Large_Tax_Payer_Unit_Mumbai_vs_Reliance_Industries_Ltd_Mumbai_on_12_April_2017

Addl Cit Large Tax Payer Unit, Mumbai vs Reliance Industries Ltd, Mumbai on 12 April, 2017
Addl Cit Large Tax Payer Unit, Mumbai vs Reliance Industries

Ltd, Mumbai on 12 April, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL "K", BENCH MUMBAI BEFORE SHRI
R.C.SHARMA, AM & SHRI RAVISH SOOD, JM (Assessment Year :2007-08) Addl. Commissioner
of Vs. M/s. Reliance Industries Income Tax, Large Tax Ltd.,3 r d Floor, Maker Payer Unit, Mumbai
Chamber-IV, 222, Nariman Point, Mumbai - 400 021 PAN/GIR No. AAACR5055K Appellant) ..
Respondent) (Assessment Year :2007-08) M/s. Reliance Industries Vs. Addl. Commissioner of
Income Ltd.,3 r d Floor, Maker Tax, Large Tax Payer Unit, Chamber-IV, 222, Mumbai Nariman
Point, Mumbai
- 400 021 PAN/GIR No. AAACR5055K Appellant) .. Respondent) (Assessment Year :2008-09) M/s.
Reliance Industries Vs. Asst. Commissioner of Income Ltd.,3 r d Floor, Maker Tax, Large Tax Payer
Unit, Chamber-IV, 222, Mumbai Nariman Point, Mumbai
- 400 021 PAN/GIR No. AAACR5055K Appellant) .. Respondent) (Assessment Year :2008-09) Asst.
Commissioner of Vs. M/s. Reliance Industries Income Tax, Large Tax Ltd.,3 r d Floor, Maker Payer
Unit, Mumbai Chamber-IV, 222, Nariman Point, Mumbai - 400 021 PAN/GIR No. AAACR5055K
Appellant) .. Respondent) (Assessment Year :2009-10) M/s. Reliance Industries Vs. Asst.
Commissioner of Income Ltd.,3 r d Floor, Maker Tax, Large Tax Payer Unit, M/s. Reliance
Industries Ltd., Chamber-IV, 222, Mumbai Nariman Point, Mumbai
- 400 021 PAN/GIR No. AAACR5055K Appellant) .. Respondent) (Assessment Year :2009-10) M/s.
Reliance Industries Vs. Asst. Commissioner of Income Ltd.,3 r d Floor, Maker Tax, Large Tax Payer
Unit, Chamber-IV, 222, Mumbai Nariman Point, Mumbai
- 400 021 PAN/GIR No. AAACR5055K Appellant) .. Respondent) (Assessment Year :2009-10)
Dy.Commissioner of Income Vs. M/s. Reliance Industries Tax, Large Tax Payer Unit, Ltd.,3 r d
Floor, Maker Mumbai Chamber-IV, 222, Nariman Point, Mumbai - 400 021 PAN/GIR No.
AAACR5055K Appellant) .. Respondent) Revenue by Mrs. Malathi Shridharan Assessee by Shri
Arvind Sonde Date of Hearing 31/03/2017 Date of Pronouncement 12/04/2017 €□‚ ƒ / O R D E R
PER BENCH:
M/s. Reliance Industries Ltd., These are the cross appeals filed by assessee and
revenue against the order of CIT(A) for the assessment year 2007-08 to 2009-10 in
the matter of order passed u/s.143(3) / 147 r.w.s. 143(3) of the IT Act.
2. Most of the grounds are common in all the years under consideration, therefore, all the appeals
were heard together and are now decided by this consolidated order.
3. Rival contentions have been heard and record perused.
4. The facts in brief are that assessee company is engaged in the business of Oil & Gas Exploration
Indian Kanoon - http://indiankanoon.org/doc/55290545/ 1

Refining of Crude Oil, Mfg. & Trading of Petrochemicals, Polyester, Fibre Immediate Textiles,
Generation & Distribution of Power and Operation of Jetties and related infrastructure, Retail
Marketing and Petroleum Products and Investment. During the course of scrutiny assessment, AO
made disallowance u/s.14A. The depreciation on capital value of goods purchased from Durga Iron
& Steel Ltd., and Surajbhan Rajkumar Pvt. Ltd., was also disallowed. Claim of deduction u/s.80IA
was also declined by AO. AO also disallowed professional fees paid to various companies on the plea
of non-genuine.
Addition was also made on account of non-funded guarantee given by assessee to bank of America
for giving loans to its associated concern.
Addition was also made in respect of interest free loans and advances given to subsidiary. Sales Tax
incentives received from Government was also added by AO treating the same as revenue receipt.
5. By the impugned order, CIT(A) deleted the addition made on account of notional Sales Tax which
has been treated by the AO as revenue receipt.
M/s. Reliance Industries Ltd., Partial relief was given on account of claim of depreciation by
directing the AO to adopt WDV as on 01/04/2008. Assessee's claim for deduction u/s.80IA was also
allowed by the CIT(A). Addition made u/s.40(a)(ia) on account of non-deduction of tax u/s.195 was
also deleted by CIT(A). By the impugned order CIT(A) restricted the guarantee commission
@0.575% in place of 2.60% of non-funded guarantee given by assessee for advancing loans to its
associated concern.
6. Against the above order of CIT(A) for the assessment year 2007-08 both assessee and revenue are
in further appeal before us.
7. Grounds taken by assessee in the A.Y.2007-08 reads as under:-
1. The learned Commissioner of Income-tax - (Appeals - 15) {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.1538,71, 72,697/- 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.
2. a. The CIT(A) erred in computing the disallowance out of interest expenditure at Rs.24.12 crores
and 0.5 percent of the monthly weighted average value of investment, i.e. proportionate
administrative and other expenses of Rs.45.50 crores and thus disallowing RS.69.62 crores u/s.14A
of the Act by adopting a method based on rule 8D of the Income tax Rules, being expenditure
incurred in relation to the income exempt u/s.10(34)/(35) of the Act while computing income under

the normal provisions of the Act (section 28 to 42 of the Act).
The appellant submits that no expenditure has been incurred in relation to earning exempt interest
income and dividend income and therefore the disallowance of the estimated expenditure ought to
be deleted under normal computation of income. b. In the alternative and without prejudice to
ground no. 2a above the CIT(A) erred in determining the disallowance u/s.14A by adopting a
method based on Rule 8D of the Income-tax Rules.
M/s. Reliance Industries Ltd., The appellant submits that rule 8D was inserted by Finance Act 2008
w.e.f. 24.03.2008 and is not applicable in the case of the appellant and therefore the basis adopted
by the CIT(A) is incorrect.
c. In the alternative and without prejudice to the above, the appellant submits that the disallowance
enhanced by the CIT(A) is excessive and unreasonable.
3. The CIT(A) erred in confirming the disallowance of depreciation of Rs.14,19,106/- 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 I.T. Act on such capitalised value of the goods is allowable.
4. The CIT(A) erred in confirming the disallowance of depreciation of Rs.55,35,000/- in respect of

jetties constructed by the appellant and used for the purpose of its business.
The CIT(A) has confirmed the order of AO wherein he failed to appreciate that since the jetty was
constructed by the appellant at its own cost and was used for the purpose of its business,
depreciation as per law was allowable. The appellant prays that depreciation on the jetties of
Rs.55,35,000/- as claimed by it be allowed.
5. The CIT(A) erred in confirming the disallowance of an amount of Rs. 5,45,40,000/- being
Professional fees paid to various companies as being non-genuine.
The Appellant submits that the CIT(A) confirmed the order of AO wherein he has misguided himself
in appreciating the evidence gathered and holding the payment of professional fees as non-genuine.
The appellant submits the Professional Fees has been paid to various companies for rendering
services duly supported by documentary evidences and therefore the claim for deduction of such
payment should be allowed.
6. a. The CIT(A) erred in confirming the addition made by the A.O. of Rs.48,82,456/- while
determining the arm's length price in respect of commission paid to its associate enterprise Reliance
Netherlands B.V.(RNBV) at Rs. 54,32,591/- as against RS.1,03,15,047/- paid by your appellant.

M/s. Reliance Industries Ltd., The Appellant submits that it has rightly calculated the value of
international transaction by applying the method prescribed u/s. 92C(1) of the LT. Act and
supported by the documentary evidence and hence the disallowance made by AO shall be deleted.
b. The CIT(A) erred in confirming the order of the AO in treating the non- funded guarantee given
by the appellant to Bank of America for giving loan to its associate concern Trivera Gmbh as
International transaction within the meaning of section 92B r.w.S. 92(1) of the Income Tax Act.
The Appellant submits that the above transaction does not fall within the definition of
"International Transaction" as defined u/s.92B of the Act and hence the addition confirmed by
CIT(A) made in the order of AO shall be deleted.
c. The CIT(A) erred in confirming the arms length price in respect of non-funded guarantee given by
the appellant for advancing loans to its associate concern to the extent of Rs.2,14,98,100/- being
0.575% of the guaranteed amount.
d. The CIT(A) erred in confirming the arm's length price in respect of an amount of
Rs.13,52,01,303/- being interest payment referable to interest free loans and advances given to its
subsidiary companies.
The appellant submits that the loans and advances given to subsidiary companies are out of its own
funds and given for furthering the business interest of the appellant and hence no disallowance is
called for on this amount.
7. Your Appellant reserves the right to add, amend, alter or vary all or any of the above grounds of
appeal as they or their representatives may think fit.
8. Grounds taken by Revenue reads as under:-
1. On the facts and in the circumstances of the case Iaid in law, the Ld. CIT(A) erred
in deleting the notional Sales Tax of Rs.
15,38,71,72,697/- which has been treated as revenue receipt by the A.O.
2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in allowing
depreciation as claimed by assessee at Rs. 35,29,64,19,750/- against the deprecation allowed by the
A.O. at Rs. 32,67,34,84,564/- by directing to adopt the WDV of the assets as on 01-04-2008.
M/s. Reliance Industries Ltd.,
3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in not deciding
the issue on merits in view of provisions of section 80IA of the Income tax Act, 1961.

4. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in not
appreciating that section 801A(8) has clearly defined that "Market Value" means the price of
goods/services would fetch, if these were sold by the unit/undertaking in the open market subject to
statutory regulations, if any and the assessee had clearly violated this section
5. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in allowing an
amount of Rs. 4,83,25,200/- u/s. 40(a)(ia) of the IT Act, by holding that no tax was withheld U/s.
195 of the IT Act without appreciation the fact that no tax was deducted at source U/s. 194 of the IT
Act.
6. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in restricting
guarantee commission at the rate of Rs. 0.575% in place of Rs. 2.50% of non funded guarantee given
by the assessee for advancing loan to its associate concerns.
7. The appellant therefore, prayed that the order of the CIT(A) be set aside and that of the Assessing
Officer be restored".
8. The Appellant craves leave to amend or alter any ground or add a new ground.
9. At the outset, learned AR placed on record a detailed chart showing various issues decided by
Tribunal either in favour of assessee or against the assessee. Our attention was invited to the
relevant paras of the Tribunal order where the issue has been discussed.
10. We have carefully gone through the order of the lower authorities as well as order of the Tribunal
in assessee's own case. For the assessment year 2007-08 the assessee had submitted its Return of
Income on 31/10/2007 declaring income of Rs.41,54,25,03,104/- under normal provisions and
Rs.132,44,13,65,353/- under section 115JB of the Income Tax Act, 1961. The assessee filed a revised
return on 12/11/2008 M/s. Reliance Industries Ltd., declaring total income of Rs.41,55,02,25,179/-
under normal provisions and Rs.143,65,78,86,236/- under section 115JB of the Income Tax Act,
1961. Assessee had plants located at Hazira, Jamnagar, Gandhar, Allahabad and Barabanki, in the
states of Gujarat and Uttar Pradesh. The Governments of Gujarat and Uttar Pradesh provided
incentives in the form of sales tax exemption amounting to Rs.15,38,71,72,697/-. The benefit of
exemption from sales tax was linked to industrial development of the under developed areas with an
objective of dispersal of industries.
In the schemes under which incentives by way of sales tax exemption have been provided, objective
has been made very clear that the State Government have provided these incentives for dispersal of
the industries to identified backward areas. The AO has treated the same as revenue receipt.
11. By the impugned order CIT(A) deleted the addition after observing as under:-
4.3 I have considered the facts of the case and submissions of the appellant as against
the observation/ findings of the AO in his order. The contentions raised by the
appellant in respect of the ground of appeal are being discussed and decided as

under:
1. This is a recurring issue in the case of the appellant, In the decision of Hon'ble
Special Bench of Mumbai ITAT in Appellant's own case for AY. 19~6-87 (88 ITD273)
(S.B.) it was held that:
"The question for consideration is whether the Tribunal in the case of Reliance
Industries Ltd. (Supra) had correctly appreciated and interpreted the ratio of the
decision of the Supreme Court in Sahney Steel & Press -Works Ltd's case (supra). On
a careful reading of the order of the. Tribunal in the case of Reliance Industries Ltd.
(Supra), it appears to us that the ratio of the judgment in Sahney Steel & Press Works
Ltd's case (supra) has been correctly interpreted and appreciated by the Bench (Para
.28) M/s. Reliance Industries Ltd., The Scheme framed by the Government of
Maharashtra in 1979 and formulated by its Resolution dated 5-1-1980 has been
analysed in detail by the Tribunal in its order in RlL for the assessment year 1985-86
which we have already referred to an extensor. On an analysis of the Scheme, the
Tribunal has come to, the conclusion that the thrust of the Scheme is that the
assessee would become entitled for the sales tax- incentive even before the
commencement of/he production, which implies that the object of the incentive is to
fund a part of the cost of the setting up of the factory in the notified backward area.
'The Tribunal has, at more than-one place, stated in the thrust of the Maharashtra
Scheme was a industrial development of the backward districts as well as generation
of employment thus establishing a direct nexus with the investment in fixed capital
assets. It has been found that the entitlement of the industrial unit to claim eligibility
for the incentive arose even while the industry was in the process of being set up.
According to the Tribunal, the Scheme was oriented towards and was subservient to
the investment in fixed capital assets. The sales tax incentive was envisaged only as
an alternative to the cash disbursement and by its very nature was to be available
only after production commenced. Thus, in effect, it was held by the Tribunal that the
subsidy in the form of sales tax incentive was not given to the assessee for assisting it
in carrying out the business operations.
The object of the subsidy was to encourage the setting up of industries in the backward area (Page
28).
Thus, the 'interpretation of the Tribunal of the ratio laid down in the judgement of the Supreme
Court in Sahney Steel & Press Works Ltd's case (supra) cannot be stated to be erroneous. The
Tribunal did recognise, as the Supreme Court itself recognised, that the object with which. the
subsidy was given is decisive, It did recognise following the distinction pointed out by the 'Supreme
Court that if the subsidy is given for setting up or expansion of the industry in a backward area, it
will be capital, irrespective of the modality or the source of funds through or from which it is given
and that if monies are given for assisting the assessee in carrying out the' business operations only,
after, and conditional upon, the commencement of production, it would be revenue: It was only for
the purpose of bringing out this distinction that the Tribunal had analysed the features of the

Maharashtra Scheme of 1979 and had come to the conclusion that the subsidy given under the
Scheme had a direct nexus with the fixed capital investment and that it could not be said that the
subsidy was given with the object of assisting or lending a M/s. Reliance Industries Ltd., helping
hand to the assessee in its business operations. (para
29) The Tribunal was thus aware of the distinction between the subsidy given with the object of
setting up the industry and the subsidy given after the industry commences of production and
conditional upon the commencement of production. Factually, the Tribunal found that the
assessee's case which fell under the Maharashtra scheme, was a case where the subsidy was given for
the purpose of facilitating the assessee to set up an industry in Patalganga, Raigad District, which is
a notified area, The actual disbursement took place after the assessee commenced production, but,
according to the Tribunal, it was only a mode of disbursement and had nothing to do with the object
for which the subsidy was given. Thus, it was found that the Tribunal did notice The crucial
observations of the Supreme Court Sahney Steel & Press Works Ltd.'s case (supra) which gave
primacy to the object of the subsidy over the fact that it was given after the commencement of
production. (para 30).
The Tribunal's observations made on the. basis of the observations of the Supreme. Court in Sahney
Steel & Press Works Ltd. 's case (supra) also show that the Tribunal was alive to the. distinction
between the character of the subsidy given with the object of promoting industrial growth in a
particular area' under the subsidy given' conditional upon the commencement of"
production and after actual commencement of production. .In our opinion also it is
not correct to understand the judgement as laying down the broad proposition that
wherever the subsidy is given after the commencement of production and conditional
upon the same, it should be treated as a revenue receipt In the hands of the assessee,.
irrespective of the object for which the subsidy was granted," The object for which the
subsidy is granted.' in our opinion also, takes primacy over the fact that it 'was given
after the commencement of production and conditional upon the same. That the
Supreme Court itself recognised this position has been amply made clear in its
observattons. (para 33) .
With great respect; we are therefore unable to share the opinion expressed in Bajaj
Auto Ltd.'s case (Supra) that the Tribunal in its order in the case of Reliance
Industries Ltd. (supra) for the assessment year 1985-86 did not correctly interpret
the ratio laid down by the Supreme Court in Sahney Steel & Press Works Ltd. 's case
(supra) . (Para 34). "
M/s. Reliance Industries Ltd., ii. The special bench -has also considered the other relevant judicial
pronouncements while giving the finding that the subsidy received by the appellant was a capital
subsidy not liable to tax.
iii. The facts during the year under consideration are the same as in the earlier years, except that this
year there is also notional sales tax subsidy claimed as capital receipt from such scheme of UP Govt.

The object of the scheme of UP Govt. is' to increase production in certain kinds of goods and thereby
fuel investment in such industries in the state which similar to those of Gujarat Govt. which: is
fuelling investment in industries in the backward areas. In the immediately preceding year also,
following the decision of the Special Bench, the issue was decided in favour of the appellant by the
Ld, CIT(A) in the office. Accordingly following the Special Bench decision discussed above, and also
relying on the orders of my' Ld. predecessors in preceding assessment years, I am inclined to allow
the appellant's claim for treatment of Notional Sales. Tax of Rs, 1538,71,72,697/- as Capital receipt
not liable to tax. This ground of appeal is therefore allowed.
iv. Since the main contention of the Appellant regarding notional Sales tax being capital in nature
not liable to tax has 'been allowed as above, it is not considered necessary to go into the alternative
plea of the Appellant claiming the Notional Sales Tax as deductible U/S 43B. However, it may be
pointed out that similar alternative plea taken in A.Y. 2003·04 to A.V, 2006-07 has been rejected
by my Ld. Predecessors for the reasons that the CBDT circular no, 496 dated 25.09.1987 clarified
the position regarding applicability of the provisions of Section 43B only to Sales Tax. Deferral
Scheme. This circular did not apply to the Sales Tax exemption scheme availed of by the Appellant.
Therefore, the alternate claim made by the appellant seeking deduction under section 43B is
rejected.
12. We had considered rival contentions and found that this issue has already been decided by the
Tribunal in assessee's own case in the assessment years 2003-04 to 2006-07, wherein Notional
Sales Tax was treated as capital receipt not liable to tax. Relevant observation of Tribunal is
contained at Page 5 para 6.5. Precise observation of Tribunal are as under:
M/s. Reliance Industries Ltd., 6.5. We have considered submissions of the

representatives of the parties and the orders of authorities below as well as earlier
order of ITAT dated 28.5.2012 (supra). We consider to reproduce paras 4.2 to 4.7 of
earlier order which are as under :
"4.2 The assessee claimed deduction of notional sales tax of Rs. 1024,34,61,999/- as
capital receipt which was received under various schemes of Government of
Maharashtra and Government of Gujarat in respect of assessee's project at
Patalganga, Jamnagar and Hazira. The said notional sales tax so received by the
assessee was treated as capital receipt not liable to tax. The AO relying upon the
decision of ITAT, Mumbai Bench in the case of Bajaj Auto Ltd., in ITA No.49 &
1101/Bom/91 for assessment year 1987-88 treated the said notional sales tax as
revenue receipt liable to tax on the ground that such sales tax subsidy is an
operational subsidy. The AO also placed reliance on the decision of the Hon'ble Apex
Court in the case of Sahani Steel and Press Works Ltd. 228 ITR 253. Being aggrieved
the assessee filed appeal before the first appellate authority.
4.3 On behalf of the assessee it was contended that the sales tax exemption given
under the schemes by the Government of Maharashtra and Government of Gujarat
are towards the objective of dispersal of industry, development of backward area and

generating employment opportunities, hence, the same is in the nature of capital

receipt not liable to tax. It was contended that the subsidy is not in the nature of
operational subsidy intended and supplementing profit of the assessee nor it is in the
nature of grant for meeting the cost of plant and machinery. Such subsidy I.T.A.
No.4475/Mum/2007 6 and 7 other appeals is in the nature of capital receipt not
liable to tax. It was contended that the said issue was considered by Special Bench of
ITAT, Mumbai in assessee's own case for A.Y 1986-87 reported at 88 ITD 273(SB)
and the Tribunal confirmed its earlier decision in assessee's own case for assessment
years 1984-85 and 85-86 that the sales tax subsidy granted to the assessee is in the
nature of capital receipt not liable to tax. It was contended that the Tribunal also
considered the decision of the Hon'ble Apex Court in the case of Sahney Steel and
Press Works Ltd.(supra). He submitted that the Special Bench while deciding the
issue in favour of the assessee also considered the decision of another Bench of ITAT
Mumbai in the case of Bajaj Auto Limited (supra) which had taken a contrary view
that the subsidy is revenue receipt. It was contended that in subsequent assessment
years ITAT has allowed similar claim of the assessee and even in the just preceding
assessment year 2001-02 the claim for deduction of notional sales tax was held in the
nature of capital receipt not liable to tax. The ld. CIT(A) accepted the above
contention of the assessee and held that the claim for deduction of notional sales tax
of Rs. 1024,34,61,999/- should be allowed as deduction as it is in the nature of capital
receipt not liable to tax.
M/s. Reliance Industries Ltd., 4.4 The assessee has also taken an alternative
submission before the ld. CIT(A) that if the amount of subsidy is regarded as revenue
receipt then such sales tax incentives received should be allowed as a deduction
under section 43B of the Act while computing the total income of the assessee. It is
relevant to state that the ld. CIT(A) has stated that the main contention of the
assessee regarding notional sales tax being capital receipt not liable to tax has been
allowed, it is not considered necessary to go into the alternative plea of the assessee
claiming notional sales tax as deductible under section 43B of the Act. He has also
stated that a similar alternative plea taken by the assessee in A.Y 2001-02 had been
rejected by his predecessor for the reason that CBDT Circular No.496 dated
25/9/1987 clarified the position regarding applicability of the provisions ofsection
43B only to sales tax deferral scheme. This circular did not apply to the sales tax
exemption scheme availed by the assessee.
4.5 Hence, the assessee as well as department are in appeal before the Tribunal.
4.6 At the time of hearing of the appeal, the ld. Representatives of both the parties
conceded that deletion of addition on account of sales tax incentives holding the same
to be a capital receipt is covered in favour of the assessee by the Special Bench
decision of the Tribunal in assessee's own case reported in 88 ITD 273. In the light of
the said decision of the Special Bench in assessee's own case, the order of ld. CIT(A)
to hold that the claim of deduction of the assessee of notional sales tax of Rs.

1024,34,61,999/- is to be held as capital receipt not liable to tax.
4.7 Respectfully following the above decision of the Special Bench of ITAT in
assessee's own case we uphold the order of ld. CIT(A) that the claim for treatment of
notional sales tax of Rs. 1024,34,61,999/- is capital receipt. Hence, we uphold the
order of ld. CIT(A) on this issue and ground No.1 of the appeal taken by the
department is rejected. Since ground No.1 I.T.A. No.4475/Mum/2007 7 and 7 other
appeals in assessee's appeal is an alternative ground, we hold that ld. CIT(A) has
rightly held that it is not necessary to go into the alternative plea of the assessee as
claiming the notional sales tax as deductible under section 43B of the Act. Therefore,
ground No.1 of the appeal taken by the assessee is rejected."
6.6 In view of above we agree that issue involved and facts are identical and respectfully following
the decision of the Special Bench of ITAT in assessee's own case and the order of Mumbai Bench of
the Tribunal in assessee's own case for assessment year 2002-03 dated 28.5.2012 (supra), we
uphold the order of ld. CIT(A) that the claim for treatment of notional sales tax is capital receipt.
Hence, ground No.1 of the appeal taken by the department is rejected. Since ground No.1 in
assessee's appeal is an alternative ground, we hold that ld. CIT(A) has rightly held that it is not
necessary to go into the M/s. Reliance Industries Ltd., alternative plea of the assessee claiming the
notional sales tax is deductible under section 43B of the Act. Therefore, ground No.1 of the appeal
taken by the assessee is rejected.
13. As the facts and circumstances during the year under consideration are same, respectfully
following the order of the Tribunal in assessee's own case vis-à-vis decision of the Special Bench in
case of Reliance Industries Ltd., 88 ITD 273, Shree Balaji Alloys Ltd., 138 DTR 36(SC), Rasoi Ltd.,
335 ITR 438(CAL), Bougainvillea Multiples Entertainment Centre (P) Ltd., 373 ITR 014(Delhi),
Kirloskar Oil Engines Ltd., 364 ITR 88 (Bom) and Associated Cement Cos. Ltd., ITA No.7594 &
7644/M/04, we do not find any infirmity in the order of CIT(A) for treating the same as capital
receipt. Accordingly ground no.1 of revenue's appeal stand dismissed.
14. The assessee in its return of income has claimed depreciation on fixed assets at
Rs.35,29,64,19,750/- The AO has allowed depreciation at Rs.3267,34,84,564/- as against the claim
of Rs.3529,64,19,750/- by taking WDV after considering the depreciation thrust upon the assessee
in earlier years by the department.
15. By the impugned order CIT(A) directed the AO to allow depreciation as claimed by the assessee
as against the depreciation allowed by the AO at Rs.3267.35 crores by directing the AO to adopt the
WDV as on 01/04/2008. The precise observation of CIT(A) is as under:-
"5.3 I have considered the facts of the case and 'submissions of the appellant as
against the observations/ findings of the AO in his order. The contentions raised by
the appellant in respect of this ground of appeal are being discussed and decided as
under:

M/s. Reliance Industries Ltd., i. This is 'also a recurring issue in the case of the
appellant. 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
appellant Le. WDV' of the year' after which depreciation had not been 'claimed by the
appellant or on the basis of the reduced WDV arrived at by the' AO' after thrusting
depreciation upon the appellant in the earlier years. This, issue has: been considered
by my Ld. Predecessors in the appellant's case in the preceding years including A.Y.
2001-02 to A.Y. 2006-07, where in view has been taken that the claim for
depredation cannot be thrust upon the Appellant. Nevertheless,' the AO has
consistently rejected the claim of the Appellant based upon the stand taken at the
assessment stage in years. In earlier years, this issue has been decided by my Ld.
Predecessors in favour of the appellant. The relevant part of the appellate order in
A.Y. 2001-02 is as under:
"I have carefully considered the submissions of the Ld. AR and also gone through the
impugned order of assessment. This issue relating to the deduction of depreciation
while computing profits and gains of business has been settled by the Supreme Court
in the case of CIT vs. Mahindra Mills (234 ITR 56). The point that remains to be
considered is whether the law laid down by the Supreme Court in the case of
Mahindra Mills would also apply subsequent to assessment year 1988-89 when the
concept of block of asset was introduced for the purpose of computing claim for
depreciation and section 34 requiring filing of prescribed particulars stands omitted.
This issue has come up before the Hon'ble lTAT, Mumbai in various appeals cited
hereinabove, where after analysing the Supreme Court Judgement in the case of
Mahindra Mills, the Hon'ble Tribunal has come to a conclusion that the depreciation
can be allowed only when the claim for such deduction is made by the assessee,
Moreover, the Hon'ble Tribunal has further observed that even after omission of
section 34 and introduction of block 'of asset 'concept from assessment year 1988-89,
the ratio had laid down by the Supreme Court still holds good. The claim for
depreciation is optional and can be allowed only if claimed by the assessee. The
Hon'ble ITAT has further referred to the Explanation -5 inserted in Section 32 of the
IT.Act by Finance Act, 2001 with effect from 1/4/2002 and have observed that the
Explanation-5 has been prospective in its effect; the principle laid down by the
Supreme Court holds good and applies to all the years prior to introduction of said
explanation. The various judgements relied upon by the appellant clearly support the
appellant's stand to the effect that the claim for depreciation cannot be forced upon
the appellant if not claimed while computing total income. Respectfully following
M/s. Reliance Industries Ltd., the various decisions relied upon by the appellant, I
hold that the depreciation of Rs.4,83,08,34,782/- cannot be thrust upon the
appellant and the claim for deduction u/s. 80lA/80lB shall be allowed without
reducing the profit by the amount of depreciation".
ii. In this year, the issue relates to the amount of WDV to be taken on 01.04.2006. Following the
decision in the appellant's case in the preceding years, the AO is directed to adopt the WDV of the

assets as on 01.04.2006 on the basis of effects given to the orders of the CIT(A) for the preceding
years. The appellant has worked out the amount of depreciation allowable' on the basis of these'
orders at Rs.3529,64,19,750/-.
16. We have considered rival contentions and do not find any infirmity in the order of CIT(A) for
directing the AO to allow depreciation by taking WDV of assets as on 01/04/2008, in so far as
CIT(A) had followed the orders of Tribunal and Supreme Court in the case of Mahindra Mills.
Precise observation of Tribunal in its order dated 13/09/2013 was as under:
19. Brief facts giving rise to the above ground of appeal are that the assessee had not
claimed depreciation in earlier years on various plants /units on the ground that
depreciation was optional as per decision of the Hon'ble Apex Court in the Mahendra
Mills (2000) 243 ITR 56 (SC). AO allowed depreciation relating to those plants/units
to the assessee in earlier years and accordingly reduced written down value (WDV) of
the said plants/units. During the assessment year under consideration, the assessee
claimed depreciation on the said plants/units in view of amendment made of
granting of depreciation compulsory in terms of Explanation-5 to Section 32(1) of the
Act. The depreciation so claimed was on the basis of WDV as per assessee's record i.e.
WDV of the year after which the deprecation had not been claimed by assessee.
However, AO allowed depreciation on the basis of reduced WDV arrived at after
allowing depreciation to the assessee in the preceding years. Thus, the AO computed
the amount of allowable depreciation of Rs.3903,53,90,481/- as against the claim of
assessee of Rs.4977,74,24,949/-. The assessee filed appeal before the First Appellate
Authority.
19.1 Ld. CIT(A) stated that the legal position as it stood prior to 1.4.2002 i.e. prior to
assessment year 2002-03, the claim for depreciation was optional. The amendment
made by insertion of Explanation 5 to section 32(1) of the Act is prospective whereby
the statute made the granting of depreciation mandatory. Ld. CIT(A) has stated that
in the earlier years, the assessee did not claim any depreciation on the said
plants/units. Hence, it was eligible for the claim of depreciation on the original WDV
and not on the reduced WDV. Thus, the ld. CIT(A) stated that the said issue had been
considered in the assessee's own case in the preceding years including assessment
years 2001-02 and 2002-03 and view has been taken that the claim for depreciation
cannot be thrust upon the assessee and the issue was decided in favour of assessee.
The ld. CIT(A) directed the AO to adopt WDV of the assets as on 1.4.2002 on the basis M/s. Reliance
Industries Ltd., of effect given to the order of ld. CIT(A) for the preceding assessment year and allow
depreciation accordingly. Hence, this appeal filed by the department.
19.2 At the time of hearing, ld. DR relied on the order of AO. Whereas, ld.AR submitted that the said
issue was considered by the Tribunal in the assessee's own case in assessment year 2002-03 and the
Tribunal vide order dated 28.5.2012 confirmed the order of ld. CIT(A) stating that WDV as on

31.3.2001 had to be taken for considering the depreciation to be allowed to the assessee in the
assessment year 2002- 03 as the claim for depreciation prior to insertion of Explanation 5 to section
32(1) of the Act inserted with effect from 1.4.2002 as applicable from assessment year 2002-03, the
claim for depreciation was optional in view of the decision of the Hon'ble Apex Court in the case of
Mahendra Mills(supra).
As the facts and circumstances during the year under consideration are same, respectfully following
the order of the Tribunal, we uphold the order passed by CIT(A) for allowing assessee's claim of
depreciation.
Thus ground no.2 of revenue's appeal is dismissed.
17. The assessee had claimed the deduction u/s.80IA on power generation undertaking by adopting
price which the industrial consumers paid during the year under consideration for electricity
purchased from State Power Distribution Agency. However, the Assessing Officer has restricted the
claim of deduction u/s.80IA to Rs.34,23,45,990/- by taking 16% return on capital base as per the
parameters prescribed by the Regulatory Authorities i.e. State Electricity Board for procuring the
electricity.
18. By the impugned Order CIT(A) allowed assessee's claim of deduction u/s.80IA after having its
observation at pages 6.3 of its appellate order.
Precise observation is as under:-
"6.3 I have considered the facts of the case and submissions of the appellant as
against the observation / findings of the AO in his order. The contentions raised by
the appellant in respect of the ground of appeal are being discussed and decided as
under:-
i. This issue also appeared in the assessee's reopened assessment for the A.Y.2006-07.
On the identical set of facts, M/s. Reliance Industries Ltd., the Ld. CIT(A) in the
office while deciding the appellant's case for A.Y.2006-07 has reached the decision as
under: "I have considered the facts of the case, the reasons given by the Assessing
'Officer for restricting 'the deduction claimed by the assessee u/s 80IA in respect of
its power generating undertakings and the' submissions of the assessee, in my
opinion the question which is required, to be answered in respect of the ground of
appeal taken by the assessee is whether the action of the AO of restricting the
deduction is correct in the present facts and circumstances of the case.. To answer the
question, it would be pertinent to refer to Sec. 80IA(8) of the Act since the said
section is relevant in the present case Sec. 80IA(8)reads as follows:
"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 purpose of any other business carried on by the assessee or

where any goods (or services) held for the purpose 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 the price that such goods or services would ordinarily
fetch in the open market.) A perusal of the said section reveals that where transfer of
any goods or services by the eligible business to any other business carried on by the
assessee is not recorded in the books of accounts of the eligible business at the
market value of such goods or services as on date of the transfer, then for "the
purposes of the deduction, the profits and gains of such M/s. Reliance Industries
Ltd., eligible business is required to be computed as if the transfer has been made at
the market value of such goods or services as on that date. As per the Explanation,'
'market value' in relation to the goods would mean the price that such-goods would
ordinarily fetch in the open market. The proviso to sub- section(8) of section 80IA
would come into operation only' when in the opinion of the Assessing Officer; the
computation of profits and gains of the eligible business in the manner provided in
the main· sub-section presents exceptional difficulty. It is, therefore, clear that the
Assessing Officer, in order to invoke the proviso, must form an opinion based on the
material on record that the computation in the manner provided presented
exceptional difficulties. If he does not form an opinion, he cannot invoke the proviso
to determine the profits & gains of the eligible business. It would, therefore, be
required to be seen whether the AO has found based on any material on record, and
has brought any evidence or material on record, that the transfer of the goods by the
eligible business, i.e. the power generating units, has not been recorded at the market
value of such goods.
It will also be required to be seen whether the AO has formed any opinion which
would justify the invoking of the proviso to Sec, 80lA(B), because it is the proviso that
the AO has invoked to work out the deduction available to the assessee u/s. 80lA .
Perusal of the facts on record show that the assessee had disclosed that it has
sold/transferred electricity to related concerns and, that the said transfer had been
done at the fair market value of the goods. In the earlier 'assessment years in the

regular assessments, the basis of taking the market value of the goods had been
accepted by the Assessing Officer. I find that the Assessing Officer has assumed the
power u/s. 80IA(B) without bringing any material on record to show that the price
recorded in the books by the eligible business did not correspond to the market value
of the goods as on the date of the transfer. It is important to note that for giving a
finding that a particular value did not correspond to the market value, the market
value has to be found out. Hence, the section pre- supposes that there is another
value attached to the said goods which would represent the market value of the
goods. I find that there is nothing brought on record to show as to how the price
recorded in the Books does not correspond to the market value of goods, when sold in
the open market, especially in the light of the reasons given by the 'assessee that such
price corresponded to the market value of the goods.
M/s. Reliance Industries Ltd., I find that the Assessing Officer has rejected the value
recorded by the eligible business by merely holding that the market value cannot be
the purchase value of electricity but the price of the electricity which the assessee can
fetch in the open market. There being no open market for electricity during the
period under review, the regulatory bodies fixed the price of electricity. He has
further held that the tariff fixed for sale by the State. Power Distribution Agency for
industrial consumers could not be called as market price as the regulatory fixes the
tariff considering the wheeling charges, transmission loss due to leakage, past losses
of the distribution agency, etc. In my opinion, the findings of the AO cannot be taken
to be correct. Even though there may be 110 open market for the goods, an open
market has to be presumed in respect of the goods in question in view of the
categorical condition laid down in the provisions itself and the law laid down in this
regard by the different Hon'ble Courts of the land and which have/been relied" upon
by the assessee in its submissions. The Assessing Officer has not brought any
material to show that the price charged was not in consonance with the market value.
The AO has also not suggested, leave alone computed as to what the market value of
the goods should be. While the assessee has given detailed reasons as to why the price
of the goods recorded by it corresponds to till! market value, the Assessing Officer
has not given any specific findings to hold as to why such price does not correspond
to the market value of the goods and as to what was the market value of such goods.
The assessee has contended that the 'rate 'charged to the end user by the State
Electricity Board would provide the 'most appropriate basis to arrive at the market
value. Since, the eligible unit is, in effect, transferring the goods to another business
which is the end consumer, the cost to the end consumer, is required to be considered
and not the tariff at which the 'Independent Power Producers' sell to the: 'State
Distribution Agency', which in turn sells to the State Electricity Board for further sale
to the end users i.e. consumers, at a rate higher than the rate at which the 'State
Distribution Agency had procured the electricity, at. 'Another important aspect which
is required to be considered is' that the: rate at which the 'Independent Power
Producers' sell to the; State - Distribution Agency' under the Electricity Act, 1948 is a
regulated rate which is determined ,on the basis' of the normative parameters

'determined by the Government of India under its Notification No, 251 (E) 'dated
30.03.1992. The normative parameters have been fixed by the Government, which is
required to be followed by all, and no deviation in fixing the tariff is allowed Hence,
even here, the rate cannot be M/s. Reliance Industries Ltd., taken to be the "price
that such goods would ordinarily fetch in the open 'market" as this is the regulated
rate fixed by the Government. It is also seen that the Assessing Officer has taken 16%
return on capital base to work out the profits of the eligible business of the. assessee
eligible for deduction u/s, 80IA of the IT.Act, 1961. 16% return on capital base in
Notification No. 251(E) dt .. 30/3/1992 is only an exercise for fixation, of tariff. It is
'one 'of the parameters 'out of many which is required to be taken into consideration
for fixing the tariff in relation' to the' rate at which the Independent Power 'Producers
sell their power to the - State Distribution Agency. Hence, 16% return on capital base
'alone' would not be relevant while computing the profits of the eligible business
under the Act.
To sum up under Sec. 80IA(8), the following conditions are required to be satisfied:-
a) Any goods or services held for the purposes of the eligible business are transferred
to any other business carried on by the assessee.
b) 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 transfer,
c) It is only when condition (b).is satisfied then the Revenue gets a right to determine
profits and gains of such eligible business at the market value of such-goods or
services. as on the date of its transfer.
The Assessing Officer had considered the rate' charged by [he State Distribution Agency as the
market value of the goods 'transferred by the eligible business in the original assessment of the
assessee, There is nothing on record to show as to how the value of the goods adopted/taken by the
assessee do not correspond to the market value of such goods especially in light of the reasons given
by the assessee. The Assessing Officer has also not expressed any opinion as to how the computation
of profits and gains of the business tn. the manner provided in the main sub-section' presented
exceptional difficulties. Hence, proviso to Sec. 80lA could not have been invoked by him. It is also
clear that the parameter 'relating to 16% of capital base js only an exercise for fixation of tariff and is
only one of the many parameters taken into M/s. Reliance Industries Ltd., consideration for fixing
the tariff under' the Old Electricity Act of 1948, This parameter is for working 'out the' tariff for sale
to Distribution agencies and not for sale to the end' consumers and not for computing the profits
and gains of the eligible business. In' view of the aforesaid reasons, the order of the AO of working
out the profits eligible for deduction on the basis of 16% return on 'capital base cannot be upheld.
As regards the submission relating to Sec, 80A(6), I find that same submissions were made by the
assessee before the Assessing Officer during the course of the re-assessment proceedings. I find that

the AO has not controverted the submissions of the assessee .I am also of the opinion that since the
said Sec, 80(6) has been specifically made retrospective from a specific date i.e. w.e.f.01.04.2009,
the same would apply only with respect to the A.Y. 2009-10 onwards and would not apply to the
A.Y.· 2VUtj-07 in question. This is also clear from the fact that the Explanation 10 Sec. 80IB(10)
was inserted by the Finance (No.2) ct, 2009 and was made operational w.r.e.f 01/04/2001 while sec.
80A(6) was also inserted by the Finance (No.2) Act, 2009 and was made operational w.r.e.f
01/04/2009. Further, as per the explanation to Sec. 80A(6), the market value means the price that
such goods or services would fetch if these were sold by the undertaking or unit or 'enterprise or
eligible business in the open market, subject to statutory or regulatory restrictions, if any. In the
present case, the AO has not brought any material on record to show that the goods supplied by the
undertaking were at a price higher than what it was required to supply as a result of any statutory or
regulatory restrictions or as to what should have been the rate at which it was required to supply the
goods as a result of any statutory or regulatory restrictions.
In the case of Reliance Infrastructure Ltd (Supra) Hon'ble jurisdictional Mumbai, Tribunal has held
that the price that the unit paid to TPC for purchase of power would be the best basis for working
out the profits of the business of generation of power even after the order MERC. In this case, the
assessee, other than using power generated from its own captive generating units, was also
purchasing power from TPC.
In the case of Jindal Steel & Power Ltd. reported in 16 SOT 509 (Del), Hon 'ble Tribunal has held as
follows:-
M/s. Reliance Industries Ltd., "Sec: 43A of the Electricity (Supply)Act,1948, lays
down rules and conditions for determining the tariff for sale of electricity by a
generating company to the State Electricity Boards. A perusal of the same reveals that
the tariff is determined on the basis of various parameters contained therein: From
the aforesaid, it is evident that on one hand it is only upon granting of specific'
consent that a private person call set up a power generating unit having 'restrictions
on the use of power generated and at the same time the tariff at which a power
generating unit can supply power to the Electricity Board is also liable to 'be
determined in accordance with the statutory requirements. In this context it can be
safely deduced that determination of tariff between the assessee and the Board can be
said to be an exercise between a buyer and seller neither in a competitive
environment and nor in the ordinary course of trade and business. It is an
environment where one of the players has the compulsive legislative mandate not
only in the realm of enforcing buying but also to set the' buying tariff in terms of
scenario cannot be, equated with a situation where the price is determined in the
normal course of trade and competition. Therefore, the price determined as per the
Power Purchase Agreement cannot be equated with market value as understood in
common parlance. There is no reason for not holding so for the purposes of. Section
80IA-(8) also, The price at which the power is supplied by the assessee to the Board
is determined entirely by the Board in terms of the statutory regulations. Such a price
cannot be equated with the market value as understood for the purposes of

s.80-IA(8) The price recorded by the assessee Rs. 3.72 per unit can be considered to
be the market value-for the purposes of s. 80- IA(8). This is for the reason that the
assessee as an industrial consumer is also buying power from the Board and the
Board supplies such power at the rate of Rs.3.72 per unit to its- consumers. This is
the price at which the consumers are able to procure the power. Thus, under the
given circumstances, it would be in the fitness of things to hold that the consideration
recorded by the assessee's undertaking generating electric power for transfer power
for captive "consumption at' the rate of Rs. 3.72 per unit corresponds to the market
value of power. The AO is directed to allow relief to the assessee under s.'80IA as
claimed:"
It is pertinent to note that the assessee is not supplying electricity to the State
Electricity Board or to any other power distribution agency.
M/s. Reliance Industries Ltd., In the case of West Coast Paper Mills Ltd. reported in
1000 TT] 833 (Mum), the Hon'ble Tribunal has held as follows:
"Having held that the assessee is entitled for the deduction available under s. 80-IA,·
the next question is what should be the price attributable to the power generated and
consumed by the assesses, The answer to the question is readily available in sub.s(8)
of s.80-IA, which reads as below:
80-IA(8) Where any goods held for the purpose of eligible profits 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
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 as on the date of 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 as'
on that date".
The above concept of transfer pricing is also apparent in r. 7 of I T Rules, 1962 provided for
determining the income from agricultural produces consumed by the agriculturist-assessee in his
business as raw material. The rule provides that in the case' of income which is partially agricultural
income and partially income chargeable as business income in determining that part which is
chargeable to income-tax, the market value of any agricultural produce which has been raised by the
assessee and utilized as a raw material in such business shall be deducted at the prevalent market
value. This principle has been considered and upheld by the Supreme Court in the case of Thiru
Arooran Sugars Ltd. Vs. ClT (1997)
-142 CTR (SC) 9; (1997) 227 ITR 432 (SC). Therefore, we direct the assessing authority to work out
the profits on the basis of the price of the power generated' by the assessee' at the average of the
annual landed cost of electricity 'purchased by the assessee from Karnataka State Electricity Board

during the impugned previous year. It may be determined on the basis of 'payment details available
from the bills issued by the Karnataka state Electriciiy Board, during the year under consideration ."
M/s. Reliance Industries Ltd., During the course of the appellate proceedings, the assessee has
submitted that the sale price of electricity by the captive generating units varies from Rs. 4.55 per
KWH to,Rs. 4.52 per KWH and for the sake of uniformity, the same had been taken at the average
rate of Rs. 4.54 per KWH for computing the claim u/s. 80IA for the power generating units. The
working had been done based on the price of electricity charges by Dakshin 'Gujarat . Vij company, a
state owned company which was the only supplier of electricity other than the captive power plants.
In views of the decisions of Hon'ble Tribunals as. discussed above, the Assessing. Officer will
examine whether the submission of the assessee with respect to the rate taken is correct. If it is
found that the rate charged by the suppliers is lower than the role adopted for sale by the captive
power generating units of the assessee, such rate would be taken by the Assessing Officer for
computing the profits of 'the' eligible-business, eligible for deduction u/s. 80IA. However, if the' rate
charged. by the suppliers is the same as the rate adopted for sale' by the 'captive power generating
units of the assessee, such rate' adopted should be accepted for' the purpose of working out the
deduction u/s. 80IA.
Subject to the above, this ground of appeal filed by the assessee is allowed.
The facts of the case are similar and issue involved is identical. Accordingly in view of the facts of the
case and keeping in view the principles of judicial consistency, it -Is directed that. the Assessing
Officer will examine correctness of the-rate taken (Rs. 4.799 per unit) and if it is found that the rate
charged by the suppliers is lower than the rate adopted for sale by the captive power generating
units of the assessee, such rate would be taken by the Assessing Officer for computing the profits of
the eligible business, eligible for deduction u/s. 80IA. However, if the rate charged by the suppliers
is the same as the rate adopted for sale by the captive power generating units of the assessee, such
rate adopted should be accepted for the purpose of working out the deduction u/s.80-lA.Subject to
the above, this ground or- appeal filed by the assessee is allowed.
19. We found that exactly similar issue has been considered by the Tribunal in assessee's own case
for the assessment year 2006-07 wherein issue has been decided in favour of the assessee. As the
facts M/s. Reliance Industries Ltd., and circumstances during the year under consideration are
same, respectfully following the order of the Tribunal in assessee's own case, we do not find any
infirmity in the order of CIT(A) for allowing assessee's claim of deduction u/s. 80IA with reference
to power generating undertaking and the power so generated being used mainly for captive
consumption.
20. Learned DR has relied on the decision of Calcutta High Court in the case of ITC Ltd., (2015) 64
Taxman.com 214 and contended that distributing expenditure not actually incurred by the assessee
increases its profits. Such profit cannot be said to be derived from industrial undertaking, therefore,
to this extent deduction u/s.80IA cannot be allowed.

21. In the course of the hearing, the Revenue has relied on the decision of Calcutta High Court in
Commissioner of Income tax, Kolkata-III v. M/s.
ITC Ltd. (ITA 426 of 2006) for the proposition that the market price determined u/s 80lA of the Act
ought not to be determined at the rate at which electricity was supplied to the assesses for its
consumption other than for Captive Power plant. According to the Revenue, this decision was
therefore in favour of the Revenue and ought to be followed in preference to the decision of the
Tribunal referred to earlier in the assessee's own case.
22. We had gone through the decision of the Calcutta High court in M/s.ITC Ltd. and found that it
has no connection to the facts of the assessee's case for following reasons:
23. First, the judgement of the Calcutta High Court was considering the provisions relating to the
Electricity Act as they stood prior to the Electricity Act, 2003 as it was dealing with A Y 2002-03. No
doubt, the Calcutta High Court has referred to Section 61 & 62 of the Electricity Act, 2003, but that
is only in context of discussion relating to the rates fixed by Tariff Regulation Commission for sale of
electricity by generating companies. The decision therefore cannot hold the field for A Y 2007-08,
2008-09 and 2009-10 as these Assessment years are years after the Electricity Act came into force
on 10.06.2003.
24. It is therefore necessary to see what is the effect of the Electricity Act 2003 and its impact on and
regulation of tariffs. The Preamble to The Electricity Act 2003 states as follows:
"An Act to consolidate the laws relating to generation, transmission, distribution,

trading and use of electricity and generally for taking measures conducive to
development of electricity industry, promoting competition therein, protecting
interest of consumers and supply of electricity to all areas, rationalization of
electricity tariff, ensuring transparent policies regarding subsidies, promotion of
efficient and environmentally benign policies, constitution of Central Electricity
Authority, Regulatory Commissions and establishment of Appellate Tribunal and for
matters connected therewith or incidental thereto".
25. A look at the Statement of Objects and Reasons annexed to the bill, para 4 would indicate that
the Act seeks to encourage private sector participation in generating, transmission and distribution
of electricity and promoting competition and providing for newer concepts like power trading and
open access. A copy of the statement of Objects and reasons M/s. Reliance Industries Ltd., is
annexed herewith. Para 4(i) of the Objects and Reasons is particularly important and it reads as
under:
"Generation is being delicensed and captive generation is being freely permitted.

Hydro projects would, however, need approval of the State Government and
clearance from the Central Electricity Authority which would go into the issues of

dam safety and optimal utilisation of water resources"
(Emphasis supplied).
26. Reference is invited to this para to show that captive generation is being freely promoted. With
this background, it is necessary to see what is the scope and impact of the Electricity Act 2003.
27. Section 12 provides that no person shall transmit electricity or distribute electricity or undertake
trading in electricity unless he is authorised to do so by a licence issued u/s 14 or he is exempt under
section 13.
28. It is quite clear that under section 12, a licence is not required for generation of electricity and
this is made clear by section 7 which reads as follows:
"PART III- GENERA TION OF ELECTRICITY Section 7. (Generating company and

requirement for setting up of generating station):
Any generating company may establish, operate and maintain a generating station
without obtaining a licence under this Act if it complies with the technical standards
relating to connectivity with the grid referred to in clause (b) of section 73.
Section 8(Hydro Electric generation)"
Notwithstanding anything contained in section 7, any generating company intending to set-up a

hydrogenating station shall prepare and submit to the Authority for its concurrence, a scheme
estimated to involve a capital expenditure exceeding M/s. Reliance Industries Ltd., such sum, as
may be fixed by the Central Government, from time to time, by notification.
29. It is only hydro-electric electricity generation which is regulated u/s 8.
In the case of the assessee, the generation is for captive consumption and therefore section 9 is
material and it reads as under:
"Section 9. (Captive generation):
(1) Notwithstanding anything contained in this Act, a person may construct, maintain
or operate a captive generating plant and dedicated transmission lines:
Provided that the supply of electricity from the captive generating plant through the
grid shall be regulated in the same manner as the generating station of a generating
company.
Provided further [flat no licence shall be required under [his Act for supply of
electricity generated from a captive generating plant to any licencee in accordance

with the provisions of this Act and the rules and regulations made thereunder and to
any consumer subject to the regulations made under subsection (2) of section
42.
(2) Every person, who has constructed a captive generating plant and maintains and operates such
plant, shall have the right to open access for the purposes of carrying electricity from his captive
generating plant to the destination of his use:
Provided that such open access shall be subject to availability of adequate

transmission facility and such availability of transmission facility shall be determined
by the Central Transmission Utility or the State Transmission Utility, as the case may
be:
Provided further that any dispute regarding the availability of transmission facility
shall be adjudicated upon by the Appropriate Commission." (Emphasis Supplied)
30. Section 9 is a non-obstante clause and permits any person to construct, maintain or operate a
Captive Generation plant and dedicated M/s. Reliance Industries Ltd., transmissions lines. A bare
perusal of section 9(1) would indicate that there is no restriction whatsoever on a person in respect
of Captive Generation plant. It is neither required to obtain a licence under section 7 or under
section 12 as a generating company if it consumes power within itself. In other words, a Captive
Generation Plant does not need to apply for licence under this Act if it complies with the technical
standards relating to connectivity with the grid referred to in clause (b) of section 73.
31. The reason for excluding a Captive Generation plant from any of the technical standards for
construction of electricity plants relating to connectivity with the grid, is because a person can,
without a licence, construct, maintain and operate a Captive Generation plant and use dedicated
transmission lines. His generating, transmitting and consuming power within his own jurisdiction
neither needs access nor seeks to use the grid and therefore such a Captive Generation Plant is not
cabined and cribbed by any regulatory mechanism under the Electricity Act 2003.
32. If however the Captive Generation Plant seeks to supply electricity to any outsider through the
grid, the proviso requires that the supply of electricity shall be regulated in the same manner as a
generating station of a generating company. The word 'grid' is defined in section 2(32) of the Act as
under:
(32) "grid" means the high voltage backbone system of inter-
connected transmission lines, sub-stations and generating plants;

33. Thereafter the proviso makes it clear that it is only when the Captive Generation Plant sells to an
outsider through the high voltage backbone system of interconnection transmission, that the full
vigour and rigour of regulation under the Electricity Act, 2003 will be attracted. The 2nd proviso
makes it clear that although no license is required when a Captive Generation plant supplies
electricity to a consumer, the rules and regulations of the Act made u/s 42(2) would apply for the
sale of electricity by a Captive Generation plant to a consumer other than himself.
34. This fact makes it clear that the provisions of section 42(2) apply only to a Captive Generation
plant in respect of sales made or electricity consumed by a third party. This distinction is very
significant in as much as there is no regulation of intra department consumption by any person
generating electricity. In other words, for a person generating electricity and consuming it there is
no obligation and no duty to either obtain a licence to set up a plant or transmit electricity which is
self consumed.
35. The Calcutta High Court in page 11 has held "the rate at which electricity was purchased from
Andhra State Electricity Board by the paper unit of the assessee can by no means be the market rate
at which the power plant of the assessee could have sold its production in the open market. In the
open market the buyer would obviously be a distribution company or a company engaged in
generation and distribution. Therefore the rate which is sold to any such company can only be the
market rate contemplated by the section". In other words, according to the Calcutta High Court, the
regulated selling price by a third party to the assessee M/s. Reliance Industries Ltd., cannot form the
selling price by a Captive Generation plant. Whilst this is the absolutely correct and true, it is wholly
irrelevant in context of Electricity Act, 2003. In a much as under the Electricity Act 2003, when the
Captive Generation plant notionally sells electricity to itself, there is no regulation in respect of
market price. In this connection, the decision of Supreme Court in the case of Thiru Arooran Sugars
Ltd. v. CIT (1997) 227 ITR 432 is material. In that case, the assessee company was a manufacturer of
sugar which purchased sugarcane from the market for crushing. It also had its own cane fields
where it cultivated sugarcane, which was entirely consumed by its factory. Since the profit made by
the assessee from the sale of sugar arose out of agricultural activities as well as manufacturing
activities, the income earned by the assessee was required to be divided into two parts. No tax was
leviable on agricultural income, but the profit generated from non-agricultural activities was leviable
to be taxed under the Act. Therefore the agricultural income had to be determined and for that
market value of the sugarcane consumed in its factory had to be determined. The relevant rule 7 of
the Income- tax Rules, 1962 read as follows:
"Income which is partially agricultural and partially from business
- (1) In the case of income which is partially agricultural income as defined in section
2 and partially income chargeable to income-tax under the head 'profits and gains of
business', in determining that part which is chargeable to income-tax the market
value of any agricultural produce which has been raised by the assessee or received by
him as rent-in-kind and which has been utilised as a raw material in such business or
the sale receipts of which are included in the accounts of the business shall be
deducted, and no further deduction shall be made in M/s. Reliance Industries Ltd.,

respect of any expenditure incurred by the assessee as a cultivator or receiver of

rent-in-kind.
"(2) For the purpose of sub-rule (1) 'market value' shall be deemed to be
(a) where agricultural produce is ordinarily sold in the market in its raw state, or after
application to it of any process ordinarily employed by a cultivator or receiver of
rent-in-kind to render it fit to be taken to market, the value calculated according to
the average price at which it has been so sold during the relevant previous year;
(b) where agricultural produce is not ordinarily sold in the market in its raw state or
after application to it of any process aforesaid, the aggregate of-
(i) the expenses of cultivation;
(ii) the land revenue or rent paid for the area in which it was grown; and
(iii) such amount as the Assessing Officer finds, having regard to all the
circumstances in each case, to represent a reasonable profit. "
36. The revenue argued that Rule 7(2)(a) ought to be followed and according to the assessee, Rule
7(2)(b) was the correct rule to be followed. The Supreme Court rejected the argument of the assessee
that Rule 7(2)(b) ought to be followed. It held at page 438 as follows:
"We are unable to uphold this argument. 'Market' in the context of rule 7 does not
mean an open market where buyers and sellers get together for the purpose of
purchase and sale of goods. The assessee-company regularly, year after year, in the
ordinary course of business bought sugarcane from registered and unregistered ryots.
Whether the purchase was at a price controlled by the Sugarcane Control Order or
not is quite immaterial. There was a price at which sugarcane could ordinarily be
purchased by the assessee for the purpose of its own business. The price paid by the
assessee was the market price. It is by now well-settled that market does not have to
be one open place of business where buyer and seller congregate (Emphasis
Supplied).
37. According to the Supreme Court, it is not necessary that there must be an actual market where
buyers and consumers congregate to purchase 8nd sell Goods Where there is no such open market,
an estimate of the market price will have to be done on an estimated hypothetical basis. It stated at
page 440, para (f) of 227 ITR 432.
The principle that value of a property will be the price which it will fetch if sold in the open market is
a well-known method of valuation which has been adopted in a large number of statutes in England

and also in India. It is well-settled that existence of an open market is not a pre-condition for
application of this principle. There may or may not be an actual market where buyers and sellers
congregate to purchase and sell goods. Where there is no such open market, an estimate of the
market price will have to be done on a hypothetical basis.
38. The Supreme Court also referred to its decision in the case of Ahmed G. H Ariff v. CWT [1970]
761TR 471 (SC), in the following words:
In the case of Ahmed G.H. Ariff v. CWT [1970176 ITR 471 , explaining the phrase 'if
sold in the open market' in section 7(1) of the Wealth-tax Act, it was observed by
Grover, J., speaking for the Court that the phrase did not contemplate actual sale or
the actual state of the market, but only enjoined that it should be assumed that there
was an open market and the property could be sold in such a market and, on that
basis, the value had to be found out. It was a hypothetical case which was
contemplated and the tax officer must assume that there was an open market in
which the asset could be sold.
In view of the aforesaid, it is very difficult to uphold the contention of Mr. Nariman
that in order to find out the market price there has to be an actual market where
there will be 'a concourse of buyers and sellers'.
39. Having discussed these principles, it laid down the following criteria for determining the price at
which the sugar cane was said to have been sold to the manufacturing unit of the assessee. It noted
that the assessee M/s. Reliance Industries Ltd., company actually bought sugarcane from a large
number of growers, year after year in the ordinary course of business. The price at which it buys the
sugarcane must be the market price and if the price was controlled, the controlled price will be taken
as the market price, because it is at this price that a willing buyer and a willing seller are expected to
transact business. Applying, this principle of the facts of the assessee's case, there is only a single
buyer for the electricity generated by the Captive Generation Power which is the assessee himself.
Just as in Thiru Arooran Sugars Ltd. v. CIT, the sugarcane produced by Thiru Arooran Sugars
categorically confirms that there was only a single buyer viz.
manufacturing unit of Thiru Arooran Sugars, the Supreme Court there stated that because
manufacturing unit also bought from other growers, the price at which they obtain sugar cane
should be adopted as market price. Applying this principle to the facts of the assessee's case, the
assessee also buys electricity from other supplier viz Gujarat Electricity Board (GEB). It is not
relevant whether that price was controlled or not. If the price at which the GEB supplied as
controlled then that would be the market price vis-a-vis the assessee. Accordingly, the price charged
by GEB should be adopted as market price. Therefore, the decision of Supreme Court in Thriu
Arooran Sugars completely covers the situation of the assessee.
40. The Supreme Court at page 441 has stated as under:

"These are the principles universally applied to find out the price at which the goods
are ordinarily sold in the open market. For determination of market value, there is no
pre-requisite that an M/s. Reliance Industries Ltd., open market where buyers and
sellers congregate to buy and sell goods must exist. In the instant case, the
assessee-company actually bought sugarcane from a large number of growers year
after year in the ordinary course of business. The price at which it buys sugarcane
must/be taken to be the market price. If the price is controlled by Sugarcane Control
Order, the controlled price will be taken as the market price because it is at this price
that a willing buyer and a willing seller are expected to transact business. As Lord
Denning pointed out, it does not make any difference to this position that the
assessee was the only buyer in the region where its factory was located".
41. The Calcutta High Court has however stated at page 11 :
"But in the case before us the electricity generated by the assessee could not be sold
to anyone other than a distribution company or a company which is engaged both in
generation and distribution."
42. In our case, the entire consumption is by the assessee itself and the assessee is not obliged to sell
to only a distribution company or a company which is engaged in generation and distribution. This
is made clear from the 2nd proviso to section 9(1) of the Electricity Act, 2003 which reads as
follows:
"Provided further that no licence shall be required under this Act for supply of
electricity generated from a captive generating plant to any licensee in accordance
with the provisions of this Act and the rules and regulations made thereunder and to
any consumer subject to the regulations made under sub-section (2) of section 42. "
43. Therefore, the decision of the Calcutta High Court is distinguishable as in that case in the .period
before the introduction of the Electricity Act, 2003 a captive generating plant would sell electricity
only to a generating or distribution and generating company whereas in the case of the M/s.
Reliance Industries Ltd., assessee after the enactment of the Electricity Act, 2003 the Assessee
would sell to "any licencee" and is not restricted to selling electricity only to a distribution company
or a generating and distribution company.
44. It was in these circumstances and for these reasons that the Calcutta High Court concluded that
the purchase price would be different from the selling price of electricity on account of wheeling and
distribution of losses. The Calcutta High Court concluded at page 12 as under:
" The rate at which electricity can be supplied to a consumer by the distribution
licensee and the rate at which the generating companies can sell electricity to the
distribution licensee are governed respectively by Sections 61 and 62 of the Electricity
Act 2003. There is tariff regulatory commission which fixes both the rates for sale
and purchase of electricity by the distribution licensee. There are provisions in

Section 62 so that the generating companies can recover expected revenue on the
basis of the tariff fixed by the commission. There are similarly provisions in Section
61 so that the distribution licensee can derive reasonable return. There is thus an
in-built mechanism to ensure permissible profit both to the generating companies
and the distribution licensees "
45. This conclusion is indisputable as applicable to licenced generating companies selling in the
market but has no application to a 'captive generating plant' as much as there is no tariff fixed by
Tariff Regulation Commission for self consumption. Therefore, the open market for sale of
electricity by a licenced generating company and the open market which must be assumed for
consumption of electricity by the generating producer itself are two different markets and the
market price for self consumption and the market price for sale by the licenced generating M/s.
Reliance Industries Ltd., companies to outsiders are two different prices. The Electricity Act, 2003
contemplates determination of market price only in respect of licenced generating companies
willing to distribute or transmit power to a distribution licensees or to a consumer and it is only
those generating companies which are regulated under section 42(2). The self consumption of
electricity by a Captive Power Plant is' not regulated under Electricity Act, 2003. In the decision of
Supreme Court In Thiru Arooran Sugars also, it is quite clear that self consumption of sugarcane
was not regulated and given that circumstance, the Supreme Court held that because the
manufacturing unit was purchasing sugar from other growers that price ought to be adopted as
market price. Similarly in the case of the assessee, in respect of the electricity produced by Captive
Power Plant for consumption, there is no regulation for pricing the price charged by GEB ought to
be adopted as market price. The market is therefore hypothetical open market exactly as was
contemplated in Rule 7(2)(a) referred to in Thriu Arooran Sugars.
46. We further observe that the Calcutta High Court had referred to section 62 of the Electricity Act
2003, whereby generating companies can recover expected revenue on the basis of tariff fixed by the
commission.
The provisions of section 62 of the Electricity Act 2003 reads as follows:
62 (1) The Appropriate Commission shall determine the tariff in accordance with
provisions of this Act for -
(a) Supply of electricity by a generating company to a distribution licensee:
M/s. Reliance Industries Ltd., Provided that the Appropriate Commission may, in
case of shortage of supply of electricity, fix the minimum and maximum ceiling of
tariff for sale or purchase of electricity in pursuance of an agreement, entered into
between a generating company and a licensee or between licensees, for a period not
exceeding one year to ensure reasonable prices of electricity;
(b) Transmission of electricity;

(c) Wheeling of electricity;
(d) Retail sale of electricity Provided that in case of distribution of electricity in the
same area by two or more distribution licensees, the Appropriate Commission may,
for promoting competition among distribution licensees, fix only maximum ceiling of
tariff for retail sale of electricity.
47. On perusal of the above, it can be observed that section 62 of the Electricity Act 2003 authorizes
commission to determine tariff for (1) Generating company supplying to distribution licensee, (2)
Transmission of Electricity (3) Wheeling of electricity (4) Retail sales of electricity.
48. Thus captive power plant and its users are not covered under the four categories mentioned in
section 62(1) above. Hence for supply of power by a captive power plant to the captive users or to
open access consumers, it is not required to get the tariff approved by the commission as stated in
section 86(1 )(a) of the Electricity Act, 2003.
49. Therefore, the decision of the Calcutta High Court cannot be applied to the acts of the assessee in
as much as it was delivered in respect of A Y 2002-03 for which the Electricity Act 2003 did not
apply and also for the reason that the Honourable Court has not considered the provisions of M/s.
Reliance Industries Ltd., sections 8, 9, 42 and 2(g) of the Electricity Act, 2003. Further the
provisions of section 62 of the Electricity Act, 2003 referred to by the Honourable Court are not
applicable to the fact of the assessee's case.
50. The Calcutta High Court has dissented from the decision of three different High Court as
follows:
1. The decision of Chattisgarh High Court Bilaspur Bench in the case of ACIT v.
Godavari Power & Ispat Ltd. - 223 Taxman 234.
2. CIT v. Kanoria Chemicals and Industries Ltd 35 taxmann.com (Cal).
3. CIT v. Graphite India Ltd ITA No ITA No 733 of 2008 (Cal).
4. Madras High Court decision referred to in page 12 (Citation not available).
51. Under these circumstances following two principles involved here.
1. Where there is a conflict of views between High Court, Tribunal may choose to follow what in its
opinion is the correct view.
2. When there is a conflict of opinion between two or more High courts, opinion of jurisdictional
High Court, which is in favour of the assessee ought to be followed.

52. If neither of the above two principles are followed, there is a decision of assessee in its own case
for the earlier year on identical fats and that ought to be followed.
53. Further there are several decision of Tribunal which have taken the same view, In cases with
similar facts viz:-.
1. ACIT, Raipur v. Godavari Power & Ispat Ltd - 133 ITD 502 (Dilaspur ITAT) M/s. Reliance
Industries Ltd.,
2. Eveready Spinning Mills (P) Ltd v. ACIT, Circle-1, Tirupur - 17 Taxmann 254 (AY 2007-08)
Chennai ITAT.
3. Assam Carbon Products Ltd v. ACIT - 100 TT J 224 (IT AT Kolkatta)
4. West Coast Paper Mills Ltd V. JCIT -100 TTJ 833 (Mum) Mumbai ITAT
5. Add!. CIT v. Jindal Steel & Power Ltd - 16 SOT 509 (ITAT Delhi).
6. Shree Cement Ltd v. The Addl. CIT Jaipur-ITA NO.503/JP/2012 (Jaipur ITAT)
54. In any view of the matter, several decision of the Tribunal listed below have taken a view
consistent with a view taken by Tribunal in assessee's own case for A Y 2006-07. In the
circumstances, except in the case of Calcutta High Court in M/s. ITC Ltd, there are four judgements
of other High Court in assessee's favour and six judgements of Tribunal in assessee favour and no
contrary decision of Tribunal. In the circumstance, the appropriate course of action to follow would
be the decision of Supreme Court in the case of Thiru Aroovan Sugar Mills and the decisions of
Calcutta High Court which are earlier in point of time and decision of Chattisgarh and Madras High
Court and various benches of Tribunals and assessee's own case for the earlier year.
55. Furthermore the Supreme Court has endorsed the view that where there is a conflict between
two High Courts the view in favour of the assessee must be adopted. There are several decision
which have taken the same view, in cases with similar facts viz:-.
1. CIT v. Vegetable Products Ltd - 88 ITR 192 (SC)
2. Pradeep J Mehta v. CIT Ahmedabad - 169 Taxman 454 (SC) M/s. Reliance Industries Ltd.,
3. CIT v. Naga Hills Tea Co. Ltd - 89 ITR 236 (SC) In view of the above discussion, the Calcutta High
Court can have no application to the assessee's case.
56. In view of the above, we respectfully follow the order of the Tribunal in assessee's own case and
confirm the order of CIT(A).
57. In the course of assessment AO made addition u/s.14A r.w.r. 8D.

Facts in brief are that during the A.Y. 2007-08, dividend income of Rs.107.81 crores was claimed by
assessee as exempt u/s.10(34) of the Act. Investment in the shares, which yielded the dividend
income were made out of net owned funds. The learned AO has disallowed estimated expenditure of
Rs.69.16 crores under normal provisions of Income tax Act and under section 115JB of the Act,
presuming it to be incurred in relation to earning of the said exempt dividend income by invoking
the provisions of section 14A of the Income-tax Act r.w.r. 8D of the Income tax Rules.
The assessee had added back an amount of Rs.2.26 crores in the return being expenditure incurred
for earning the exempt dividend income, however, the AO has failed to appreciate the same.
58. By the impugned order, CIT(A) computed disallowance of interest at Rs.24.12 crores and 0.5%
of the monthly weighted average value of investment, i.e. proportionate administrative and other
expenses of Rs.45.50 crores and thus disallowing RS.69.62 crores u/s.14A.
59. Learned AR placed on record the order of the Tribunal in assessee's own case for the assessment
year 2006-07 wherein disallowance of other expenses was restricted to 1% of the exempt income.
However, M/s. Reliance Industries Ltd., disallowance of interest was deleted. Precise observation of
Tribunal was as under:-
61.2 We observe that the above ground has been considered by the Tribunal vide
paras 9.1 to 9.8 hereinabove. The Tribunal vide para 9.6 by following its earlier order
I.T.A. No.4475/Mum/2007 77 and 7 other appeals dated 28.5.2012 in assessee's own
case for preceding assessment year 2002-03 on similar facts has held that
proportionate disallowance of interest is not justified as the assessee's own funds are
far in excess than the interest free advances given by assessee and the investment
made which is giving exempt income to the assessee.
61.3 At the time of hearing, ld. Representatives of the parties have categorically stated
the findings given in assessment year 2003-04 will be applicable for this assessment
year 2006-07 as well. Since, we have held vide para 9.6 that ld. CIT(A) is not justified
to make proportionate disallowance of interest as assessee's own funds are far in
excess interalia than the investment made which is giving exempt income to the
assessee, and have held that the disallowance of interest as computed by ld. CIT(A)
by applying Rule 8D read with section 14A of the Act is not justified.
61.4 In so far as disallowance of administrative expenses u/s 14A of the Act, we have
held vide para 9.7 that it is fair and reasonable to restrict the disallowance to 1% of
the exempt income. Since in the assessment year under consideration, the assessee
has earned interest income of Rs.88.01 crores which is exempt u/s 10(23G) of the Act
and Rs.22.44 crores being dividend income exempt u/s 10(34) of the Act aggregating
to Rs.110.45 crores, we restrict disallowance to 1% of the said exempt income which
works out to Rs.1,10,45,000/- for the purpose of computing the total income under
the normal provisions of Act. In regard to disallowance u/s 14A for computing the
book profit u/s 115JB of the Act, we have held hereinabove in para 9.7 that while

computing the book profit u/s 115JB of the Act, the provisions of section 14A cannot
be imported and therefore no disallowance u/s 14A of the Act can be considered
while computing the book profit u/s 115JB of the Act.
61.5 In view of above ground No.2 of the appeal of assessee is allowed in part by
restricting the disallowance to Rs.1,10,45,000/-
u/s 14A of the Act while computing total taxable income under the normal provisions of Act but no
disallowance under section 14A be considered while computing the book profit u/s 115JB of the Act.
60. The learned AR submitted that the AO has not identified any expenditure which is directly
incurred in relation to the earning of exempt M/s. Reliance Industries Ltd., dividend income.
Without finding any business expenditure as having been incurred in relation to exempt dividend
income, the AO cannot make any disallowance out of the claim of business expenditure. It was also
submitted that assessee had not incurred any part of interest expense for earning the exempt
income. It was stated that the interest bearing borrowed funds were invested in the normal course of
carrying on the business. The assessee submits that its own funds are far greater than investment
and interest free advances available, hence, it is proved that investments have been made out of own
funds. In this connection, the assessee had relied on the Judgement of Bombay High Court in the
case of CIT vs Reliance Utilities and Power Limited (313 ITR 340) and HDFC Bank vs DCIT [383
ITR 0529]. In the light of above facts and judicial pronouncements, the assessee prayed that the
disallowance made by the AO and confirmed by the CIT(A) should be deleted and the same shall be
restricted to the disallowances offered by the Assessee.
61. Rival contentions have been heard and record perused. We had also deliberated on the judicial
pronouncements referred by lower authorities in their respective orders as well as cited by learned
AR and DR during the course of hearing before us in the context of factual matrix of the case. During
the A.Y. 2007-08 we found that the total interest free own funds of the assessee are as under:
M/s. Reliance Industries Ltd., Particulars 31.03.2007 Rs in Crore Own Funds:

Shareholder Funds 63,967.13 (Share Capital + Reserves) (Refer page 6 of the paper
book):
Less: Investments yielding exempt 14,954.12

income (Refer page 69 of the
assessment order)
Excess of own Fund 49,013.01
62. From the above table it is clearly evident that the assessee's own funds are far in
excess of total investments (which includes investments of Rs 1,602.11 crares giving
rise to exempt income). Therefore, no interest expense can be attributable for making
disallowance u/s 14A of the I.T. Act.

63. In this connection reliance can be placed on the following judgments
i) HDFC Bank Limited vs Dy. Commissioner of Income tax - 2(3), Mumbai & Ors.
(Writ Petition No.1753 of 2016)
(ii) CIT vs HDFC Bank Limited [ITA 330/2012 Bom HC]
(iii) CIT Vs. Reliance Utilities & Power Ltd reported in 313 ITR 340 [Bombay HC]
(iv) CIT vs GUJARAT STATE FERTILIZERS & CHEMICALS LTD [ITA 82 of 2013]
64. Respectfully following the above decisions, we direct AO to delete disallowance of

interest.
65. With regard to disallowance under Rule 8D (2)(iii) we found that the Rule 8D is
not applicable in the A.Y. 2007-08. Tribunal in the A.Y. 2006-07 restricted the
disallowance at 1% of exempt income after M/s. Reliance Industries Ltd., considering
the dlsallowances made in the preceding assessment years.
In view of earlier orders of ITAT for A.Y. 2006-07 on similar facts and circumstances when rule 8D
was not applicable, we direct the AO to restrict the disallowance u/s. 14A of the Act out of
administrative expenses to the extent of 1% of exempt Income for the purpose of computation of
income under normal provisions of Act in so far as Rule 8D is not applicable to A.Y. 2007-08 under
consideration. We direct accordingly.
66. AO has also disallowed depreciation of Rs.14.19 lakhs on the capitalised value of goods
purchased from Durga Iron and Steel and Surajbhan Rajkumar Pvt. Ltd. By the impugned order
CIT(A) confirmed the same.
67. At the outset, learned AR fairly conceded that the issue has been decided against assessee by
Tribunal in the assessment year 2006-07.
As the facts and circumstances during the year under consideration are same, we confirm the action
of lower authorities for disallowance of depreciation in the A.Y. 2007-08, 2008-09 & 2009-10.
68. In ground No.4 assessee alleged disallowance of depreciation of jetties. The AO has disallowed
the depreciation in respect of jetties constructed by assessee and used for the purpose of its
business. By the impugned order CIT(A) confirmed the action of the AO.
69. We have heard the rival contentions and found that exactly similar issue has been decided in
favour of assessee by the Tribunal in M/s. Reliance Industries Ltd., assessee's own case for the
assessment year 2004-05 after having the following observation:-

87. We observe that on identical facts, the Tribunal considered similar issue in the
case of Reliance Ports and Terminals Ltd., and allowed the claim for depreciation on
the cost incurred by the assessee on construction of jetties at Sikka Port, Gujarat, for
GMB.
In the said case, the assessee constructed jetties at Sikka Port, Gujarat of GMB primarily to serve
imports of group companies at the port. As per the agreement entered into, the assessee was entitled
to concession in wharfage charges i.e., land / shipping fee on use of jetty, which was to be set-off
against capital investment made by the assessee. The assessee treated this right to use the jetty as an
intangible asset and claimed depreciation on the cost incurred @ 25%. The Assessing Officer stated
that the assessee was not entitled to depreciation on the cost of construction of jetty as the entire
cost being reimbursed by GMB by way of rebate on the wharfage charges which otherwise the
assessee was liable to pay in full. Further, the right to use the jetty was not in the nature of any
business or commercial right similar to normally accepted intangible asset such as knowhow,
patents, copy rights, trade marks, license, franchises or any other business or commercial rights in
similar nature. That entire investment in the jetty was quantifiable and the return from the
investment was specified based on which the rebate on wharfage charges was determined. It is
relevant to state that in the said case, as per the agreement, the ownership of the jetty was to be with
GMB although, the cost of building and jetty was made by the assessee. In the said case also, the
assessee was required to pay landing and shipping fees (known as wharfage charges) @ 20% of the
actual landing and shipping fees specified in the schedule of port charges. The balance 80% was
required to be set-off against the capital investment i.e., the cost of the construction of jetties.
After the capital investment was recovered through such set-off, the assessee was required to pay
landing and shipping fees at normal rate. The agreement was to remain in force for a period of 25
years or till such time such aggregate of the rebate obtained by the assessee in wharfage charges
equaled the amount of construction of the jetties, whichever is earlier. The assessee spent `
14,25,63,02,471, and treated the same as intangible asset under section 32(1) of the Act on the
reasoning that it was license and also represent business and commercial right on which the
assessee claimed depreciation @ 25%. The Assessing Officer did not agree with the assessee and
disallowed the claim. The first appellate authority also confirmed the action of the Assessing Officer.
Further, the Commissioner (Appeals) held that the expenditure to be allowed proportionately over a
period of 25 years. Being aggrieved, the assessee filed appeal before the Tribunal. The Tribunal, after
considering the submissions of the Representatives of the parties, held that by virtue of the terms
M/s. Reliance Industries Ltd., of agreement, the assessee only acquired the commercial right or
license and they are really an intangible asset within the meaning of section 32(1) of the Act.
Thereafter, the Tribunal, vide Para-32, of the said order, held that the assessee is entitled for the
depreciation by treating the expenditure as part of block of intangible asset. The relevant Para- 32 of
the said order, reads as follows:-
"32. The question is whether the present expenses incurred by the assessee can be
said satisfy the tests of being licences, franchises or any other business or commercial
rights being intangible assets within the meaning of the aforesaid provisions. In our

view, the Tribunal in the earlier year has already concluded that this expenditure is
question is incurred wholly and exclusively for the purpose of business and the terms
of the agreement which are extracted hereinabove clearly shows that the assessee has
acquired some business or commercial right by incurring this expenditure. This
expenditure has not resulted in the acquisition of any tangible asset like building,
machinery, plant or furniture. Any other expenditure which did not result in the
acquisition of these intangible assets can only be treated as intangible assets. In our
view, substantial expenditure incurred by the assessee is for certain commercial
considerations and business interest has resulted in business advantage to the
assessee in the form of priority user of the infrastructure facility that was badly
needed by the assessee and its associates concerns. The assessee would have been
forced to incurred extra expenditure if this expenditure were not incurred by the
assessee. After all the businessman does not incur any expenditure unless it gives
some business advantage and the huge expenditure incurred by the assessee is only
to get such business advantage like priority user by the assessee company and right to
claim rebate on the wharfage charges payable or to guard against the possible
increase in the wharfage charges that may be necessitated by efflux of time or
economic inflation. All points are considered together, in our view, the expenditure in
question give rise to acquisition of licence or other business or commercial right
which are really in the nature of intangible asset and are fully covered within the
meaning of section 32(1) of the Act. In the light of the above discussion, the
contention of the assessee that the said expenditure is to be treated as an intangible
asset, and therefore, the assets are entitled for appropriate depreciation by treating
the said expenditure as part of the block of intangible asset is fair, reasonable and in
accordance with the amendment provisions of law in this regard."
88. We observe that the terms of agreement of the assessee before us are similar to the terms of
agreement which was considered in the case of Reliance Ports & Terminals Ltd. (supra) and entered
into with GMB. The benefit which the assessee before us is entitled to get on account of construction
of jetty are similar to the case considered by the Tribunal, vide its order dated 26th November 2007
(supra).
M/s. Reliance Industries Ltd., The learned Departmental Representative, during the course of his
submissions, has not pointed out any distinguished facts in the case before us viz-a-viz in the above
case of Reliance Ports and Terminals Ltd. (supra). We observe that the decision in above case
squarely apply to the facts of the case before us. Therefore, respectfully following the earlier order of
the Tribunal dated 26th November 2007 (supra), we hold that the assessee is entitled for
depreciation at the rate as applicable on the cost incurred for construction of jetty at Dahej. Hence,
we allow ground no.3, of the appeal filed by the assessee by reversing the orders of the authorities
below".
70. We have considered rival contentions. The facts and circumstances during the year under
consideration are same as discussed by the Tribunal in assessee's own case in the assessment year
2004-05, we, therefore, follow the order of the Tribunal and allow this ground in favour of the

assessee in the A.Y. 2007-08, 2008-09 & 2009-10.
71. In Ground No.5, assessee aggrieved by the action of CIT(A) confirming the disallowance of an
amount of Rs.5,45,40,000/- being Professional fees paid to various companies as being
non-genuine.
72. The facts relating to this issue are that the IT Department conducted search and seizure
operations in the premises of a person namely Shri. S.K. Gupta and his group companies. In view of
the statement recorded of Shri S.K. Gupta, AO disallowed the fees paid for professional services to
various persons. During the course of assessment proceeding, the assessee explained that it has
availed the professional services of Shri. S.K. Gupta for the business purposes and made the
payments to him which duly constitute business expenses deductible u/s 37 of the Act. However, the
AO made the disallowance of said professional feed, in view of the admission made M/s. Reliance
Industries Ltd., in the statement given by Shri S. K. Gupta and the said disallowance has been
confirmed by the CIT(A).
73. From the record we found that during the subjected year assessee has availed the services of Shri
S. K. Gupta and paid the professional fees and also reimbursed expenses to his companies. The
payments towards professional services charges and reimbursement of expenses were contended to
be genuine and incurred for business purposes, hence, the same was claimed as deduction u/s 37 of
the Act. We found that identical issue has been decided by Tribunal in favour of the assessee in
preceding year i.e. A Y 2006-07 (Reopened) in ITA No.536/Mum/2012 order dated 29/05/2015,
wherein the ITAT has deleted the disallowance following the decision of DCIT Vs. M/s. Link
Engineers Pvt Ltd (ITA No.968 & 2248/Del/2011).
74. As the facts and circumstances during the year under consideration are same, respectfully
following the order of the Tribunal, we direct the AO to delete the disallowance of professional fee
paid to various companies.
75. In ground No.6a, assessee is aggrieved by the action of CIT(A) confirming the addition made by
AO of Rs. 48,82,456/- while determining the arm's length price in respect of commission paid to its
associate enterprise Reliance Netherlands at Rs. 54.32 lakhs as against Rs.103.15 lakhs paid by the
assessee.
76. At the outset, learned AR fairly agreed that issue has been decided by the Tribunal in assessee's
own case for the assessment year 2004- M/s. Reliance Industries Ltd., 05 against assessee after
having observation at page 54. Respectfully following the order of Tribunal in assessee's own case,
we do not find any infirmity in the order of CIT(A) for confirming the addition in the A.Y.2007-08 &
2008-09.
77. In Ground No.6b, assessee is aggrieved by the action of CIT(A) in confirming the order of the AO
in treating the non funded guarantee given by the assessee to the Bank of America for giving loan to
its associated concern Trivera Gmbh as international transaction. It was pleaded by learned AR that
above transaction does not fall within the definition of international transaction as defined u/s. 92B

of the Act.
Hence, the addition confirmed by CIT(A) is not correct.
78. Relevant facts giving rise to above grounds of appeal are that during the year under
consideration, the assessee provided corporate guarantee to Bank of America in connection with
loans of Euro 65 Million taken by its associated enterprise viz Trivera GmbH. Assessee has not
charged any guarantee feel commission to Trevira GmbH for providing said guarantee. The assessee
explained that it has not incurred any cost for providing guarantees and the same have been
provided as part of normal commercial practice followed by bank of taking guarantee of parent
company and / or directors for lending the loan to subsidiary company. The assessee also contended
that the transaction does not fall within the definition of an "international transaction" u/s 92B of
the Act as it has no bearing on income of the assessee.
79. We found that exactly similar issue has been considered by tribunal in assessee's own case in
assessment year 2005-06 & 2006-07 wherein addition on account of guarantee commission has
been restricted to 0.385% after having the following observation.
80. Relevant observation of the Tribunal in the assessment year 2005-06 in its order dated
13/09/2013 was as under:-
52.2 Relevant facts giving rise to above grounds of appeal are that during the
previous year, the assessee provided corporate guarantee to Bank of America in
connection with loans of Euro 80 Million taken by its associated enterprises viz
Trevira GmbH. TPO has stated that assessee has not charged any guarantee
fee/commission to Trevira GmbH for providing said guarantee. The assessee stated
that guarantees have been provided by it to Banks which are not its associated
enterprises. That the assessee has not incurred any cost for providing guarantees and
the same have been provided as part of normal commercial practice followed by bank
of taking guarantee of parent company and /or directors. The assessee also
contended that the transaction of providing guarantee does not fall within the
definition of "international transaction"under section 92B of the Act.
52.3 TPO did not accept above contention of the assessee. He stated that providing
guarantee to its associated enterprises by assessee is a clear evidence of benefit being
provided. That if Trevira GmbH had requested any bank or third party to provide
such guarantee for its loans, it would have had to pay guarantee fee/commission.
52.4 The assessee cited an instance where it itself had paid guarantee commission of
0.25% per annum to ICICI in respect of guarantee provided to it. Without prejudice
to the above contention, the assessee submitted to TPO that the same rate may be
applied in the instant case also, as the above comparable relates to assessee's own

loan transaction within India with the ICICI Bank, Mumbai.
52.5 TPO has stated that assessee has submitted only a comparable in which ICICI
Bank, Mumbai granted loan to RIL which is a well established company with well
established credentials in India. That the assessee's Associated Enterprises (AE) is
based in Germany.
That the details with regard to risk profile and the credit profile of its AE, Trevira GmbH with regard
to the said loan transaction has not been submitted. Thus, TPO stated that assessee's contention
that 0.25% guarantee fee should be applied cannot be accepted as it does not factor in certain
essential variables such as place of the loan transaction and the normal range of guarantee fee
charged there, M/s. Reliance Industries Ltd., the I.T.A. No.4475/Mum/2007 66 and 7 other appeals
risk profile and the credit profile of the parties involved etc. Similarity of geographical region is one
of the cardinal principles in application of CUP. Finally, TPO after considering that a public
company with limited liability of 51% being held by Dutch State, FMO, (Nederlandse
Financierings-Maastschappij Voor Ontwikkelingslanden N.V.) who charged 2.5% in a case of Rabo
India Finance Pvt. Ltd. and stated that entities in Netherland and Germany belong to one common
market, i.e. EU. Therefore, TPO considered the said rate as comparable uncontrolled price (CUP) for
benchmarking this transaction. Accordingly, TPO considered the ALP of grantee fee at the rate of
2.5% on the guarantees of Euro 80 Million granted by assessee which works out to 11,27,00,000/-
on this transaction. Since assessee has not charged any guarantee fee/commission, TPO suggested
the said amount as adjustment payable to the assessee and the AO made the addition. Being
aggrieved, assessee filed appeal before the First Appellate Authority.
52.6 On behalf of the assessee, it was contended that assessee provided guarantee to the Bank
against the loan given by them to assessee's subsidiary as normal commercial practice in the
capacity of parent company. The assessee reiterated its submissions as made before TPO that the
transaction of providing guarantee by a parent company for the loan taken by its associated
enterprises does not constitutes an "international transactions" as defined in section 92B read with
section 92(1) of the Act. It was also contended that assessee had given non funded corporate
guarantee to the bank which is not comparable with independent instances relied upon by the
TPO/AO for computing ALP of 2.5% guarantee commission as comparable case. It was also
contended that guarantee was given as a part of commercial exigency. Since such incidental benefit
attributable solely to its being a part of a larger concern, it cannot be considered as providing any
services or giving rise to any income which could be considered for application of transfer pricing
provisions. The assessee also furnished details regarding guarantee commission charged by bank in
India for giving non funded guarantees and it varies from 0.25% to 0.6%, the details thereof are
given by ld. CIT(A) in table at page 43 of its impugned order as under :
S.No. Document Name of Bank Name of Company Guarantee date providing

fees/commission guarantee payable 1 13.01.2005 HSBC Reliance Industries 0.25%
Ltd., 2 06.08.2007 HDFC Bank Reliance Industries 0.35% Ltd., Ltd., 3 04.10.2007
ICICI Bank Reliance Gas 0.25% Ltd., Transportation Infrastructure Ltd., 4
10.12.2007 Canara Bank Reliance Gas 0.50% Transportation M/s. Reliance

Industries Ltd., Infrastructure Ltd., 5 11.12.2007 ABN AMRO Bank Reliance

Industries 0.60% Ltd., 6 12.03.2005 Standard Reliance Industries 0.25% Chartered
Ltd., Bank 7 27.04.2005 Bank of Reliance Industries 0.25% America Ltd., 8
18.12.2004 HSBC Reliance Industries 0.25% Ltd., 9 05.02.2008 Bank of Trevira
GmbH 0.50% America 10 06.02.2008 Commerzbank Trevira GmbH 0.65% 52.6 It
was also contended in the alternative that guarantee commission in the given set of
facts cannot be considered more than 0.25% p.a. which is comparable with the rates
prevailing in the market in similar kind of guarantees given by bank.
52.7 Ld. CIT(A) considered the submissions of the assessee and vide paragraph 15.6.7
has directed the AO to take rate of 0.38% as guarantee commission payable and thus
restricted the addition to Rs.
1,71,30,400/- and given relief of Rs. Rs.9,55,69,600/- . The said para reads as under :
"15.6.7 I have considered the submission of the appellant. The appellant's contentions
are not acceptable so far as the issue relating to the case that the transaction of
providing guarantee by a parent company for the loan taken by its associated
enterprise does not constitute an international transaction as defined in section
92Br.w. 92(1) of the Act. Since the guarantee has been provided by the appellant on
behalf of its associate enterprise viz. Trevira GmbH, the international transaction
therefore is between the two associated enterprises. In case of providing guarantees
there is a clear evidence of a benefit being provided and therefore the above
transaction clearly constitutes an International Transaction as defined in section 92B
of the Act. However, I find that the TPO has grossly erred in applying the rate of 2.5%
since as per the above cited table, from the 10 cases given the average rate on which
the appellant has paid guarantee commission to third parties is 0.38%. Therefore, in
my view the rate of 0.38% is the appropriate rate. In view of above discussion I direct
the AO to take the rate of 0.38% as guarantee commission payable by the appellant.
The addition is thus restricted to Rs.1,71,30,400/- and the appellant gets a relief of
Rs.9,55,69,600/- (11,27,00,000 - 1,71,30,400)."
Being aggrieved the assessee as well as department, both are have raised this issue in their
respective appeal before the Tribunal.
52.8 On behalf of the assessee, the ld. AR submitted that the assessee had given guarantee to the
bank for the loan given to its associated enterprises because of business interest. Ld. AR submitted
that the assessee has given guarantee to the bank I.T.A. No.4475/Mum/2007 M/s. Reliance
Industries Ltd., 68 and 7 other appeals and thus transaction is between the assessee and the bank,
and it is unrelated party. It is not a transaction between the assessee and its associated enterprises
and thus, cannot be termed as "international transaction" under section 92B of the Act. During the
course of hearing the attention of the ld. AR was drawn to the amendment made by Finance Act,
2012 with retrospective effect from 1.4.2002 by way of Explanation to Section 92B whereby
guarantee commission is now considered to be "international transaction", the ld. AR submitted

that if any adjustment is to be made the guarantee commission could be considered at the lowest
rate paid by assessee i.e. 0.25% and Rule 10B(1)(a) does not permit for taking the average rate while
applying CUP method for making any adjustment on account of transactions with associated
enterprises. Ld. AR submitted that rate of guarantee of 2.5% as considered by TPO is in respect of
the parties where both are outside India and relates to furnishing guarantee in case of a finance
company. He submitted that charging of guarantee commission depends on various factors. Ld. AR
submitted that business strategy should be taken into consideration while making any Transfer
Pricing adjustment in respect of such transaction. Hence, said rate of 2.5% is not comparable and
the ld. CIT(A) should have taken the rate of guarantee commission at 0.25% as ALP which is
comparable for similar kind of guarantee given by bank in India.
52.9 On the other hand, ld. DR while supporting the order of TPO submitted that the transaction of
giving guarantee by the assessee to its Associate Enterprise is "International Transaction" and the
same was not benchmarked by the assessee. He referred the amendment made by the Finance Act,
2012 with retrospective effect from 1.4.2002 by way of Explanation added in section 92B of the Act
and submitted that payment of guarantee fee is included in the expression "international
transaction" in view of Explanation-(i) (c ) to section 92B of the Act. He submitted that once
guarantee fee falls within the meaning of "International Transaction", the methodology provided in
the Rules becomes applicable. The ld. DR submitted that TPO has benchmarked the rate of
guarantee commission by applying CUP method to take an incident of a company situated in
Netherlands which is situated in same common market r.e. EU. Therefore, rate of TPO be confirmed
as compared to the average rate taken by ld. CIT(A) of internal comparables of the guarantee
commission paid by assessee to its bank for providing guarantee.
52.10 We have carefully considered the submissions of ld. Representatives of the parties and the
orders of ld. CIT(A) as well as TPO. There is no dispute to the fact I.T.A. No.4475/Mum/2007 69
and 7 other appeals that for providing guarantee by the assessee to Bank of America against the
financial assistance given to assessee's AE Trevira GmbH, the assessee has not charged any
commission. In this regard, the assessee firstly contended that providing of guarantee by the
assessee to the bank on behalf of its AE does not constitute an "international transaction" and the
said transaction is between the M/s. Reliance Industries Ltd., assessee company and the bank, who
are unrelated parties and not between the two associated enterprises. We are of the considered view
that the above contention of the ld. AR has rightly been rejected by authorities below and
particularly in view of the amendment made by Finance Act, 2012 with retrospective effect from
1.4.2002 by way of Explanation -(i) (c) of section 92B to include guarantee in the Expression
"international transaction". Therefore, the contention of the ld. AR that providing of guarantee to
the bank on behalf of its AE does not fall in the definition of "international transaction" has no
merits. We agree with TPO that there is a benefit to assessee's AE by providing of guarantee by the
assessee for the loan taken from bank by Trevira GmbH. The assessee has undertaken a risk on
behalf of its AE, which in any case, of third party consideration, the same would not have been
undertaken or would have charged a consideration for it by the assessee. Now, the question arises as
to what should be the rate of guarantee commission at ALP. Ld. CIT(A) has given the details of
guarantee commissions charged by bank in India for giving non-funded guarantees to third party
and it varies from 0.25% to 0.6% per annum. On the other hand, TPO has compared the rate bearing

risk at 2.5% by considering an external comparables of a finance company. However, it is a fact that
while applying the external comparables, the TPO has not brought out any thing on record that
under which terms and conditions and circumstances the said public company has charged 2.5%
rate of guarantee commission for providing guarantee on behalf of the Finance Company. The
charging of a guarantee commission depends upon transaction to transaction and mutual
understanding between the parties. There may be a case where bank may not charge any guarantee
commission, depending upon it's evaluation of relationship with a particular client. Therefore,
universal application of rate of 2.5% for guarantee commission cannot be considered a market rate
as it largely depends upon the terms and conditions on which loan has been given, risk undertaken,
relationship between bank and the client, economic and business interest etc. In the case, before us
when the assessee has itself paid guarantee commission at the rate varying from 0.25% to 0.6% per
annum to third party and considering the fact that assessee has stated that it has not incurred any
cost for providing guarantee to the bank for the loan given to its I.T.A. No.4475/Mum/2007 70 and
7 other appeals subsidiary, we are of the considered view that applying the rate of 2.5% by TPO
based on external comparables is not justifiable and cannot be confirmed.
52.11 We also agree with ld. DR that the contention of the assessee that there could not be any cost
or charge or guarantee fee for providing corporate guarantee on behalf of its AE to a bank cannot be
accepted because there is always an element of benefit or cost by way of risk and the assessee itself
has paid guarantee commission to the bank in India. That the rates varies from 0.25% to 0.6% as
mentioned hereinabove.
M/s. Reliance Industries Ltd., 52.12 We are of the considered view that the ld. CIT(A) on the facts
and circumstances of the case has rightly taken average rate on which the assessee has paid
guarantee commission to third party, which comes to 0.38%. Hence, we uphold the order of ld.
CIT(A) to charge guarantee commission at the rate of 0.38% being ALP for the guarantee given by
the assessee to Bank of America on behalf of its AE Trevira GmbH. In view of above, we reject
Ground No.9 of the appeal taken by assessee as well as Ground No.6 of the appeal taken by the
department.
81. Similarly in the assessment year 2006-07, the Tribunal observed as under:-
64.3 We have considered the above submissions of ld. Representatives of the parties
and orders of authorities below. We agree with the ld.
Representatives of the parties that similar issue has been considered by the Tribunal in preceding
assessment year i.e. assessment year 2005-06 in paras 52.2 to 52.12 hereinabove. Since the facts
and the issue in this assessment year i.e assessment year 2006-07 are identical to assessment year
2005-06, we for the reasons mentioned in paras 52.10 to 52.12 hereinabove uphold the order of ld.
CIT(A) to charge guarantee commission at the rate of 0.385% being ALP for the guarantee given by
the assessee to Bank of America on behalf of its AE Trivera GmbH. Hence Ground No.5 of the
appeal taken by assessee as also Ground No.5 of the appeal taken by department, both are rejected.

82. In view of the above discussion, respectfully following the order of the Tribunal consistently
taking the view to restrict guarantee commission at 0.385%, we direct the AO to restrict the addition
on account of guarantee commission to 0.385% in the A.Y. 2007-08, 2008-09 & 2009-10. We direct
accordingly.
83. In Ground No.6c, assessee is also aggrieved by the action of CIT(A) in confirming the arm's
length price in respect of non-funded guarantee given by the assessee for advancing loans to its
associated concerns to the extent of Rs.2,14,98,100/- being 0.575% of the guarantee amount.
84. As discussed above, the Tribunal in the assessment year 2005-06 and 2006-07 have restricted
the addition at Rs.0.38%. Respectfully following the order of the Tribunal, we direct the AO to
restrict the addition on account of non-funded guarantee to 0.38% in all the years under
consideration.
85. In Ground No.6d, assessee is aggrieved by the action of CIT(A) in confirming arm's length price
in respect of an amount of Rs.13,52,01,303/- being interest payment referable to interest free loans
and advances given to its subsidiary companies.
86. Relevant facts giving rise to above grounds of appeal are that during the subjected year, the
assessee has given interest free loans to two of its subsidiary companies viz. RNBV, Reliance India
Middle East DMCC (RIME) and purchase consideration amounting to USD 25,356,458 for
participating Interest in Oman Block - 18 and Yemen Block - 9 transferred to Reliance Exploration
and Production DMCC (REP DMCC) as a loan due from 28 March 2007, which was outstanding at
the end of the relevant financial year. No interest has been charged by the assessee since the
amounts were given as temporary advances to the above companies for the purpose of meeting their
urgent business requirements and further the companies are 100% subsidiaries of the assessee
which contribute to furthering the business interest of the assessee. The TPO has not accepted the
explanation given by the assessee and held that the assessee ought to have charged the interest on
the said loans at the market rate prevailing on the date on which such loans and made the M/s.
Reliance Industries Ltd., adjustment of interest @ 5.3% which worked out to Rs. 13,52,01,303/-.
The CIT(A) upheld the adjustment of Rs. 13,52,01,303/- made by the TPO.
87. Contention of learned AR was that loans and advances given to the subsidiary companies are out
of its own funds are given for furthering the business interest of the assessee and hence no
disallowance is called for.
88. We have considered rival contentions and gone through the orders of lower authorities. We
found in the case of Taurian Iron & Steel Co. Pvt.
Ltd., v/s. ADCIT (ITA No.5920/Mum/2012) similar adjustment has been restricted at LIBOR +
1.50%. In the case of Golawal Diamonds v/s. ACIT (ITA No. 518/Mum/2014) also adjustment has

been restricted at LIBOR + 1.50%. Respectfully following the verdicts laid down by Tribunal in these
cases under similar facts and circumstances, we direct the AO to restrict adjustment at LIBOR +
1.50%. We direct accordingly.
89. In Ground No.5 of the department appeal, the department is aggrieved by action of CIT(A) for
allowing an amount of Rs.
4,83,25,200/- u/s. 40(a)(ia) of the Act, by holding that no tax was withheld U/s. 195 of the Act.
90. Brief facts of the case are that during the year under consideration the Income tax Officer (IT)
TDS Range-2, Mumbai had passed an order u/s.201 (1) r.w.s. 201(1A) dated 25.10.2007 holding that
the assessee company had paid an amount of RsA,S3,25,2001- being interest in FY 2006-07 without
deduction of withholding tax u/s 195 of the Income tax Act, 1961. Accordingly, the ITO TDS held
that the assessee had failed M/s. Reliance Industries Ltd., to comply with the provisions of section
195 of the act by not deducting and remitting the withholding tax.
91. Learned AR placed on record the order of the Tribunal in assessee's own case in ITA
No.4595/Mum/2010 dated 08/06/2012 wherein the appeal of the revenue on this ground was
dismissed after having the following observation.
3. The relevant facts as culled from the order of CIT(A) are that M/s Reliance Industries Ltd. had
raised foreign currency loans of USD 100 million through the issue of 10.5% Foreign Currency notes
lead managed by Merrill Llynch & Morgan Stanley for the purpose of financing the import of capital
goods and services. All payments made under the loan agreement are net of taxes. ECB loan were
raised and the approval from Government of India was obtained for taking the loans through
following letters.
Sl. Letter No. and Dated Amount (USD) Million

No.
F. No.6(50)/93-ECS, dated 19.07.1995 and 150
subsequent letter dated 22.09.1995 and
15.02.1996 (Loan Key No.1995145)
F.No.6(358)/95-ECB, dated 22.08.1995 and 150
subsequent letter dated 19.02.1997.
(Sanction No.60)
superseded by letter dated 30.07.1996

(Sanction No.61)
F. No.6(578)/95-ECB, dated 06.01.1997 and 100
subsequent letter dated 10.02.1997
(Sanction No.666)
F. No.6(578)/95-ECB, dated 06.01.1997 and 214
subsequent letter dated 10.02.1997
(Sanction No.667)
F. No.6(49)/97-ECB, dated 21.07.1997 and Trenches
subsequent letter dated 31.07.1997 for both I:BP 150 Million
Tranches I & II II:USD 150 Million

Total not to exceed USD

405 million
The appellant was required to pay interest of USD 10,98,300 to DB Services Tennessee Inc. vide
debt service invoice dtd. 23/1/2007. Approval for the above referred ECB was obtained from the
Government of India, Ministry of Finance, Department of Economic Affairs (GOI) vide their letter
dt.30/07/1996. Appellant made remittance of above mentioned interest without deduction of tax at
source. The AO did not agree and after M/s. Reliance Industries Ltd., considering the appellant's
contention, held that the tax was required to be deducted at source. The AO computed the tax to be
deducted at Rs.1,32,89,430/- and held appellant to be liable for default u/s.201 and further levied
interest u/s.201(A), for the default in remittance, of Rs.11,96,049/- for the delay of nine months.
4. Before the CIT(A), the assessee submitted that this issue has been examined by the ITAT in the
assessee's own case in ITA Nos.5966, 5967, 5968/Mum/2002 vide order dated 23-3-2006 and ITA
No.s 5407 & 5408/Mum/2007, vide order dated 15-4-2009. Learned CIT(A) after analyzing the
issue in detail and the decision of the ITAT as have been relied upon, allowed the assessee's appeal.
5. We have carefully considered the impugned orders and material on record. It is noticed that this
issue has been decided in a bunch of appeals vide order dated 23-9-2011, passed in ITA Nos.2046,
2057, 2058, 2059/Mum/2008, ITA Nos.5167, 5168, 5193, 5176, 5195 & 5196/Mum/2008 and
further vide order dated 28-9-2011, passed in ITA Nos.824, 825, 1000, 1001 & 1002/Mum/2008.
The relevant findings as given in order dated 28-9-2011 are reproduced herein below :-
8. Having carefully heard the submissions of the rival parties and perusing the
material available on record we find that the facts are not in dispute inasmuch as it is
also not in dispute that on the identical issue in the case of Reliance Industries Ltd
V/s Dy. Director of Income Tax (IT) 2(1) ITA No.516/Mum/2002 dated 8.2.2005;
(2005) 98 TTJ (Mum); (2005) 3 SOT 501(Mum.), the Tribunal has decided the
matter in favour of the assessee vide finding recorded in paragraphs 13 to 22 of the
report which are reproduced as under :
"13. We have carefully heard the submissions of both the sides at length and
thoroughly examined the factual as well as legal aspect of the issue raised before us
on proper perusal of the material placed before us. The appellant was aggrieved and
the issue arises from an order passed u/s. 195(2) of IT Act dated 13/2/02, relevant
portion already reproduced supra, through which the assessee was directed to remit
the interest only after deducting with holding tax @ 20%. In fact the appellant has
moved an application seeking a "No Objection Certificate" in respect of remittance of
interest of US $ 1,05,902.78 to M/s. Deutsche Bank, AG London without deduction of
with holding tax at source. This request was rejected by the concerned authority i.e
Dy.Director of Income Tax (International Taxation), Mumbai vide impugned order
u/s.195(2) of IT Act on the ground that the exemption u/s./10(15)(iv)(f) in respect of
interest payment had already been withdrawn by Government of India vide its
communication dated 5/2/2000. So the interest was held to be liable to with holding

tax in India. The first appellate authority has also dismissed the plea of the assessee
and affirmed the action of the A.O in a brief order, relevant portion already
reproduced supra. We have also narrated in above paras the facts and figures of the
External Commercial Borrowings (in short ECB) availed in respect of a project of
Petro Chemical Complex at Hazira and Jamnagar. To resolve this issue it is in the
interest of justice to first of all streamline the question to be answered by us which
according to us are as follows:
(1) What is the implication of Hon'ble Delhi High Court decision as well as the SLP
filed before the Hon'ble Apex Court on the jurisdiction of the Tribunal.?
M/s. Reliance Industries Ltd., (2) What is the scope of Section 10(15)(iv)(f) and whether the
exemption was rightly withdrawn considering the utilization of ECB and merits of the case? (3)
Whether the A.O was right in directing the assessee to deduct withholding tax @ 20% vide an order
u/s.195(2) of IT Act 14. Even before we proceed to answer the above questions it is pertinent to
examine the contents of section 248 of IT Act, which according to both the parties is the only section
under which an appeal lies against such-direction as made in the impugned order u/s.195 of IT Act.
The section 248 reads as follows: "Appeal by person denying liability to deduct tax:
248. Any person having in accordance with the provisions of section 195 and 200
deducted and paid tax in respect of any sum chargeable under the Act, other than
interest, who denies his liability to make such deduction may appeal to the
Commissioner (Appeals) to be declared not liable to make such section."
From plain reading of this section there is no ambiguity that an appeal is provided to a person who,
having deducted tax and paid the sum, denies his liability to make such deduction. A person who
denies liability to deduct tax u/s.195 on the amount payable to a nonresident is entitled to appeal
u/s248 and the CIT(A) has the jurisdiction to quantify the amount on which alone the tax is
deductible. In the case of CIT vs. Wesman Engineering Co. Pvt. Ltd., 188 ITR 327(SC) it was held
that, "language of section 248 is wide enough to cover any order passed u/s.195". In an another
decision Hon'ble Karnataka High Court in the case of ACIT vs. Motor Industries Co., 249 ITR 141
has also entertained this argument that where an assessee was denying the very liability to deduct
tax, the Tribunal was justified in entertaining the appeal in respect of the liability u/s.195 of IT Act
and appeals relating to levy of interest. These two decisions are sufficient and suffice to state that the
first appellate authority as well as the Tribunal both are competent to decide this issue being duly
authorized by the above cited provision of IT Act.
15. Now, we have to answer the first question about the jurisdiction of this Tribunal keeping in view
the order of Hon'ble Delhi High Court and the SLP decided by the Hon'ble Apex Court. On careful
reading of the order of the Delhi High Court it is implicit that the Court was aware of the fact that
vide an order u/s.195(2) dated 13/2/02 the application of the assessee had been rejected. Further
the Hon'ble Court was also aware that an appeal had been preferred by the appellant against the
said rejection before the first appellate authority i.e Ld. CIT (A) vide para-13 the Hon'ble Court in
the said order has clearly mentioned about these facts. Being fully aware of the entire situation and

the circumstances under which the exemption was withdrawn resulting into direction of 20%
deduction of tax the Hon'ble Court at page-159 placitum "H" has observed as follows: "The question
which survives for consideration now is as to whether by reason of the impugned order the Central
Government issued any direction to the statutory authorities. In the instant case no action had been
taken as a result whereof the quasi-judicial authorities became denuded of their quasi-judicial
power. Merely communicating the impugned judgment to the effect that such exemption had been
withdrawn is communication of a foundation of fact. If, according to the petitioner, the order of the
quasi judicial authority suffers from any illegality they could have carried the matter high up."
So the Hon'ble Court has viewed that the quasi-judicial authorities cannot be denuded of their quasi
judicial power. Mere communication of withdrawal of M/s. Reliance Industries Ltd., exemption,
according to the view expressed was a foundation of fact to be adjudicated by quasi-judicial
authority to determine whether such an order suffers from any illegality. After expressing this view
the Hon'ble Court has concluded as follows vide placitum "C" and "D" on page - 160.
"There cannot be any doubt whatsoever that the assessing authority and the appellate
authority are quasi-judicial authorities. By reason of the order impugned in the writ
petition the Central Government has in no way curtailed the power of a judicial or
quasijudicial authority (c) It is well known that the jurisdiction of judicial review of
this court is limited. Having regard to the facts and circumstances, we do not find
that there exists any illegality, irrationality or procedural impropriety in the decision.
This court is not concerned with the merits of the decision." (D) After hearing the
submissions of both the sides and on threadbare reading of the order of the Hon'ble
Delhi High Court we find force in the arguments of ld. A.R. Having read the paras of
the said order it can be culled out that final direction of the Delhi High Court was that
this issue be decided by the assessing authority and the appellate authority who are
the quasi-judicial authorities. Due to this reason the Hon'ble Court has not shown its
concern with the merits of the decision. On a conjoint reading of the two paras it is
amply clear that the matter was left open to be decided by quasi-judicial authorities
after taking into account the merits of the decision of withdrawal of exemption
challenged before the Hon'ble Court. So we have to act upon accordingly and
following the direction of the Hon'ble Court hereby we are authorized as well as
empowered to decide this appeal.
16. At this juncture, even after deciding the issue of jurisdiction whether lies with the Tribunal, or
not, in above para, still we deem it proper to consider a step further that whether the Tribunal has
jurisdiction to look into the question as whether the decision of the Central Government and
withdrawal of exemption was correct. In this connection an argument was placed before us that an
Act is the supreme considering the hierarchical levels i.e the supreme is the Act then comes the rule
made there under, next is the position of notification and the last is letters or approvals. It was
argued with supporting case laws that the rules must be sub-servient to the provisions of the section
enacted in a statute. In the case of CIT vs. New Citizen Bank of India, 58 ITR 468 the Hon'ble
Bombay High Court has also observed, "when a rule is made under a particular section it is the
section which controls and governs the rule and the rule must be construed in the light of the

decision and not view-versa".
So the basic question is that once because of the letter or notification the provisions of the statute
have been negated or diminished by an executive order then what is the course left to a tax payer.
Naturally the answer is that a tax payer has no option but to knock the door of the judiciary. In a
plethora of decisions it was unequivocally held that the full effect of the provision has to be given in
preference to supporting legislature such as rules, notifications, approvals etc. Some of the decisions
in this regard are worth quoting as follows:
(i) CIT vs. Abdul Hussein Essaji Arsiwalla, 69 ITR 38 (Bom) wherein the Hon'ble
Court at page-44 has observed as under:
"It is a cardinal principle of interpretation that it is this main statute which will
govern the rules made under the rule making power given under the Act and not view
versa. If the interpretation of the provision of the statute is M/s. Reliance Industries
Ltd., clear, a rule framed under the rule making power given under the statute cannot
affect it. It is well-settled that rules must be interpreted in the light of the section
under which it is made and no exercise of the rule-making power can affect or
derogate from the full operative effect of the provisions of the statue."
(ii) CIT vs. Taj Mahal Hotel, 82 ITR 44(SC), wherein vide para-49 the Hon'b;e Court has observed as
under:
"It has been rightly observed that the Rules meant only for the purpose of carrying
out the provisions of the Act and they could not take was what was conferred by the
Act or whittle down its effect"
(iii) M.C.T. Muttaiah Chettiar Family Trust vs. 4th ITO, 86 ITR 282(Mad) wherein at page 88
observed as under:
"The role of subordinate or delegated legislation and the part it could play as an
ancillary body to the primary legislative authority is very well channalised by rules of
interpretation. Any such delegated power being essentially subordinate in its nature,
is limited by the terms of the enactment where under it is delegated. It is, therefore,
necessary that the delegated authority must be exercised strictly in accordance with
the powers creating it and in the light and spirit of the parent or enabling statute. It
cannot be postulated that the right of delegation can be unlimited in its
scope........................................................All rules or forms which are creatures of such
rules, prescribed for the purpose of effectuating the policy of the statute, must be read
in the light of the statutory provisions in the main enactment under which they are
made and therefore, such rules or forms cannot contradict or create an irreconcilable
position resulting in an anomalous situation. The primary and the only object of the
income-tax Act is to tax, tax and tax the income. If the legislature in its wisdom
grants a concession and by creating a concession a reciprocal right or privilege is

vested in a assessee, such a reciprocal right cannot be wildly dealt with so as to negate
its usefulness by making a rule which cannot be reconciled with the main statutory
provision. The object of the subordinate legislature is to carry out the statutory
provisions effectively and not to neutralize or contradict them. The rules made under
the rule-making power should strictly conform with the intendment of the main
provisions of the statute and can be consistent therewith...................................."
(iv) CIT vs. Bombay State Transport Corporation, 118 ITR 399 (Bom), wherein vide page 405
observed as under:
"It would appear to us that there is much to be said in favour of the view that it is not
within the competence of the rule-making authority. To put it in other words the rule
made in this manner which provides for a nil percentage of depreciation on a certain
class of asset, or in class of cases, to use the language of s 10(2)(vi), cannot be
accepted as a rule made for carrying out the purposes of the Act, indeed, such a rule
may be regarded as patently violate of the purposes of the Act, i.e of s 10(2).
(iv) CIT vs. Hyderabad Asbestos Cement products Ltd, 172 ITR 762(AP) wherein the
Hon'ble Court at page No.775 & 776 has observed as under:
"Learned Counsel for the assessee invited our attention to the decision of the
Supreme Court in CIT vs. S. Chenniappa Mudaliar (1969), 74 ITR 41. Relying on this
decision, learned counsel represented that if the notification should be held to be
inconsistent in any manner, it should M/s. Reliance Industries Ltd., given way to the
statutory provisions contained in section 36(1)(iv) of the Act and, therefore, it is not
strictly necessary for this court to strike down conditions Nos. 2 and 3 of the
notification in question.........................................................................In all these cases,
the courts were dealing with the constitutional validity of the provisions as opposed
to the validity of subordinate legislation with reference to the provisions of the Act
itself. Learned standing counsel does fairly admit that the Supreme Court decision
referred to above does provide that even in a reference proceeding, if the subordinate
legislation is held to be in excess of the power conferred, it could be ignored and the
matter decided keeping in mind the provisions of the Act which are paramount.
We think that in the facts and circumstances of this case, we must invoke the doctrine
of "reading down" and apply the principle enunciated by the Supreme Court in the
above referred case. We may refer to the following observation of the Supreme Court
(p.48).
"It is true that the Tribunal's powers in dealing with the appeals are of the widest
amplitude and have, in some cases been held similar to, and identical with the
powers of an appellate court under the Civil Procedure Code."

(vi) CIT vs. Sirpur Paper Mills, 237 ITR 41(SC), as per the head notes relevant observation of the
Hon'ble Court is as follows.
"The section states that the deduction shall be wholly allowed. It permits the Board to
specify conditions but these conditions cannot have the effect of curtailing the scope
of the deduction granted by the section. The amplitude of the deduction permitted by
the section cannot be cut down under the guise of imposing a "condition". In fact, this
is not a condition but an impermissible attempt to rewrite the section. The last
condition imposed by the said notification is that the deduction shall be spread out
equally over a period of five years commencing with the assessment year relating to
the previous year in which the amount was paid. This too is n "condition" but a
provision super added to the section which does not contemplate any such
distribution of the deduction. Under the section the deduction is available in the
assessment year relating to the previous year in which the payment was made and it
must be so granted. The second and third conditions aforesaid are not valid".
17. The purpose of above discussion by reproduction of relevant extracts of certain precedents is to
ascertain whether the Tribunal has its role in deciding the issue cropped up on account of a rule or
notification or any such decision taken by sub-ordinate quasi-judicial authority. On careful reading
of the above decisions it is implicit that the Tribunal does have the power to deal with the validity of
such rules or notification and by applying the doctrine of "reading down" can strike down such rules
if held to be in contradiction with the provisions of the statute itself. The gist of all the above
decisions is that the rules are made only for the purpose of carrying out the provisions of the Act
which cannot be taken away or whittle down the effect conferred by the statute. With the result we
hereby agree with the contentions of ld. A.R that the ITAT has both the power and duty to deal with
such rules or notification and decide whether the same are in agreement with the main provisions of
the statute. In view of above discussion, in the present appeal, now we have to decide the M/s.
Reliance Industries Ltd., validity of the withdrawal of exemption as has been done by the
subordinate competent authority. For this purpose first of all we have to examine the language of
the relevant section and its scope as well as its application.
18. The section under with exemption is granted is section 10(15)(iv)(f) of IT Act, reads as follows:
"Income not included in total income
10. In computing the total income of a previous year of any person, any income
f a l l i n g w i t h i n any of the f o l l o w i n g c l a u s e s s h a l l n ot be i n c l u d e d
...............................................................................
(iv) Interest payable ---
(f) by an industrial undertaking in India on any money borrowed by it in foreign

currency from sources outside India under a loan agreement approved by the Central
Government having regard to the need for industrial development in India, to the

extent to which such interest does not exceed the amount of interest calculated at the
rate approved by the Central Government in this behalf, having, regard to the terms
of the loan and its repayment."
On plain reading of this section it is clear that certain conditions are required to be fulfilled for
availing the tax exemption such as, firstly the person taking the loan must be an industrial
undertaking, secondly the loan must be in foreign currency from sources outside India, thirdly the
loan agreement must be approved by the Central Government having regard to the need for
industrial development in India and lastly the rate of interest payable on the said loan should not
exceed the rate approved by the Central Government having regard to the terms of the loan and its
repayment. While considering the arguments of ld. A.R. Supra, we have examined the procedure
adopted by the appellant as well as the prescribed authority before approving the loan. The company
has raised foreign currency loan in the past as an External Commercial Borrowings (ECB). In this
regard several correspondence has been made with the Government of India and the loan was
approved by the Director (ECB), Department of Economic Affairs, Ministry of Finance, North Block,
New Delhi. As far as the approval of loan and the sanctioning of agreement is concerned the same is
not in dispute and it is an admitted fact supported by several correspondence and letters written
may back since 1993 onwards. There is a reference of such correspondence in the above paras of this
order and the paper book contains the copies of all those letters and approvals. To finance its project
of Jamnagar Petro Chemical Complex, External Borrowings were made in terms of the policy of
Government of India granting permission for ECB to be utilized by industrial undertakings in India.
Under this plan the company had made several application to Government of India from time to
time and obtained permission to raise ECB loans in foreign exchange. Further an application was
moved to raise the loans upto US $ 4.25 million. In this regard Dy.Director (ECB) vide a letter dated
6/10/97 has raised a question about the utilization of ECB already sanctioned in the Hazira Phase-II
Expansion Project. The utilization ECB was explained by the company that out of the US $ 914
million ECB received, US $ 205.35 million was yet to be utilized as on 31/1/97. The explanation was
given in M/s. Reliance Industries Ltd., respect of the said unutilized ECB that there were letters of
credit to the tune of US$224.88 million. So at that time it was mentioned that the conditions were
satisfied as the entire amount of ECB obtained for Hazira Phase-II Project was either utilized in the
Project or kept for Forex commitment. On page 15 of the compilation placed on record there is a
detailed working of the amount utilized and also kept for Forex commitment. Subsequently a
request was made to grant permission to pre-pay/ buy back to 20% of outstanding ECB per year. A
proposal was made to the concerned Ministry in the year 1998. In response to this proposal of buy
back of ECB a show cause was issued by the Ministry of Finance on 12/4/99. After prolonged
correspondence between the appellant company and the Ministry there was a proposal from
Dy.Director ECB for withdrawal of tax exemption granted u/s.10(15)(iv)(f). The main objection of
the appellant in this regard is that the concerned authorities have arbitrarily decided to withdraw
the exemption though there was no withdrawal as far as the approval of loan and agreement was
concerned. The basic objection of the appellant company is that the approval originally granted in
the year 1997 remained intact and the same was not rejected or withdrawn, however, the
Dy.Director (ECB) had decided to withdraw the exemption. The consequence of the said withdrawal
was that the assessee company wanted to remit interest to a foreign bank, already mentioned above,
without deduction of tax at source. That application was rejected by the impugned order u/s.195(2)

dated 13/2/02 and it was directed to deduct tax @ 20%. The pertinent question which is to be
answered is whether it was justifiable on the part of the Dy.Director (ECB) to change the rules in
midway when the entire scheme was near to its completion and the appellant company had sought
permission of pre-payment. The plea before us is that once the Government had granted the
approval and there was no change in the conditions prescribed then it is functous officio. It was
pleaded that once a loan agreement was approved them it was obligatory in law to grant exemption
to such interest which became payable as a result of a loan agreement. It is also stressed before us
that not only the exemption was withdrawn but in the mid way a condition of end use of ECB
proceeds was arbitrarily and illogically imposed. Arguments in this regard was that there was no
such condition of specific end use of ECB proceeds in the provisions of the statute. As there was no
such condition laid down in the statute itself, then a rule or any such direction should not be
imposed which happened to be in contradiction of the main governing section, in this regard several
case laws were cited. The provision of the statute provides in an unambiguous terms to grant
exemption in respect of interest payable to an international investor who has lent money to
industrial undertaking in India under a loan agreement as approved by the Central Government.
The Counsel from the side of the appellant has emphasized the phase "having regard to the need for
industrial development in India" used in the said provision. The Government of India has properly
regarded the need for industrial development only thereafter issued the notification and floated this
scheme of ECB. The arguments have further been advanced that whenever or wherever the
legislation decides to ascertain the usage of money the suitable language is used in the body of the
statute itself. For M/s. Reliance Industries Ltd., example section 10(15)(iv)(c) has mentioned the
end used of money borrowed and specifically directed to be "in respect of the purchase outside India
or raw material or capital plant and machinery". So the end use in the said section is categorically
specified. Few more sections have also been quoted in support of this argument, therein also the
phrase was distinctly used. Another example cited of the phraseology used in section 10(15) (iv) (e)
wherein the language used is, "where the moneys are borrowed either for the purpose of advancing
loan to industrial undertakings in India for purchase outside India or raw material or capital plant
and for the purpose of importing any goods". So the section clearly laid down the purpose of
utilization of monies borrowed. Thus the arguments before us is that the purpose of utilization of
ECB is missing in the statute, therefore, imposition of such condition through a letter by Dy.
Director (ECB) was illegal and against the intention of the legislature.
19. We have examined the several connected provisions referred supra and also the case laws in this
regard and arrived at the conclusion that the Revenue Authorities have to act upon in the light of the
statute and the provisions of the Act and not empowered to exercise discretion by making the rules
or notification / order which derogate or deviate from the provisions of the statute. It is a cardinal
principle, as made by several Hon'ble Courts that it is the main statute which will govern the rules
provided under an Act and not vice versa. As far as the section now for our consideration is
concerned it is amply clear that no criteria has been laid down for the end use of the money
borrowed. The term used in that section is "having regard to the need for industrial development in
India", in contrast to the phrase used in other section wherein the utilization as well as the purpose
is mentioned and also directed the end use of the monies borrowed. So we can safely state that by
imposing a condition by Dy. Director (ECB) during the progress of the scheme was like changing the
rules of the game in mid way and the change of the rule was in respect of a game already played to

alter its outcome. A retrospective or ex-post facto change in such a manner is an arbitrary approach
having no legal sanctity.
20. Nevertheless, on merits as well it was argued that the funds were rightly utilized as prescribed
under the scheme. While discussing the arguments of ld. A.R in above paras we have noticed that an
explanation was offered about the utilization of ECB. In these paras we have noted that ld. A.R has
referred certain letters addressed to the Dy. Director (ECB) giving details of the utilization of ECB.
For the same of brevity there is no need to reiterate again the submissions in this regard. On
page-40 of the compilation there is a letter dated 26/11/96 issued by Ministry of Finance seeking
details of utilization of ECB proceeds and therein para (ii) was specifically mentioned, verbatim
reproduced herein above, through which it was indicative that the authorities were aware about the
utilization of ECB by adopting two modes i.e funding through foreign currency and also utilization
of own resources. In para (i) of the said letter dated 26/11/96 the Dy. Director (ECB) has indicated
the utilization of foreign currency expenditure. Ld. A.R has informed that Director (ECB) has made
it clear that the foreign currency expenditure incurred after the date of application but before the
date of borrowing was considered as eligible expenditure for utilization of ECB. The M/s. Reliance
Industries Ltd., subsequent para also approved as per ld. A.R, the expenditure incurred on item for
which ECB was proposed which had been made from the appellant's own resources incurred upto
22/11/95. So it was argued that it was very much within the knowledge of the concerned authority
about the fungibility of funds. The said mixed method of utilization of funds was in a way accepted
by the Ministry in the past. As far as the concept of fungibility of funds is concerned this is not a new
concept and it is approved by several judicial authorities. We have persued the precedents cited in
this regard in the light of the prevailing circumstances of the appeal in hand. In one of the case of
Woolcombers of India Ltd 134 ITR 219 (cal) the concept of fungibility was considered and it was
held that the profits were sufficient to meet the advance tax liability as the profits were deposited in
the overdraft account, so the taxes were not paid out of overdraft but out of the profits of the
relevant year. An another case of Hon'ble Supreme Court has also been cited, decided in the case of
J.B. Boda & CO., 2323 ITR 271, wherein Their Lordship have expressed that, "A two way traffic is
unnecessary. To insist on a formal remittance first and thereafter to receive the commission from
the foreign reinsurer, will be an empty formality and a meaningless ritual on the facts of this case.".
In that case the assessee was a reinsurance company. The gross premium was payable in foreign
exchange and the assessee retained the commission and then remitted US dollars equal to premium.
The broker claimed that the brokerage retained was convertible foreign exchange and the mere fact
that it was designated in rupees would not detract from the position that it was in effect foreign
exchange. It was contended that the assessee instead of remitting the entire amount to the foreign
reinsurers and then receiving remittance in foreign currency from the said reinsurers the
commission due to it, entered into an agreement with the foreign reinsurers, that while remitting
the reinsurance premium, the assessee would retain the fee due to it for the technical services
rendered. The Supreme Court upheld the contention of the assessee and held that two way traffic
was unnecessary. To insist on a formal remittance to the foreign reinsurers first and thereafter to
receive the commission from the foreign reinsurer would be an empty formality and a meaningless
ritual. The statement of remittance having been filed with the Reserve Bank of India, in effect the
income was received in convertible foreign exchange in a lawful and permissible manner.

21. On relying upon these decisions the alternate plea as made before us is that even assuming that
end user restriction could have been imposed by the Central Government ex-post facto even then
the appellant company had in fact invested or utilized far more foreign currency in US dollar for
capital goods and services in respect of the Jamnagar Petro Chemical Complex. To establish the total
utilization of funds certain facts and figures in the form of charts have been placed before the
concerned authorities and it was argued that the figures shown were not in dispute. It is also argued
that the undisputed and unchallenged factual position was that the total utilization of funds was
much more the ECB availed under the scheme. Let it remain undisputed and without entering into
dispute which is more in the nature of findings of fact we have to concentrate on the core issue of
withdrawal of exemption. The legislature has granted exemption to the lender i.e the foreign
institution and not to M/s. Reliance Industries Ltd., the borrower i.e the appellant company. If there
was a mistake, for arguments, if at all the committed by the borrower even then the lender cannot be
punished by withdrawal of exemption. This view of ours gets fortified by a decision of Hon'ble Apex
Court in the case of CIT vs. Chotatingrai Tea Estate Pvt. Ltd. & Others, 258 ITR 259.
22. After an elobrate discussion made herein above we deem it proper to summarize the gist of those
elongated paras. First of all we want to observe that if the bureaucracy or executive is acting in an
unjustifiable manner then the only course left to a citizen is to approach the judiciary for legitimate
redressal. This is what exactly had been done in this appeal by the appellant company. At first the
company had tried to convince the authorities concerned i.e Dy. Director (ECB) about the utility of
foreign currency loan already approved, but on failure knocked the door of the judiciary by filing a
writ to Hon'ble Delhi High Court. Special Leave Petition has also been filed, however, the Hon'ble
Apex Court vide an order dated 31/5/02 has observed as follows:
"Be that as it may, since the issue of utilization or pre-payment of the ECBs is not
before us, we will not go into that question, if the petitioners are aggrieved by any
such action of the respondents by which their utilization or pre-payment of the ECBs
are also restricted, it is open to them to challenge the same in appropriate
proceedings if permissible in law."
A mere dismissal of SLP does not mean that the judgment of a High Court stands affirmed by the
Supreme Court. The effect of dismissal is that no appeal was permitted and not that an appeal
against the said judgment was dismissed by the Supreme Court affirming the view of the High
Court, nor does it mean that the judgment of High Court has been approved by the Supreme Court
on merits as indicated by the Hon'ble Apex Court, case laws relied upon are J.K. Charitable Trust vs.
WTO 222 ITR 523(All) and CIT (A) vs. Quality, 224 ITR 77 (Pat). Both the Hon'ble Courts have
expressed that it is open to the appellant company to challenge the same in appropriate proceedings
if permissible in law. Following the view expressed by Their Lordship in the said judgment the
appellant company has thereafter approached the quasi judicial and judicial authorities step by step.
All such attempts of redressal remained unsuccessful so the issue has now reached upto the stage of
second appeal i.e before us. In other words, an order u/s. 195(2) was passed which was challenged
by invoking the provisions of section 248 before the first appellate authority i.e ld. CIT (A) and on
rejection of appeal the matter was carried further, so the jurisdiction of the Tribunal does lie to
adjudicate upon this appeal. An ancillary issue of withdrawal of exemption was raised and it was

necessary to first settle that issue to arrive at a right conclusion to get this appeal decided. As we
have already observed the executive has changed the rules of the scheme in mid way which had
already been followed as well as acted upon and the change was such to alter its outcome altogether.
As we have observed supra the issue of utilization of ECB funds was for the first time raised when
the entire scheme was at its fag end. According to the company the time had come for repayment or
buy back of the outstanding loans. It was a commercial decision taken by the company in the
capacity of a prudent businessman. At that juncture the clock could not be set into reverse M/s.
Reliance Industries Ltd., motion. Certain steps already taken by the appellant company which were
well within the knowledge of the concerned authority could not be retracted. As the facts indicates
retrospectively the mode of utilization of the funds could not be altered. Rather the sanctioning
authority has not checked at that very point of time when according to them, if at all, there was
mis-utilization of ECB borrowings. On the contrary the claim of the assessee was that the utilization
was in accordance with the scheme though by the process of fungible funds, the obligations were
satisfied and the conditions were fulfilled. So according to us, at that stage, it was catastrophic to
withdraw the exemption already granted u/s.10(15)(iv)(f). Due to the withdrawal of the exemption
the impugned order u/s.195(2), now under dispute was passed directing to deduct with holding tax
@ 20%. To arrive at a logical conclusion first we hold that, considering the totality of the facts,
circumstances, conditions of the scheme, evidences of utility of the funds and the legal matrix of the
case, the withdrawal of exemption was unwarranted. Consequent there upon we also hold that the
appellant company was not liable to deduct withholding tax @ 20% in respect of the interest
payment of US $ 1,05,902 to M/s.Deutsche Bank - AG. With the result, we hereby quash the order
passed u/s.195(2) of IT Act as well as reverse the findings of ld. CIT(A). We order accordingly. Here
it is necessary to mention that in paragraph 22 of the above referred order, the Tribunal has
mentioned the date of order of the Hon'ble Apex Court of dismissal of Special Leave Petition as
31.5.2002 whereas as per order of Hon'ble Supreme Court the date is 25.2.2003.
9. We further find that the above decision of the Tribunal has been consistently followed by the
Coordinate Benches of the Tribunal in (i) Assistant Director of Income Tax (IT) 3(1) V/s Reliance
Industries Ltd in Director of Income Tax (IT) 2(2) V/s Reliance Industries Ltd in ITA Nos.5407 &
5408/Mum/2007, (AY-2003-04) dated 15.4.2009 and iii) Reliance Industries Ltd V/s Dy. Director
of Income Tax (IT) 2(1) in ITA Nos.5966, 5967 & 5968/Mum/2002 & ITA No.4118/2003, dated
23.3.2006. We further find that the Revenue has challenged the above orders of the Tribunal before
the Hon'ble Jurisdictional High Court and the High Court has also dismissed the Revenue's Notice
of Motion vide decision dated 20.6.2011.
10. The Hon'ble Supreme Court in Radhasoami Satsang V/s CIT (1992) 193 ITR 321(SC) has held
(head note, page 322): ITA No :
4595/Mum/2010 19 "Strictly speaking, res judicata does not apply to income tax
proceedings. Though, each assessment year being a unit, what was decided in one
year might not apply in the following year; where a fundamental aspect permeating
through the different assessment years has been found as a fact one way or the other
and parties have allowed that position to be sustained by not challenging the order, it
would not be at all appropriate to allow the position to be changed in a subsequent

year.
11. For the reasons as discussed above and in the absence of any contrary decision
brought on record by the Revenue and keeping in view the consistency, we
respectfully following the decision of the Tribunal and Hon'ble Supreme Court
(supra) uphold the order of the ld. CIT(A) in M/s. Reliance Industries Ltd., allowing
the appeals of the assessee and reject the grounds taken by the Revenue in all these
appeals.
12. In the result, the Revenue's appeals stand dismissed". 6 Thus, respectfully
following the aforesaid decisions, we find no merit in the present appeal filed by the
department. Hence, the grounds taken by the revenue are dismissed.
7. In the result, the appeal filed by the department is dismissed
92. As the facts and circumstances during the year under consideration are same,
respectfully following the order of Tribunal in assessee's own case, we do not find any
infirmity in the order of CIT(A) allowing amount u/s.40(a)(ia) of IT Act.
93. In Ground No.6, Revenue is aggrieved by the action of CIT(A) restricting the
guarantee commission @0.575% in place of 2.5% of non-funded guarantee given by
assessee for advancing loan to its associated concerns.
94. We found that on this issue both assessee and revenue are in appeal and the
Tribunal in its order for assessment year 2006-07 at para 64.3 have restricted the
disallowance to 0.38%. We had already discussed the issue at para 64.3 hereinabove.
Accordingly AO is directed to restrict the same to 0.38% Grounds taken by assessee
in ITA NO.796/Mum/2013 (A.Y.2008-
09) reads as under:

payment of sales tax and therefore the amount of RS.11,33,25,21,847/- is allowable as
per the provisions of Section 43B of the Income-tax Act, 1961.
M/s. Reliance Industries Ltd., 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 giver a decision on this issue in
favour of the Appellant.
2. a. The CIT(A) erred in confirming the disallowance of RS.101.93 crores i.e. out of interest
expenditure at RS.22.76 crores and 0.5 percent of average value of investment, i.e. proportionate
administrative and other expenses of RS.79.17 crores computed by the AO u/s.14A of the Act r.w.r.
8D of the Income tax Rules, as against Rs.3,30,60,894/- computed and disallowed by the appellant,

being expenditure in relation to the income exempt u/s.10(34) of the Act while computing income
under the normal provisions of the Act (section 28 to 42 of the Act).
The appellant submits that an expenditure of Rs.3,30,60,894/- has been incurred in relation to
earning exempt dividend income and therefore the disallowance of the estimated expenditure ought
to be restricted to Rs.3,30,60,894/- under normal computation of income.
b. The CIT (A) erred in confirming the action of the AO in disallowing expenditure u/s.14A of the
Act r.w.r. 8D of the Income tax Rules.
i) without recording satisfaction on the correctness of expenditure disallowed by the appellant with
regards to the accounts of the appellant.
ii) with reference to investments in shares of subsidiary companies which are made for strategic
purpose.
iii) with reference to investments in shares and securities which have not given rise to exempted
income.
c. In the alternative and without prejudice to the above, the appellant submits that the disallowance
made by the AO and confirmed by the CIT(A) is excessive and unreasonable.

Ltd. in A.Y. 2003-2004.
as plant and machinery in A.Y. 2003-04 and were used during the year under M/s. Reliance
Industries Ltd., consideration and hence depreciation u/s. 32 of the I.T. Act on such capitalised
value of the goods is allowable.
4. The CIT(A) erred in confirming the reduction of profits of the business of the undertaking while
computing deduction under section 10B of the Act by an amount of Rs.7,56,20,473/- being
recoveries of various expenses incurred and charged to Profit and Loss Account of the undertaking.
The appellant submits that the other income of Rs.7,56,20,473/- represents recoveries of expenses
incurred and debited to Profit & Loss Account of the undertaking and therefore the same has been
rightly included in the profit of the business of the undertaking while computing deduction under
section 10B of the Act.
5. The CIT(A) erred in confirming the disallowance made by the AO of Rs.6,79,77,588/- being
Professional Fees Paid to various parties, holding that the parties have not rendered any services to
the appellant and the appellant has not been able to establish the nature of consultancy services
rendered by these parties.

The appellant submits the Professional Fees has been paid to various parties for rendering
Liasioning services in the normal course of business and ought to have been allowed u/s.37 of the
Act.
6. a. The CIT(A) erred in confirming the addition made by the A.O. of Rs.17,45,988/- while
determining the arm's length price in respect of commission paid to its associate enterprise Reliance
Netherlands BV.(RNBV) at Rs.26,18,980/- as against Rs.43,64,968/- paid by your appellant.
The Appellant submits that it has rightly calculated the value of international transaction by
applying the method prescribed u/s. 92C(1) of the I.T. Act and supported by the documentary
evidence and hence the disallowance made by AO shall be deleted.
b. The CIT(A) erred in confirming the order of the AO w.r,t. determining the arm's length price of
the guarantee commission, in respect of non-funded guarantee provided to Reliance Europe Ltd, UK
@ 2.50%p.a. instead of 0.30% p.a. adopted by the Appellant.
M/s. Reliance Industries Ltd., The Appellant submits that the guarantee commission rate, adopted
by the appellant @0.30% p.a. is comparable with guarantee commission rates prevailing in the
market for similar kind of guarantees given by banks, for which comparable cases were furnished by
the appellant.
c. The CIT(A) erred in determining the arm's length price of the guarantee commission, in respect of
non-funded guarantee provided to Trevira Gmbh, Germany @0.575% p.a. instead of 0.30% p.a.
adopted by the Appellant.
The Appellant submits that the guarantee commission rate, adopted by the appellant @0.30% p.a. is
comparable with guarantee commission rates prevailing in the market for similar kind of guarantees
given by banks, for which comparable cases were furnished by the appellant.
d. The CIT(A) erred in determining the arm's length price of interest, (in respect of interest free
loans and advances given to its subsidiary companies) @ LlBOR + 150 basis points (if average
maturity period of loan is 3 to 5 yrs) and @ LlBOR + 250 basis points (if average maturity period of
loan is more than 5 yrs).
7. Your Appellant reserves the right to add, amend, alter or vary all or any of the above grounds of
Grounds taken by revenue in ITA NO.815/Mum/2013 for the A.Y. 2008-09 reads as under:

1. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in
deleting the notional sales tax of Rs.11,33,25,21,847/- which has been treated as
revenue receipt by the A.O.
allowing depreciation as claimed by assessee at Rs.32,28,00,18,444/- against the
depreciation allowed at Rs.30,12,64,26,001/- by directing to adopt the WDV of the
assets as on 01/04/2007 and thereby disallowing Rs.2,15,35,92,443/-
M/s. Reliance Industries Ltd., being depreciation on plants at Hazira, Patalganga Cracker Unit at
Hazira, Oil & Gas division , SBM Refinery and Polypropylene and Paraxylene complex at Jamnagar
and also erred in allowing consequential change of the claim of deduction u/s.80IA & U/s.80IB of
the IT. Act.
3. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in not deciding the
issue on merits in view of provisions of section 80lA of the Income Tax Act, 1961.
4. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in not appreciating
that section 80IA(8) of the IT. Act. has clearly defined that "market value" means "the price the
goods/services would fetch if these were sold by the unit/undertaking in the open market subject to
statutory regulations, if any," and the assessee had clearly violated this section.
5. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in allowing an amount
of Rs.101.93 crores u/s.14 A of the LT. Act r.w.r. 8D of the Income Tax Rules, being expenditure
incurred in relation to the income exempt u/s.10(34) of the Act while computing book profit
u/s.115JB of the I.T.Act
6. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in allowing
depreciation of Rs.47,05,000/- in respect of jetties constructed by the assessee without appreciating
the fact of the case.
7. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in allowing of
Rs.6,08,48,652/- out of the lease rent/gas transportation charges paid in respect of all pipeline
utilized for the purpose of its business without appreciating the facts of the case.
8. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in restricting
guarantee commission at the rate of 0.575% in place of 2.5% of non funded guarantee given by the
assessee for advancing loan to its associate concerns regarding guarantee given to Trevira GmbH
Germany on account of transfer pricing adjustments.
9. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the
addition on account of guarantee commission which is made by the A.O. at 2.5% of non funded
guarantee given by the assessee for advancing loan to its M/s. Reliance Industries Ltd., associate
concerns regarding guarantee given to Recorn (Malaysia) SDN BHD on account of transfer pricing

adjustments.
10. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in directing to accept
the transfer pricing adjustment in computing Arm's Length Price by adopting the rate of interest @
4.95 % p.a. instead of adopting the rate of interest @ 7.5 % based on RBI circular without
appreciating the rate calculated by the TPO as per the market rate for loan advance to M/s.RIME
OMCC, UAE.
11. The appellant prays that the order of the Learned CIT(A) on the above grounds be set aside and
that of the A.O. is restored.
12. The appellant craves leave to amend or alter any ground or add a new ground which may be
necessary.
96. In Ground No.1, assessee has alleged addition of Rs.11,33,25,21,847/- claimed u/s.43B. The facts
and circumstances of the case are parametria to what we have decided in ground No.1 of assessee's
and department's appeal for the A.Y.2007-08 hereinabove.
AO is directed accordingly.
97. In ground No.2, assessee has alleged disallowance of Rs.101.93 crores u/s.14A read with Rule
8D. Facts in brief are that during the year under consideration assessee has received dividend of
Rs.17.62 crores and same is claimed exempt u/s 10(34)/(35) of the I.T. Act in its computation of
total income. The assessee had identified the expenditure of Rs.3,30,60,894/- being salary,
administrative and 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. The AO
however did not accept the disallowance made by the assessee and M/s. Reliance Industries Ltd.,
determined an amount of Rs.101.93 crores being expenditure relatable for earning the exempt
income u/s.14A of the Act r. w. Rule 8D of the IT Rules, i.e. proportionate disallowance out of
interest on borrowed funds of Rs.22.76 crores and Rs.79.17 crores being 0.5% of the average value of
investments, towards administrative and other expenses. After considering the amount already
disallowed by the assessee, the AO disallowed the sum of Rs. 98.62 crores u/s.14A of the Act r.w.
Rule 8D of the IT Rules. The CIT(A) has confirmed the disallowance.
98. We have considered rival contentions and found that during the year under consideration
assessee has incurred interest and administrative and other expenses in the normal course of
carrying on its business of Oil & Gas Exploration, Refining of Crude Oil (EOU/SEZ), Manufacturing
& Trading of Petrochemicals, Polyester, Fibre Intermediates, Textiles, Generation & Distribution of
Power, Operation of Jetties and related Infrastructure, Retail Marketing of Petroleum Products,
Fabrication and Investments. No part of interest is allocable toward earning of exempt income as
the interest expenses have been incurred for business purposes only. The AO has not identified any
expenditure which is directly relatable to the earning of dividend income. We also found that

assessee's own funds are far in excess of the investment made in exempt income giving securities
which is evident from the audited accounts of the assessee wherein the own funds are Rs.81,448.60
Cr as against the exempt income giving securities of Rs.17,219.01 Cr. Therefore, no M/s. Reliance
Industries Ltd., interest expense can be attributable for making disallowance U/S 14A r.w.
Rule 8D of the I.T. Act.
99. From the record we found that the total interest free own funds of the assessee as on
31/03/2008 are as under:-
Particulars 31.03.2008
Rs in Crore
Own Funds: Shareholder Funds 81,448.60
(Share Capital + Reserves)
(Refer page 5 of the paper book):
Less: Investment (Refer page 42 of 17,219.01

the assessment order)
Excess of own Fund 64,229.59
100. From the above table it is clearly evident that the Assessee's own funds are far in excess of total
investments (which includes investments of Rs.10 crores giving rise to exempt income). Therefore,
no interest expense can be attributable for making disallowance u/s 14A r.w.Rule 8D(2)(ii) of the
I.T. Rules. Following the reasoning given in the A.Y. 2007- 08, we do not find any justification for
disallowance of interest expenditure.
101. Respectfully following the decision of Bombay High Court in case of Reliance Utiities (supra) of
HDFC Bank (supra), we direct AO to delete disallowance of interest so made.
102. From the record, we found that the investments in the subsidiary companies have been made
for strategic purpose of having controlling M/s. Reliance Industries Ltd., interest therein, and there
was no intention of earning exempt income therefrom for the purposes of calculating the
disallowance under Rule 8D(2)(ii) and 8D(2)(iii) of the IT. Rules only those investment has to be
considered on which the assessee has received the dividend for this purpose reliance can be placed
on the d e c i s i o n of H o n ' b l e D e l h i H i gh C o u r t in the ca se of ACB I n d i a L i m i t e d
[TS-176-HC-201S-Del).
103. It was argued by learned AR that exempt income is Rs.17.62/- crore only whereas the
disallowance made by the AO is Rs.101.93 crores, which is far in excess of exempt income earned by
the assessee. The disallowance u/s 14A of the IT. Act cannot exceed the exempt income.

For this purpose reliance was placed on the judgment of Hon 'ble Delhi High Court in the case of
JOINT INVESTMENTS PVT LTD vs CIT [TS-92- HC-20I5-Del).
104. We have considered rival contentions. With regard to disallowance under Rule 8D (2)(iii), we
observe that the investments in the subsidiary companies have been made for strategic purpose of
having controlling interest therein, and there was no intention of earning exempt income therefrom.
Hence the investment made for strategic control should not be considered for making disallowance
u/s 14A r.w. Rule 8D(2)(iii) of the I.T. Rules. In support of the above contention, we rely on the
following judgment:
- M/s. J.M. Financial Limited vs Addll. CIT [ITA 4521/Mum/2012]
- CIT Vs. Oriental Structural Engineers Pvt. Ltd [ITA 605/2012]
- Mls Garware Wall Ropes Limited Vs. Add!. CIT [ITA No. 5408/Mum/2012 M/s.
Reliance Industries Ltd.,
105. Furthermore, for the purposes of calculating the disallowance under Rule 8D(2)(ii) and 8D(2)
(iii) of the I.T. Rules only those investment have to be considered on which the assessee has received
the dividend.
106. In view of the above average of value of investment, income from which does not or shall not
form part of the total income" has to be considered and not all the investments as done by the AO.
We rely on the judgment of Hon'ble Delhi High Court in the case of ACB India Limited [TS-176-
HC-2015-Del]. If only investments on which dividend was received were to be considered, then the
disallowance in respect of administrative expenses by applying the provisions of under rule 8D(2)
(iii) of the IT. Act @ 0.5% of the value of investments would work out to Rs.
3.37 crore. Accordingly, we direct AO to restrict disallowance of other expenses to Rs.3.37 crores.
107. In view of the above, we delete the disallowance made on account of interest and restrict the
disallowance under Rule 8D (2)(iii) to the extent 0.5% of average value of investment which have
yielded dividend during the year under consideration which works out to Rs.3.37 crores. We direct
accordingly.
108. In ground No.3, assessee is aggrieved for disallowance of depreciation of capitalized value of
goods purchased from Durga Iron and Steel Ltd., and Surajbhan Rajkumar Pvt. Ltd., in the
A.Y.2003-04. We have already considered this issue in assessee's appeal for the A.Y.2007- 08
hereinabove. AO is directed accordingly.
109. Ground No.4 pertains to reduction of profits of the business of the undertaking while
computing deduction under section 10B of the Act by an amount of Rs.7,56,20,473/- being

recoveries of various expenses incurred and charged to Profit and Loss Account of the Undertaking.
110. We have considered rival contentions and found from record that the assessee in the return of
income had claimed exemption u/s.l0B of the Income tax Act with reference to Refinery and
Petrochemicals Undertaking. While computing the deduction u/s.10B of the Act, other income of
Rs.98S,83, 198/- was considered as part of the eligible profit as the same was derived from the
business of export. However the AO in the assessment order has excluded the amount of other
income of Rs.985,83,198/- while computing deduction u/s.l0B of the Act by observing that the
nature of these receipts clearly indicates that they are not derived from the export of goods by
Export Oriented Unit. Further, relying on the Supreme Court judgement in the case of Liberty India
(317 ITR 218) wherein it has been held that the other income cannot be considered as income
derived from the export of goods, the AO excluded the other income while computing the deduction
u/s.l0B of the Act. The action of the AO has been upheld by the CIT(A).
111. We had verified the details of various income amounting to Rs.985 crores which were identified
by the AO as income from other sources. We found that a sum of Rs.7,56,20,473/- credited under
the head miscellaneous recoveries are received for Purging, Degassing Charges for Railway wagons
& tankers of IOCL, BPCL and HPCL and recovery of M/s. Reliance Industries Ltd., cost on account
of infrastructures facilities provided to GAlL and others.
Further a detailed working of per-unit cost incurred for purging and degassing and recoveries made
from IOCL, BPCL and HPCL totalling to Rs.1,70,50,000/- was also filed. The recoveries from the
above oil companies were on account of cleaning expenses paid to contractors.
The cost incurred has been debited to P&L account, which are recovered from IOCL, BPCL & HPCL
and shown as other income in the P&L account of the undertaking. The other income though
recovered from the above parties and shown as income in the P&L account of the undertaking goes
to reduce expenses and increase export profits eligible for deduction u/s.10B of the IT Act,1961.
112. Further more recovery of Rs.5,85,70,473/- for cost incurred on Infrastructure facilities provided
to GAlL (India) Limited and others, was towards reimbursement of expenses incurred for providing
these facilities.
The same was debited to P&L account. The reimbursement of the same by GAlL goes to reduce the
cost incurred by the assessee.
113. In view of the above discussion, we restore the matter back to the file of the AO for finding out
the exact nature of income and for deciding the issue afresh as per law.
114. Ground No.5 relates to disallowance of professional fees paid to various parties on the plea that
these parties have not rendered services to the assessee.

116. Brief facts relating to the issue are that the assessee had availed the services of AVNI
LIASIOING SERVICES(Proprietor - Shri Vijay Kumar Gupta), ARNAV LIASIONING &
COORDINATION (Proprietor - Shri Anish Kumar Gupta) for liasioning and coordination services.
Liasioning and coordination was required to be done at Delhi and North India for liasioning with
various Government Departments in connection with business related matters to be followed up in
Government offices. The assessee paid fees and reimbursed cost incurred of Rs.6,79,77,588/- to the
above parties for rendering the aforesaid services which was debited to Profit and Loss account
under professional fees. All the payments concerning the above services rendered by these
companies were made by Alc. Payee Cheques. The AO however, disallowed the amount of
Rs.6,79,77,588/- being reimbursement of expenses and professional fees paid by the assessee, on
the basis that no services were rendered by above parties to the assessee. The disallowance made by
the AO has been confirmed by the CIT(A).
117. It was contended by learned AR that the AO has made the disallowance just on the basis of the
letter received from Income tax Officer, Ward 37(1), New Delhi. The assessee has furnished the
details of professional services rendered by the above parties, and the bills given by them for
rendering the services. The assessee also submitted that the aforesaid two parties have rendered
liasioning and coordination services like maintaining cordial relationship with various agencies and
departments, Delhi being capital of the country there are various offices M/s. Reliance Industries
Ltd., located at Delhi where lot of procedural work is required. The liasioning and coordination
services are required for keeping good relationship with these offices so as to facilitate the
procedural work in these offices. The assessee was running retail business through its 100%
subsidiary Reliance Retail Ltd having retail stores at Punjab, Delhi and National Capital Region as
per the list attached with the invoices submitted during the course of proceedings. The stores are
located at Ludhiana, Jalandhar, Amritsar, Chandigarh, Punjab, Delhi and National Capital Region
(NCR).
The AR submitted that the invoices with its enclosures filed as a part of the paper book clearly spells
out the nature of liasioning work attended by the consultant. The aforesaid parties who have been
paid fees and reimbursed cost incurred on behalf of the assessee for liasioning work have rendered
services which are in the nature of maintaining good relations with all local authorities where the
retail stores are situated for smooth functioning of business. These authorities include Police,
Transportation Dept., District Administration, Octroi Dept., Municipal Corporation, Electricity
Dept, Fire Fighting Dept. etc. and various other business agencies with whom liasioning is required
for smooth functioning of the Retail Stores and obtaining various approvals required for running the
stores. The expenditure are incurred in the normal course of business and wholly and exclusively for
the purpose of running the business;
therefore, the disallowance made by the AO shall be deleted.
118. The AR further submitted that all the payments concerning the above services rendered by
these parties were made by A/c. Payee Cheque and M/s. Reliance Industries Ltd., were duly

supported by bills and vouchers. The above two parties have confirmed that they have rendered the
liasioning and coordination services to the assessee and incurred expenses which have been
reimbursed.
119. Learned AR placed on record the orders passed Delhi IT AT in the case of above parties in
appeal nos. 117 - 119IDel/13 for A.Y. 2007-08 to 2009-10 (Shri Vijay Kumar Gupta) wherein the
ITAT has restored the matter back to the file of AO for fresh adjudication after providing due and
proper opportunity to the assessee.
120. We had carefully gone through the order of the ITAT Delhi Bench in case of Shri Vijay Kumar
Gupta dated 22/07/2016 wherein ITAT held as under:-
2. The assessee has raised similar grounds of appeal in all the three appeals.
However, at the very outset of the hearing of the arguments, the ld. AR submitted that the issues
involved in all these three appeals stand covered vide order of this Tribunal in the case of assessee's
sons Shri Anish Kumar Gupta and Shri Ashish Kumar Gupta in ITA Nos. 120 & 121/Del/2013 for
A.Ys 2007- 08 and 2008-09, a copy of which has been furnished on record. The ld. AR further
submitted that neither the ld. CIT(A) nor the AO was justified in coming to a haste and arbitrary
conclusion without appreciating the facts and circumstances of the case and without verifying the
confirmations of the assessee of the assessee placed on record. The ld. AR contended that he has no
objection if the matter is restored to the file of the AO for fresh adjudication and prayed that the AO
may be directed to verify the confirmations before passing order.
3. On careful consideration of above submissions, at the outset, from the copy of the order of the
Tribunal dated 9.1.2014, passed in the cases of Shri Anish Kumar Gupta and Shri Ashish Kumar
Gupta in ITA Nos. 120 to 121/Del/2013 and 112 to 114/Del/2013 for ay 2007-08 to 2009-10 [supra]
as relied upon by the ld. AR of the present assessee, we observe that in the appeal of Shri Anish
Kumar Gupta, the issue is restored to the file of the AO with the following observations:
"13. We have duly considered the rival contentions and gone through the record
carefully. The stand of the assessee is that he has entered into an agreement with
M/s. Reliance Industries for providing certain services on a monthly payment of
Rs.10,000 plus reimbursement of the actual expenditure. Now, the assessee has
pointed out that he has received a sum of Rs.378,93,279 in assessment year 2007-08
and sum of Rs.340,66,623 in assessment year 2008-
09. These are the gross receipts. The payer has given a confirmation disclosing M/s.
Reliance Industries Ltd., the fact that assessee has incurred a sum of Rs.371,52,574
under various heads in assessment year 2007-08 and Rs.333,41,778 in assessment
year 2008-09. The payer has observed that it is reimbursing the expenses incurred by
the assessee on its behalf. In this situation, the amount to this extent is neither a loan
to the assessee nor a gift. He has not kept this amount in his pocket. If the Assessing
Officer has any doubt that these expenses are not genuine expenditure then they are

to be examined in the hands of the payer. It is to be seen in the case of Reliance

Industries as to for what purpose these expenses have been incurred and if they are
not for business purposes then they can be disallowed in the hands of Reliance
Industries. The other angle could be that if Reliance Industries denies that these
expenditures do not pertain to it then its genuineness could be examined in the hands
of the assessee. In that case, if it is proved that these are not business expenditure,
assessee has received this money and kept in his pocket, only then, it can be assessed
in the hands of the assessee. We also find that in assessment year 2008-09, learned
Assessing Officer has observed that these amounts are to be added in the income of
the assessee on protective basis. Therefore, learned Assessing Officer has misguided
himself in examining this issue in the hands of the assessee. Learned Assessing
Officer can examine veracity of assessee's claims with regard to the balance amount
i.e. the difference between Rs.378,93,277 minus Rs.3,71,525 and Rs.340,66,623
minus Rs.333,41,778. How the total amount can be added in the hands of the
assessee is not ascertainable in the assessment order. The confirmation of Reliance
Industries is available on pages 53 and 63 of the paper book. We have gone through
these documents. This issue is also set aside to the file of the Assessing Officer for
readjudication. Learned Assessing Officer shall keep in mind that similar additions
are deleted by Learned CIT(Appeals) in assessment year 2006-07 and ITAT has
affirmed the order of Learned CIT(Appeals). He shall also keep in mind that in the
case of Anish Gupta, he himself made addition on protective basis.
14. Now, we take the remaining grounds of appeal in the case of Ashish Kumar
Gupta. The ground No.5 in assessment year 2007-08 is connected with Ground No.2.
In this ground, assessee has pleaded that Learned CIT(Appeals) has erred in
confirming the addition of Rs.1,53488. The brief facts of the case are that according
to the Assessing Officer, assessee had shown advance of Rs.114,76,588 while he has
furnished the details by way of cash received from the agriculturalist at
Rs.113,23,100. The Assessing Officer has made the addition of this amount under sec.
68 of the Act. He treated the balance amount i.e. difference between these two at
Rs.1,53,488 as unexplained on the ground that assessee has neither given the details
nor confirmation. Since, we have already set aside the main issue whereby
unexplained cash credits have been added, we deem it appropriate to set aside this
issue also to the file of the Assessing Officer. Learned Assessing Officer shall
readjudicate this issue also."
4. From the order of the Tribunal dated 09.1.2014 [supra, we also observe that the similar issue has
been restored to the file of the AO in the appeals of Shri Anish Kumar Gupta with the following
observations:
"16. The brief facts with regard to these grounds are that Shri Ashish Gupta was
running a proprietorship concern, namely, "Arnav Lisioning Services". He entered
into an agreement with Reliance Industries Ltd. on 5th day of April 2006 for
providing consultancy services. The Reliance Industries supposed to pay consultancy

fee of Rs.15,000 per month. According to the assessee, he has received a sum of
Rs.283,83,450 from Reliance Industries Ltd. towards expenditure in assessment year
2007-08. The assessee had incurred a sum of M/s. Reliance Industries Ltd.,
Rs.276,98,340. In its confirmation, Reliance Industries has confirmed that this much
amount was towards reimbursement of expenditure. Learned Assessing Officer has
made analysis of these expenses under various heads and thereafter he made an
addition of Rs.274,76,043 which represents reimbursement of expenditure. Learned
Assessing Officer is of the opinion that these expenses are for non-business purposes.
Apart from this amount, learned Assessing Officer has made addition of Rs.2,02,476.
This is an expense which was payable by the assessee. Similarly, in assessment year
2008-09, Reliance Industries has paid Rs.255,77,109 and the reimbursement of
expenses out of this amount is of Rs.249,03,984. Learned Assessing Officer has
observed that the expenditure were for non-business purposes. He also assessed the
income on protective basis with regard to the receipts from M/s. Reliance Industries.
Learned Assessing Officer further made an addition of Rs.7,99,012 which is
challenged by the assessee in ground No.3. This amount represents TDS credit
claimed by the assessee at Rs.6,19,012 plus Rs.1,80,000 i.e. consultancy fee of 12
months. Learned Assessing Officer has made an addition of Rs.247,78,097 on
protective basis which is an amount worked out by debiting the total receipts paid by
the Reliance Industries at Rs.255,77,109 minus Rs.7,99,012.
17. In assessment year 2009-10, Assessing Officer has again made an addition of
Rs.46,08,774. The assessee had received a sum of Rs.49,00,004 from Reliance
Industries and out of this amount, a sum of Rs.45,03,104 was towards the
reimbursement of expenditure. The Assessing Officer has made an assessment of
Rs.46,08,774 on protective basis. He worked out this amount by debiting a sum of
Rs.1,80,000 claimed by the assessee as consultancy charges from the total amount
paid by the Reliance Industries Ltd. in this year.
18. The facts are similar to that of Shri Anish Kumar Gupta as discussed in the
foregoing paragraphs of this order. Learned Assessing Officer in two assessment
years i.e. 2008-09 and 2009-10 himself has observed that the alleged receipts from
the Reliance Industries is to be assessed on protective basis in the hands of the
assessee, then how he can made addition on substantive basis in assessment year
2007-08. We have set aside this also to the file of the Assessing Officer for
readjudication in the case of his brother. Following our observations in para 13, we
allow these grounds also and set aside all these issues to the file of the Assessing
Officer for readjudication
5. The ld DR has fairly accepted that the facts and circumstances of the present case pertaining to
father of Shri Anish Kumar Gupta and Shri Ashish Kumar Gupta are quite similar and issue involved
in these three appeals is also same to the earlier appeals decided by the Tribunal order dated
9.1.2014 [supra]. The ld. DR supported the order of the ld. CIT(A) and submitted that the ld. CIT(A)
was quite justified in upholding the order of the AO. However, he raised no serious objection to the

assessee's submission that he has no objection if the appeal is restored to the file of the AO for and
verification of the confirmations filed by the assessee.
6. We have heard the arguments of both the sides and carefully perused the relevant material placed
on record before us. We find from the order of the ld. CIT(A) that the issues under consideration
have not been decided by the AO in a proper manner and facts have not been appreciated in a
judicious manner. We find that the confirmations have not been verified by the lower authorities.
We further find that the ld. CIT(A) has passed the order without providing the assessee due
opportunity of being heard. On the basis of foregoing discussion and careful perusal of the operative
part of the ld. CIT(A)'s conclusion, it is amply clear that the ld. CIT(A) has decided the issue in haste
by passing a cryptic order which is not sustainable. We further note that the ld. CIT(A) has M/s.
Reliance Industries Ltd., also not properly considered the submissions and facts of the case and
simply followed the AO's conclusion and dismissed the appeals of the assessee. We further note that
the ld. CIT(A) too has not given due opportunity of being heard to the assessee. The ld. DR has
supported the order of the ld. CIT(A). However, he raised no serious objection if the appeal is
restored to the file of AO for fresh adjudication of first appeal. Therefore, in the interest of justice,
we deem it fit to restore the grounds of appeal raised by the assessee in all the three appeals to the
file of the AO for fresh adjudication. Needless to mention that the AO shall provide due and proper
opportunity of being heard to the assessee, without being prejudiced with the earlier impugned
order. Grounds of appeal raised by the assessee are allowed for statistical purposes.
121. In view of the finding recorded by the Tribunal in the hands of the recipients Vijay Kumar
Gupta and Anish Kumar Gupta, we restore the matter back to the file of AO for deciding afresh the
allowability of professional fees paid by assessee.
122. Ground No.6 pertains to addition made in respect of commission paid to its associated
enterprises by determining the arm's length price at Rs.26,18,980/- as against Rs.43,64,968/-. We
have already considered this issue in the A.Y.2007-08 while deciding ground No.6(a) hereinabove,
as the facts and circumstances are same. We confirm the addition made by the lower authorities.
123. Ground No.6(b) and (c) pertain to addition made on account of arm's length price of guarantee
commission in respect of non-funded guarantee provided to AE. We have considered rival
contentions. This issue has been decided by us in ground No. 6(c) of assessee's appeal for the
A.Y.2007-08. As the facts and circumstances are same, respectfully following the reasoning given
hereinabove in the A.Y.2007-08, disallowance is restricted to 0.385%. We direct accordingly.
124. Ground No. 6(d) pertains to determining the arm's length price of interest, (in respect of
interest free loans and advances given to its subsidiary companies) @ LIBOR + 150 basis points (if
average maturity period of loan is 3 to 5 yrs) and @ LIBOR + 250 basis points (if average maturity
period of loan is more than 5 yrs).

125. We have considered rival contentions. The facts and circumstances during the year under
consideration are same as discussed by us while deciding ground No.6 (d) for the A.Y.2007-08 in
conclusion given by us hereinabove in the A.Y.2007-08.
126. Ground No.1 of department's appeal pertains to addition of the National Sales Tax. The issues
have been discussed by us elaborately in the A.Y.2007-08. AO is directed to delete the same
reasoning given in the A.Y.2007-08.
127. Ground No.2 of Revenue's appeal refers to allowing depreciation as claimed by assessee at
Rs.3228,00,I8,444/- against the depreciation allowed at Rs.3012,64,26,001/- by directing to adopt
the WDV of the assets as on 01/04/2007 and thereby disallowing Rs.215,35,92,443/- being
depreciation on plants at Hazira, Patalganga, Cracker Unit at Hazira, Oil & Gas division, SBM
Refinery and Polypropylene and Paraxylene complex at Jamnagar and also erred in allowing
consequential change of the claim of deduction u/s.80IA & U/s.80IB of the IT. Act.
128. We have considered rival contentions. The facts and circumstances are same as discussed by us
in ground No.2 of department's appeal for A.Y.2007-08. Following the same reasoning, AO is
directed accordingly.
129. Ground No. 3 & 4 of department's appeal refers to not deciding the issue on merits in view of
provisions of section 80lA of the Income Tax Act, 1961 wherein it is clearly defined that "Market
Value" means the price of goods/services would fetch, if these were sold by the unit/undertaking in
the open market subject to statutory regulations, if any and the assessee had clearly violated this
section.
130. We have considered rival contentions. As the facts and circumstances are same as discussed by
us in ground No.3 & 4 of department's appeal for the A.Y.2007-08, the grounds raised by revenue
are dismissed.
131. This is with reference to disallowance u/s.14A read with Rule 8D have already been discussed
by us while deciding ground No.2 of assessee's appeal. Following the same reasoning, we dismiss the
ground raised by the Revenue.
132. Ground No.6 refers to decline of depreciation in respect of jetties we have already considered in
length this issue in the A.Y.2007-08 while deciding ground No.4 of assessee's appeal. As the facts
and circumstances are the same, following the same reasoning, we dismiss the ground raised by the
Revenue.
133. Ground No. 6 relates to the disallowance of part of the lease rent of Rs 6,08,48,652/-, being
portion of lease rent held to be repayment of principal. The disallowance has been made in respect

of the two pipelines, i.e. Hazira-Dahej pipeline and Dahej-Baroda pipeline, following the reasoning
adopted in the assessments for AY s 2003-04 and 2004-05.
134. We have considered rival contentions and found that this issue was decided in favour of the
assessee by ITAT Mumbai in the case of Indian Petrochemicals Corp. Ltd. a company merged with
the assessee company vide its order in ITA Nos. 1426/Ahd/2009 & 3921/Mum/2009 for A Y
2005-06 and IT No.4005/Mum/2013 for A Y 2006-07 vide order dated 18.11.2015. As the facts and
circumstances are identical; therefore, the disallowance deleted by the CIT(A) deserves to be
confirmed.
135. Ground No. 8 & 9 of Revenue's appeal relates to adjustments made to ALP on guarantee
commission at the rate of 0.575% in place of 2.5% of non funded guarantee given by the assessee for
advancing loan to its associate concerns.
136. We have elaborately discussed this issue while deciding ground 6(b) and (c) of assessee's appeal
hereinabove, following the same reasoning, we dismiss this ground of revenue's appeal.
137. Ground No.10 refers to CITCA)'s direction to accept the transfer pricing adjustment in
computing Arm's length Price by adopting the rate of interest @ 4.95% p.a. instead of adopting the
rate of interest M/s. Reliance Industries Ltd., @ 7.5% based on RBI circular without appreciating
the rate calculated by the TPO as per the market rate for loan advance to M/s RIME DMCC, UAE).
138. We have considered rival contentions. This issue has been considered elaborately by us while
deciding the ground No. 6(d) of assessee's appeal, following the same reasoning, AO is directed
accordingly.
ITA5770/Mum/2013 (A.Y.2009-10)(Reopened) Grounds taken by assessee are as under:-
1. The learned Commissioner of Income Tax (Appeals)-LTU, Mumbai {hereinafter

referred to as CIT(A)} erred in confirming the action of the Addl.
Commissioner of Income tax -L TU, Mumbai (hereinafter referred to as AO) in re-opening of the
assessment by invoking the provisions of section 147 read with section 148 of the Income-tax Act,
1961.
The Appellant submits that the notice u/s.148 for re-opening the assessment is bad in law, illegal,
ultra-virus, in excess of and/or in want of jurisdiction and otherwise void.
2 The CIT(A) erred in confirming the action of the AO in disallowing an amount of Rs.83,75,235/-
being Professional Fees Paid to various parties by holding that the parties have not rendered any
services to the appellant and the appellant has not been able to establish the nature of consultancy
services rendered by these parties.

The appellant submits the Professional Fees has been Paid to various parties for rendering
Liasioning services duly supported by documentary evidences and therefore ought to have been
allowed u/s.37 of the Act.
3 The CIT(A) erred in confirming the action of the AO in reducing the profits of the business of the
undertaking while computing deduction under section 10B of the Act by an amount of
Rs.11,17,23,864/- being recoveries of various expenses incurred and charged to Profit and Loss
Account of the undertaking.
The appellant submits that the other income of Rs.11, 17,23,864/- represents recoveries of expenses
incurred and debited to Profit & Loss Account of the undertaking and therefore the same has been
rightly included in the profit of the business of the undertaking while computing deduction under
section 10B of the Act.
4. The appellant reserves the right to add, amend, alter or vary all or any of the above grounds of
139. In this appeal, assessee is aggrieved for reopening of assessment as well as merit of the addition
so made. It was contended by learned AR that notices u/s.148 is bad in law for want of jurisdiction.
After going through the reasons recorded for reopening, we do not find any infirmity in the order of
lower authorities for reopening of assessment.
140. In ground No.2, assessee is aggrieved for disallowance of Rs.83,75,235/- being Professional
Fees Paid to various parties by holding that the parties have not rendered any services to the
assessee and the assessee has not been able to establish the nature of consultancy services rendered
by these parties.
141. We have considered rival contentions and found that while deciding assessee's appeal for the
A.Y.2008-09, we have elaborately discussed the issue while disposing ground No.5. As the facts and
circumstances during the year under consideration are same, following the same reasoning, we
restore the matter back to the file of AO for deciding afresh.
142. Ground No.3 pertains to action of the AO in reducing the profits of the business of the
undertaking while computing deduction under section 1OB of the Act by an amount of
Rs.11,17,23,864/- being recoveries of various expenses incurred and charged to Profit and Loss
Account of the undertaking.
143. We have considered rival contentions. We have already dealt with this issue while disposing
Ground No.4 of assessee's appeal for the A.Y.2008-09, following the same reasoning, matter is
restored back to the file of the AO for deciding afresh.

M/s. Reliance Industries Ltd., ITA NO.1892/Mum/2014 (A.Y.2009-10) The following grounds have
been taken by assessee:-

payment of sales tax and therefore the amount of Rs.679,97,97,429/- is allowable as
per the provisions of Section 438 of the Income-tax Act, 1961.
The Appellant submits that there is a deemed payment of Sales tax which is allowable u/s.438 of the
Act and the CIT(A) ought to have given a decision on this issue in favour of the Appellant.
2. a. The CIT(A) erred in confirming the disallowance of Rs.87.85 crores i.e. out of interest
expenditure at Rs.5.02 crores and proportionate administrative and other expenses of Rs.82.82
crores u/s.14A of the Act r.w.r. 8D of the Income tax Rules, as against Rs.3,45,01,874/- computed
and disallowed by the appellant, being expenditure in relation to the income exempt u/s.1 0(34) of
the Actwhile computing income under the normal provisions of the Act (section 28 to 42 of the Act).
The appellant submits that an expenditure of Rs.3,45,01,874/- has been incurred in relation to
earning exempt dividend income and therefore the disallowance of the estimated expenditure ought
to be restricted to Rs.3,45,01,874/- under normal computation of income.
b. The CIT(A) erred in confirming the disallowance of Rs.87.85 crores u/s.14A of the Act r.w.r. 80 of
the Income tax Rules, as against Rs.50,384/- disallowed by the appellant, being expenditure
incurred in relation to the income exempt u/s. 10(34/35) of the Act while computing book profit
u/s.115JB of the Act.
The appellant submits that an expenditure of Rs.50,384/- has been worked out as incurred in
relation to earning exempt dividend income and further 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, therefore the
disallowance of the estimated expenditure ought to be restricted to Rs.50,384/- for computing book
profit u/s. 115JB of the Act.
c. The CIT (A) erred in confirming the action of the AO in disallowing expenditure u/s.14A of the Act
r.w.r. 80 of the Income tax Rules,
i) without recording satisfaction on the correctness of expenditure disallowed by the appellant with
regards to the accounts of the appellant.
ii) with reference to investments in shares of subsidiary companies which are made for strategic
purpose.
iii) with reference to investments in shares and securities which have not given rise to exempted
income.

M/s. Reliance Industries Ltd., d. In the alternative and without prejudice to the above, the appellant
submits that the disallowance made by the AO and confirmed by the CIT(A) is excessive and
unreasonable.
3. The CIT(A) erred in confirming the addition made by the AO of Rs. 13,43,28,800/- being
provision for Wealth tax, while computing book profit under section 115JB of the Act.
The Appellant submits that there is no provision u/s.115JB of the Act by virtue of which adjustment
could be made to Book Profits on account of provision for Wealth Tax and hence such adjustments
shall be deleted.

Ltd. in AY. 2003-2004.
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 I.T. Act on such capitalised value of the goods is allowable.
5. The CIT(A) erred in confirming the disallowance of depreciation of Rs.39,99,240/- in respect of

jetties constructed by the appellant and used for the purpose of its business.
The CIT(A) failed to appreciate that since the jetty was constructed by the appellant at its own cost
and. was used for the purpose of its business, depreciation as per law was allowable. The appellant
prays that depreciation on the jetties of Rs.39,99,2401- as claimed by it be allowed.
6. a. The CIT(A) erred in confirming the order of the AO w.r.t. determining and treating the
non-funded guarantee given by the Appellant to the various banks for giving loan to its AE's as
international transaction within the meaning of Section 92B of the Income Tax Act.
The Appellant submits that the above transaction does not fall within the definition of
"International Transaction" as defined u/s.92B of the Act and hence the addition made by the AO as
confirmed by CIT(A) shall be deleted.
b. The CIT(A) erred in determining the arm's length price of the guarantee commission, in respect of
non-funded guarantee provided to 3 AE's, i.e. M/s. Recron Malaysia SdnBhd, M/s. Reliance
Industries (Middle East) DMCC ('M/s. RIME'), and M/s. Reliance Europe Ltd, UK @ 0.575% p.a.
instead of 0.30% p.a. adopted by the Appellant.
The Appellant submits that the guarantee commission rate, adopted by the appellant @0.30% p.a. is
comparable with guarantee commission rates prevailing in the market for similar kind of guarantees
given by banks, for which comparable cases were furnished by the appellant.

M/s. Reliance Industries Ltd., c. The CIT(A) erred in confirming the action of the AO in determining
the arms length price at Rs. 29,61,74,7231- being interest chargeable in respect of interest free loan
of USD 70,000,000 (equivalent to Rs. 3,55,04,00,000) and Euro 12,946,245 (equivalent to Rs.
81,91,00,000), advanced to its AE i.e. M/s. RIME DMCC, UAE.
d. The CIT(A) erred in confirming the action of the AO in computing an arms length interest on the
aforesaid loan of USD 70,000,000 (equivalent to Rs.3,55,04,00,000) which was converted into 5%
Non-cumulative compulsory convertible preference shares of the AE, allotted to the appellant, as on
31st March 2009, which was duly substantiated by share certificate issued by the AE. Further, the
balance loan of Euro 12,946,245 (equivalent to Rs. 81,91,00,000) was advance to the AE for
furthering the business interest of the appellant by enabling to expand itself in international
markets through indirect acquisition of majority stake in the GAPCO group companies.
e. Without prejudice to the above, the CIT(A) erred in confirming the action of the AO for computing
the arms length price by adopting the rate of interest @ 7.5% p.a. instead of adopting the average
rate of interest charged in the case of third party comparables @ 5% p.a. [ i.e.Loan provide by Axis
Bank (in the range of 3.25% p.a. to 5% p.a.) which averages @ 4.13% p.a. and the composite average
rate (risk plus risk free) published by Bloomberg Reuters @ 5.83% p.a.] and which also, is the
weighted average cost of borrowing of the Appellant during the financial year 2008-09.
7. Your appellant reserves the right to add, amend, alter or vary all or any of the above grounds of
ITA NO.2549/Mum/2014 (A.Y.2009-10) The following grounds have been taken by revenue:-
deleting the addition of sales tax incentives/ subsidy of Rs.679,97,97,429/- holding it
as being capital in nature.
allowing depreciation as claimed by assessee holding that the claim of depreciation
for the year was optional in nature.
directing the AO to adopt the rate followed by the assessee for M/s. Reliance
Industries Ltd., working out deduction u/ s 80lA, without appreciating that the AO
has correctly worked out the profit on the basis of return on capital.
allowing of Rs.3,46,45,OS3/- being the principal component of the lease rent paid on

leased pipelines without appreciating that the assessee had capitalized the assets and
had claimed only finance charges in its accounts.
5. On the facts and circumstances of the case and in law, the Ld. CJT(A) erred in
allowing expenses of Rs.35,32,00,000/- arising out of mark to market transaction in
foreign exchange derivates without appreciating the facts of the case.
directing the AO to adopt the rate of 0.575% as the ALP of the guarantee commission
without appreciating the facts of the case.
7. The appellant prays that the order of the ld. CIT(A) on the above ground be set
aside and that of the Assessing Officer restored.
8. The Appellant craves leave to amend or alter any ground or add a new ground
which may be necessary.
144. All the above grounds are similar to the grounds raised in the A.Y. 2007-08 and
2008-09 which we have elaborately discussed hereinabove.
Following the same reasoning, we direct the AO to follow the same. In Ground No.2, assessee is
aggrieved for disallowance u/s.14A r.w.R.8D.
We found that assessee was having sufficient interest free funds during this year also. Following the
reasoning given by us in the A.Y. 2008-09, we direct for deleting the disallowance of interest. With
regard to disallowance under Rule 8D(2)(iii), AO is directed to follow the procedure given in the
A.Y. 2008-09 for excluding investment made for strategic purposes and also to exclude the
investment income from which does not form part of total income for computing disallowance
under Rule 8D(2)(iii).
We direct accordingly.
145. In the result, appeals of the Revenue are dismissed whereas appeals of the assessee are allowed
in part in terms indicated hereinabove.
Order pronounced in the open court on this 12/04/2017
Sd/- Sd/-
(RAVISH SOOD) (R.C.SHARMA)
JUDICIAL MEMBER ACCOUNTANT MEMBER

Mumbai; Dated 12/04/2017

Karuna Sr.PS
Copy of the Order forwarded to :
1. The Appellant
2. The Respondent.
3. The CIT(A), Mumbai.
4. CIT
DR, ITAT, Mumbai
5. BY ORDER,
6. Guard file.
□□□□□□□□ □□□□□ //True Copy//
(Asstt. Registrar)
ITAT, Mumbai

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Addl Cit Large Tax Payer Unit, Mumbai vs Reliance Industries Ltd, Mumbai on 12 April, 2017

Addl Cit Large Tax Payer Unit, Mumbai vs Reliance Industries

3. Rival contentions have been heard and record perused.

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7. Grounds taken by assessee in the A.Y.2007-08 reads as under:-

1. The learned Commissioner of Income-tax - (Appeals - 15) {hereinafter referred to

tax Act, 1961.

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the normal provisions of the Act (section 28 to 42 of the Act).

3. The CIT(A) erred in confirming the disallowance of depreciation of Rs.14,19,106/- on the

4. The CIT(A) erred in confirming the disallowance of depreciation of Rs.55,35,000/- in respect of

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8. Grounds taken by Revenue reads as under:-

15,38,71,72,697/- which has been treated as revenue receipt by the A.O.

M/s. Reliance Industries Ltd.,

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M/s. Reliance Industries Ltd., 6.5. We have considered submissions of the

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generating employment opportunities, hence, the same is in the nature of capital

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1024,34,61,999/- is to be held as capital receipt not liable to tax.

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Precise observation of Tribunal in its order dated 13/09/2013 was as under:

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Thus ground no.2 of revenue's appeal is dismissed.

Precise observation is as under:-

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M/s. Reliance Industries Ltd.,

"An Act to consolidate the laws relating to generation, transmission, distribution,

"Generation is being delicensed and captive generation is being freely permitted.

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dam safety and optimal utilisation of water resources"

"PART III- GENERA TION OF ELECTRICITY Section 7. (Generating company and

Section 8(Hydro Electric generation)"

Notwithstanding anything contained in section 7, any generating company intending to set-up a

29. It is only hydro-electric electricity generation which is regulated u/s 8.

"Section 9. (Captive generation):

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Provided that such open access shall be subject to availability of adequate

(32) "grid" means the high voltage backbone system of inter-

connected transmission lines, sub-stations and generating plants;

M/s. Reliance Industries Ltd.,

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"Income which is partially agricultural and partially from business

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respect of any expenditure incurred by the assessee as a cultivator or receiver of

(i) the expenses of cultivation;

M/s. Reliance Industries Ltd.,

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40. The Supreme Court at page 441 has stated as under:

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41. The Calcutta High Court has however stated at page 11 :

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The provisions of section 62 of the Electricity Act 2003 reads as follows: