TaxTMI 
TaxTMI 
2017 (10) TMI 588
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....urn on 30.11.2011 declaring loss of Rs. 313.18 crore. Thereafter, a revised return was filed on 26.03.2013 declaring income of Rs. 417.20 crore under the normal provisions and Rs. 3505.76 crore under MAT provisions as per section 115JB of the Act. On perusal of the assessee's Annual accounts, it was noticed by the AO that the assessee made investments in shares/mutual funds and earned exempt dividend income of Rs. 64,76,90,189/-. The assessee offered suo motu disallowance u/s14A of the Act to the tune of Rs. 18 lakh as the amount of expenses incurred in relation to the exempt income. The assessee was asked to furnish the details and basis of quantum of the disallowance. The assessee furnished its reply which has been reproduced on pages 4 and 5 of the assessment order. It was tendered that it raised funds through Initial Public Offer (IPO) in December, 2006. Idle funds realized from the IPO and pending utilization for the projects were used in short-term risk free liquid investments. It was further explained that up to the Financial year 2008-09, the assessee had not borrowed any funds; during the Financial year 2009-10, the assessee company borrowed Rs. 1345 crore from State Bank ....
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....hat a query was raised about the exempt dividend income of Rs. 64.76 crore earned by the assessee and the amount of disallowance offered under Section 14A at Rs. 18 lakh. The assessee's reply has been reproduced in the assessment order and thereafter, the Assessing Officer proceeded to deal with the same on page 6 of his order as under: - "A further query has been raised on this issue on 30.01.2015 and 06.02.2015 wherein the AR of the assessee company was asked to furnish the working of disallowance under section 14A and 115JB since the details furnished so far was not found to be correct as per provision of section 14A of the IT Act, 1961. The AR of the assessee relied upon the submission made in his letter dated 12.01.2015 and also furnished working of expenses u/s 14A amounting to Rs. 13,35,108. The reply of the assessee has been considered carefully but not found to be correct. The assessee company has submitted in its reply that the company has relied upon the quotation receipt from the JM Financial Services Pvt. Ltd. to determine the amount of expenses relatable to earn this dividend income on the basis of fee to be charged for management of surplus funds in to vario....
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....was once again required to furnish the working of disallowance under section 14A. The assessee furnished working of expenses u/s 14A having regard to its accounts computing the amount of disallowance at Rs. 13,35,108. The same was again considered carefully but not found to be correct as the assessee : 'did not consider various aspects of indirect expenses in the shape of establishment in addition to direct expenses'. He further found that : 'There are lot of cost factors involved in investment in shares/mutual funds', which were not considered by the assessee. In the next para, the Assessing Officer dealt with the claim of the assessee about the not making any investment in shares out of borrowed funds. He placed reliance on the judgment of Hon'ble jurisdictional High Court in the case of CIT Vs. Abhishek Industries [2006] 156 Taxman 257 (P&H) to negative the assessee's claim on this issue as well. That is how, he did not find correct the assessee's working of disallowance. Thereafter, the provisions of section 14A read with rule 8D were applied to determine the amount of expenditure in relation to income not includible in total income. 6. It is thus discernible from page 6 of ....
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....made to the tune of Rs. 2.40 crore. The assessee argued that no part of interest bearing funds had gone into investment in those two companies in respect of which the AO made disallowance of interest. It was also argued that income from operations of the company was Rs. 418.04 crore and the assessee had also raised capital of Rs. 7.90 crore, apart from receiving interest free deposit of Rs. 10.03 crore. The assessee submitted before the first appellate authority that the balance-sheet of the assessee adequately depicted that there were enough interest free funds at its disposal for making investment. The ld. CIT(A) got convinced with the assessee's submissions and deleted the addition. Before the Tribunal, it was contended on behalf of the Revenue that the shareholders' funds were utilized for the purchase of its assets and hence the assessee was left with no reserve or own funds for making investment in the sister concern. Thus, it was argued that the borrowed funds had been utilized for the purpose of making investment in the sister concern and the disallowance of interest was rightly called for. The Tribunal, on appreciation of facts, recorded a finding that the assessee had suf....
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.... the assessee to the bank was not justified. 9. Applying the above proposition in the context of section 14A, the Hon'ble Karnataka High Court in CIT & Anr vs. Microlabs (2016) 383 ITR 490 (Kar) has held that when investments are made from common pool and non-interest bearing funds are more than the investment in tax free securities, no disallowance of interest expenditure u/s 14A can be made. This view has been taken by following the judgment of the Hon'ble Bombay High Court in CIT vs. HDFC Bank Ltd. (2014) 366 ITR 515 (Bom). It is further observed that this issue is no more res integra in view of the recent judgment delivered by the Hon'ble Supreme Court in Godrej & Boyce Manufacturing Company Ltd. vs. DCIT (2017) 394 ITR 449 (SC), in which it has been held that when interest free funds in the form of share capital and reserves are more than investment, then no disallowance of interest can be made u/s 14A. 10. Adverting to the facts of the instant case, we find that the Assessing Officer has taken value of investments yielding exempt income at Rs. 1,179.96 crore. As against this, the assessees's share capital with the reserve and surplus at the close of the year....
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....1,07,56,90,703 Administrative expenses 1,96,86,30,968 Less: Company share in following expenses not related to earning dividend income -Legal & Professional services 62,99,47,521 -Contract Employee Charges 66,50,568 63,65,98,089 Total 2,40,77,23,582 Less: Directors' Salary (Refer Tax Audit Report) 23,59,48,525 Balance 2,17,17,75,057 No of Employees (support staff) 244 Cost per employee 89,00,717 Considering the number of transactions 15% cost of employee is considered Also Refer to Note 1 13,35,108 Note 1: Conservatively amount is very high as it includes salary of employee at very senior level and who are not directly or indirectly involved in investment portfolio management' 13. It can be seen from the above computation that the assessee took Staff cost at Rs. 107.56 crore and Administrative expenses at Rs. 196.86 crore. Thereafter, it reduced a sum or Rs. 63.65 crore towards Legal and professional ....
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....ind that the same is merely a quotation and does not satisfy prescription of section 14A(2) being actual expenditure incurred by the assessee for earning exempt income, and the satisfaction of the Assessing Officer 'having regard to the accounts of the assessee'. Moreover, this quotation is only for handling the surplus funds 'in line with your investment policy guidelines'. It transpires that even as per this quotation, investment policy guidelines have to be drawn by the assessee only, which again entails costs. We, therefore, hold that the assessee's calculation of disallowance under section 14A of the Act read with Rule 8D(2)(iii) has been rightly rejected by the Assessing Officer. 15. At this juncture, it is relevant to note the ratio decidendi of the judgment of the Hon'ble jurisdictional High Court in Punjab Tractors Ltd. Vs. Commissioner of Income Tax, (2017) 78 taxmann.com 65 (P&H). In this case, the disallowance was made by the Assessing Officer under section 14A read with rule 8D. The assessee challenged the same before the Hon'ble High Court. Their Lordships observed in para 38 that "Assessing Officer cannot be faulted for not being satisfied with the claim of the as....
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....mounting to Rs. 503.24 crore apart from additional depreciation amounting to Rs. 538.66 crore in the revised return. However, as per letter dated 07.01.2005 filed during the course of assessment proceedings, the assessee withdrew the claim of additional depreciation amounting to Rs. 538.66 crore. As a result of withdrawal of the claim of additional depreciation, the original deduction claim under section 80IB from Rs. 2042.81 crore shot up to Rs. 2579.07 crore. The Assessing Officer allowed the claim of additional depreciation by relying on Explanation 5 to section 32(1)(ii) and also holding that the judgment of the Hon'ble Supreme Court in the case of Goetze India Ltd. Vs. Commissioner of Income Tax (2006) 284 ITR 323 (SC) does not permit him to take cognizance of a claim made during the course of assessment proceedings after the completion of the time for filing revised return. The assessee is aggrieved against the decision of the Assessing Officer in this regard. 20. Having heard both the sides and perused the relevant material on record, we find that the judgment of the Hon'ble Supreme Court in the case of Goetze India Ltd. (supra) though restricts the power of the Assessing....
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.... assets, such percentage on the written down value thereof as may be prescribed: Provided that ..... Explanation 5.-For the removal of doubts, it is hereby declared that the provisions of this sub-section shall apply whether or not the assessee has claimed the deduction in respect of depreciation in computing his total income; (iia) in the case of any new machinery or plant (other than ships and aircraft), which has been acquired and installed after the 31st day of March, 2005, by an assessee engaged in the business of manufacture or production of any article or thing or in the business of generation or generation and distribution of power, a further sum equal to twenty per cent of the actual cost of such machinery or plant shall be allowed as deduction under clause (ii) : ............" 24. In our considered opinion, the contention that additional depreciation is an incentive and not depreciation has no legal legs to stand. It can be noticed that section 32 with caption "Depreciation" opens through sub-section (1) with the expression "In respect of depreciation of" and then sets out tangible and intangible assets owned and used by the assessee....
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....ing for allowing depreciation mandatorily, gets magnetized. Explanation 5, even if placed under clause (ii), applies to sub-section (1) of section 32, which also covers clause (iia). We, therefore, hold that the Assessing Officer was fully justified in granting additional depreciation amounting to Rs. 538.66 crore under clause (iia) read with clause (ii) of section 32(1). This ground is not allowed. 27. The next issued raised in this appeal is against the computation under section 115JB of the Act whereby the assessee is aggrieved against the disallowance and addition of Rs. 2,53,87,76,183/- to the 'book profit'. 28. Facts apropos this issue are that the Assessing Officer observed from the computation of 'book profit' made by the assessee under section 115JB of the Act that it claimed Depreciation/amortization of Rs. 299.17 crore and Depletion of Rs. 332.65 crore. The assessee claimed depreciation on Fixed assets as per Straight line method, whereas the claim of Depletion was made on the basis of cost of Producing facilities on Unit of Production (UOP) basis. There is no dispute on the former amount. As regards the second amount of Rs. 332.65 crore, the AO did not agree with ....
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....ing capital work in progress is charged as expense. In the background of the above discussion, the Assessing Officer held that in respect of a successful oil producing facility, its block of assets will have all the costs transferred from capital work in progress to the capital cost. The assessee was found to have transferred Capital work in progress (Exploration and Development) amounting to Rs. 3090.26 crore to the Fixed assets, on which depreciation was charged on straight line basis. A further sum of Rs. 9275.52 crore was found to have been transferred to the Cost of producing facilities (Schedule 8A), on which Depletion was charged on UOP basis. On the basis of the amount of Depletion claimed by the assessee, the AO worked out the rate of 'Depletion' under the 'Straight line method' at 22.32%. Considering the provisions of Schedule XIV to the Companies Act, the Assessing Officer opined that serial no. II of such Schedule, which is applicable insofar as the Depletion is concerned, provides for depreciation @ 5.28% on straight line method. In his opinion, the Profit and loss account was not prepared as per Parts II and III of Schedule VI of the Companies Act. The Assessing Offic....
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.... during the year amounting to Rs. 1765.70 crore. A sum of Rs. 927.52 crore has been transferred to 'Cost of producing facilities.' An amount of Rs. 3090.26 crore, representing Tangible fixed assets, has been transferred from Schedule 8-B to the Schedule of fixed assets for the purposes of regular depreciation. A sum of Rs. 1510.44 crore is in respect of unsuccessful exploration, which has been debited to the Profit & Loss Account. We are not concerned directly with any of the figures from Schedule 8-B. Now, we espouse Schedule 8-A in which a sum of Rs. 927.52 crore, representing costs incurred in respect of successful exploration and development, has been transferred from Schedule 8-B. After adding this amount to the opening balance and additions, a gross figure of Rs. 1489.89 crore has been determined. From this amount, the assessee has reduced the amount of Depletion to the tune of Rs. 332.65 crore for determining the closing balance of Rs. 1157.23 crore. The amount of Depletion at Rs. 332.65 crore is in dispute, which was worked by apportioning the gross amount of 'Cost of producing facilities' in the ratio of Production during the year vis-a-vis the opening reserves of oil. Thi....
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....mount of cost of producing facilities before such Depletion at Rs. 1489.89 crore. It can be noticed from the above Table that the amount of Depletion charges for all the three blocks totaling Rs. 332.65 crore has been worked out from the Production facilities costs and Site restoration costs. For example, closing Production facilities cost in respect of Block RJ-ON- 90/1, before depletion, stands at Rs. 610.63 crore. The amount of Depletion for the year at Rs. 120.11 crore has been worked out by multiplying unit of production cost of Rs. 93.10 with the figure of production of oil during the year at 1,29,01,808. Per unit cost of Rs. 93.10 has been computed by dividing the total amount before depletion amounting to Rs. 610.63 crore with opening reserve of oil barrels at 6,55,88,358. Similar working of Production facilities cost has been done for other two blocks, namely, RV and CB. In the same manner, calculation has been done for Site restoration cost of all the three blocks. To put it simply, the assessee worked out the amount of Depletion charges for the year by apportioning the total Production facilities cost and Site restoration costs in the ratio of barrels of oil produced dur....
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....he Guidance note provides the mechanism for calculating the amount of depreciation/depletion under the UOP method. Paras 41 and 42 of the Note, which are more relevant for our purpose, read as under:- "41. The depreciation charge or the UOP charge for the acquisition cost within a cost centre is calculated as under: UOP charge for the period = UOP rate x Production for the period UOP rate = Acquisition cost of the cost centre / Proved Oil and Gas Reserves 42. The depreciation charge or the Unit of Production (UOP) charge for all capitalised costs excluding acquisition cost within a cost centre is calculated as under: UOP charge for the period = UOP rate x Production for the period UOP rate = Depreciation base of the cost centre / Proved Developed Oil and Gas Reserves" 34. The other method set out in the Guidance note is Full cost method under which all costs incurred in prospecting, acquiring mineral interests, exploration and development are accumulated in large cost centres. Mechanism for determining depreciation (Depletion) under the Full cost method has been given in paras 48 and 49 of the Guidance note. 35. The assess....
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....actual or legal position. Once the Revenue has throughout accepted the calculation of Depletion by the assessee under the UOP method in the earlier years, there was no logic in deviating from the same in the instant year. 37. The ld. DR vehemently relied on the judgment of the Hon'ble Delhi High Court in Krishak Bharati Cooperative Ltd. VS. DCIT (2013) 350 ITR 24 (Del) in which it has been held that if the Revenue has taken a mistaken view of statutory provisions in assessment for one year, then there is no estoppel in taking a correct view in subsequent year. We are in respectful agreement with the proposition. However, the fact of the matter in the instant case is that the UOP method adopted by the assessee is not only recommended by the Institute of Chartered Accountants of India but also followed by the Oil industry as such. 38. The ld. DR relied on a publication of the Institute: 'Compendium of Accounting Standards' to put forth that a Guidance Note need not be followed. This Compendium unequivocally notes that the Institute of Chartered Accountants of India has, from time to time, issued 'Guidance Notes' and 'Statements' on a number of matters. Whereas, the 'Statements'....
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....een made only in the computation of 'book profit' u/s 115JB by noticing that the amount of Depletion calculated by the assessee under the UOP method gives rate of depreciation of 22.32%, whereas Schedule XIV to the Companies Act provides rate of depreciation under the SLM at 5.28%. In other words, the AO disputed the percentage of Depletion at 22.32% without questioning the accuracy of the amount of Depletion given by the assessee and, thereafter, reduced the rate of 5.28% given in Schedule XIV to the Companies Act for recomputing book profit u/s 115JB by disallowing the alleged excess depreciation rate. To put it simply, the point of view of the AO is that the amount of Depletion calculated by the assessee under the UOP basis gives rate of 22.32% under the straight line method, which is higher than 5.28% given under Schedule XIV to the Companies Act and hence such lower rate should be applied for working out the book profit u/s 115JB of the Act. 40. The ld. DR as also the AO pressed into service Circular no. F. No. 5/31/2002-CL-III dated 21.2.2003 dealing with the alternative basis for providing Depreciation u/s 205(2)(c) of the Companies Act. First para of this Circular states....
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....ould disclose depreciation rates if they are different from the principal rates specified in the Schedule. On this basis, it is suggested that a company can charge depreciation at rates which are lower or higher than those specified in Sch. XIV. It may be clarified that the rates as contained in Sch. XIV should be viewed as the minimum rates and, therefore, a company shall not be permitted to charge depreciation at rates lower than those specified in the Schedule in relation to assets purchased after the date of applicability of the Schedule." 44. The Hon'ble Supreme Court in Malayala Manorama Company Ltd. Vs. CIT (2008) 300 ITR 251 (SC) dealt with a question: 'whether in respect of a company consistently charging depreciation in its books of account at the rates prescribed in the IT Rules, the ITO has jurisdiction u/s 115J of the IT Act, 1961 to re-work net profits by substituting the rates prescribed in Schedule XIV of the Companies Act, 1956?' It took note of the Circular dt. 7th March, 1989 issued by the Company Law Department, which provides that the rates of depreciation prescribed in Sch. XIV are the minimum rates. The assessee in that case argued before the Hon'....
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....ecedent. 47. Once higher rates of depreciation are permissible and the fact that the AO converted the amount of Depletion charged by the assessee under the UOP method to the rate under Straight line method, which turned out to be a rate higher than that prescribed under Schedule XIV, Circular dated 7.3.1989 will regularize the claim of depreciation at higher rate under the straight line method. Thus the reliance of the ld. DR on Circular dated 21.2.2003, prohibiting the following of UOP method, does not advance his case. 48. Now, let us examine if the legislature has put a ceiling on the rate of depreciation to be claimed for the purpose of computing book profit u/s 115JB of the Act For that, we consider it apt to reproduce the relevant parts of section 115JB, at the material time, as under:- 'Special provision for payment of tax by certain companies. 115JB. (1) Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee, being a company, the income-tax, payable on the total income as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April,....
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....count for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act. Explanation 1 to this sub-section provides modus operandi for calculating 'book profit.' It states that 'book profit' means 'the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (2) as increased by' certain items given in the Explanation, if any of them has been considered in the Profit & Loss Account, and as reduced by certain items set out in the Explanation. Thus, it is clear that the exercise of calculating 'book profit' begins with the amount of 'net profit as shown in the profit and loss account prepared in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act'. It is, therefore, essential that the Profit & Loss Account of a company must have been drawn in the first instance in accordance with Parts II and III of Schedule VI. If the Profit & Loss Account is not in accordance with the same, then, necessary alteration is required to be made so as to confirm the Profit & Loss Account in accordance with Parts II and III of Schedule VI. At this stage, we need to d....
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....relevant parts of its earlier decision in Apollo Tyres (supra) delivered in the context of section 115J of the Act. In the later judgment, their Lordships held that : 'the AO has to accept the authenticity of the accounts maintained in accordance with the provisions of Part II and Part III of Sch. VI to the Companies Act, which are certified by the auditors and passed by the company in the general meeting. ......The AO does not have the jurisdiction to go beyond the net profit shown in the P&L a/c except to the extent provided in the Explanation. Thereafter, the AO has to make adjustment permissible under the Explanation given in s. 115JA of the 1961 Act. ..... For the purposes of s. 115JA, the AO can increase the net profit determined as per the P&L a/c prepared as per Parts II and III of Sch. VI to the Companies Act only to the extent permissible under the Explanation thereto.' 52. In a still later decision Ajantha Pharma Ltd. VS. CIT (2010) 327 ITR 305(SC), the Hon'ble Supreme Court, dealing with section 115JB observed that : 'sec. 115JB is the successor section to s. 115JA. In essence, it is the same except that s. 115JA provided for MAT on companies, so far as it does not d....
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.... with the amount of net profit declared by the assessee in its Profit and loss account as a starting point for calculating 'book-profit', once the statutory auditors have certified it to be in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act and such accounts have been approved by the company in its general meeting and thereafter accepted and registered by the Registrar of Companies. However, such amount of net profit as determined in a uniform manner in all the three sections as a starting point is required to be adjusted in accordance with the prescription of the Explanation contained in each such section. For example, there is clause (iv) of the Explanation to section 115J which provides that the amount of loss or depreciation which would be required to be set off against the profits of the relevant previous year as if the provisions of section 205 of the Companies Act are applicable, would be reduced. Interpreting this clause, the Hon'ble Supreme Court in Surana Steels (P) Ltd. vs. DCIT (1999) 237 ITR 777 (SC) has held that the term 'loss' occurring in cl. (b) of the first proviso to section 205(1) of Companies Act has to be read as amount ....
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....any, the total income, as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1997 but before the 1st day of April, 2001 (hereafter in this section referred to as the relevant previous year) is less than thirty per cent of its book profit, the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to thirty per cent of such book profit. (2) Every assessee, being a company, shall, for the purposes of this section prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI58 to the Companies Act, 1956 (1 of 1956) : Provided that while preparing profit and loss account, the depreciation shall be calculated on the same method and rates which have been adopted for calculating the depreciation for the purpose of preparing the profit and loss account laid before the company at its annual general meeting in accordance with the provisions of section 210 of the Companies Act, 1956 (1 of 1956) : Provided further that where a company has adopted or ado....
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.... same as have been adopted for the purpose of preparing such accounts including profit and loss account as laid before the company at its Annual General Meeting in accordance with the provisions of section 210 of the Companies Act. The second proviso to section 115JA is not material for our purpose which deals with a situation in which a company adopts financial year under the Companies Act, which is different from the previous year under the Income-tax Act, 1961. Be that as it may, even the language of second proviso under section 115JA is similar to the language of the second proviso to section 115JB except for the addition of '(i) the accounting policies' and '(ii) the accounting standards adopted for preparing such accounts including profit and loss account'. It, therefore, becomes evident that the material part of the provisions of section 115J, 115JA and 115JB, in so far as it concerns the preparation of Profit & Loss Account in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, is similar. The contention of the ld. DR that the decisions rendered in the context of sections 115J and 115JA of the Act on preparing Profit and loss account in a....
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....es to "profit and loss account", "profit" and "loss" in this section and elsewhere in this Act, shall be construed, in relation to such a company, as references respectively to the "income and expenditure account", "the excess of income over expenditure", and "the excess of expenditure over income". (3) to (6) .........' 59. It is clear from the language of sub-section (1) of section 210 of the Companies Act that a Profit & Loss Account shall be prepared and placed before a company at every Annual General Meeting. The relevant part of section 211 of the Companies Act, dealing with the format and contents of the balance sheet and Profit & Loss Account, reads as under:- "211. Form and contents of balance sheet and profit and loss account (1) Every balance sheet of a company shall give a true and fair view.... (2) Every profit and loss account of a company shall give a true and fair view of the profit or loss of the company for the financial year and shall, subject as aforesaid, comply with the requirements of Part II of Schedule VI, so far as they are applicable thereto : (3) .... (3A) Every profit and loss account and....
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....od covered by the account. There are (i) to (xv) subclauses of clause 3 of Part II. Sub-clause (iv), which is relevant for our purpose, reads as under:- "(iv) The amount provided for depreciation, renewals or diminution in value of fixed assets. If such provision is not made by means of a depreciation charge, the method adopted for making such provision. If no provision is made for depreciation, the fact that no provision has been made shall be stated and the quantum of arrears of depreciation computed in accordance with section 205(2) of the Act shall be disclosed by way of a note." 61. Then, there are other clauses of Part II of Schedule VI to the Companies Act which are not relevant in so far as the issue under consideration is concerned. On going through the prescription of subclause (iv) of Clause 3 of Part II of Schedule VI of the Companies Act as extracted above, it becomes manifest that the requirement is to disclose 'The amount provided for depreciation, renewals or diminution in the value of fixed assets.' There is no reference to the rates of depreciation to be adopted for the purpose of preparing Profit & Loss Account in accordance with Par....
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....bility of profits for paying dividend. Thus, to say that the mandate of section 205 applies to the pan Companies Act, is not acceptable. It can be noticed that there are other provisions in the Companies Act as well which require the calculation of net profit in the manner laid down in sections 349 and 350 of the Companies Act. Section 350, in turn, provides for calculating depreciation in terms of Schedule XIV of the Act. For example, section 198 of the Companies Act deals with overall maximum managerial remuneration payable in case of absence or inadequacy of profits. Sub-section (1) of section 198 provides that in case of absence or inadequacy of profits, the total managerial remuneration shall not exceed 11% of the net profits of that company for that financial year computed in the manner laid down in section 349 and 350 of the Act. Similarly, there is another specific provision of section 387 dealing with remuneration of manager of a company. This section also provides for allowing remuneration to a manager by way of a specified percentage of the net profits of the company calculated in the manner laid down in section 349 and 350 of the Companies Act. There is still another sp....
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....ce with the provisions of Parts II and III of Schedule VI to the Companies Act, the command of Schedule XIV of the Companies Act, requiring the charging depreciation at the prescribed rates, does not, therefore, get attracted. In the absence of the prescription of any rates of depreciation in Parts II and III of Schedule VI, and further section 115JB of the Act mandating every company to prepare its Profit and Loss account in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, we are unable to restrict the rate of Depletion to the rate specified in Schedule XIV to the Companies Act. If the intention of the legislature had been to prepare Profit and Loss account by charging depreciation at the rates provided in Schedule XIV, it would have specifically set out so unequivocally in section 115JB by making reference to Schedule XIV to the Companies Act. In the absence of any such provision, we cannot import rates of depreciation given in Schedule XIV to be mandatorily followed for preparing Profit and loss for the purposes of section 115JB of the Act. 64. Again coming back to first proviso to section 115JB(2) of the Act heavily relied by the ld. DR....
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....nt for intra group services in the nature of business planning and project review board. 67. Briefly stated, the facts of this issue are that the assessee reported 22 international transactions clubbed under convenient heads, including Receipt of services, Recovery of expenses, Consideration for bank guarantee (received), Recovery of expenses from UJVs and Reimbursement of expenses to UJVs. The AO made reference to the Transfer Pricing Officer (TPO) for determining the arm's length price (ALP) of the international transactions. The TPO has tabled all the international transactions at page 2 of his order. The instant dispute relates to the three international transactions clubbed under the head 'Receipt of services', which head has four transactions in total, namely, Receipt of services in relation to business planning from Cairn Energy Plc. worth Rs. 11,93,02,725/-; Receipt of services in relation to business planning from Capricorn Energy Ltd. worth Rs. 2,15,18,396/-; Receipt of services in relation to project review board from Capricorn Energy Ltd. worth Rs. 1,71,59,556/-; and Reimbursement of related travel and accommodation expenses to Capricorn Energy Ltd. amounting to Rs. ....
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....services to others as well and if yes, then the basis of allocation amongst various entities be furnished. The assessee did not furnish such information by stating that it was not privy to the information whether the AEs render such services to any other AEs/third parties. Further, the assessee failed to give justification of the rate of fee paid by it for the services rendered. In such circumstances, the TPO rejected the assessee's approach of aggregation and application of the TNMM as the most appropriate method. He selected Comparable uncontrolled price (CUP) method as the most appropriate method. In the absence of any demonstrable benefit arising to the assessee because of these services, the TPO computed ALP at Nil and proposed transfer pricing adjustment of Rs. 14.36 crore. The assessee remained unsuccessful before the Dispute Resolution Panel (DRP) and eventually, the AO made an addition of equal amount in the impugned order. The assessee is aggrieved against the addition. 68. We have heard both the sides and perused the relevant material on record. It is seen that the assessee paid Rs. 14.36 crore as cost of the above services and also mark up of 10% amounting to Rs. 1.4....
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.... operating in the oil and gas industry but in any event to a standard which is at least equivalent to, and not lower than, that to which such services are provided to CAIRN or its Affiliates; (ii) in accordance with good and prudent practice in the international oil and gas industry; (iii) in compliance with all applicable laws; and (iv) in conformity with all descriptions and specifications provided by CEIL and its Affiliates to CAIRN. 2.4 CAIRN shall undertake its obligations under this Agreement as an independent contractor and shall not be the agent of, nor have any authority to bind or commit, CEIL or any Affiliate of CEIL to any Third Party. Nothing in this Agreement and no action taken by the Parties or their Affiliates under this Agreement shall constitute a partnership, association, joint venture or other co-operative entity between the Parties Of their Affiliates. 2.5 The Services shall be provided by individuals who are suitably skilled, experienced and qualified to carry out the Services. Nothing in this Agreement shall render any employees of CAIRN or any Affiliates of CAIRN as employees, workers or agents of CEIL or any Aff....
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....ch records the amount billed at US $ 611172.57, being, charges for business planning on the basis of hourly rates of the experts. Pages 456 to 459 are the details of such billed amount which record name of the employee of the AE, number of hours, hourly rate and total amount in US Dollars. Similarly, page 460 is a copy of another Invoice dated 31.10.2010 with value of US $ 103795.69. This also talks of charges for business planning time writing. Subsequent pages contain similar details of employees who worked for the assessee, number of hours spent, rate per hour and the total amount. Factum of the assessee having received services from its AE is clearly evidenced from these documents. The view point of the TPO that such services were duplicate in nature as the assessee was already in similar line of business, is not correct. The assessee undertook exploration work in Rajasthan oil wells in the later part of the preceding year. The assessee also explained to the TPO that it is a highly technical work requiring services of experts for optimising production. Such contentions have not been controverted with any cogent material. Thus, the claim of the Revenue that the assessee was alre....
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....urchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, .....'. It is discernible from the above definition of international transaction given in section 92B that it refers to 'a transaction' between two or more associated enterprises. The term 'transaction' has been defined in section 92F(v) and also in Rule 10A(d) of the Income-tax Rules, 1962. The Rule defines the term 'transaction' to include: 'a number of closely linked transactions.' On going through the above provisions, it becomes palpable that the arm's length price is essentially determined on transaction-by-transaction approach for each international transaction separately; and for that purpose, a transaction in singular also includes plural for closely linked transactions. In other words, where the transactions are not closely linked, then their ALP should be determined separately for each international transaction and such determination of ALP for 'an' international transaction as per section 92C(1) is done as per the most appropriate method. To put it simpl....
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....d the question of aggregation of international transactions. Their Lordships held that several transactions between two or more AEs can form a single composite transaction if they are closely linked transactions and the onus is always on the assessee to establish that such transactions are part of an international transaction pursuant to an understanding between various members of a group. The Hon'ble High Court observed that in case of a package deal where each item is not separately valued but all are given a composite price, these are one international transaction. It went on to hold that where a number of transactions are priced differently but on the understanding that the pricing was dependent upon the assessee accepting all of them together (i.e. either take all or leave all), then it is also an international transaction. But it will be on the assessee to prove that although each is priced separately, but they are provided under one composite agreement. It still further held that each component may be priced differently also, but it will have to be shown that they are inextricably linked that one cannot survive without other. Merely because purchase of goods and acceptance o....
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....led transaction. Further, the CUP method is a transaction specific method which strives to determine the ALP of an international transaction on a micro level, thereby lending more credibility to the ALP of a transaction. As such, we hold that the CUP is the most appropriate method for determining the ALP of the international transaction under the present circumstances and the TPO was fully justified in applying the CUP as the most appropriate method. 78. Turning to the methodology adopted, we find that the TPO though applied CUP method but determined Nil ALP without making reference to any comparable uncontrolled transactions. It was on account of his having canvassed a view that either the services were not received by the assessee or were duplicate in nature. Such a view has been overturned by us in earlier paras. Under these circumstances, we are left with no option but to set aside the impugned order and remit the matter to the file of AO/TPO for a fresh determination of the ALP of the international transaction of 'Receipt of services' primarily under the CUP method. In case, the TPO finds that the CUP method cannot be applied either due to non-availability of the relevant d....