respect of profits and gains from newly established industrial undertakings or hotel business in backward areas.

(1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking, or the business of a hotel, to which this section applies, there shall, in accordance with and subject to the provisions of this section, he allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to twenty per cent thereof.”

The assessee in that case claimed deduction on gross profits (without depreciation and investment allowance) of the undertaking stating that “profits and gains” is not the same as “income”, whereas revenue claimed that deduction is allowable only on net profits as computed under sections 28 to 43D of the Act.

The full bench of the Apex court reproduced the reference order dated 5-11-2014 (referring the matter to full bench) highlighting the observation of Rajasthan High court as under:

“It is most humbly submitted that the concept ‘profits and gains’ is a wider concept than the concept of ‘income’. The profits and gains/loss are arrived at after making actual expenses incurred from the figure of sales by the assessee. It does not include any depreciation and investment allowance, as admittedly these are not the expenses actually incurred by the assessee. However, the term ‘income’ does take into consideration the deductions on account of depreciation and investment allowance. Therefore, the term profits and gains are not synonymous with the term ‘income’.

The Apex Court overruled its earlier judgement in the case of Motilal Pesticides (2000) 243 ITR 83 (SC), holding that language of section 80HH and 80M are materially different as section 80HH uses the expression “profits and gains” whereas section 80M refers to “income”. Therefore, the decision in the context of section 80M ought not have been relied on by the Supreme Court in the context of section 80HH.

The Supreme Court after discussing all the earlier judgements of the Supreme Court i.e. Cambay Electric Supply [1978] 113 ITR 84 (SC), Cloth Traders [1979] 118 ITR 243 (SC), Distributor Baroda [1085] 155 ITR 120 (SC), HH Sir Ram Verma [1994] 205 ITR 433 (SC), Kotagiri Industrial Co-operative Tea Factory Ltd [1997] 224 ITR 604 (SC) concluded as under:

“19) Reading of Section 80HH along with Section 80A would clearly signify’ that such a deduction has to be of gross profits and gains, i.e., before computing the income as specified in Sections 30 to 43D of the Act. It is correctly pointed out by Division Bench in the reference order that in Mali/al Pesticides case, the Court followed Me judgment rendered in the M/s. (‘b/h Traders (P) Lid. which was a case under Section 80M of the Act, on the premise that language of Section 80HH and Section 80M is the come. This basis is clearly incorrect as the language of two provisions is materially different. We are, therefore, of the considered opinion that judgment of Motilal Pesticides is erroneous. We, therefore, overrule this judgment

The Apex Court also held that provisions of section 80AB, which is a deeming fiction to provide that for the purposes of deduction under Chapter VIA (heading C deduction in respect of certain income), only income as computed under the provisions of the Act shall be deemed to income eligible for deduction, are not clarificatory in nature and the provisions of section 80AB are applicable prospectively. Hence the same would not apply to AY 1979-80 and 1980-81.

Finally, the Apex Court allowed the appeal of the assessee holding that the phrase “profits and gains” means gross profits of the business in (19) as under:

“19) Reading of Section 80HH along with Section 80A would clearly signify that such a deduction has to be of gross profits and gains, i.e., before computing the income as specified in Sections 30 to 43D of the Act.”

The appellant submits that the wording “profits and gains” used in section 80HH is pari materia with the wording in section 1OAA and, hence, the ratio laid down by the Hon’ble Apex Court in the case of Vijay Industries squarely applies to the case of the assessee. Section 1OAA of the Act, reads as under:

Section 10AA of the Income-tax Act provides for tax incentive in respect of profits and gains of a unit set up in a SEZ as under:

Special Provisions in respect of newly established Units in Special Economic Zones 10AA (1) Subject to the provisions of this section, in computing the total income of an assessee, being an entrepreneur as referred to in clause 0) of section 2 of the Special Economic Zones Act, 2005, from his Unit, who begins to manufacture or produce articles or things or provide any services during the previous year relevant to any assessment year commencing on or after the 1st day of April, 2006, but before the first day of April, 2021, the following deduction shall be allowed-

(i)hundred per cent of profits and gains derived from the export, of such articles or things or from services for a period of five consecutive assessment years beginning with the assessment year relevant to the previous year in which the Unit begins to manufacture or produce such articles or things or provide services, as the case may be, and fifty per cent of such profits and gains for further five assessment years and thereafter;

(ii) for the next five consecutive assessment years, so much of the amount not exceeding fifty per cent of the profit as is debited to the profit and loss account of the previous year in respect of which the deduction is to be allowed and credited to a reserve account (to be called the “Special Economic Zone Re-investment Reserve Account”) to be created and utilized for the purposes of the business of the assessee in the manner laid down in sub-section (2).

[Explanation – For the removal of doubts, it is hereby declared that the amount of deduction under this section shall be allowed from the total income of the assessee computed in accordance with the provisions of this Act, before giving effect to the provisions of this section and the deduction under this section shall not exceed such total income of the assessee.]

Thus, on perusal of section 1OAA read in light with the recent Apex Court decision in the case of Vijay Industries, it is submitted that

(1) Section 10AA provides tax incentives equal to 100% / 50% of “profits and gains” derived from exports from a unit set up in a SEZ.

(2) The term “profits and gains” has not been defined under the Act.

(3) The full bench of the Apex court has held that the terms “profits and Gains” and “income” are different and hence are to be assigned different meaning. The term “profits and gains” mean gross profits i.e. gross revenue receipts less actual expenses. The depreciation and investment allowance, etc are not actual expense, hence need to be excluded.

(4) The provision of section 80AB (i.e. deeming fiction to provide deduction only from income irrespective of language used) is applicable only to sections included in Chapter VIA under the heading “C- deduction in respect of certain income’. It is not applicable to section 10AA as the said section does not come within Part ‘C’ of Chapter VI-A of the Act.

The appellant submits that section 80AB was inserted by the Finance (No2) Act 1980 w.e.f 01 04.1981. Further section 10A was originally inserted w.e.f 01 .04.1981 by the Finance Act 1981. The legislature in its wisdom has not made 80AB applicable to section 10A/ 10AA/ 1 13A5/ 10B of the Act, even though the said section provide for deduction to be granted to an assessee. Therefore, the appellant submits that section 80AB cannot be applied in the present case to determine the amount of deduction to be allowed under section 10AA of the Act. The appellant submits that as section 80AB is not applicable to section 10AA, the interpretation given by the Supreme Court to the term “profits and gains” must be applied to section 10AA as well. It is further submitted that a deeming fiction should be given a stricter interpretation. Moreover, the Apex Court in Vijay Industries (supra) has held that provision of this section is not clarificatory in nature.

(5). The appellant submits that even though section 80A(1) is not applicable to section 10AA, the reference to 80A(1) in the decision of Supreme Court would not make the decision inapplicable to section 10AA for the following reasons:

(a) Section 80A(1) only provides that deduction u/s 80C to 80U would be available to the assessee. Therefore section 80A provides the section in which deduction would be available. Section 80A does not determine the quantification of the said deduction. However, the Supreme Court was concerned with determining the quantification of deduction for the purpose of which section 80A is not relevant. Therefore, the appellant submits that the Supreme Court decision will be applicable on the facts of the present case.

(b) The provision of section 80A(1) is incorporated in section 10AA(1) itself. Section 80A(1) provides that – “In computing the total income of the assessee, there shall be allowed from his gross total income …………….. Section 10AA (1) also provides that – “Subject to provisions of this section, in computing the total income of an asses.cee ………………….  …the following deduction shall be allowed”. Therefore, the appellant submits that both section 80A(1) as well as section 10AA(1) provide that deduction is to be allowed in computing the total income of the assessee. Therefore, the appellant submits that what has been stated in 80A(1) has been incorporated in section 10AA(1). Hence, the appellant submits that the provisions of section 10AA(1) and section 80HH r.w.s 80A(1) are pari materia.

(C) The appellant submits that reference to ‘gross total income’ in section 80A(1), which is not stated in section 10AA(1), is irrelevant as the same only provides the stage at which the deduction is be allowed. The appellant submits that the Supreme Court was not concerned with the stage of allowing deduction, but was concerned with the quantification of deduction. Hence, the appellant submits that the decision of Supreme Court would apply in full force.”

110. Per contra, the ld. departmental representative elaborately argued that the said decision of Vijay Industries (supra) is not applicable in the facts of the present case. The submissions of the ld. DR in this regard are reproduced as under:-

“(ii) This issue was discussed at length during the hearing. In the appellant’s case the issue is deduction under section 10AA falling under chapter III of the Act, while in the case of Vijay industries, the issue is deduction under section 80HH falling under chapter VIA of the Act .However the appellant contends that the language of section 80HH is parimateria with the language used in section 10AA.This argument is totally fallacious and the crucial points of departure in the language used in these two sections and the difference in applicability of the provisions of these two section subsequent to the decision in the case of Vijay Industries are discussed hereunder based on the language used in the act, case laws etc.

(iii) The decision in the case of Vijay Industries Ltd. is rendered on the allowability of deduction u/s. 80HH of the Act, overruling the apex court decision in the case of Motilal Pesticides [243 ITR 26 (SC)]. The decision in the case of Motilal Pesticides (in respect of section 80HH) was rendered in turn relying on the decision in the case of Distributors Baroda Pvt. Ltd. vs. Union of India (1985) AIR 1585 (SC) dated 1/7/1985. The subject matter of discussion in the case of Distributors Baroda Pvt. Ltd. was Sec. 80M and in this decision, the earlier decision on Sec. 80M in the case of Cloth Traders vs. Addl. CIT was overruled. In the case of Distributors Baroda Pvt. Ltd. (supra.),it was held that the deduction under the relevant section 80M is to be allowed from the net income. It was also held that Sec. 80AA (which pertains to section 80M of the Act (introduced wr.e.f 1/4/1968 vide Finance Act (No. 2) ,1980 and since omitted w.e.f 1/4/1998) in its retrospective operation is merely clarificatory of the law as it always was since 1/4/1968 and no complaint can validly be made against it. Thereafter in the case of Motilal Pesticides (supra) pertaining to A.Y 1979-80 and 1980-81 on the issue of deduction u/s 80HH , Hon’ble Apex court held that section 80AB applicable to all sections under chapter VIA except section 80M and introduced w.e.f 1/4/1981) is merely clarificatory and the decision in the case of Distributor’s Baroda (supra) (pertaining to assessment year 1979-80 and 1980-81) is irrespective of section 80AB of the act. Therefore, in the case of Motilal Pesticides, the Hon’ble Supreme Court relied on its decision in the case of Distributors Baroda Pvt. Ltd. and held that same principles are applicable for deduction u/s.80HH. It was also held that Sec.80M and Sec.80HH are similar in nature and deduction is to allowed from the net income.

iv) In the recent judgement in the case of Vijay Industries Ltd.( A.Y 1979-90 and 1980-81), however, the judgement in the case of Motilal Pesticides is overruled. It has been held that the language of Sec.80HH and the language of Sec.80M are not similar. It has been further held that Sec. 80AB (which pertains to all sections in chapter VI A except section 80M) is not clarificatory but prospective in nature and operative from A.Y. 1981-82. The Hon’ble apex court has, therefore, held that reading of Sec.80HH along with Sec.80AB would clearly signify that the deduction u/s.80HH has to be of the gross profits and gains, i.e., before computing the income as specified in Sec. 30 to 43D of the Act.

It is in this background that the Appellant has preferred the ground on the basis of the latest decision of the Hon’ble Supreme Court in the case of Vijay Industries Ltd. and contended that the deduction of profits and gains derived from export u/s. 10AA of the Act also would mean gross profits and gains, i.e. before computing the income as specified in Sec. 30 to 43D of the Act. It is contended by the Appellant that the language of Sec. 80HH and the language of Sec. 10AA are identical and, therefore, the decision is applicable to Sec. 10AA also pertaining to “deduction provisions”.

v) The first contention of the Appellant is that the decision rendered by the Hon’ble apex court in the case of Vijay Industries Ltd. pertaining to deduction allowable u/s. 80HH is applicable to Sec.10AA also. The assessment year in the case of the appellant is AY 2013-14. The relevant section 10AA, 80HH and also section 801A as applicable to the year under consideration needs to be discussed. In this connection, firstly, the relevant part of Sec. 80HH is reproduced as under:

“80HH. (1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking, or the business of a hotel, to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to twenty per cent thereof”

Same provision was there in AY 1979-80/ 1980-81 also which was the year under consideration in the case of Vijay Industries. It is clear from a bare reading of the above section that the deduction u/s 80HH is allowable from the “profits and gains” of the industries. In the case of Vijay Industries Ltd. relied upon by the Appellant, only the words “profits and gains” are referred. In fact, the words “profits and gains” have been used in para 17 and 18 of the order. Further, the Hon’ble apex court states in para 17 that “thus, so far as deduction admissible under this provision is concerned it is from the “profits and gains”. This particular combination of words has been used in various parts of the order and sometime within quotes.

vii) Now coming to section 10AA, relevant extract of this section, as applicable to A.Y. 2013-14 (assessment year involved in assessee’s case), is reproduced here under:

“10AA. (1) Subject to the provisions of this section, in computing the total income of an assessee, being an entrepreneur as referred to in clause(j) of section 2 of the Special Economic Zones Act, 2005, from his Unit, who begins to manufacture or produce articles or things or provide any services during the previous year relevant to any assessment year commencing on or after the 1st day of April, 2006, a deduction of

(i) Hundred per cent of profits and gains derived from the export, of such articles or things or from services for a period of five consecutive assessment years beginning with the assessment year relevant to the previous year in which the Unit begins to manufacture or produce such articles or things or provide services, as the case may be, and fifty per cent of such profits and gains for further five assessment years and thereafter;

(ii) For the next five consecutive assessment years, so much of the amount not exceeding fifty per cent of the profit as is debited to the profit and loss account of the previous year in respect of which the deduction is to be allowed and credited to a reserve account (to be called the “Special Economic Zone Re-investment Reserve Account”) to be created and utilized for the purposes of the business of the assessee in the manner laid down in sub­section (2).”

A bare reading of this section shows that the deduction is allowable on the “profits and gains derived” from the undertaking. Thus, a very important word “derived” is used in this section and the deduction is to be allowed only on the “profits and gains “derived” from the undertaking and not from the “profits and gains”. This is a very important departure from the language used in the case of section 80HH. In this connection it is worthwhile to note that that similar words as in Sec. 10AA have been used in Sec.801A of the Act applicable for the year under consideration, relevant part of which is reproduced hereunder:

“80-IA. (1) Where the gross total income of an assessee includes any profits and gains derived by an undertaking or an enterprise from any business referred to in sub-section (4) (such business being hereinafter referred to as the eligible business), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of an amount equal to hundred per cent of the profits and gains derived from such business for ten consecutive assessment years.”

Thus, in Sec.801A also, the deduction is allowable only from the profits and gains “derived” from the undertaking. It is also to be noted that Sec. 801A has been referred in many sub-sections of Sec. 10AA for applicability of the various provisions, which essentially is because of the fact that both the sections are similar in nature in allowing deductions from the profits and gains derived from the undertaking.

At this stage, it is necessary to understand what does this word “derive” mean and how does it render the methodology of deduction under section 801A different from that of Sec. 8OHH, which was the subject matter of discussion in the case of Vijay Industries Ltd (supra).

In this connection, reference may be made to the decision of the Hon’ble Division Bench of the Bombay High Court in the case of Plastiblends India Ltd. vs. Addl. CIT (ITA No 1282 of 2007) dated 16/10/2009 [318 ITR 352], which was duly confirmed by the Hon’ble apex court vide order dated 09/10/2017. the decision was in respect of AY 1997-98 (i.e after incorporation of section 80AB) In the case of Plastiblends India Ltd., the Hon’ble Division Bench of the jurisdictional High Court has discussed various issues like total income, scope of total income, heads of income, deductions to be made under Chapter VIA of the Act, etc. The Hon’ble jurisdictional High Court thereafter analyzed the word “derived” used in this section (among other sections) and referred to the decision in the case of Liberty India vs. CIT. The Hon’ble High Court held that Sec. 801A is a code by itself and is a special deduction which is linked to profit. In para 43 of the order, it was noted that “thus, on analysis of all the decisions referred herein above, it is seen that the quantum of deduction allowable u/s.801A of the Act has to be determined by computing the gross total income from the business, after taking into account all the deductions allowable u/s.30 to 43D of the Act. Therefore, whether the assessee has claimed the deduction allowable u/s.30 to 43D of the Act or not, the quantum of deduction u/s.801A has to be determined on the total income computed after deducting all deductions allowable u/s.30 to 43D of the Act.”

The jurisdictional High Court in para 34 to 36 observed as under:

“34. As noted earlier, the Apex Court in the case of Mahendra Mills (supra) has neither considered the scope of deduction under Chapter VI-A nor the said decision can be read to mean that by disclaiming current depreciation the assessee can claim enhanced deduction under any other provision in the Act. Therefore, reliance placed on the decision of the Apex Court in the case of Mahendra Mills (supra) in computing the quantum of deduction under section 80-IA of the Act is wholly misplaced.

35. The question then to be considered is, whether on a plain reading of Section 801A read with other relevant provisions in Chapter V/-A, can it be said that the quantum of deduction allowable under Section 80/A depends upon the assessee claiming or not claiming current depreciation ? To be specific, the question is, whether the choice, if any, vested in the assessee in claiming or not claiming current depreciation has any bearing in determining the quantum of deduction allowable under Section 80/A of the Act?

36. In our opinion, the above question is no longer res-integra. The Apex Court in the case of M/s.Liberty India V/s. Commissioner of Income Tax reported in 2009 (12) SCALE 51, held as under :

“13 Before analyzing Section 80-/B, as a prefatory note, it needs to be mentioned that the 1961 Act broadly provides for two types of tax incentives, namely, investment linked incentives and profit linked incentives. Chapter VI-A which provides for incentives in the form of tax deductions essentially belong to the category of “profit linked incentives”. Therefore, when Section 80-IA/80-IB refers to profits derived from eligible business, it is not the ownership of that business which attracts the incentives. What attracts the incentives under Section 80-/A/80-/B is the generation of profits (operational profits). For example, an assessee company located in Mumbai may have a business of building housing projects or a ship in Nava Sheva. Ownership of a ship per se will not attract Section 80-/B (6). It is the profits arising from the business of a ship which attracts sub-section (6). In other words, deduction under sub-section (6) at the specified rate has linkage to the profits derived from the shipping operations. This what we mean in drawing the distinction between profit linked tax incentives and investment linked tax incentives. It is for this reason that Parliament has confined deduction to profits derived from eligible businesses mentioned in subsections (3) to (1 1A) [as they stood at the relevant time]. One more aspect needs to be highlighted. Each of the eligible business in subsections (3) to (1 1A) constitutes a stand-alone item in the matter of computation of profits. That is the reason why the consent of “Segment Reporting” stands introduced in the Indian Accounting Standards (AS) by the Institute of Chartered Accountants of India (ICAI).

14. Analysing Chapter V/-A, we find that Sections 80-lB I 80-IA are the Code by themselves as they contain both substantive as well as procedural provisions. Therefore, we need to examine what these provisions prescribe for ”computation of profits of the eligible business”. It is evident that Section 80-lB provides for allowing of deduction in respect of profits and gains derived from the eligible business. The words “derived from” in narrower in connotation as compared to the words “attributable to”. In other words, by using the expression “derived from” Parliament intended to cover sources not beyond the first degree. In the present batch of cases, the controversy which arises for determination is: whether the DEPB credit I Duty drawback receipt comes within the first degree sources ? According to the assessee(s), DEPB credit/duty drawback receipt reduces the value of purchases (cast neutralization), hence, it comes within first degree source as it increases the net profit proportionately. On the other hand, according to the Department, DEPB credit, duty drawback receipt do not come within first degree source as the said incentives flow from Incentive Schemes enacted by the Government of India or from Section 75 of the Customs Act, 1962. Hence, according to the Department, in the present cases, the first degree source is the incentive scheme/ provisions of the Customs Act. In this connection, Department places heavy reliance on the judgment of this Court in Sterling Food (supra). Therefore, in the present cases, in which we are required to examine the eligible business of an industrial undertaking, we need to trace the source of the profits to manufacture (see CIT v. Kirloskar Oil Engines Ltd., reported in [1986] 157 ITR 762) 15. Continuing our analysis of Sections 80- IA/80-IB it may be mentioned that sub-section (13) of Section 80-lB provides for applicability of the provisions of sub-section (5) and sub-sections (7) to (12) to Section 80-IA, so for as may be, applicable to the eligible business under Section 804B. Therefore, at the outset, we stated that one needs to read Sections 801, 80-IA and 80-lB as having a common Scheme. On perusal of sub-section (5) of Section 80- IA, it is noticed that it provides for manner of computation of profits of an eligible business. Accordingly, profits are to be computed as if such eligible business is the only source of income of the assessee therefore, the devices adopted to reduce or inflate the profits of eligible business has got to be rejected in view of the overriding provisions of sub-section (5) of Section 80-IA, which are also required to be read into Section 804B. [see Section 80-18(13)]. We may reiterate that Sections 801, 80-IA and 80-lB have a common scheme and if so read it is clear that the said sections provide for incentives in the form of deduction(s) which are linked to profits and not to investment. On analysis of Sections 80-IA and 80-IB it becomes clear that any industrial undertaking, which becomes eligible on satisfying sub-section (2), would be entitled to deduction under subsection (1) only to the extent of profits derived from such industrial undertaking after specified dote(s). Hence, apart from eligibility, sub-section (1) purports to restrict the quantum of deduction to a specified percentage of profits. This is the importance of the words “derived from industrial undertaking” as against “profits attributable to industrial undertaking”.

Thus even for the A.Y 1997-98, in the case of Plastiblend (supra) and without reference to section 80AB, Hon’ble High court rendered the decision after discussing the scope of profits and gains derived and held that the quantum of deduction u/ s.801A has to be determined on the total income computed after deducting all deductions allowable u/s.30 to 43D of the Act.

Thereafter, the Hon’ble apex court confirmed the jurisdictional High Court decision and held (in para 18) that “the assessees/appellants want 100% deduction, without taking into consideration depreciation which they want to utilise in the subsequent years. This would be anathema to the scheme under Section 80-IA of the Act which is linked to profits and if the contention of the assessees is accepted, it would allow them to inflate the profits linked incentives provided under Section 80-IA of the Act which cannot be permitted.”

The decision in the case of plastiblends is apparently not referred in the decision rendered in the case of Vijay industries.

In the case of Vijay Industries Ltd.7 the issue involved was deduction u/s. 80HH as applicable to AN 1979-80,1980-81.The assessment year concerned is 2013-14 and for this year the language of Sec. 10AA is parimateria with Sec. 801A of the Act (and not section 80HH)and therefore decision in the case of Vijay Industries is not applicable as the deduction is now allowable from the profits and gains profits and gain derived from the undertaking in the case of 10AA/801A for the year under consideration, unlike from profits and gains as in section 80HH.

Moreover, relying on the decision in the case of Plastiblends India Ltd. (supra) on the issue of “derived from the undertaking”, the ground raised by the Appellant is not maintainable and is liable to he dismissed, at the threshold.

viii) Further the scenario is also completely changed after insertion of section 80AB w.e.f 1/4/1981, and, therefore also the appellant’s argument is not acceptable. As regards section 80 AB, it is also worthwhile to note that the decision in the cases of Distributors Baroda, Motilal Pesticides and Vijay Industries, the assessment years involved were 1979-80 and 1980-81.

As discussed earlier in Chapter VIA, there is a paradigm shift with the introduction of Sec. 80AB of the Act (pertaining to sections other than Sec.80M) with effect from 0 1/04/1981). The Hon’ble apex court in the case of Vijay Industries Ltd. held that section 80 AB is applicable from 1981-82 onwards. The assessee’s case also relates to A.Y. 2013-14. Therefore, even drawing a parallel from Chapter VIA w.r.t section 80HH of the Act, to the deduction claimed u/s. 10AA (Chapter III), the decisions relied upon by the Appellant are not applicable for the year under reference. In the case of Plastiblends India Ltd., the assessment year involved was 1997-98 and the decision was mainly on interpretation of the word “derived” and from that angle also the assessee’s ground can not be accepted.

(ix) Further in Sec. 10AA, there is a clarification given as under:

7. In section 10AA of the Income-tax Act, after sub-section(‘1), the following Explanation shall be inserted with effect from the 1st day of April, 2018, namely.–

“Explanation.—For the removal of doubts, it is hereby declared that the amount of deduction under this section shall be allowed from the total income of the assessee computed in accordance with the provisions of this Act, before giving effect to the provisions of this section and the deduction under this section shall not exceed such total income of the assessee]”

The appellant contends this explanation is prospective in nature. However the language of the explanation itself says that it is for the purpose of removal of doubts that deduction is to be allowed from the income computed as per provisions of the Act. In any case , the language of section 10AA itself makes it clear that the deduction is to be allowed from income computed as per provisions of the Act as discussed before w.r.t. the decision in the case of Plastiblends (supra) and therefore there is no substance in the arguments of the appellant.

(x) It may be also noted that the decision in the case of Vijay Industries pertains to only section 80HH and the language used in that section as specifically pointed out by the Hon’ble Apex Court in para 17 of the order.

(xi) Reference is also invited to section 10AA(8) which says that provisions of section 10A(6) are equally applicable which bars giving effect to section 32(2) even in later years.

(xii) Further section 10AA being part of chapter III is essentially a exemption section though Post amendment, such exemption is available in form of deduction from profits and gains derived from the undertaking, the interpretation needs to be done strictly as held in the case of Commissioner of Customs (Import) vs. Dilip Kumar and company & Others (SC) Civil appeal number 3327 OF 2007 dated 30/7/2018 and in case of ambiguity the same needs to be interpreted in favour of revenue.

111. The rejoinder of the learned Counsel of the assessee in this regard with respect to the arguments raised by the ld. DR are as under:-

“Further, the Learned DR made the following submissions:

a. The decision in the case of Vijay Industries is rendered in the context of section 80HH r.w.s 80AB, which is a deduction section under Chapter VI-A and therefore cannot be applied to section 10AA.

b. The provisions of section 80AB are pari-materia with the Explanation below section 1OAA(1).

c. The Explanation below section 10AA being clarificatory in nature, will apply retrospectively and, hence, deduction u/s 10AA for AY 2013-14 will be computed only w.r.t the amount of income as computed in accordance with the provisions of the Act.

d. The depreciation is compulsory as per Explanation 5 to section 32 and hence ought to be applied while computing profits u/s 10AA.

The appellant submits that the arguments of the Revenue are not sustainable for the following reasons:-

(I) 10AA is deduction section :- The Learned AR, pointed out that the AO in his order at para 13.3 has explained in detail the provisions of section 10A/10B/10AA, the judicial pronouncements and Board Circular on the subject matter. In para 13.3.4, the AO himself has stated that provisions of section 10A/10B/10AA etc are “deduction provisions” and, hence, the decision of the Apex court is squarely applicable to the facts of the appellant.

(ii) Explanation to section 10AA is not pari materia to section 80AB.

The appellant submits that on plain reading it is clear that section 80AB is not pari materia to Explanation to section 1OAA. While section 80AB provides for income with reference to which the deduction has to be made under Chapter VIA i.e. deduction u/s VI-A is to be allowed with reference to income as computed in accordance with the provisions of the Act, Explanation to section 10AA provides for deduction u/s. 10AA to be allowed from the total income of the assessee Thus, while deduction under Chapter VIA r.w.s 80AB is in respect of the income as computed in accordance with the provisions of the Act, the deduction u/s 10AA as per the Explanation shall not exceed the total income of the assessee i.e. while 80AB provides the basis for quantifying he deduction under various head of chapter VIA, Explanation to section 10AA(1) provides that deduction shall be allowed from total income. Hence, Explanation to section 10AA(1) does not deal with quantification of deduction.

(ii) Further the said Explanation to section 1OAA is prospective and not retrospective.

The appellant further submits that the Explanation to section 10AA was inserted by the Finance Act 2017 w.e.f 0104.2018 and hence the same cannot be applied retrospectively.

The appellant further relies on the Explanatory Memorandum’ to the Finance Bill 2017, wherein in the context of rationalization of provisions of section 10AA, it was stated that the amendment will take effect from 1St April 2018 and will accordingly apply in relation to assessment year 2018-19 and subsequent years. Hence, the appellant submits that the Explanation to section 10AA is prospective in nature and not retrospective.

Without prejudice to the above, the appellant submits that in case the Explanation to section 10AA is held to be pare materia to the provisions of section 80AB, then relying on the Apex Court decision, wherein it was held that the provisions of section 80AB cannot held to be retrospective in nature, the Explanation below 10AA(1) also cannot be applied retrospectively as it is an amendment of substantive nature.

Explanation 5 to section 32

The appellant submits that while computing the income under the heard “profits and gains of business” of the assessee, depreciation u/s 32 of the Act has been computed and, hence, Explanation 5 to section 32 is complied with. However, relying on the aforesaid Apex Court decision, while quantifying the amount of the deduction u/s. 10AA in respect both Refinery SEZ and PP SEZ , the term “profits and gains’ would mean gross revenue receipts less actual expenses i.e excluding depreciation and investment allowance, etc as the same are not actual expense and hence need to be excluded.

The appellant submits that the Hon’ble Apex Court has provided the interpretation of the wording “profits and gains” for the purpose of section 80HH. As the wording of section 1OAA is para materia to the wording in section 80HH, the ratio laid down by the Apex Court would apply with full force. The narrow interpretation sought to be drawn by the DR cannot be accepted.

Thus it is submitted that deduction of profits and gains derived from the export u/s 10AA of the Act would mean gross profits and gains, i.e., before computing the income as specified in Sections 30 to 43D of the Act.”

112. Further contention of the assessee Counsel is that the judgment of Hon’ble Supreme Court in the case of Plastiblends India Ltd., 398 ITR 568 is not applicable to the facts of the present case for the following reasons:-

“Firstly the said judgement deals with deduction under section 80IA which falls under Chapter VI-A and is therefore covered by provisions of section 80AB (i.e. the deeming fiction to provide deduction only from income as included in the gross total income of the assessee). In the appellant’s case the deduction is claimed under section IOAA of the Act which is not covered in section 80AB. The legislature in its wisdom has not made 80AB applicable to section 10A/10AA/10B/10BA/10C of the Act, even though the said sections provide for deduction to be granted to an assessee.

Secondly, deduction under section 10AA of the Act (prior to the amendment made by Finance Act 2017 by way of insertion of Explanation) was to be given at the stage of computing the gross total income of the eligible undertaking under Chapter IV of the Act i.e. prior to the commencement of the exercise to be undertaken under Chapter VI of the Act for arriving at the total income of the assessee from the gross total income. This has been held by the Supreme Court in the case of CTT v. Yokogawa India Ltd 391 ITR 274 (SC) in the context of section 10A of the Act. Plastiblends India deals with a situation of computation of deduction under Chapter VIA of the Act i.e. after computing the gross total income of the eligible undertaking under Chapter IV of the Act.

(7) There is clear evidence in the Act that whenever the legislature wanted to allow a deduction as a percentage or fraction of the income computed under the head ‘Profits and Gains from Business or Profession’ it has specifically provided for the same. Thus section 33ABA reads, inter alia as follows:

“33ABA. (1) Where an assessee is carrying on business consisting of the prospecting for, or extraction or production of, petroleum or natural gas or both in India and in relation to which the Central Government has entered into an agreement with such assessee for such business, has before the end of the previous year—

(a) deposited with the State Bank of India any amount or amounts in an account (hereafter in this section referred to as the special account) maintained by the assessee with that Bank in accordance with, and for the purposes specified in, a scheme (hereafter in this section referred to as the scheme) approved in this behalf by the Government of India in the Ministry of Petroleum and Natural Gas: or

(b) deposited any amount in an account (hereafter in this section referred to as the Site Restoration Account) opened by the assessee in accordance with, and for the purposes specified in, a scheme framed by the Ministry referred to in clause (a) (hereafter in this section referred to as the deposit scheme), the assessee shall, subject to the provisions of this section, be allowed a deduction (such deduction being allowed before the loss, if any, brought forward from earlier years is set off under section 12) of—

(i) a sum equal to the amount or the aggregate of the amounts so deposited; or

(ii) a sum equal to twenty per cent of the profits of such business (computed under the head “Profits and gains of business or profession” before making any deduction under this section), whichever is less…. ” Similarly section 80HHC provides, inter alia as follows :-

(3) For the purposes of sub-section (1),—

(a) where the export out of India is of goods or merchandise manufactured or processed by the assessee, the profits derived from such export shall be the amount which bears to the profits of the business, the same proportion as the export turnover in respect of such goods bears to the total turnover of the business carried on by the assessee…

Explanation.—For the purposes of this section,

(a)…

(b)….

(baa) “profits of the business ” means the profits of the business as

computed under the head “Profits and gains of business or profession”

as reduced by…

The above shows that a computation under the head ‘Profits and Gains from Business or Profession is quite different from a phrase ‘profits and gain” simplictor.

(8) The Explanation to section 10AA introduced by the Finance Act, 2017 with effect from 1.4.2018 makes it clear that its purpose is to allow deduction under section 10AA from the total income of the assessee and not the total income of the undertaking. The memorandum explaining the provisions of the Finance Bill 2017 at 391 1TR 1 (St) at page 214 state as follows:-

“Rationalisation of provisions of Section 10AA

Under the existing provisions of the section 10AA, deduction is allowed from the total income of an assessee, in respect of profits and gains from his Unit operating in SEZ. Subject to fulfillment of certain conditions. Section 10AA allows deduction in computing the total income of the assessee, hence the deduction is to be allowed for the total income of the assessee as computed in accordance with the provision of the Act before giving effect to the provisions of section 10AA. However, courts have taken a view (while deciding the matter pertaining to section 10A which also contains similar provision) that the deduction is to be allowed from the total income of the undertaking and not from the total income of the assessee.

In view of the above, it is proposed to clarify that the amount of deduction referred to in section 10AA shall be allowed from the total income of the assessee computed in accordance with the provisions of the Act before giving effect to the provisions of the section 10AA and the deduction under section IOAA in no case shall exceed the said total income.

This amendment will take effect from 1st April, 2018 and will, accordingly, apply in relation to the assessment year 2018-19 and subsequent assessment years. [Clause 7]”

Hence as long as the assessee has a positive total income the deduction under section 10AA must be granted. It does not deal with the method by which the deduction is to be computed.”

113. The assessee has made further submission that in alternative and without prejudice to the above arguments, the assessee submits that 100% profit and gains derived from export appearing in Section 10AA(1)(i) of the Act should be interpreted as 100% of profits and gains based on commercial principles. Thus, without prejudice to the aforesaid submission and arguments, in arriving at the commercial profit of the SEZ unit eligible for deduction 10AA of the Act, depreciation charged in the books as per the Companies Act 1956 may be deducted, instead of the depreciation allowance as computed u/s.32 of the Income Tax Act.

114. The ld. counsel of the assessee contends that Hon’ble Apex Court in the case of Vijay Industries (supra) has also referred to profit and gains on commercial principles. That profit and gains on commercial principles envisage allowance of deprecation as per Companies Act and not depreciation as per Income Tax Act. The ld. counsel submits that the Hon’ble Supreme Court and Hon’ble High Courts have already dealt with this proposition that commercial profits mean profits without adjustment of depreciation as per income tax act earlier also. In this regard, he referred to the following case laws:-

1. Hindustan Unilever Ltd. v. DCIT (Bom. HC) 325 ITR 102

2. Plastiblends India Ltd. v. Addl. CIT, Mumbai (SC) 398 ITR 568

3. CIT v. Yokogawa India Ltd. (SC) 391 ITR 274

4. Kilburn Properties Limited v. CIT (Kolkata HC) 17 ITR 134

5. Ezra Propritary Estate Ltd. v. CIT (Kolkata HC) 18 ITR 762

6. Indra Singh & Sons Ltd. v. CIT (Kolkata HC) 33 ITR 341

7. CIT v. Cocanada Radhaswami Bank Ltd. (SC) 57 ITR 306

8. CIT vs. Bhavnagar Trust Corporation (P.) Ltd. (Gujarat HC) 69 ITR 278

9. Western states Trading Co. P. Ltd. v. CIT (SC) 80 ITR 21

10. CIT v. Shrikishan Chandmal (Madhya Pradesh HC) 60 ITR 303

11. CIT v. R. Dalmia (Delhi HC) 96 ITR 463

12. Brooke Bond and Co. Ltd. v. CIT (SC) 162 ITR 373

13. CIT v. Solar Chemical Pvt. Ltd. (Allahabad HC) 190 ITR 216

14. CIT v. Ramnath Goenka (Madras HC) 259 ITR 26

15. Raheja IT Park v. DCIT (ITAT Hyderabad) ITANo. 1774/Hyd/14, 727/Hyd/15 & 728/Hyd/15

16. K. Badianiv. CIT(SC) 105 ITR 642

115. We have carefully considered the submissions and perused the records. Before proceeding further it may be gainful here to refer to the decision of Hon’ble Supreme Court in the case of Vjay Industries (supra) which read as under :-

“ JUDGMENT

A.K. Sikri, J. – Leave granted. Delay condoned.

2. In all these appeals issue relates to the interpretation that is to be accorded to the provisions of Section 80HH of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’). Section 80HH and other related provisions, as it existed at the relevant time, are to be taken note of since we are concerned with the Assessment Years 1979-80 and 1980-81. Section 80HH provides deduction from income at specified rates in respect of certain industrial undertakings which are covered by the said provision. Issue is limited, namely, while computing the deduction whether it is to be available out of ‘income’ as computed under the Act or out of ‘profits and gains’, without deducting therefrom ‘depreciation’ and ‘investment allowance’. Language of sub-section (1) of Section 80HH will have to be seen, in order to comprehend the aforesaid issue. It reads:

“80HH. Deduction in respect of profits and gains from newly established industrial undertakings or hotel business in backward areas.

(1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking, or the business of a hotel, to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to twenty per cent thereof.”

3. As can be seen from the above, this Section grants deduction from profits and gains to an undertaking engaged in manufacturing or in the business of the hotel. The deduction is admissible at the rate of 20% of the profits and gains of undertaking for 10 assessment years. Certain conditions are to be fulfilled in order to be eligible for such a deduction, about which there is no dispute insofar as these appeals are concerned. Conflict is confined to one aspect viz. 20% deduction of gross profits and gains or net income. Whereas assessees want deduction at the rate of 20% of profits and gains, i.e., gross profits, the stand of the Income Tax Department is that deduction at the rate of 20% is to be computed after taking into account depreciation, unabsorbed depreciation and investment allowance. To put it otherwise, as per the Department, the income of the assessee is to computed in accordance with the provisions contained in Sections 28 to 44DB which are the provisions for computation of ‘income’ under the head ‘profits and gains of business or profession’. Once income is arrived at after the application of the aforesaid provisions, 20% thereof is allowable as deduction under Section 80HH. The assessees, on the other hand, submit that Section 80HH uses the expression ‘profits and gains’ which is different from ‘income’. Therefore, whatever profit and gains are earned by an undertaking covered by Section 80HH of the Act, 20% thereof is admissible as deduction. As a corollary, from such profits and gains of the industrial undertaking, depreciation or unabsorbed investment allowances which are the deductions admissible under Sections 32 and 32AB of the Act, cannot be taken into consideration.

4. We may mention, at this stage, that this Court in the the case of Motilal Pesticides (I) (P.) Ltd. v. CIT [2000] 111 Taxman 83/243 ITR 26 has taken the view which is favourable to the Department. This view is followed by the High Court in the impugned judgment thereby dismissing the appeals of the appellants/assessees herein. The assessees in these appeals submit that the aforesaid view taken in Motilal Pesticides (I.) (P.) Ltd. case (supra) is not a correct view as it ignores certain earlier judgments on this very issue. Therefore, according to them, Motilal Pesticides (I.) (P.) Ltd. case (supra) needs a re-look.

5. These appeals had come up for hearing before a Devision Bench of this Court. After hearing the arguments advanced by the counsel for the parties on the aforesaid lines, the Division Bench noted the conflict and passed orders dated 5th November, 2014, thereby referring the matter to a larger Bench. That is how the matters have come up before this Bench.

6. In order to appreciate the controversy, we would have to go through certain provisions of the Act in order to understand broadly the scheme of taxation on the income of assessees.

7. Section 4 of the Act is a charging Section which makes total income of the previous year of every person chargeable to tax at the rates which may be specified from time to time. The said Section, thus, imposes income tax upon a person in respect of his income. Of course, income is to be charged at the rate or rates fixed for the year by the Annual Finance Act. Also the levy is to be on the total income of the assessable entity, computed in accordance with the provisions of the Act. Section 5 lays down the scope of the total income.

While computing the total income, certain incomes are exempted which are not to be included and these are mentioned in Section 10 of the Act.

8. Section 14 of the Act is the next provision which is relevant for these appeals. It is the first provision in Chapter IV which is titled ‘computation of total income’ and, obviously, contains the provision for computation of total income. Section 14 enumerates different heads of income, namely, salaries, income from house property, profits and gains of business or profession, capital gains and income from other sources. Insofar as income under the head ‘profits and gains of business or professions’ is concerned, provisions thereto are contained in Sections 28 to 44DB of the Act. Section 28 specifies various incomes which shall be chargeable to income tax under this head. Thereafter, Section 29 provides that income referred to in Section 28 shall be computed in accordance with the provisions contained in Sections 30 to 43D. These sections provide for deductions of various kinds. Among them, Section 32 relates to depreciation, Section 32AB gives deductions in respect of certain investment allowance. After providing for admissible deductions to an assessee, income under this head is ascertained. In a similar way, as noted above, income under the other heads is worked out. If a particular assessee has income under more than one heads, in the income tax returns, the said assessee would show the respective incomes under the aforesaid heads thereby arriving at total income on which the tax would become payable.

9. Chapter VIA also contains provisions in respect of certain deductions which are to be made in computing total income. Section 80A of this Chapter stipulates that in computing the total income of an assessee, there shall be allowed from ‘gross total income’ the deductions specified in Section 80C to 80U. It is relevant to point out that though Chapter VIA also allows certain deductions in computing total income, these provisions are not clubbed with the provisions of part of Chapter IV of the Act. There is a reason for doing so. The provisions made in Chapter IV are for the purposes of computing total income qua income under the head ‘profits and gains’ from business or profession. Various deductions which are specified to be given from the gross total income are in the nature of expenses incurred or to be treated as expenses. It may be rents paid, insurance premium paid for building, expenditure incurred on scientific research, various other kinds of expenditures etc. The purpose is to arrive at true income after making such expenditure admissible for deduction. Deductions provided under Chapter VIA, on the other hand, are largely in the nature of incentives. For example, under Section 80CCA deductions provided is in respect of deposits under National Savings Scheme or payment to a deferred annuity plan purpose is to encourage the assessees to make deposits under these Schemes. Likewise, under Section 80CCC, deduction is given in respect of contribution to certain Pension funds. The deductions are also given, inter alia, for donations for scientific research or rural development, to newly established industrial undertakings or hotel business in backward areas, small scale industrial undertakings, housing projects, export business, businesses earning convertible foreign exchange etc.

10. It is in the aforesaid scheme, one has to consider whether deductions under Section 80HH, which falls under Chapter VIA, is to be given after applying the provisions for computation of income as mentioned in Chapter IV of the Act. Once, we examine the matter keeping in view the aforesaid nature of scheme, answer becomes obvious. Chapter VIA, is a stand alone chapter dehors Chapter IV. Therefore, provisions relating to various kinds of deductions mentioned therein have to be construed independent of Chapter IV of the Act. Another pertinent aspect which is to be borne in mind is that conceptually ‘income or total income’ is different from ‘profits and gains’. There are various heads of income and if an assessee is earning income under more than one heads, all these are to be clubbed together to arrive at total income. Profits and gains from the business or profession is only one of the heads of income.

11. We are to examine and interpret the provisions of Section 80HH of the Act keeping in view the aforesaid parameters. As noted above, it mentions that in computing the total income of the assessee, a deduction from profits and gains of an amount equals to 20% thereof shall be provided.

12. Argument of Mr. Bagaria, learned senior counsel appearing for the appellant, is that in Motilal Pesticides’ (I) (P.) Ltd. case, (supra) this Court missed the marked difference in the terms ‘Income’ and ‘Gross Total Income’ as referred to in Section 80AB as against ‘Profits and Gains of Business’ as appearing in Section 80HH and 80-I. It is argued that the restrictive clause in Section 80AB is applicable only to the provisions based on Income/Gross Total Income/Net Taxable Income and is wholly inapplicable to provisions like 80HH/80I/80IA/80J under which the deduction has been provided for promoting a particular kind of activity and is accordingly calculatable on the Profit and Gains of Business, i.e. such activity. It is argued that Sections 80HH and 80I very categorically refer to and use the terminology ‘profits and gains of Industrial Undertakings’. The terms ‘profits and gains’ and ‘income’ are not same but are different. The term ‘profits and gains’ has not been defined under the provisions of the Act whereas the term ‘income’ has been defined. It is further submitted that there are a number of provisions under Chapter VIA, some of which refer to the term ‘profits and gains’. Whereas some other refer to the term ‘income’. Thus, in some of the provisions of Chapter VIA, the deduction is intended to be given out of ‘profits and gains’, whereas in some other sections, the deduction has been provided to be given out of ‘income’. When the term ‘profits and gains’ has not been defined under the Act, in that case, its meaning has to be understood as is being understood in commercial world.

13. The aforesaid arguments is countered by Ms. Vibha Datta Makhija, learned senior counsel who appeared for the Revenue. She argues that the judgment in Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 (SC) noted in the Reference Order, is on Section 80E of the Act which has no bearing in the instant case that pertains to Section 80HH. She also submits that legislative intent would be clear from the fact that decision in Cloth Traders (P) Ltd. v. Addl. CIT [1979] 118 ITR 243/1 Taxman 335 (SC)  led to the insertion of Section 80AB in the Act. The purpose, therefore, was to take away the effect of the judgment in Cloth Traders (P.) Ltd’s. case (supra) According to her, Section 80AB makes it clear that deductions to be made is with reference to Income included in the Gross Total Income under the heading ‘C – Deduction in respect of certain incomes’. It also makes it clear that the amount of income of that nature is to be computed in accordance with the provisions of the Act (before making any deduction under this Chapter). That alone shall be deemed to be the amount of income of that nature which is derived or received by the assessee and which is included in his Gross Total Income.

14. Her submission is that though Section 80AB came to be inserted by the Finance (No.2) Act, 1980 with effect from 01.04.1981, it is clarificatory in nature. To read the provision in this manner, she has relied upon the judgment in H.H. Sir Rama Varma v. CIT [1993] 71 Taxman 237/[1994] 205 ITR 433 (SC). She has also referred to the Constitution Bench judgment in Distributors (Baroda) (P.) Ltd. v. Union of India [1985] 22 Taxman 49/155 ITR 120 (SC), which has overruled Cloth Traders (P.) Ltd’s., case (supra) and in particular paragraph 12 thereof which reads as under:

’12. Soon after the enactment of Section 80-M a question arose before the Gujarat High Court in Addl. CIT v. Cloth Traders Pvt. Ltd. whether on a true construction of that section, the permissible deduction is to be calculated with reference to the full amount of dividends received by the assessee from a domestic company or with reference to the dividend income computed in accordance with the provisions of the Act, that is, after deducting the interest paid on monies borrowed from earning such income. The Gujarat High Court in a judgment delivered on November 28, 1973, held that the deduction permissible under Section 80-M is liable to be calculated with reference to the dividend income computed in accordance with the provisions of the Act and not with reference to the full amount of dividends received by the assessee. The assessee being aggrieved by this judgment preferred an appeal to this Court and this appeal was allowed by the judgment delivered in Cloth Traders case. This Court overruled the view taken by the Gujarat High Court and held that the deduction required to be allowed under Section 80-M must be calculated “with reference to the full amount of dividends received from a domestic company and not with reference to the dividend income as computed in accordance with the provisions of the Act, that is, after making deductions provided under the Act”. This decision was given by the Court on May 4, 1979.”

13. Now, according to Parliament, this interpretation placed on Section 80-M by the summit court was not in conformity with the legislative intent and it resulted in considerable unjustified loss of revenue. Parliament therefore immediately proceeded to set right what according to it was an interpretation contrary to the legislative intent and with a view to setting at naught such interpretation. Parliament, by Section 12 of Finance (No.2) Act, 1980, introduced in the Income Tax Act, 1961, Section 80-AA with retrospective effect from April 1, 1968, that is, the date when Section 80-M was originally enacted, providing that the deduction required to be allowed under Section 80­M in respect of inter-corporate dividends “shall be computed with reference to the income by way of such dividends as computed in accordance with the provisions of this Act (before making any deduction under this Chapter) and not with reference to the gross amount of such dividends”. It is the validity of this new Section 80-AA which is challenged in the present writ petition. But we may make it clear that what is challenged is not the prospective operation of Section 80-AA. That would clearly be unexceptionable because the Legislature can always impose a new tax burden or enhance an existing tax liability with prospective effect. But the complaint of the assessee was against retrospective effect being given to Section 80-AA, because that would have the effect of enhancing the tax burden on the assessee by setting at naught the interpretation placed on Section 80­M by the decision in Clothe Traders case and reducing the amount of deduction required to be allowed under Section 80-M. However, as pointed out at the commencement of this judgment, it would become necessary to examine this complaint against the constitutional validity of retrospective operation of Section 80-AA only if we affirm the interpretation placed on Section 80-M by the decision of this Court in Cloth Traders case. If we do not agree with the decision of this Court in Cloth Traders case and take the view that the Gujarat High Court was right in the interpretation placed by it on Section 80-M in Addl. CIT v. Cloth Traders Pvt. Ltd., no question of constitutional validity of the retrospective operation of Section 80-AA would remain to be considered, because in that event Section 80-AA in its retrospective operation would be merely clarificatory in nature and would not involve imposition of any new tax burden.’

15. Ms. Makhija also relied upon the judgment of this Court in CIT v. Kotagiri Industrial Co-Operative Tea Factory Ltd. [1997] 91 Taxman 214/224 ITR 604 wherein provisions of Section 80P of the Act are interpreted in the following manner:

‘1. … The Tribunal referred the following question for the opinion of the High Court:

“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the deduction under Section 80-P of the Income Tax Act should be allowed before set-off of unabsorbed losses of earlier year?”…

5. Reference may be made at this stage to the provisions of Section 80-P which falls in Chapter VI-A of the Act. Sub-section (1) of Section 80-P, which is relevant for the purpose of the case, provides as follows:

“80-P. (1) Where in the case of an assessee being a cooperative society, the gross total income includes any income referred to in sub-section (2), there shall be deducted, in accordance with and subject to the provisions of this section, the sums specified in sub-section (2), in computing the total income of the assessee.”

6. For the purpose of Chapter VI-A the expression “gross total income” is defined in clause (5) of Section 80-B in the following terms:

” ‘gross total income’ means the total income computed in accordance with the provisions of this Act, before making any deduction under this Chapter.”

7. If Section 80-P(1) is read with the definition of the expression “gross total income” contained in Section 80-B(5), it has to be held that for the purpose of making deduction under Section 80-P it is necessary to first determine the gross total income in accordance with the other provisions of the Act. This means that for the purposes of the present case the gross total income must be determined by setting off against the income the business losses of the earlier years as required under Section 72 of the Act…

12. Having regard to the law as laid down by this Court in Distributors (Baroda) (P) Ltd. [(1986) 1 SCC 43 : 1986 SCC (Tax) 159 : (1985) 155 ITR 120] and H.H. Sir Rama Varma [1994 Supp (1) SCC 473 : (1994) 205 ITR 433] , it must be held that before considering the matter of deduction under Section 80-P(2) the Income Tax Officer had rightly set off the carried-forward losses of the earlier years in accordance with Section 72 of the Act and on finding that the said losses exceeded the income, he rightly did not allow any deduction under Section 80-P(2) and the Appellate Assistant Commissioner as well as the Tribunal and the High Court were in error in taking a contrary view.

13. The principle of statutory construction invoked by Ms Ramachandran has no application in construing the expression “gross total income” in sub­section (1) of Section 80-P. In view of the express provision defining the said expression in Section 80-B(5) for the purpose of Chapter VI-A, there is no scope for construing the said expression differently in Section 80-P.’

16. We have considered the aforesaid submissions.

17. At the outset, it needs to be pointed out that in these cases, the Court is concerned with the provisions of Section 80HH of the Act and, therefore, the language used in that particular provision is to be kept in mind. As noted above, sub-section (1) of Section 80HH allows “a deduction from such profits and gains of an amount equal to 20 per cent thereof”, in computing the total income of the assessee. Thus, so far as deduction admissible under this provision is concerned it is from the ‘profits and gains’. In this context first question would be: what meaning is to be assigned to the expression ‘profits and gains’? Here we find that the reference order dated 5th November, 2014 rightly draws a distinction between ‘profits and gains’ and ‘income’. We would like to reproduce the said reference order in its entirety as we find that it captures the legal position lucidly and succinctly:

‘1. We are concerned in these cases with Assessment Year 1979-1980 and Assessment Year 1980-1981. The High Court of Rajasthan by the impugned judgment dated 17th May, 2004 construed Section 80-HH of the Income Tax Act, 1961 following a judgment of this Court in Motilal Pesticides(I) Pvt. Ltd. v. Commissioner of Income Tax, Delhi-II [2000] 9 SCC 63. The High Court noticed an argument made before it to the following effect:

“It is most humbly submitted that the concept ‘profits and gains’ is a wider concept than the concept of ‘income’. The profits and gains/loss are arrived at after making actual expenses incurred 2 from the figure of sales by the assessee. It does not include any depreciation and investment allowance, as admittedly these are not the expenses actually incurred by the assessee. However, the term ‘income’ does take into consideration the deductions on account of depreciation and investment allowance. Therefore, the term profits and gains are not synonymous with the term ‘income’.”

However, the High Court correctly felt that it was bound by the judgment of this Court.

2. Motilal Pesticides(I) Pvt. Limited (Supra) is a Judgment of this Court which affirmed the Judgment of the Delhi High Court concerning the interpretation of the very same Section 80-HH of the Income Tax Act. The assessment years also happened to be the same assessment years as involved in these appeals.

3. The question of law set out by this Court is, whether, on the facts and circumstances of the case, the Tribunal was right in holding that the assessee was not entitled to deduction under Section 80-HH of the Income Tax Act, 1961 on the gross profit of Rs.34,30,035 (Liquid Section) but on the net income 3 therefrom for Assessment Year 1979-80?

4. Thereafter, this Court set out Section 80-HH in para 2 and Section 80-M in para 3 of the Judgment. It will be noticed that whereas Section 80-HH uses the expression “any profits and gains derived from”, Section 80-M uses the expression “any income”. Section 80-M was held, in the Cloth Traders (P) Ltd. Vs. CIT (1979) 3 SCC 538, to mean that for the purpose of that Section, deduction is to be allowed on the gross total income and not on net income. This was over-ruled in Distributors (Baroda) Pvt. Ltd. Vs. Union of India (1986) 1 SCC 43.

5. Bhagwati, J. who was party to the earlier decision in the Cloth Traders’ case delivered a judgment in the Distributors( Baroda) case holding that the Cloth traders’ case was obviously incorrectly decided because the words “any income” cannot possibly refer to gross total income but referred only to “net income”. Further, Distributors (Baroda) case followed the judgment of this Court in Cambay Electric Supply Industrial Co. Ltd. v. The Commissioner of Income Tax, Gujarat-II, Ahmedabad [1978] 2 SCC 644 which decision concerned itself with Section 80-E of the Income Tax Act. Section 80 E reads as follows:—

“80E – Deduction in respect of profits and gains from specified industries in the case of certain companies-(1) In the case of a company to which this section applies, where the total income (as computed in accordance with the other provisions of this Act) includes any profits and gains attributable to the business of generation or distribution of electricity or any other form of power or of construction, manufacture or production of any one or more of the articles or things specified in the list in the Fifth Schedule, there shall be allowed a deduction from such profits and gains of an amount equal to eight per cent, thereof, in computing the total income of the company.

(2) This section applies to

(a) an Indian Company; or (b) any other company which has made the prescribed arrangements for the declaration and payment of dividends (including dividends on preference shares) within India. But does not apply to any Indian Company referred to in Clause (1), or to any other company referred to in clause (b), if such Indian or other company is a company referred to in Section 108 of its total income as computed before applying the provisions of sub-section (1) does not exceed twenty-five thousand rupees”.

6. It will be noticed that in marked contrast to the Section under consideration in this appeal i.e. 80-HH, Section 80-E uses the expression “total income [as 5 computed in accordance with the provisions of this Act]” and goes on to speak of any profits and gains, so computed, for the purpose of deduction under Section 80-E. It will be seen in the present case the said words are conspicuous by their absence in Section 80-HH even though the expression “profits and gains” is the same expression used in section 80-E.

7. The finding in paragraph 4 in Motilal Pesticides (supra) that the language of Section 80-HH and Section 80-M is the same is, with respect, prima facie, incorrect. Conceptually, “any income” and “profits and gains” are different under the Income Tax Act.

(See Section 80-M read with Sections 80-AA & AB, Section 80-T which speak of “any income” and Section 28 which speaks of “income from profits and gains” showing thereby that conceptually the two expressions are understood as distinct in law).

8. In paragraph 5 of the judgment in Motilal Pesticides(Supra), Shri Ramamurthi, learned senior counsel appearing for the appellant submitted that both Cloth Traders and Distributors (Baroda) were cases which pertained to Section 80-M only and this Court had no occasion to consider the application of Section 80-AB with 6 reference to Section 80-HH of the Act. The Court in repelling this contention referred to another decision in H.H. Sir Rama Varma v. CIT [1994] Supp(1) SCC 473, which judgment dealt with the then newly enacted Section 80-AA and 80-AB. Both these sections again are relatable to deductions made under Section 80-M; and Section 80-T with which that judgment was concerned also uses the expression “any income” as opposed to “profits and gains”. It will be clear, therefore, that prima facie Varma’s case again has very little to do with the concept of “profits and gains” with which we are concerned here. For these reasons, the matters be placed before the Hon’ble Chief Justice of India to constitute an appropriate Bench to consider the correctness of the judgment in Motilal Pesticides (supra).’

18. We have already stated, in brief and broadly, the scheme of the Act insofar as assessment of income is concerned, particularly, with reference to computing the income as provided in Chapter IV of the Act and contrasted it with the deductions that are allowable under Chapter VI-A of the Act while computing total income. That scheme itself draws distinction between the concept ‘income’ on the one hand and ‘profits and gains’ on the other hand. Insofar as computation of income under the head ‘profits and gains’ from business or profession is concerned, Section 28 of the Act mentions various kinds of incomes which are chargeable under this head. Therefore, all those incomes specifically mentioned in that provision when earned by a particular assessee, are to be aggregated to arrive at profits and gains of the assessee. Section 29 thereof mentions the method of arriving at ‘income’ which is to be computed in accordance with the provisions contained in Sections 30-43D of the Act. Sections 30-43D contain deductions of various kinds which are in the nature of expenditure or the like nature. After providing the deductions admissible in these provisions, one arrives at the figure of net profits which would become the net income under the head ‘profits and gains of business or profession’. In contrast, as mentioned above, under Chapter VI-A of the Act certain deductions are given by way of incentives. Assessees may earn these deductions on fulfilling the eligibility conditions contained therein, even when they are not in the nature of any expenditure incurred by the assessee. Here, Section 80A of the Act provides that in computing the total income of assessee, there shall be allowed from his gross total income, in accordance with the subject of the provisions of this Chapter, the deductions specified in Sections 80C to 80U. As mentioned above, Sections 80C to 80U contain different subject matters and also specify particular percentage of deductions for a particular period. Significantly, Section 80A itself uses the expression ‘from his gross total income’ as it states that deduction is to be allowed to an assessee ‘from his gross total income’. Moreover, different provisions from Sections 80C to 80U, while mentioning the percentage at which and for which period a particular deduction is allowable, also specifies as to how such a deduction is to be worked out, namely, specific percentage of deduction of which component. These sections provide different parameters. Insofar as Section 80HH is concerned, it specifically mentions that deduction @ 20% of ‘profits and gains’.

19. Reading of Section 80HH along with Section 80A would clearly signify that such a deduction has to be of gross profits and gains, i.e., before computing the income as specified in Sections 30 to 43D of the Act. It is correctly pointed out by Division Bench in the reference order that in Motilal Pesticides (I.) (P.) Ltd. case (supra), the Court followed the judgment rendered in the Cloth Traders (P) Ltd. case (supra) which was a case under Section 80M of the Act, on the premise that language of Section 80HH and Section 80M is the same. This basis is clearly incorrect as the language of two provisions is materially different. We are, therefore, of the considered opinion that judgment of Motilal Pesticides (I.) (P.) Ltd. case (supra) is erroneous. We, therefore, overrule this judgment.

20. We are unable to subscribe to the contention of the learned senior counsel for the Revenue that Section 80AB, which was inserted by Finance (No. 2) Act, 1980 with effect from 1st April, 1981 is clarificatory in nature. It is a provision made with prospective effect as the very Amendment Act says so. Therefore, it cannot apply to the Assessment Years 1979-80 and 1980-81, when Section 80AB was brought on the statute book after these assessment years. This position becomes clear from the reading of Circular No. 281 dated September 22, 1980 issued by the Central Board of Direct Taxes itself. This circular inter alia describes the reasons for adding new Sections 80AA and 80AB. It refers to judgment in Cloth Traders (P.) Ltd. case (supra) and mentions that the directions specified in the aforesaid sections will be calculated with reference to the net income as computed in accordance with the provisions of the Act (before making any deduction under Chapter VIA) and not with reference to the gross amount of such income, subject, however, to the other requirements of the respective sections. Notwithstanding the same, this circular also categorically mentions that it will take effect from April 01,1981. Following portion of this circular is relevant:

“The new section 80AB will take effect from 1st April, 1981, and will accordingly apply in relation to the assessment year 1981-82, and subsequent years. It should be carefully noted that the new section 80AB, unlike section 80AA, will not have any retrospective operation.”

21. It is, thus, clear that change in legal position is brought about only, with the insertion of Section 80AB and made applicable from Assessment Year 1981-82. In view thereof, judgments in the case of Cloth Traders (P.) Ltd. (supra) relied by the Revenue will be of no relevance. Likewise, judgment in Kotagiri Industrial Co-Operative Tea Factory Ltd. case (supra) decided altogether different question, which can be discerned from the passages extracted therefrom and will have no application to the instant case.

22. As a result, all these appeals are allowed.

116. A reading of the above said makes it clear that while expounding upon the provisions of section 80 HH, the Hon’ble Court was considering as to whether while computing the deduction whether it is to be available out of income as computed under the act or out of profit and gains without deducting therefrom depreciation u/s. 32 and investment allowance u/s. 32AB of the Act.

117. After elaborating upon the language of the section and the arguments of the parties honourable court in paragraph 17 of the above order noted that subsection 1 of section 80 HH allows a deduction from such profits and gains of an amount equal to 20% thereof in computing the total income of the assessee. Further Hon’ble Apex Court observed that the so far as deduction admissible under this provision is concerned it is from the profits and gains. That in this context the 1st question would be; what meaning is to be assigned to the expression profits and gains.

118. After reproducing the reference order in this regard honourable supreme court expounded that the scheme of the act insofar as assessment of income is concerned particularly with reference to computing the income as provided in chapter IV of the act and contrasted it with the deduction that are allowable under chapter VIA of the act while computing total income. That the scheme itself draws distinction between the concept of income on the one hand and profits and gains on the other hand. That insofar as computation of income under the head profits and gains from business or profession is concerned section 28 of the act mentions various kinds of income to be chargeable under this Act. That therefore all those incomes specifically mentioned in that provision when earned by a particular assessee are to be aggregated to arrive at profits and gains of business. Section 29 thereof mentions the method of arriving at income which is to be computed in accordance with the provisions contained in section 30-43D of the act. Section 30-43D contains deductions of various kinds which are in the nature of expenditure of the likenature. After providing the deductions admissible under these provisions one arrives at the figure of the profit which would become the net income under the head profits and gains of business or profession. In contrast as mentioned above under chapter VI A of the Act certain deductions are given by way of incentives. Assessee’s may earn this deductions on fulfilling the eligibility conditions contained therein, even when they were not in the nature of expenditure incurred by the assessee. Here section 80A of the act provides that in computing the total income of assessee there shall be allowed from his gross total income in accordance with the subject of the provisions of this chapter the deductions as specified in section 80C to U. As mentioned above section 80 C to 80 U contain different subject matters.

119. The Hon’ble Apex Court expounded that reading section 80 HH along with section 80A would clearly signify that deduction has to be of gross profits and gains that is before computing the income as a specified in section 30 to 43D. Thereafter honourable court held that the judgement of Motilal pesticides is erroneous in as much as the language of 80 M and 80H are materially different and hence the same was overruled. Thereafter the honourable court held that provisions of section 80 AB are perspective.

120. From the above exposition it is amply clear that honourable Supreme Court significantly brought out difference between computation of income i.e. profit which becomes the net income under the head profits and gains of business and profession in contradiction to profit and gains with reference to which the deduction is to be allowed. The exposition that emerges from the above said order is that the profit and gains of business with reference to which the assessee is eligible to get the deduction is to be computed before deduction of the depreciation and investment allowance as per the income tax act.

121. Now by way of this additional ground the assessee contends that it had been granted deduction under section 10 AA on the profit which is the net income under the head profits and gains of business after the depreciation as per Income Tax Act, and in view of the above said exposition it deserves that the deduction be granted with reference to profit and gain as expounded in the above said decision.

122. Now in this regard assessee’s contention is that provisions of section 80HH and section 10AA are pari materia. This has been disputed by the Revenue.

123. The provisions of section 80 HH reads as under :-

Deduction in respect of profits and gains from newly established industrial undertakings or hotel business in backward areas.

80HH. (1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking, or the business of a hotel, to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to twenty per cent thereof.

(2) This section applies to any industrial undertaking which fulfils all the following conditions, namely :—

(i) it has begun or begins to manufacture or produce articles after the 31st day of December, 1970 but before the 1st day of April, 1990, in any backward area;

(ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence in any backward area :

Provided that this condition shall not apply in respect of any industrial undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such industrial undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section;

(iii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose in any backward area;

(iv) it employs ten or more workers in a manufacturing process carried on with the aid of power, or employs twenty or more workers in a manufacturing process carried on without the aid of power.

Explanation.—Where any machinery or plant or any part thereof previously used for any purpose in any backward area is transferred to a new business in that area or in any other backward area and the total value of the machinery or plant or part so transferred does not exceed twenty per cent of the total value of the machinery or plant used in the business, then, for the purposes of clause (iii) of this sub-section, the condition specified therein shall be deemed to have been fulfilled.

(3) This section applies to the business of any hotel, where all the following conditions are fulfilled, namely :—

(i) the business of the hotel has started or starts functioning after the 31st day of December, 1970 but before the 1st day of April, 1990, in any backward area;

(ii) the business of the hotel is not formed by the splitting up, or the reconstruction, of a business already in existence;

(iii) the hotel is for the time being approved for the purposes of this sub­section by the Central Government.

(4) The deduction specified in sub-section (1) shall be allowed in computing the total income in respect of each of the ten assessment years beginning with the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles or the business of the hotel starts functioning:

Provided that,—

(i) in the case of an industrial undertaking which has begun to manufacture or produce articles, and

(ii) in the case of the business of a hotel which has started functioning,

after the 31st day of December, 1970, but before the 1st day of April, 1973, this sub-section shall have effect as if the reference to ten assessment years were a reference to ten assessment years as reduced by the number of assessment years which expired before the 1st day of April, 1974.

(5) Where the assessee is a person other than a company or a co-operative society, the deduction under sub-section (1) shall not be admissible unless the accounts of the industrial undertaking or the business of the hotel for the previous year relevant to the assessment year for which the deduction is claimed have been audited by an accountant as defined in the Explanation below sub-section (2) of section 288 and the assessee furnishes, along with his return of income, the report of such audit in the prescribed form duly signed and verified by such accountant.

(6) Where any goods held for the purposes of the business of the industrial undertaking or the hotel are transferred to any other business carried on by the assessee, or where any goods held for the purposes of any other business carried on by the assessee are transferred to the business of the industrial undertaking or the hotel and, in either case, the consideration, if any, for such transfer as recorded in the accounts of the business of the industrial undertaking or the hotel does not correspond to the market value of such goods as on the date of the transfer, then, for the purposes of the deduction under this section, the profits and gains of the industrial undertaking or the business of the hotel shall be computed as if the transfer, in either case, had been made at the market value of such goods as on that date :

Provided that where, in the opinion of the Assessing Officer, the computation of the profits and gains of the industrial undertaking or the business of the hotel in the manner hereinbefore specified presents exceptional difficulties, the Assessing Officer may compute such profits and gains on such reasonable basis as he may deem fit.

Explanation.—In this sub-section, “market value” in relation to any goods means the price that such goods would ordinarily fetch on sale in the open market.

(7) Where it appears to the Assessing Officer that, owing to the close connection between the assessee carrying on the business of the industrial undertaking or the hotel to which this section applies and any other person, or for any other reason, the course of business between them is so arranged that the business transacted between them produces to the assessee more than the ordinary profits which might be expected to arise in the business of the industrial undertaking or the hotel, the Assessing Officer shall, in computing the profits and gains of the industrial undertaking or the hotel for the purposes of the deduction under this section, take the amount of profits as may be reasonably deemed to have been derived therefrom.

(8) [***]

(9) In a case where the assessee is entitled also to the deduction under section 80-I or section 80J in relation to the profits and gains of an industrial undertaking or the business of a hotel to which this section applies, effect shall first be given to the provisions of this section.

(9A) Where a deduction in relation to the profits and gains of a small-scale industrial undertaking to which section 80HHA applies is claimed and allowed under that section for any assessment year, deduction in relation to such profits and gains shall not be allowed under this section for the same or any other assessment year.

(10) Nothing contained in this section shall apply in relation to any undertaking engaged in mining.

(11) For the purposes of this section, “backward area” means such area as the Central Government may, having regard to the stage of development of that area, by notification in the Official Gazette, specify in this behalf :

Provided that any notification under this sub-section may be issued so as to have retrospective effect to a date not earlier than the 1st day of April, 1983.

124. The provision of section 10AA reads as under:

Special provisions in respect of newly established Units in Special Economic Zones.

10AA. (1) Subject to the provisions of this section, in computing the total income of an assessee, being an entrepreneur as referred to in clause (j) of section 2 of the Special Economic Zones Act, 2005, from his Unit, who begins to manufacture or produce articles or things or provide any services during the previous year relevant to any assessment year commencing on or after the 1st day of April, 2006, but before the first day of April, 2021, the following deduction shall be allowed—

(i) hundred per cent of profits and gains derived from the export, of such articles or things or from services for a period of five consecutive assessment years beginning with the assessment year relevant to the previous year in which the Unit begins to manufacture or produce such articles or things or provide services, as the case may be, and fifty per cent of such profits and gains for further five assessment years and thereafter;

(ii) for the next five consecutive assessment years, so much of the amount not exceeding fifty per cent of the profit as is debited to the profit and loss account of the previous year in respect of which the deduction is to be allowed and credited to a reserve account (to be called the “Special Economic Zone Re-investment Reserve Account”) to be created and utilized for the purposes of the business of the assessee in the manner laid down in sub-section (2).

Explanation.—For the removal of doubts, it is hereby declared that the amount of deduction under this section shall be allowed from the total income of the assessee computed in accordance with the provisions of this Act, before giving effect to the provisions of this section and the deduction under this section shall not exceed such total income of the assessee.]

(2) The deduction under clause (ii) of sub-section (1) shall be allowed only if the following conditions are fulfilled, namely :—

(a) the amount credited to the Special Economic Zone Re-investment Reserve Account is to be utilised—

(i) for the purposes of acquiring machinery or plant which is first put to use before the expiry of a period of three years following the previous year in which the reserve was created; and

(ii) until the acquisition of the machinery or plant as aforesaid, for the purposes of the business of the undertaking other than for distribution by way of dividends or profits or for remittance outside India as profits or for the creation of any asset outside India;

(b) the particulars, as may be specified by the Central Board of Direct Taxes in this behalf, under clause (b) of sub-section (1B) of section  10A have been furnished by the assessee in respect of machinery or plant along with the return of income for the assessment year relevant to the previous year in which such plant or machinery was first put to use.

(3) Where any amount credited to the Special Economic Zone Re-investment Reserve Account under clause (ii) of sub-section (1),—

(a) has been utilised for any purpose other than those referred to in sub­section (2), the amount so utilised; or

(b) has not been utilised before the expiry of the period specified in sub-clause (i) of clause (a) of sub-section (2), the amount not so utilised, shall be deemed to be the profits,—

(i) in a case referred to in clause (a), in the year in which the amount was so utilised; or

(ii) in a case referred to in clause (b), in the year immediately following the period of three years specified in sub-clause (i) of clause (a) of sub­section (2), and shall be charged to tax accordingly :

Provided that where in computing the total income of the Unit for any assessment year, its profits and gains had not been included by application of the provisions of sub-section (7B) of section 10A, the undertaking, being the Unit shall be entitled to deduction referred to in this sub-section only for the unexpired period of ten consecutive assessment years and thereafter it shall be eligible for deduction from income as provided in clause (ii) of sub­section (1).

Explanation.—For the removal of doubts, it is hereby declared that an undertaking, being the Unit, which had already availed, before the commencement of the Special Economic Zones Act, 2005, the deductions referred to in section 10A for ten consecutive assessment years, such Unit shall not be eligible for deduction from income under this section :

Provided further that where a Unit initially located in any free trade zone or export processing zone is subsequently located in a Special Economic Zone by reason of conversion of such free trade zone or export processing zone into a Special Economic Zone, the period of ten consecutive assessment years referred to above shall be reckoned from the assessment year relevant to the previous year in which the Unit began to manufacture, or produce or process such articles or things or services in such free trade zone or export processing zone :

Provided also that where a Unit initially located in any free trade zone or export processing zone is subsequently located in a Special Economic Zone by reason of conversion of such free trade zone or export processing zone into a Special Economic Zone and has completed the period of ten consecutive assessment years referred to above, it shall not be eligible for deduction from income as provided in clause (ii) of sub-section (1) with effect from the 1st day of April, 2006.

(4) This section applies to any undertaking, being the Unit, which fulfils all the following conditions, namely:—

(i) it has begun or begins to manufacture or produce articles or things or provide services during the previous year relevant to the assessment year commencing on or after the 1st day of April, 2006 in any Special Economic Zone;

(ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence:

Provided that this condition shall not apply in respect of any undertaking, being the Unit, which is formed as a result of the re­establishment, reconstruction or revival by the assessee of the business of any such undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section;

(iii) it is not formed by the transfer to a new business, of machinery or plant previously used for any purpose.

Explanation.—The provisions of Explanations 1 and 2 to sub-section (3) of section 80-IA shall apply for the purposes of clause (iii) of this sub-section as they apply for the purposes of clause (ii) of that sub-section.

(5) Where any undertaking being the Unit which is entitled to the deduction under this section is transferred, before the expiry of the period specified in this section, to another undertaking, being the Unit in a scheme of amalgamation or demerger,—

(a) no deduction shall be admissible under this section to the amalgamating or the demerged Unit, being the company for the previous year in which the amalgamation or the demerger takes place; and

(b) the provisions of this section shall, as they would have applied to the amalgamating or the demerged Unit being the company as if the amalgamation or demerger had not taken place.

(6) Loss referred to in sub-section (1) of section 72 or sub-section (1) or sub­section (3) of section 74, in so far as such loss relates to the business of the undertaking, being the Unit shall be allowed to be carried forward or set off.

(7) For the purposes of sub-section (1), the profits derived from the export of articles or things or services (including computer software) shall be the amount which bears to the profits of the business of the undertaking, being the Unit, the same proportion as the export turnover in respect of such articles or things or services bears to the total turnover of the business carried on by the undertaking:

Provided that the provisions of this sub-section [as amended by section 6 of the Finance (No. 2) Act, 2009 (33 of 2009)] shall have effect for the assessment year beginning on the 1st day of April, 2006 and subsequent assessment years.

(8) The provisions of sub-sections (5) and (6) of section 10A shall apply to the articles or things or services referred to in sub-section (1) as if—

(a) for the figures, letters and word “1st April, 2001”, the figures, letters and word “1st April, 2006” had been substituted;

(b) for the word “undertaking”, the words “undertaking, being the Unit” had been substituted.

(9) The provisions of sub-section (8) and sub-section (10) of section 80-IA shall, so far as may be, apply in relation to the undertaking referred to in this section as they apply for the purposes of the undertaking referred to in section 80-IA.

(10) Where a deduction under this section is claimed and allowed in respect of profits of any of the specified business, referred to in clause (c) of sub­section (8) of section 35AD, for any assessment year, no deduction shall be allowed under the provisions of section 35AD in relation to such specified business for the same or any other assessment year.

Explanation 1.—For the purposes of this section,—

(i) “export turnover” means the consideration in respect of export by the undertaking, being the Unit of articles or things or services received in, or brought into, India by the assessee but does not include freight, telecommunication charges or insurance attributable to the delivery of the articles or things outside India or expenses, if any, incurred in foreign exchange in rendering of services (including computer software) outside India;

(ii) “export in relation to the Special Economic Zones” means taking goods or providing services out of India from a Special Economic Zone by land, sea, air, or by any other mode, whether physical or otherwise;

(iii) “manufacture” shall have the same meaning as assigned to it in clause (r) of section 2 of the Special Economic Zones Act, 2005;

(iv) “relevant assessment year” means any assessment year falling within a period of fifteen consecutive assessment years referred to in this section;

(v) “Special Economic Zone” and “Unit” shall have the same meanings as assigned to them under clauses (za) and (zc) of section 2 of the Special Economic Zones Act, 2005.

Explanation 2.—For the removal of doubts, it is hereby declared that the profits and gains derived from on site development of computer software (including services for development of software) outside India shall be deemed to be the profits and gains derived from the export of computer software outside India.

125. In this regard we note that section 80HH with which the honourable Supreme Court was concerned with, provided that where the gross total income of the assessee includes any profits and gains derived from an industrial undertaking, or the business of the hotel to which this section applies, there shall in accordance with an subject to the provisions of this section be allowed in computing the total income of the assessee deduction from such profits and gains of an amount equal to 20% thereof.

126. The provision of section 10 AA provides that in computing the total income of an assessee following deduction shall be allowed –…………. Percent of profits and gains derived from exports.

127. From the above it is amply clear that the language of section 80 HH and 10 AA are pari materia in as much as both the section provides that in computing the total income of the assessee deduction shall be allowed at certain percentage of profit and gains derived from….

128. Now it was the meaning of above referred “profit and gains” derived that honourable Supreme Court expounded that the same refers to profits which are commercial profit and without deducting the depreciation and investment allowance as per the income tax act.

129. Thus the contention of the learned counsel of the assessee that languages of both the above section are pari materia is to be accepted. The submission of the learned departmental representative that the languages are different is not at all sustainable in light of the above said discussion. The distinction brought out by the learned departmental representative is not based upon a proper and full reading of the concerned section. The suggestion of the learned departmental representative that section 80 HH does not deal with profit and gains derived is totally fallacious. The term derived has been very much used and the same in facts controls the provision of section 80 HH. Hence learned departmental representative submission in this regard is not sustainable.

130. The submission of the learned departmental representative and the stand of the revenue will succeed only when the explanation below section 10 AA is considered as clarificatory. The said explanation inserted by Finance Act 2017 with effect from 1/4/18 provides that

“For the removal of doubts, it is hereby declared that the amount of deduction under this section shall be allowed from the total income of the assessee computed in accordance with the provisions of this act, before giving effect to the provisions of this section and the deduction under this section shall not exceed such total income of the assessee”.

131. In this regard it is noted that the provisions of section 80 AB are pari matereia with the provisions of this explanation. Section 80 AB reads as under:

“Deductions to be made with reference to the income included in the gross total income.

80AB. Where any deduction is required to be made or allowed under any section included in this Chapter under the heading “C.—Deductions in respect of certain incomes” in respect of any income of the nature specified in that section which is included in the gross total income of the assessee, then, notwithstanding anything contained in that section, for the purpose of computing the deduction under that section, the amount of income of that nature as computed in accordance with the provisions of this Act (before making any deduction under this Chapter) shall alone be deemed to be the amount of income of that nature which is derived or received by the assessee and which is included in his gross total income.”

132. This section was introduced by Finance Act 1980 with effect from 1.4.1981.

133. A bare reading of the above makes it clear that the explanation below section 10 AA and provision of section 80 AB are pari materia. Honourable Supreme Court in the case of Vijaya industries (supra) has expounded that provision of section 80 AB are prospective. In our considered opinion the ratio from the above honourable Supreme Court decision also applies here and accordingly the explanation below 10 AA has to be construed to be prospective. Hence the same cannot be invoked in determining the amount of deduction in the present assessment year. The learned departmental representative submission that the same is clarificatory accordingly fails.

134. Furthermore learned departmental representative submission that the decision of Vijaya industries was rendered without considering other decisions in this regard is not at all sustainable. This decision of honourable Supreme Court in the case of Vijaya Industries (supra) is a recent decision rendered by the larger bench of 3 of their Lordships from the honourable court. By no stretch of imagination it can be said that the subject dealt with by the elaborate speaking and reasoned recent order by this larger bench of the honourable Supreme Court is to be overlooked by referring to other decisions of lesser strength in judicial hierarchy. Hence the learned departmental representative submission that while rendering this decision other decisions were not referred is not at all acceptable. It is settled law that decision rendered by the honourable Supreme Court is the law of the land and is totally binding upon all the other courts and tribunals. Furthermore the submission of learned Departmental Representative that other decisions have not been considered by the Hon’ble Supreme Court is without any substance. Moreover, as cogently brought by learned Counsel of the assessee in para 9 of his submisison, the reference to decision of Plastibends India Ltd. (supra) here is not applicable. Suffice is to reiterate here that it dealt with a deduction provision under section 80IA, which falls under Chapter VI-A and is therefore covered by provisions of section 80AB (i.e. the deeming fiction to provide deduction only from income as included in the gross total income of the assessee). In the appellant’s case the deduction is claimed under section 1OAA of the Act which is not covered in section 80AB. That the legislature in its wisdom has not made 80AB applicable to section 10A/10AA/10B/10BA/ 10C of the Act, even though the said sections provide for deduction to be granted to an assessee. Secondly, deduction under section 10AA of the Act (prior to the amendment made by Finance Act 2017 by way of insertion of Explanation) was to be given at the stage of computing the gross total income of the eligible undertaking under Chapter IV of the Act i.e. prior to the commencement of the exercise to be undertaken under Chapter VI of the Act for arriving at the total income of the assessee from the gross total income. This has been held by the Supreme Court in the case of CTT v. Yokogawa India Ltd 391 ITR 274 (SC) in the context of section 10A of the Act. Plastiblends India deals with a situation of computation of deduction under Chapter VIA of the Act i.e. after computing the gross total income of the eligible undertaking under Chapter IV of the Act.

135. The other submission of the learned departmental representative is that section 10 AA is a part of chapter 3 and is essentially an exemption section. This the learned departmental representative himself contradicts by submitting that though post-amendment such an exemption is available in form of deduction from profit and gains derived from the undertaking. The reading of section 10AA clearly shows that the section itself provides that the same is a deduction provision. Honourable Supreme Court in the case of CIT versus Yokogawa India Ltd civil appeal No. 8498 of 2013 another’s had the occasion to consider this aspect. The honourable Supreme Court settled the issue by holding that the amendment in section 10A has altered the nature of the provision from providing exemption to providing for deductions. The deductions under section 10A are prior to the commencement of the exercise to be undertaking under chapter VI of the Act i.e aggregation of income and set off of loss. The above exposition is applicable on all fours here. Hence the submission of learned departmental representative year also doesn’t succeed. The last claim of The learned departmental representatives submission is that decision of honourable Supreme Court in the case of Commissioner of Customs (Import) versus Dilip Kumar and company and others Civil Appeal No. 3327 of 2007 dated 30/7/2018 provides that interpretation needs to be done strictly and in case of ambiguity the same needs to be interpreted in favour of the revenue. Here we find that it cannot be said that after the elaborate and well reasoned and speaking order rendered by the recent larger bench of three of their Lordships of the honourable Supreme Court there can be any scope of ambiguity in the interpretation of the meaning of word profit and gains with reference to which the discussion is being made here. Accordingly the submission of the learned departmental representative does not oxygenate the revenue’s stand.

136. Accordingly in the background of aforesaid discussion and the precedent from the Hon’ble Supreme Court we direct the assessing officer to grant the deduction under section 10 AA with reference to the profit and gains as determined by the honourable Supreme Court in the case of Vijay Industries (supra).

137. The without prejudice submission of the learned Counsel of the assessee does not need any separate adjudication. In fact by requesting for computation of profit without adjustment of the difference between depreciation as per Companies Act and Income Tax Act, the learned Counsel of the assessee is reiterating the computation of commercial profit exposition (without adjustment u/s. 32 and 32AB) of Hon’ble Supreme Court in the case of Vijay Industries (supra). Undoubtedly the catena of decisions referred by learned Counsel of the assessee is supportive of this proposition.

Transfer pricing issues :

138. Ground No. 7

7. Reference to the Transfer Pricing Officer (‘TPO’) under section 92CA of the Act.

7.1 On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming the action of Assessing Officer (‘AO’) in making a reference of the Appellant’s case to the TPO, without applying his mind and without recording his satisfaction, thereby making the entire process of referring the matter to the TPO as invalid;

7.2 On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming the action of the learned AO in not stating reasons to show that any of the conditions mentioned in clauses (a) to (d) of Section 920(3) of the Act were satisfied before making an adjustment to the total income of the Appellant;

7.3 On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming the action of AO of not demonstrating the motive of the Appellant to shift profits outside of India by manipulating the prices charged in its international transaction, either at the stage of invoking or initiating the assessment or at the stage of framing the assessment;

7.4 On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming the action of the learned AO in not demonstrating that the course of business between the Appellant and the closely connected person was so arranged that it produces to the Appellant more than ordinary profits which might be expected to arise in its eligible business;

7.5 On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming the action of the learned AO in not demonstrating the motive of the Appellant, to carry out transactions between an eligible business and other business, to reduce the taxable profits by manipulating the prices of its Specified Domestic transactions, either at the stage of invoking or initiating the assessment or at the stage of framing the assessment.

139. These are general grounds. Ground No.7.1 to 7.3 not been pressed by the learned counsel of the assessee. For ground No. 7.4 the learned counsel of the assessee placed reliance upon several case laws.

140. The proposition canvassed is that as mandated under section 80IA(10) the assessing officer/transfer pricing officer has failed to prove the existence of arrangement between the assessee and its related party. That there cannot be any adverse inference just because the assessee’s margins are better.

141. As regards ground No. 7.5, the learned counsel of the assessee submits that the same is general ground.

142. Upon careful consideration we find that these are general grounds and that they are with reference to other Transfer Pricing addition partly sustained by learned CIT appeals in subsequent grounds. We shall be dealing this issue’s subsequently as follows.

143. Ground No. 8

8 Guarantee Commission charged in respect of corporate guarantee provided on behalf of Associated Enterprises

8.1 The learned CIT(A) erred in confirming the order of the AO/ TPO in treating the guarantee given by Appellant to banks for giving loan to its Associated Enterprises as International Transaction within the meaning of Section 92B r.w.s 92(1) of the Act.

8.2 The learned CIT(A) erred in determining the ALP of guarantee commission at 0.38% p.a. in case of short term guarantees given by the Appellant on behalf of its Associated Enterprises instead of 0.30% determined by the Appellant for the period of January to March 2013 even after accepting the yield spread approach adopted by the Appellant

144. Ground No. 8.1 is not pressed by learned counsel of the assessee. In ground No. 8.2, the assessee submits that the same is covered in favour of the assessee by earlier decision of the ITAT including the order in the Miscellaneous application. That under the yield spread approach the guarantee commission cannot be static and it would keep changing on the basis of interest spread. That rate of commission was 0.3% of the period 1 January 2013 to 31 January 2013. We note that this has already been dealt by us in the revenues appeal here in above.

145. Ground No. 9

9. Availing of Business Support Services (‘BSS’) from RCITPL:

9.1 On the facts and in the circumstances of the case and in law, the learned AO erred in making and the learned CIT(A) erred in determining the arm’s length mark-up of 8.20% on the cost of the services without considering the mark-up of 5.90% as determined by the Appellant and proposing the transfer pricing adjustment of INR 3,40,64,984; ;

9.2 The learned CIT(A) erred in rejecting the comparable companies namely Cameo Corporate Services Limited, Neilsoft Limited and Goldmine Advertising Limited without providing any cogent reasons.

9.3 On the facts and in the circumstances of the case, the learned CIT(A) erred in confirming the action of the learned AO in cherry picking the comparable company namely Asian Business Exhibition & Conference Limited.

146. Brief facts of the case are that the AE- RCITPL has entered into an agreement with the assessee for provision of AE has provided BSS to the eligible business (Reliance Refinery SEZ) of the assessee for a service fee of cost plus a mark-up of 5% on cost of services. As per assessee, the BSS provided by RCITPL is a low end services and routine in nature. In order to render the service no special skill set or intangibles are involved while rendering the services.

147. As per assessee, the assessee has benchmarked the transaction by applying TNMM as the MAM and selecting AE as the tested party. Using the external database the assessee has selected the following comparables:

Sr.
No.
Company Name NCP (%)
1 Empire Industries 4.32
2 HGS Business Services Pvt. Ltd. 15.33
3 ICRA Management Consulting Services Ltd. 2.10
4 Spectrum Business Solutions Ltd. 1.82
Arithmetic Mean 5.90

The 5% margin earned by AE is within the tolerance range, hence it was contented that RIL Refinery SEZ is not making more than ordinary profits and the specified domestic transactions between RCITPL with RIL Refinery SEZ related to provision of Business Support Services were consistent with the arm’s length standard from Indian transfer pricing regulations perspective.

148. The TPO rejected the search process conducted by the assessee and conducted a fresh search process to determine the arm’s length mark-up of the transaction by applying TNMM. The TPO issued a show cause notice proposing to use the following comparable companies:-

Sr. No. Name of Comparable Company OP/OE(%)
1 BVG India Limited. 24.08
2 Axis Integrated Systems Limited. 36.30
3 Asian Business Exhibition &
Conferences Limited.
12.09
4 HGS Business Services Private Limited. 14.52
Average 21.75

149. The assessee vide letter dated 18 October 2016 gave reply to the show cause notice of the TPO, objecting to the comparables selected by the TPO. The TPO determined the arm’s length margin of 18.09% on cost and proposed an transfer pricing adjustment of INR 13,93,47,074/-. The comparables relied upon by the learned TPO are as under:

Sr. No. Name of comparable company NCP (%)
1 BVG India Limited 24.08
2 Asian Business Exhibition & Conferences Limited 12.09
Average 18.09

The assessee vide letter dated 6 December 2016 filed a rectification application with the TPO, requesting to rectify the margin of the alleged comparable company M/s. BVG India Limited from 24.08% to 22.49% (correct margin). The TPO recomputed the margin and revised it to 23.47%, accordingly the arm’s length margin was revised to 17.78% restricting the alleged adjustment to INR 13,60,47,029/-.

150. Upon the assessee’s appeal, the learned CIT(A) gave part relief by retaining some of the comparables. He held as under :-

“I have carefully perused the order of the TPO and the submissions made by the Appellant during the course of the Appellate proceedings and the findings are tabulated as under:

Name of the company Contention of the appellant Comments of CIT(A)
Empire Industries Ltd. The trading and indenting segment of the company is engaged in sales and service support of machines in metal forming, metrology, assembly and testing lines, welding, etc. and metal cutting tools for turning, milling, mill turn centers, boring, drilling, etc.. The company earns agency commission from the same. In addition, the company offers various equipment and related installation service support to manufacturers ports, oil and gas pipelines, power generation, refineries, petrochemicals and other industries. This segment is functionally comparable to that of the tested party. The other segment is engaged in developing, leasing, managing, and maintaining industrial real estate properties and also operates vending machines under the name ‘Grabbit, which vend food and non­food product The company has various business segments and low end business support service segment of trading and indenting is comparable with the business activity of the Appellant. The segmental audited accounts of the relevant segment is available and accordingly it can be reliably used for benchmarking analysis and is therefore accepted as comparables.
Cameo Corporate Services Limited The company is an established service provider, Providing business support services to a wide range of clients. Its main businesses are in the areas of Document Management, Medical Transcription, Data Conversion and Registry & Share Transfer. The TPO has not discussed. So no opinion can be given.
Neilsoft Limited The Company, along with its subsidiaries in USA, Germany and branch located in UK provides Software engineering services to its clients. The Company provides solutions across a range of engineering segments. The TPO has not discussed. So no opinion can be given.
Goldmine
Advertising
Limited
The company is engaged in service- oriented activities. Its revenue comprises of Space Media, Radio Advertising etc. The TPO has not discussed. So no opinion can be given.
BVG India Limited BVG India Limited is engaged in providing and undertaking facility management, mechanised, housekeeping, transportation, plant relocations, attendant services and labour supply. It also undertakes various projects for garden development, slum rehabilitation, landscaping, beautification projects, engineering and other contracts.

Three reportable segments are:

* Facility services The division is engaged in the business of mechanized housekeeping, transportation, labour  supply, facility management etc.

* Facility projects The division is engaged in the business of horticultural and  landscaping  contracts, plant  relocation contracts, etc.

* Engineering projects The division is engaged in the business of rural electrification contracts.

The comparable company is engaged in diverse business activity. It is engaged in high end infrastructure activities, along with other low end services. However, the segmental accounts of the company is not available to compute the margins earned in each segments. Accordingly, the comparable company is rejected.
Asian Business Exhibition & Conference Limited No submissions made .not disputed in appeal hence accepted.

As regards Cameo Corporate Services Ltd, Neilsoft Limited and Goldmine Advertising Limited the same are not discussed in TPOs order hence not considered. ‘Considering the above the arm’s length price is as follows:

S.No. Comparable company %
1 Empire Industries Ltd. 4.32
2 Asian Business Exhibition & Conferences Ltd. 12.09
Arm’s length price 8.20

151. Against this order assessee as well as Revenue both are in appeal. The revenues ground is that learned CIT appeals erred in including the comparable M/S Empire industries Ltd and another ground is that learned CIT appeals erred in excluding the comparable M/S BVG India Ltd. and M/s. Alsec Technologies.

152. The learned counsel of the assessee states that assessee is aggrieved by the non inclusion of following comparable :

  • Cameo Corporate Services Ltd.,
  • Neilsoft Limited
  • Goldmine Advertising Limited.

153. In this regard, the learned counsel of the assessee relied upon several case laws. It is the further contention of the learned counsel of the assessee that Cameo Corporate Services Ltd. and Goldmine Advertising Limited, need to be considered for benchmarking purposes, as they are providing business support services and that the entire object of Transfer Pricing studies to determine the ALP of transaction. Therefore, if an assessee mistakenly includes and/or excludes a company from the list of comparables it is not irrevocable or irreversible. The learned counsel of the assessee also submits that assessee is aggrieved that learned CIT (A) erred in confirming the action of the assessing officer in cherry picking the non-comparable company namely Asian Business Exhibition and Conference Ltd. It is the submission that this comparable is to be rejected as the employee cost total operational cost ratio is only 12.83% and that of the assessee’s 66.6%. That low cost of the employees cost implies that company would not be providing services by employing its own sources and is following a different business model. Hence, the same is functionally not comparable. Further, the learned counsel of the assessee submits that from the website it is observed that the company is engaged in the business of exhibitions such as trade fair organizer, networking events, conferences, activation, road shows, digital and publications entail completely different set off employee skills and are not comparable.

154. As regards the revenues grounds the learned counsel of the assessee relies upon assessee submission before the learned CIT(appeals). The learned counsel submits that the learned CIT(appeals) has appreciated the submissions and given a finding of facts which have not been controverted by the revenue.

155. Upon careful consideration as regards the revenues grounds relating to comparables namely empire industries Ltd and BVG India Ltd, we note that assessee has given cogent submissions before the learned CIT(appeals). The learned CIT(appeals) has duly appreciated the submissions and found the voracity thereof. The revenue has not produced any cogent submission rebutting the finding of the learned CIT(appeals). As regards Alsec Technologies the revenue’s ground is misplaced as TPO himself has excluded it from final comparable. Moreover, as pointed out by learned Counsel of the assessee that the ITAT in assessee’s own case for A.Y. 2012-13 has held that this is not a valid comparable to assessee. Hence the grounds raised by the revenue in this regard are dismissed.

156. As regards assessee’s plea of inclusion of cameo corporate services, neilsoft ltd and goldmine advertising Ltd, we find that these companies were not selected by the assessee itself in the comparable analysis. Therefore there was no occasion for the Transfer Pricing officer discuss or to include them. The learned CIT(appeals) is therefore not wrong in holding that there is no discussion by assessing officer in this regard. However since the assessee is also objecting to the inclusion of the only other comparable that is Asian business exhibition and conference Ltd on account of substantial variation in employee cost, it will be in fitness of things these comparables are also considered by transfer pricing officer. As regards the objection to Asian business exhibition and conference Ltd. is concerned, the objection appears to be genuine. The huge variation in employee cost does point out the lack of comparability. However the AO may examine the factual aspect in this regard. Hence the issue stands remitted the file of Transfer Pricing officer. The TPO should consider the issue afresh in light of our observations as above. Needless to add assessee should be granted adequate opportunity of being heard.

157. Ground No. 10 reads as under:

10. Inter-unit transfer of Power:

10.1 On the facts and in the circumstances of the case and in law, the learned AO erred in making and the learned CIT(A) erred in confirming the transfer pricing adjustment of INR 32,45,02,729 in relation to the transaction of inter-unit transfer of Power from the Captive Power Plant (‘CPP’) to Other Manufacturing Division (‘OMD’) by computing the arm’s length rate at INR 6.155 per KHW without considering INR 6.45 per KHW as determined by the Appellant;

10.2 On the facts and in the circumstances of the case and in law, the learned AO erred in reducing and the learned CIT(A) erred in confirming the reduction of deduction by INR 17,52,72,214 claimed under section 80IA of the Act;

10.3 On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming the action of the learned AO in rejecting the economic analysis or the benchmarking analysis of the Appellant, on the application of internal Comparable Uncontrolled Price Method by the Appellant, without providing any cogent reasons;

10.4 On the facts and in the circumstances of the case, the learned CIT(A) erred in confirming the action of the learned AO in accepting the economic analysis of the learned TPO without providing cogent reasons and specifically:

The learned AO and CIT(A) failed to appreciate that the turnover of the comparable company is more than 10 times that of the tested transaction;

The learned AO and CIT(A) failed to appreciate that the level of market of the comparable transaction adopted by the learned TPO, is different as compared

with the level of market in which appellant (manufacturing units) operate;

The learned AO and CIT(A) erred by relying on non-contemporaneous data, order dated 29 April 2014, to determine the arm’s length rate.

158. Brief facts of the case are that the assessee has a Manufacturing Division at Hazira (‘HMD’). The HMD is a multi-product, fully integrated complex, manufacturing a wide range of petrochemicals, polymers, polyesters and polyester intermediates. The complex comprises of a Naphtha cracker feeding downstream petrochemical, fiber intermediates and polyester plants. The uninterrupted power required for the process plants at HMD is produced by CPP GTG VIII, CPP GTG IX and STG – II. All these three power units claim income based deduction under section 80IA of the Act. The assessee also has Manufacturing Division at Dahej (‘DMD’). DMD operates an ethane/propane recovery unit, a gas cracker, a caustic chlorine plant and 4 downstream plants, which manufacture polymers and fiber intermediates. For the uninterrupted power supply to Dahej Division, RIL is operating power unit in Dahej.

159. The manufacturing activity in both the aforesaid manufacturing units I.e. HMD and DMD is highly complex and processes are highly integrated requiring uninterrupted Power supply for its manufacturing activities. These units draws Power from the captive power units, in case these units require additional Power the same is drawn from the third parties i.e., Dakshin Gujarat Vij Company Limited. Therefore these two manufacturing units, in domestic tariff area, draws Power from these four Power generating units.

160. The aforesaid four power generating units have transferred Power to other units of the assessee for the consideration which is tabulated below:-

Transferring Unit Receiving Unit Amount in INR
CPP GTG VIII – Hazira RIL Hazira Complex 1,59,44,24,817
CPP GTG IX – Hazira RIL Hazira Complex 1,48,71,16,083
STG – II – Hazira RIL Hazira Complex 82,51,56,395
CPP II – Gandhar Complex RIL Gandhar/Dahej Complex 3,17,29,70,085

The power units have supplied power to other manufacturing units of RIL @ 6.45 per KWH. The TPO held that this transaction was reported as specified domestic transaction under Section 92BA(iii) r.w.s 80-1A(8) of the Act. The assessee has benchmarked the above transaction on application of CUP method as MAM and adopting an internal comparable where by the electricity rate at which the Power was sold by Dakshin Gujarat Vij Company Limited (‘DGVCL’) to the Manufacturing Division. The DMD unit pays to third Party i.e. DGVCL at the rate of INR 6.45 KHW. Hence, the transaction is at arm’s length.

161. The learned TPO issued show-cause notice (SRN) dated 14 October 2016 as to why the profitability or the deduction claimed by the aforesaid CPP should not be restricted to the profits/rate -computation prescribed in the Notification No. I-7/145(160)/2008-CERC dated 19 January 2009 issued by the Central Electricity Regulatory Commission, New Delhi. The assessee filed reply to the SCN issued by the TPO vide its letter dated 24 October 2016, the TPO accepted the response filed by the Appellant and no adjustment was proposed at this stage by the learned TPO. The learned TPO again issued a show cause notice during the course of hearing held on 27 October 2016, wherein the learned TPO has proposed to adopt the rate at which Power is purchased from Gujarat State Electricity Board and proposed the arm’s length price of INR 4.70 per unit.

162. The assessee filed a detailed reply vide letter dated 28 October 2016, objecting to the proposed methodology of determining the arm’s length price of the learned TPO. The learned TPO rejected the analysis of the assessee and determined the ALP of the transaction of inter-unit transfer of Power from the CPP to DMD at INR 6.155 per KHW and proposing an adjustment of INR 32,45,02,729/-.

163. Upon assessee’s appeal, the learned CIT(A) decided the issue against the assessee by holding as under:

“I have carefully perused the order of the TPO and the submissions made by the Appellant during the course of the Appellate proceedings. Since, the grounds of appeal are interlinked, for the purpose of adjudication, all the grounds of appeals are merged and discussed below.

The appellant for its manufacturing units have availed power from its power generating units i.e. CPP GTG VII, CPP GTG IX and STG-II at Rs, 6.45 per KWH. All these units are claiming deduction u/s. 80IA of IT Act, 1961.The appellant has also availed power from a party DGVCL at Rs.6.45 per KWH. The transaction in this case is supply of power between the appellant and the power supply units. The appellant has considered manufacturing unit as a tested party and contends that as per CUP method transaction is at arm’s length as rate charged by the above four power units and the third party is same.

The AO however noted that the third party i.e. DGVCL has actually purchased power at Rs. 3.92 per KWH and considered this for benchmarking the transactions. However TPO in para 3.3.22 agreed with the submission of the appellant that the actual purchase rate is 4.70 per KWH. The appellant has further contended that only gas based plants can be taken for comparison and the TPO accordingly has considered only gas based plant and arrived at ALP of Rs. 6.155 per KWH and made adjustments accordingly.

Detailed submissions of the appellant has been reproduced by the AO in the asst. order. The submission during appellate proceedings is also reproduced above. The TPO has discussed provision of section 92BA, 92K, 10B(2) and 80IA (B) of IT act 1961 in para 3,3.3 in his order. The TPO in para 3.3.8 contended that the power generating units should be noted as the tested party and should be tested against similar comparable with similar FAR. The power generating units do not conduct any distributing activity and therefore cannot be compared with the price charged by the distributing company DGVCL to the end customer. Therefore for fulfilling the object of 80IA through the mechanism of TP provisions the transaction should be benchmarked as done by the TPO. Reliance is also placed on the decision in the case of CIT Vs ITC Ltd 64 taxmann. Com 214 (Cal) in appeal No. 425 of 2006 dt. 1.06.2015 wherein the amended provisions of sec 80IA(8) was considered. The facts are similar. The appellant has also relied on the decisions in the case of Pr. CIT Vs Gujarat Alkaline and Chemicals, CIT Vs Shah Alloys (whereon the SLP of revenue is dismissed) and its own case in AY 2005-06 and ay 2006-07. However, as mentioned by TPO the decision were rendered for determining the fair market value for the propose of sec 80IA(8) as it existed. Therefore considering the entirety of the facts and decision in the case of CITVs ITC Ltd this ground of appeal is dismissed.

167. Against this order, the assessee is in appeal before us.

168. We have heard both the counsel and perused the records. Learned counsel of the assessee contended that assessee has benchmarked the transaction using internal cup by considering the manufacturing unit as a tested party and comparing the inter unit power rate at which the power was purchased by the manufacturing units from the third-party DGVC. That in the case of Reliance Industries Ltd for assessment year 2005-06 to assessment year 2012-13 the ITAT Mumbai has upheld that the power rate charged by DGVCL for determining the market rate of unit rate of electricity.

169. Furthermore it is the contention that Hon’ble High Court has rejected the appeal of the revenue for assessment year 2006-07 and has discussed non applicability of judgement of Hon’ble Calcutta High Court in the case of CIT vs. ITC Ltd.

170. Learned counsel of the assessee further pleads that he is relying upon the decision of honourable Supreme Court in the case of Radha Soami Satsang vs. CIT (1992) 193 ITR 321 (SC), for the proposition that on the ground of consistency also DG VCL rate should be accepted. It is further contended that market value of electricity supplied by the CPP unit to the other unit would be the same as charged by the Gujarat Electricity Board to the end consumers. In this regard learned Counsel of the assessee also referred to ITAT decision and Hon’ble Gujarat High Court decision. It is further contention that honourable Supreme Court has also rejected the special leave decision filed by the Commissioner of income tax, Ahmedabad and the principle down by the honourable High Court has attained finality in favour of the assessee.

171. With regard to ground No. 10.4 it is the contention of the learned counsel of the assessee that he will not press this ground if ground No. 10.3 is decided in favour of the assessee.

172. In this ground the assessee contends that assessee’s CPP is supplying power to the manufacturing unit that is the customer and learned Transfer Pricing officer has applied rate at which power generating unit is selling to power distribution which will then sell to the end consumer. Hence the level of market is different.

173. It is further contended that rate which electricity is supplied by GEB to the end consumer is to be considered as the market rate at which the captive power plant can sell power to other unit.

174. Upon careful consideration we find that for the purpose of 80IA(8), the rate of electricity as taken by the assessee has been consistently approved by the ITAT and Hon’ble Jurisdictional High Court also. We may refer here the provisions of section 80IA(8):-

Deductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development, etc.

80-IA.

(8) Where any goods or services held for the purposes of the eligible business are transferred to any other business carried on by the assessee, or where any goods or services held for the purposes of any other business carried on by the assessee are transferred to the eligible business and, in either case, the consideration, if any, for such transfer as recorded in the accounts of the eligible business does not correspond to the market value of such goods or services as on the date of the transfer, then, for the purposes of the deduction under this section, the profits and gains of such eligible business shall be computed as if the transfer, in either case, had been made at the market value of such goods or services as on that date:

Provided that where, in the opinion of the Assessing Officer, the computation of the profits and gains of the eligible business in the manner hereinbefore specified presents exceptional difficulties, the Assessing Officer may compute such profits and gains on such reasonable basis as he may deem fit.

Explanation.—For the purposes of this sub-section, “market value”, in relation to any goods or services, means—

(i) the price that such goods or services would ordinarily fetch in the open market; or

(ii) the arm’s length price as defined in clause (ii) of section 92F, where the transfer of such goods or services is a specified domestic transaction referred to in section 92BA.

175. The rate charged by the assessee has been duly accepted by the Tribunal and upheld by the Hon’ble Jurisdictional High Court in the case of CIT vs. M/s. Reliance Industries Ltd. (in ITA No. 1056 of 2016 dated 30.01.2019), which reads as under:

4. Question (c) pertains to the dispute between the department and the assessee regarding the rate at which the electricity generated by one unit of the assessee-company and provided to the another be valued. The assessee contended that such valuation should be at the rate at which the electricity distribution companies are allowed to supply electricity to the consumers. The revenue on the other hand argues that the appropriate rate should be the rate at which the electricity is purchased by the distribution companies from the electricity generating companies.

5. This controversy arose in the background of the fact that the assessee had set up a captive power generating unit and claimed deduction under Section 80IA of the Income Tax Act, 1961 (“the Act” for short) in respect of the profits arising out of such activity. Obviously, therefore the attempt on the part of the assessee was to claim larger profit under the unit which was eligible for such deduction as against this, attempt of the revenue would be see that the ineligible unit shows greater profit.

6. The Tribunal in the impugned judgment extracted extensively from the order of CIT (Appeals) and independent reasons for confirming the same. In such order CIT (Appeals) had placed reliance on an earlier judgment of the Tribunal in case of Reliance Infrastructure Limited Vs. Addl. CIT, Range 1(1), Learned counsel for the assessee had placed on record a copy of the judgment of the Tribunal in case of Reliance Infrastructure limited. In such judgment an identical issue came up for consideration. The Tribunal by detailed judgment had held and observed as under:-

“44. In the given facts and circumstances of the case, we are of the view that the profits of the business of generation of power worked out by the Assessee on the basis of the price that it paid to TPC for purchase of power continues to be the best basis even after the order of MERC and therefore the same has to be accepted as was done in the past and as approved by the ITAT in Assesssee’s case. We therefore dismiss ground.”

7. Counsel for the assessee pointed out that the judgment of the Tribunal in case of Reliance Infrastructure limited (supra) was carried in appeal by the revenue before the High Court in Income Tax Appeal No.2180 of 2011, such appeal was dismissed making following observations:-

“6. As far as question (d), namely, the claim relating to purchase price from Tata Power Company is concerned and that was for the deduction under Section 80IA, the ITAT in paragraph 21 onwards has noted the factual findings and also referred to the order of the Maharashtra Electricity Regulatory Authority (for short “MERC”). Paragraph 36 set outs as to how the claim arose. The claim has been considered in the light of Section 80IA and particularly proviso and explanation thereto. The Tribunal eventually held that till the Assessment Year 2005-2006, the Revenue considered the rate at which the power was purchased by the Assessee from Tata Power Company as market value. There is nothing brought on record as to how the rate determined by the MERC is the true market value. The Assessee gave explanation that the rates determined by the MERC do not reflect the correct market rate. The finding is that the mode of computation and deduction under Section 80IA requires no deviation from the past. The findings of fact and to be found in paragraphs 42 to 50 also reflect that the very issue came up for consideration for the Assessment Year 2003-2004. For the reasons assigned by the ITAT and finding that the attempt is to seek reappreciation and reappraisal of the factual data that we come to a conclusion that even question (d) as framed is not a substantial question of law.”

8. Thus, the issue at hand had been examined by this Court on earlier occasion and the view of the Tribunal under similar circumstances was approved.

9. Additionally, we also notice that similar issue came up for consideration before Chhattisgarh High Court in case of Commissioner of Income-tax, Raipur Vs. Godawari Power & Ispat Limited1, in which the Court held and observed as under:

“31. The market value of the power supplied to the Steel-Division should be computed considering the rate of power to a consumer in the open market and it should not be compared with the rate of power when it is sold to a supplier as this is not the rate for which a consumer or the Steel-Division could have purchased power in the open market. The rate of power to a supplier is not the market rate to a consumer in the open market. 32. In our opinion, the AO committed an illegality in computing the market value by taking into account the rate charged to a supplier. it should have been compared with the market

10. Gujarat High Court in case of Principal Commissioner of Income-Tax Vs. Gujarat Alkalies and Chemicals Ltd. also had occasion to examine such an issue. It referred to earlier order in case of Asst. CIT Vs. Pragati Glass Works Pvt. Ltd.2 in which following observations were made:-

“7. To our mind, Tribunal has committed no error. Assessing Officer and CIT(Appeals) while adopting Rs.4.51 per unit as the value of electricity generated by eligible unit of assessee and supplied through its non eligible unit only worked out cost of such electricity generation. In fact CIT(Appeals) in terms recorded that Rs.4.51 was computed as the reasonable value of the electricity generated by eligible unit of assessee. This amount included Rs.4.17 per unit which was the cost of electricity generation and Rs.0.34 per unit which was duty paid by the assessee to GEB for such power generation. Thus the sum of Rs.4.51 per unit only represented the cost of electricity generation to the assessee. In Section 80IA(8) of the Act what is required to be ascertained is the market value of the goods transferred by the eligible business, when such transfer is by eligible business to another non eligible business of the same assessee and the consideration recorded in the accounts of the eligible business does not correspond to market value of such goods. Term “Market Value” is further explained in explanation to said sub-section to mean in relation to any goods or services, price that such goods or services will ordinarily fetch in the open market. To our mind sum of Rs.4.51 per unit of electricity only represented cost of electricity generation to the assessee and not the market value thereof. It is not in dispute that the GEB charged Rs. 5 per unit for supplying electricity to other industries including non eligible unit of the assessee itself. Tribunal therefore, while adopting the said base figure and excluding excise duty therefrom to work out Rs. 4.90 as the market value of the electricity generated by the assessee, to our mind, committed no error. It can be easily seen that if the assessee were to supply such electricity or was allowed to do so in the open market, surely it would not fetch Rs. 4.51 per unit but Rs. 5 per unit as was being charged by GEB. Since the excise duty component thereof would not be retained by the assessee, Tribunal reduced the said figure by the nature of excise duty and came to the figure of Rs. 4.90 to ascertain the market value of electricity generated by the eligible unit and supplied to non eligible business of the assessee. No error was committed by the Tribunal. No question of law therefore, arises. Tax Appeal is dismissed.”

7. Judgment of Calcutta High Court in case of Commissioner of Income-tax, Kolkata – III Vs. ITC Ltd. was also brought to our notice in which the said High Court has taken a different stand. However, since the issue has already been examined by this Court earlier and in view of the decisions of the Chhattisgarh and Gujarat High Court, we see no reason to entertain this question.”

176. Here we note that the assessing officer while expounding that rate duly approved under 80 IA(8) is to be changed for Transfer Pricing purposes has placed reliance upon honourable Calcutta High Court decision in the case of ITC Ltd. We find that the view of TPO and learned CIT(appeals) also by relying upon Calcutta High Court decision in ITC Ltd that market value basis duly approved by the honourable Bombay High Court shall change for the purpose of domestic transfer pricing regimen here is not at all sustainable. The reliance by learned CIT(appeals) on honourable Calcutta High Court decision in the case of ITC Limited supra has been distinguished by the honourable jurisdictional High Court. The honourable jurisdictional High Court has chosen not to follow the Calcutta High Court decision. Hence in our considered opinion, the authorities below have misled themselves by relying upon Calcutta High Court decision in this regard. This decision has not found favour with honourable jurisdictional High Court.

177. Thus we find that the view of the authorities below that the definition of the market value shall change for the purpose of domestic transfer pricing regimen is not at all sustainable. Accordingly, in the background of the aforesaid discussion and precedent, we set aside the orders of the authorities below and decide issue in favour of the assessee.

178. In the result, these appeals stand partly allowed.

Order pronounced under Rule 34(4) of the ITAT Rules by placing the result on notice board on 10.11.2020.

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