MUMBAI, APRIL 22, 2013: THE issues before the Bench are - Whether expenditure originally shown as Capital Work in Progress can be later claimed as revenue expenditure for income tax purposes upon commencement of the commercial production; Whether any question of TDS liability on interest payable on External Commercial Borrowing can arise, although when the same has been specifically exempted by CBDT u/s 10(15)(iv)(c); Whether when the deployment of the funds borrowed has been already verified by the Department at the time of granting the exemption, the exemption granted u/s 10(15)(iv)(c) continues to apply and Whether when there is no question of TDS liability, section 40(a)(i) has no application. And the verdict goes in favour of the assessee.

Facts of the case

ITA No.4715/Mum/2005 - AY 2001-02

Pre-commencement expenses claimed as revenue expenditure

The assessee had started the commercial production of Hot Rolled Coils (HRC) from 1.4.96. When this HRC unit was under trial production the entire revenue expenditure of this division was shown under Capital Work In Progress (CWIP) in the those years. As the HRC unit has commenced commercial production from 1.4.96 onwards, the entire revenue expenditure for this year was debited in the P/L A/c except for a portion of the expenditure which was, shown under CWIP as an allocation towards the additional plant and machinery/ unit under construction/installation included in CWIP. For income tax purposes, this was claimed as revenue expenditure separately in the computation, as HRC unit forms part of its existing business. However, the AO has disallowed the same stating that it was capital expenditure. Similarly the AO has also disallowed assessee’s claim for fees paid to financial institutions for loan, Floating Rate Notes (FRN) restructuring expenses and HBI plant repairs and maintenance.

On appeal, the CIT(A) CIT (A) following his predecessor’s orders in earlier years and also for AY 1999-2000 allowed the claims as revenue expenditure.

Aggrieved, the Revenue filed an appeal before the Tribunal.

The counsel for the assessee submitted that the issues are covered in favour of the assessee in assessee's own case in previous AYs.

Exemption u/s 10(15)(iv)(c)

The assessee had borrowed USD 40 Million from abroad in March, 1997 by way of ECB from a consortium of foreign banks syndicated by Bearishch Landensbank, Singapore. Assessee had incurred interest expenditure on this loan. AO has disallowed the same u/s 40(a)(ia) stating that no TDS has been made from this interest. Assessee has submitted that the interest on the above loan was exempted u/s 10(15)(iv)(c) and thus no TDS was required to be made on this interest. The CIT (A) allowed assessee’s contention on the reason that the same issue was decided by his predecessor in favour of assessee.

Aggrieved, the Revenue filed an appeal before the Tribunal.

The Departmental Representative submitted that approval u/s 10(15)(iv)(c) was granted by the CBDT vide letter dated 12.03.1997. Assessee has not deducted TDS while making the payment since it had obtained approval u/s 10(15)(iv)(c). The approval granted by the CBDT has not been withdrawn.

ITA No.2838/Mum/2007 – AY 2002-03

Notional addition of interest not allowed

The assessee had received advance monies from M/s High Grade Pellets Ltd without interest and thus, the AO had made an addition of notional interest on account of interest not charged on balance due from M/s High Grade Pellets Ltd. The CIT(A) following his predecessor order in AY 2001-02 allowed the assessee contention that interest was charged and so notional addition or disallowance did not arise.

Aggrieved, the Revenue filed an appeal before the Tribunal.

ITA No.5086/Mum/2007 – AY 2004-05

The assessee had taken long term advances from a foreign customer, CMC Trading AG, Switzerland in an earlier year. These advances were funded by the foreign banks and therefore CMC has assigned all the rights arising out of the above contracts to these banks. The assessee could not fulfill the entire commitments as per the agreement and as per the settlement 33% of the loan was repaid, and the rest was waived off. As the waiver from the principal amount was a remission given by the lenders from the loan principal amount and thus capital in nature, the same was not considered as forming part of taxable income. Consequent to this claim, AO held that the waiver of loan would reduce the cost of plant and machinery as per section 43(1) as the fund was utilized for acquisition of plant and machinery. Accordingly, he disallowed a certain amount of depreciation by reducing the above waiver of loan from the written down value of plant and machinery in block of assets.

On appeal, the CIT (A), the assessee argued that as per section 43(1) “actual cost” means the actual cost of the assets to assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority. Further, the assessee submitted that waiver of loan by the lender cannot be treated as if that lender has met the portion of the cost of the plant and machinery acquired much before in an earlier year. CIT(A) allowed the appeal.

Aggrieved, the Revenue filed an appeal before the Tribunal.

Having heard the parties, the Tribunal held that,

ITA No.4715/Mum/2005 - AY 2001-02

Pre-commencement expenses claimed as revenue expenditure

+ ITAT Coordinate Bench in the last referred order has held as under:

[".....It is a settled legal position that whether two businesses are one and the same business will not depend upon the nature of business or the product but on the fact whether there is unity of control and integration of the two businesses by common management, administration and finance etc. This view is supported by the judgment of Hon'ble Supreme Court in case of Prithvi Insurance Co. Ltd. (supra) and in case of Veecumsees (220 ITR 185) which have been relied upon by the CIT(A). In this case, there is clear finding by the CIT(A) that there was integration, interlacing, interdependence and dovetailing of the two division which has not been controverted before us. Therefore we have to hold that HRC project has to be taken as part of the existing business. In view of the above position all expenditure incurred in connection with new project which is of revenue in nature has to be allowed...."];

+ the issue in second ground is similar to the first ground. In view of this, since the issues are already covered in favour of assessee and the CIT (A) followed his own orders in earlier years which are upheld by the ITAT, the Revenue grounds are dismissed;

+ there is no dispute with reference to assessee obtaining ECB loan of USD 40 Million on 20.03.1997 which comes to Indian Rs. 143,45,99,850 at the relevant time. From 20.03.1997 and 30.03.1998 assessee made payments in foreign exchange of over Rs.400 crores in respect of Plant & Machinery, raw materials and components. AO has not treated the payments of interest as allowable on account of non deduction of tax at source with the following arguments;

Exemption u/s 10(15)(iv)(c)

+ in the present order, the CIT (A) without elaborate discussion has allowed assessee’s claim on the same reason as that of AY 2000-01. Therefore, in order to examine the issue, we had to extract the above order of the CIT (A) for considering this ground. As can be seen from the above, the CIT (A) discussed the issue both on facts as well as on law. It is a fact that the CBDT has examined the receipt of interest as per the provisions of section 10(15)(iv)(c) of the Act. Therefore, where the utilization is for purchase outside India of raw material, components or Plant & Machinery, so long as exemption granted is valid, the interest received by the other party is not covered by the IT Act and by virtue of exemption granted by the Central Govt., the question of TDS on the above amount does not arise at all. Since there is no requirement of TDS, question of disallowance under section 40(a)(ia) for non deduction of tax also does not arise. Moreover, as seen from the correspondence with the Ministry of Finance by the assessee company way back in December, 1996 and February, 1997 it can be noticed that the CBDT also insisted on verifying the deployment of funds and assessee vide the letter dated 7.2.1997 enclosed the Auditor’s certificate certifying the attached statement showing the deployment of funds equivalent to USD 40.22 million and corresponding invoices for import of capital goods for the hot rolled coils project of the company out of Euro Convertible Bonds issue of USD 75.00 million. They also placed on record the approval of the RBI for the purpose of financing the Put Option under Euro Convertible Bonds issue of USD 75 Million. After examining the relevant certificates the CBDT Foreign Tax Division vide letter dated 12.03.1997 granted the approval under section 10(15)(iv)(c). Therefore, the contention of assessee now made at the time of payment of interest does not survive as the issue of utilization of the funds was already examined by the CBDT at the time of granting exemption. As already stated once the interest income is not taxable in the hands of recipient and was exempted by the Govt. of India, question of TDS on the interest paid by assessee does not arise. Therefore, the ground has no merit and accordingly rejected;

ITA No.2838/Mum/2007 – AY 2002-03

Notional addition of interest not allowed

+ this issue is covered in favour of assessee by the order of the Tribunal in assessee’s own case for AY 2001-02 in ITA No.4962/Mum/2005 dated 16.05.2012 as under:-

["......To this extent, we find that both the orders of lower authorities are lacking in details regarding break up of interest attributable to the various categories referred to above. However, at the same time, so far as the advance to HGPL is concerned, we find that the said advance has direct bearing with the commercial needs of the assessee. Once it has been established that the advances have been made for commercial reasons, no part of interest can be disallowed. Therefore, modifying the order of Ld. CIT(A), the AO is directed to allow the claim of interest. Accordingly, the appeal is allowed".];

+ the CIT (A) gave a finding that during the year interest was payable by assessee to M/s High Grade pellets Ltd and so no disallowance is possible. In view of this finding and since the issue was already covered in favour of assessee in earlier year, we uphold the order of CIT(A);

ITA No.5086/Mum/2007 – AY 2004-05

+ we have considered the issue. As far as the facts and law are concerned, they were already elaborately stated above. The Coordinate Bench in the case of Akzo Nobel Coatings India (P.) Ltd. vs. DCIT (LTU), Bangalore considered similar issue;

+ respectfully following the Coordinate Bench, we uphold the order of the CIT (A) which is according to the law on the issue. Therefore, we are of the opinion that there is no merit in the Revenue ground and accordingly ground is rejected.

(See 2013-TIOL-271-ITAT-MUM)