Income Tax Appellate Tribunal – Mumbai
Kansai Nerolac Paints Ltd, Mumbai vs Addl Cit Rg 6(2), Mumbai on 15 May, 2019 आयकर अपीऱीय अधिकरण “K” न्यायपीठ मब ुं ई में । IN THE INCOME TAX APPELLATE TRIBUNAL “K” BENCH, MUMBAI BEFORE SHRI MAHAVIR SINGH, JUDICIAL MEMBER AND SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER आयकर अपीऱ सं./I.T.A. No.6789/Mum/2013 (नििाारण वर्ा / Assessment Year: 2007 -08)
DCIT Ci rcle -6(2) बिाम/ M/s. Kansai Nerolac
R.No. 563, Aay akar Bhavan, Paints Ltd.,
M.K. Ro ad, Church gate, v. Nerolac House, K.G. Marg, Lower Parel,
Mumbai-400020 Mumbai-400013 स्थायी ऱेखा सं ./ PAN :AAACG1376N (अपीऱाथी /Appellant) .. (प्रत्यथी / Respondent) आयकर अपीऱ सं./I.T.A. No.7196/Mum/2013 (नििाारण वर्ा / Assessment Year: 2007 -08) M/s. Kansai Nerolac Paints बिाम/ Addl. CIT Circle -6( 2)
Ltd., R.No. 669,
Nerolac House, K.G. Marg, Aayakar Bhavan, v.
Lower Parel, Mumbai 40001 3 M.K. Ro ad, Mumbai- 400020
स्थायी ऱेखा सं ./ PAN : AAACG1376N (अपीऱाथी /Appellant) .. (प्रत्यथी / Respondent) Revenue by: Shri. Rignesh K. Das (DR) Shri. Rajeev Gubgotra (DR) Assessee by : Ms. Aarti Vissanji सन ु वाई की तारीख /Date of Hearin g : 15-02-2019 घोषणा की तारीख /Date of Pronouncement : 15 -05-2019 आदे श / ORDER PER RAMIT KOCHAR, Accountant Member These cross appeals, filed by Revenue as well as by Assessee, being ITA No. 6789/Mum/2013 & ITA no. 7196/Mum/2013 respectively both for assessment year 2007-08 are directed against the appellate order dated 24.09.2013 in appeal no. CIT(A)-15/Arr.109/13-14 passed by learned Commissioner of Income-tax (Appeals)-15, Mumbai (hereinafter called “the I.T.A. No.6789/Mum/2013 I.T.A. No.7196/Mum/2013 CIT(A)”), the appellate proceedings had arisen before learned CIT(A) from the
assessment order dated 18.02.2011 passed by learned Assessing Officer
(hereinafter called “the AO”) u/s 143(3) read with Section 144C(3) of the
Income-tax Act, 1961 (hereinafter called “the Act”). 2. The grounds of appeal raised by the Revenue in the memo of appeal
filed with the Income-Tax Appellate Tribunal, Mumbai (hereinafter called “the tribunal”) in ITA no. 6789/Mum/2013 for AY 2007-08, read as under:- 1. “Whether on the facts and in circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of Rs.8,91,860/- incurred by the assesses on kavesar Unit for expenses pertaining to kavesar Unit without appreciating the fact that assessee has discontinued its pigment operation at kavesar from 1.4.1999 and this expenditure cannot be treated as expenditure incurred wholly and solely for the purposes of business of the assessee?. 2. “Whether on the facts and in circumstances of the case and in law, the Ld CIT(A) erred in deleting the disallowance of Rs.77,948/- being depreciation in respect of assets of kavesar factory without appreciating the fact that assessee has discontinued its pigment operation at kavesar from 1.4.1999 and the assets in question were never put to use?. 3. “The appellant craves leave to amend or alter any ground or add a new ground which may be necessary”. 3. The grounds of appeal raised by the assessee in the memo of appeal
filed with the tribunal in ITA no. 7196/Mum/2013 for AY 2007-08, read
as under:- 1. a. The learned Commissioner of Income-tax (Appeals) erred in granting only partial relief and upholding action of the Assessing Officer of not giving deduction for insurance expenses of Rs. 41,696/- in relation to the discontinued pigment operations of the appellant at Kavesar (Thane). 2. The learned Commissioner of Income-tax (Appeals) erred in upholding action of the Assessing Officer of disallowance Rs.8,65,032/- on account of expenditure on purchase of application software. 3. a. The learned Commissioner of Income-tax (Appeals) erred in upholding action of the Assessing Officer of disallowance of Rs.68,04,816/- under section 14A. b. The learned Commissioner of Income-tax (Appeals) erred in making enhancement of Rs.9,88,935/-. c. The learned Commissioner of Income-tax (Appeals) has erred in upholding action of the Assessing Officer of not following the method 2|Page I.T.A. No.6789/Mum/2013 I.T.A. No.7196/Mum/2013 approved by the honorable ITAT in appellant’s own case for A.Y. 1999- 2000 for calculating disallowance u/s. 14A. d. The learned Commissioner of Income-tax (Appeals) has erred in not considering the disallowance Rs. 1,50,725/- already made by the assessee in the return. 4. a. The learned Commissioner of Income-tax (Appeals) has erred in upholding action of the Assessing Officer of making addition of Rs.5,12,27,909/- u/s. 145A on account of differential Cenvat Credit in opening and closing stock. b. Without prejudice to the above, the learned Commissioner of Income- tax (Appeals) has erred in upholding action of the Assessing Officer of adopting an artificial formula for calculating the value of Cenvat in opening and closing stock disregarding the actual values mentioned in Tax Audit Report. c. The learned Commissioner of Income-tax (Appeals) has erred in not following the decision of Supreme Court in the case of CIT Vs. Indo Nippon Chemical Co. Ltd (261 ITR 275) and decision of I.T.A.T. Mumbai in the case of Hawkins Cookers Ltd V. ITO (14 DTR 206). 5. a. The learned Commissioner of Income-tax (Appeals) erred in upholding action of the Assessing Officer of making adjustment/addition of Rs.53,16,420/- on account of notional guarantee fee for counter guarantee given by the appellant to an Associated Concern. b. The learned Commissioner of Income-tax (Appeals) erred in upholding action of the Assessing Officer of confirming the adjustment/addition of Rs.53,16,420/- on account of notional guarantee fee for which no reference was made by the Assessing Officer to the Transfer Pricing Officer.” 4. The brief facts of the case are that the assessee is engaged in the
business of manufacturing of paints and varnishes. The AO observed from
the earlier year orders that assessee had not continued its pigment
operations at Kavesar (Thane) from 01.04.1999. The AO observed that the
assessee has however continued claiming expenses incurred with respect to
said unit which were incurred under various heads of income to the tune of
Rs. 10,37,610/- which stood debited to Profit and Loss Account . Further,
the AO observed that the assessee has also claimed depreciation to the tune
of Rs. 77,948/- u/s. 32 of the 1961 Act with respect to aforesaid unit.
These expenses were also disallowed in earlier years by the AO. The assessee
reiterated its submissions as were made in earlier years. The AO disallowed
the expenses to the tune of Rs. 10,11,504/- incurred with respect to Kavesar
Unit (including depreciation ) by following assessment order dated 3|Page I.T.A. No.6789/Mum/2013 I.T.A. No.7196/Mum/2013 28.02.2003 passed by the AO u/s. 143(3) for AY 2000-01 , vide assessment
order dated 18.02.2011 passed by the AO u/s 143(3) read with Section
144C(3) of the 1961 Act. 5. Aggrieved by the assessment framed by the AO vide assessment order
dated 18.02.2011 passed u/s 143(3) read with Section 144C(3) of the 1961
Act, the assessee carried the matter in appeal before learned CIT(A) who was
pleased to allow these expenses partly as business expenses by following the
decision of tribunal for AY 2000-01 vide order dated 22.12.2010 passed by
tribunal. However, the Ld. CIT(A) disallowed the expenses incurred on
account of insurance as in the view of learned CIT(A), the tribunal has by
implication upheld the disallowance of insurance expenses while passing
order for AY 2000-01. The learned CIT(A) partially allowed relief to the
assessee wherein all expenses except insurance expenses with respect to
kavesar unit was allowed vide appellate order dated 24.09.2013 passed by
learned CIT(A) by holding as under:- “4.3 I have considered the facts of the case, submission of the appellant as against the findings / observations of the AO in his order u/s 143(3)/144C(3) of the I.T. Act. The contentions and submissions of the appellant are being discussed and decided here in under: “i. The appellant argued that in its own case for A.Y. 2000-01, the Hon’ble ITAT have allowed the expenses and also depreciation claimed by it. However, on perusal of the order dated 22.12.2010 it is noted that Hon’ble ITAT in para 13 of the order have allowed the expenses on account of rates and taxes, watch and ward and depreciation. Following the same, the disallowance made by AO with regard to these expenses is directed to be deleted. However, in this year expenditure on account of insurance has not been allowed. Impliedly Hon’ble ITAT have upheld this disallowance. Thus since the facts are identical as compared to the year under consideration respectfully following the above the Hon’ble ITAT, the disallowance made by AO on account of insurance is upheld. ii. This ground of appeal is partly allowed.” 6. Now the matter is before tribunal at behest of both the rival parties.
The Revenue is aggrieved by decision of learned CIT(A) allowing expenses
incurred including depreciation with respect to Kavesar unit by learned 4|Page I.T.A. No.6789/Mum/2013 I.T.A. No.7196/Mum/2013 CIT(A) , while assessee on the other hand is aggrieved by disallowance of
insurance expenses by learned CIT(A). The Ld. DR has mainly relied on the
assessment order passed by the AO , while Ld. Counsel for the assessee
submitted that the tribunal has allowed the entire expenses including
depreciation and insurance expenses with respect to Kavesar Unit for AY
2004-05 vide order dated 19.03.2018 in ITA no. 212/Mum/2008 for AY
2004-05 by following the decision of tribunal for AY 2003-04 in ITA no.
1525/Mum/2007 and our attention was drawn to para 2.5 of the appellate
order dated 19.03.2018 passed by tribunal. Our attention was also drawn to
paper book filed by the assessee with tribunal at page 4 wherein detailed
note on expenses on Kavesar unit is placed. It is claimed that the assessee
company is engaged in manufacture of paints. It has been claimed that
Pigments is a basic raw material used for production of paints. The Kavesar
Unit at Thane was engaged in manufacturing of pigments which was used by
assessee for manufacturing of paints in its factories located at various
locations in India. It is claimed that after closure of Kavesar factory all the
requirements of paints were met by buying pigments from market and the
closure of Kavesar unit had not resulted in to closure of assessee‟s business
of manufacture of paints. Further it was claimed that it discontinued
operations only at Kavesar plant, while its operations were carried out in
other plants/factories. The assessee contended that the closure of Kavesar
Unit did not result in closure of business of the assessee. The assessee had
also contended that its entire business was controlled from head office at
Lower Parel, Mumbai . It is claimed that there is unity of control and
interlacing of all business activities, thus it was claimed that discontinuance
of one of the activities does not amount to discontinuance of the entire
business. 7. We have considered rival contentions and perused the material on
record . We have observed that the assessee has closed operations at its
manufacturing unit at Kavesar factory situated at Thane since 1.4.1999. The
assessee however was claiming expenses incurred ( including depreciation )
with respect to its Kavesar unit since AY 2000-01, of which allowability of
these expenses as Revenue expense is a matter of dispute between Rival
Parties. The matter has reached tribunal and we have observed that tribunal
was pleased to allow these expenses including depreciation for AY 2004-05 5|Page I.T.A. No.6789/Mum/2013 I.T.A. No.7196/Mum/2013 in ITA no. 212/Mum/2008 vide appellate order dated 19.03.2018 wherein
tribunal followed the decision of the tribunal in assessee‟s own case for AY
2003-04 in ITA No.1525/Mum/2007 , by holding as under:- “2.5 We have heard the rival submissions and perused the relevant materials on record. We find that the ITAT ‘K’ Bench, Mumbai in assessee’s own case for AY 2003-04 (ITA No. 1525/Mum/2007) has followed the following order of the Tribunal for AY 2002-03: “It is observed that a similar issue has been decided by the Tribunal in assessee’s own case for the earlier years i.e. assessment year 2000-01 and 2001-02 by its order dated 22nd December, 2010 and 28th March, 2012 passed in ITA No. 6491/Mum/2004 and 2519/Mum/2005 respectively whereby a similar disallowance sustained by the Ld. CIT(Appeals) on account of depreciation and other expenses of Kavesar Factory was deleted by the Tribunal accepting the alternative contention of the assessee that the expenses incurred to protect the business assets should be allowed as deduction as held by Hon’ble Bombay High Court in the case of Hindustan Chemical Works Ltd. 124 ITR 561. It was also held by the Tribunal that the assets of Kavesar Unit having already entered the block of assets of the assessee, depreciation thereon could not be disallowed on the ground of non-user as the use of block of assets was to be considered and not the use of individual assets. Respectfully following the orders of the coordinate bench of this Tribunal on a similar issue in assessee’s own case for assessment year 2000-01 and 2001-02, we delete the disallowance partly sustained by the Ld. CIT(A) on account of various expenses and depreciation in relation to Kavesar unit and allow ground No. 1 of the assessee’s appeal.” Facts being identical, we follow the above decisions of the Coordinate Bench and allow the 1st ground of appeal.”

8. We have observed that this issue is a recurring issue before the
tribunal in the case of the assessee . It is also observed that the tribunal in
the preceding year AY 2004-05 had held that expenses incurred by the
assessee ( including deprecation ) with respect to Kavesar Unit situated at
Thane which was lying closed since 01.04.1999 is to be allowed as revenue
expenses. The facts being identical in this year and we have no reason to
take divergent view than what was taken by tribunal in preceding year AY
2004-05 and also with a view to maintain consistency( Ref: Hon‟ble Supreme
Court decision in the case of Radhasoami Satsang v. CIT reported in
(1992)193 ITR 321(SC) ), we hold these expenses be allowable as business
expenses. Thus, we hold that these expenses including depreciation of Rs.
6|Page I.T.A. No.6789/Mum/2013 I.T.A. No.7196/Mum/2013 10,11,504/- with respect to Kavesar Unit located at Thane be allowed as
Revenue Expenses. Thus we do not find any merits in the appeal of the
revenue which stood dismissed. Thus, both ground number 1 and 2 raised
by Revenue in its appeal stood dismissed. The Ground No. 3 raised by
Revenue in its appeal is general in nature and does not require separate
adjudication. This also disposes ground no.1 raised by the assessee in its
appeal which stood allowed . We order accordingly.

9. Now we move to the other grounds of appeal raised by the assessee in
its appeal filed with tribunal in ITA no. 7196/Mum/2013 for AY 2007-08.

10. Vide ground no. 2. , the assessee has challenged disallowance of
expenditure to the tune of Rs. 8,65,032/- on account of expenditure
incurred on purchase of application software. These expenses incurred by
the assessee towards acquisition of application software were claimed by the
assessee as Revenue expenses and cost thereof were charged to Profit and
Loss Account . The assessee had claimed before the AO that these
application software are used for the purposes of operating computers and
were purchased separately and were not supplied by manufacturer
alongwith computers. Without prejudice, It was also claimed that the new
version of these application software is launched every year in the market
and the application software purchased in one year become outdated in the
next year. However, these expenses incurred by the assessee towards
purchase of application software were disallowed by the AO by treating the
same as capital expenditure but the AO allowed depreciation to the tune of
60% for full year while 30% rate of depreciation was allowed for half year, as
was prescribed in Appendix-I of the Income-tax Rules, 1962- Computer
including Computer Software . The assessee carried the matter in appeal
before the Ld. CIT(A) but without success who was pleased to dismiss the
appeal of the assessee vide appellate order dated 24.09.2013 passed by
learned CIT(A), by holding as under:

” 5.3 I have considered the facts of the case, submission of the appellant as against the findings / observations of the AO in his order u/s 143(3)/144C(3) of the I.T. Act. The contentions and submissions of the appellant are being discussed and decided here in under:

i. The AO has allowed the depreciation @ 60% on the software purchased by the assessee after treating the same as 7|Page I.T.A. No.6789/Mum/2013 I.T.A. No.7196/Mum/2013 capital expenditure. The appellant argued that the expenses relate to the software for downloading data from SAP system processing and hence relying upon several decisions same was claimed to be revenue in nature.

ii. From records I find that identical issue in appellant’s own case had come up before Hon’ble ITAT in A.Y. 2003-04 wherein the findings of the AO to allow depreciation @ 60% after holding the expenditure being capital in nature have been upheld. Since the facts are identical, following the same the disallowance made by the AO is upheld.

iii. Accordingly, this ground of appeal is dismissed.”
11. The assessee being aggrieved by appellate order passed by learned
CIT(A) on this issue against the assessee carried the matter further in appeal
before the tribunal. The Ld. Counsel for the assessee submitted that tribunal
while adjudicating assessee‟s appeal for AY 2004-05 in ITA no.
212/Mum/2008 vide appellate order dated 19.03.2018 in assessee‟s own
case has decided the issue in favour of the assessee by following the decision
of Hon‟ble Delhi High Court in the case of CIT v. Amway India Enterprises
(2012) 346 ITR 341(Delhi) and CIT v. Asahi India Safety Glass Ltd. (2012)
346 ITR 329 (Del) . The said order of the tribunal in ITA no. 212/Mum/2008
for AY 2004-05 in assessee‟s own case is placed in file.

12. The Ld. DR on the other hand relied upon the appellate order passed
by Ld. CIT(A).

13. We have considered rival contentions and have perused the material
on record .We have observed that the assessee has incurred expenditure
towards acquisition of application software of which cost thereof was claimed
as Revenue expenses by charging the same to Profit and Loss Account. The
assessee has claimed that these application software purchased are required
for operating computer systems and bring in efficiencies in operations. The
said application software were not supplied by computer hardware
purchased by the assessee but were separately acquired. There are infact
three software purchased by the assessee, which are subject of dispute
before us, as under:

Application Software Amount(Rs.) 1. Minitab latest Software M.E. Project 4,81,624 8|Page I.T.A. No.6789/Mum/2013 I.T.A. No.7196/Mum/2013 2. Iquinox Ver. 6 3,26,000 3. Internet proxy server software 57,403 Total 8,65,032 It is claimed that Minitabl Software helps in increasing the manufacturing
efficiency. It helps extract date from SAP system and compile them in a
suitable and presentable manner so as to give meaningful analysis to the
management and other personnel, which increases efficient use of resources.
It is claimed with respect to second application software namely Iquinox Ver.
6 that all the mails received by an employee on official email ID is first
received by server at its head office and it is scanned for viruses and then
sent to respective recipient. Thus , it was claimed that it did not give any
benefit of enduring nature. With respect to Internet proxy server, it is
claimed that it helps to grant/restrict access to various web sites and other
online material to different employees of the assessee . It is claimed that this
software restricts access to web and it did not create any benefit of enduring
nature. It is also claimed that these application software are upgraded in a
year time as the old version gets outdated and upgraded versions are
required to be purchased again to keep up pace with technological
advancement. The details and invoices for these application software are
placed in paper book/page 7-12. The AO treated these application software
as capital assets and allowed depreciation on rates as prescribed for
Computer including Computer Software as prescribed in Appendix-I of the
Income-tax Rules, 1962 which was later confirmed by learned CIT(A). We
have observed that the tribunal in assessee‟s own case for AY 2004-05 in ITA
no. 212/Mum/2008 for AY 2004-05 vide appellate order dated 19.03.2018
has granted relief to the assessee by holding that the expenditure incurred
by the assessee toward purchase of application software is revenue in nature
and has allowed relief to the assessee by following the decision of Hon‟ble
Delhi High Court in the case of CIT v. Amway India Enterprises (2012) 346
ITR 341(Delhi) and CIT v. Asahi India Safety Glass Ltd. (2012) 346 ITR 329
(Del) , by holding as under:

“3.5 We have heard the rival submissions and perused the relevant materials on record. In Amway India Enterprises (supra), it has been held that the purchase of software is a revenue expenditure.
9|Page I.T.A. No.6789/Mum/2013 I.T.A. No.7196/Mum/2013 In Asahi India Safety Glass Ltd. (supra) it is held that the extent of expenditure cannot be a decisive factor in determining its nature and treatment in books of account not conclusive. The Hon’ble High Court held that the software expenses were not to create new asset or a new source of income but to upgrade the system and thus the software expenditure is revenue expenditure.

Facts being identical, we follow the ratio laid down in the above decisions and hold that the expenditure incurred by the assessee towards the purchase of application software is revenue in nature. Thus the 2nd ground of appeal is allowed.”

Respectfully following the decision of tribunal in assessee‟s own case for AY
2004-05 and with a view to maintain consistency( Ref: Hon‟ble Supreme
Court decision in the case of Radhasoami Satsang v. CIT reported in
(1992)193 ITR 321(SC) ) , we hold that expenditure incurred by the assessee
for purchase of application software to the tune of Rs. 8,65,032/- be allowed
as Revenue expenses. We have while taking decision has also noted that
these are not operating software but are application software. The ground
number 2 in assessee‟s appeal is allowed. We order accordingly.

14. The next issue raised by the assessee in its appeal vide ground
number 3(a) to (d) relates to disallowance of expenditure incurred in relation
to earning of an exempt income by invoking provisions of Section 14A of the
1961 Act. The assessee had received total dividend income of Rs.
7,18,30,645/- from Indian Companies and Mutual Funds which was claimed
as an exempt income u/s. 10(34) and further interest income of Rs.
1,02,97,467/- on tax free bonds were received by the assessee which was
also claimed as an exempt income u/s. 10(15) of the Act. The assessee suo
motu voluntarily disallowed Rs. 1,50,725/- as an expenditure incurred in
relation to earning of an exempt income keeping in view provisions of Section
14A of the 1961 Act. The AO had made further disallowance of expenditure
incurred in relation to earning of an exempt income by invoking provisions of
Section 14A of the 1961 Act to the tune of Rs. 58,15,881/- , which was
arrived at after allowing deduction of suo motu voluntary disallowance of
expenditure incurred in relation to earning of an exempt income to the tune
of Rs. 1,50,725/- u/s. 14A as was made by the assessee .The AO held as
under vide assessment order dated 18.02.2011 passed u/s 143(3) read with
Section 144C(3) of the 1961 Act:-
10 | P a g e I.T.A. No.6789/Mum/2013 I.T.A. No.7196/Mum/2013 ” 5.4. In view of the above, the disallowance in the case of the assessee has to be made as per Sub-section (2) of Section 14A of the Income Tax Act.. In assessee’s case for A.Y.2006-07, the disallowance u/s 14A was computed out as per formula worked out by DRP [Dispute Resolution Panel] on the basis of directions given in the case of Godrej & Boyce Mfg. Ltd [supra] .
On the same basis, disallowance u/s 14A for the current year is worked out as below Working of Disallowance u/s.14A: i) Direct Expenditure relating to exempt
income – ii) a) Expenditure by way of interest other than 96,15,000
(i) above Value of the investments as on 1st April 1,043,315,111 Value of the investments as on 31st March 740,300,000 b) Average value of investments during the 891,807,555
year Value of the total assets as on 1st April 5,158,278,000 Value of the total assets as on 31st March 6,217,300,000 c) Average value of total assets during the 5,687,789,000
year Amount of disallowance [a ( b/c ) ] 1,507,568 iii) 0.5% of Average Investment 4,459,038 TOTAL DISALLOWANCE U/S.14A (i+ii+iii) 5,966,606 5.5. Thus, the disallowance u/s.14A of the IT Act works out to Rs.59,66,606/-. Since the assessee company has already disallowed an amount of Rs.1,50,725/- and added back to the business income in the Statement of Income, a further disallowance of Rs.58,15,881/-(i.e. 59,66,606-1,50,725) is made under section 14A of I. T. Act 1961.

Addition made to total income: Rs.58,15,881/-”
11 | P a g e I.T.A. No.6789/Mum/2013 I.T.A. No.7196/Mum/2013 15. Aggrieved by an assessment framed by the AO as aforesaid wherein
further disallowance of expenditure to the tune of Rs. 58,15,881/- was made
by the AO by invoking provisions of Section 14A of the 1961 Act, the
assessee carried the matter further in appeal before Ld. CIT(A) who was
pleased to dismiss the appeal of the assessee and further enhancement of
disallowance of expenditure by Rs.9,88,935/- was made by learned CIT(A)
u/s. 14A of the 1961 Act vide appellate order dated 24.09.2013 , by holding
as under:

“6.3 I have considered the facts of the case, submission of the appellant as against the findings/observations of the AO in his order u/s 143(3)/144C(3) of the I.T. Act. The contentions and submissions of the appellant are being discussed and decided here in under:

i. In this case AO following the order of DRP for A.Y. 2006-
07 has made disallowance of Rs. 59,66,606/- u/s.14A as against Rs. 1,50,725/- made by the assesses. It is a fact of the case that the appellant has made huge investments totalling to Rs. 154.82Crores against which it has earned Rs. 7.18 crore as dividend from domestic companies, and Rs. 1.02 Crores as interest on tax free bonds which have been claimed exempt under Section 10(34), and 10(15) of the Act respectively and thus the same are not forming part of the total income of the appellant. Accordingly, the provisions of section 14A of the Act, is clearly applicable in respect of disallowances of corresponding expenditure debited by the appellant in its P & L A/c, The appellant’s initial submission to the AO, that no disallowance should be made as no expenditure has been incurred is not acceptable. Because apart from the direct costs that, may have been incurred in respect of management/employee’s salary deciding/ handling this work in the company, there would be costs associated with the infrastructure facilities used for investments, there would be certain direct and indirect expenses relating to such investments, such as expenses relating to portfolio management, supervisory charges, audit charges, taxation and law charges etc. Further there would interest costs of the funds deployed in the investments yielding tax exempt incomes, as the appellant has not been able to clearly establish that it had no interest costs towards the funds deployed for such purposes. It may further be pointed out that the appellant itself had offered disallowance of Rs. 1,50,725/-. Therefore, it cannot be said that there are no costs/expenses attributable to earning of the income which is not forming part of the total income. 12 | P a g e I.T.A. No.6789/Mum/2013 I.T.A. No.7196/Mum/2013 ii. The appellant has contended that it had sufficient
funds and that the investments were made out of
internal accruals. In this regard the appellant also relied
upon the Judgement of Hon’ble Bombay High Court in the
case of CIT Vs. Reliance Utilities & Power Limited (Supra).
In this regard it is stated that the decision is in respect of
the allowability of interest under section 36(1) (iii) of the
Act and not in respect of section 14A of the Act. The
appellant has submitted that there cannot be
disallowance of interest as it had sufficient internal/own
funds for such investments. In this regard it is mentioned
that in the proposed proforma, the clause (i) takes care of
it. As per the working submitted by the appellant, the
appellant has taken such direct interest/expenses
attributable to the exempt income as NIL. This further
takes care of appellant’s reliance on the case of Reliance
Utilities & Power Ltd. (Supra). There is therefore
disallowance worked out based on indirect interest and
further 0.5% of the average weighted value of
investments.

iii. The appellant contended that the assessee is
following the decision of the Hon’ble ITAT in appellant’s
own case for A.Y. 1999-2000 for working out
disallowance. In this regard it is mentioned that said
decision has been delivered by Hon’ble ITAT Mumbai
vide order dated 21.09.2006. Thereafter Hon’ble High
Court in the case of Godrej & Boype Manufacturing Co.
Ltd. had decided that in A.Yrs, preceding A.Y.2008-09
the disallowance u/s. 14A has to be made on a
reasonable basis. The .assessee has earned exempt
income of Rs. 8.20 crores against which disallowance of
Rs. 1,50,725/- .cannot held to be reasonable by any
yardstick. Accordingly reasonable disallowance following
the directions of the Hon’ble Mumbai High Court was
required to be made.

iv. Accordingly, a show cause notice was issued to
the appellant which is reproduced as under:-

“In relation to the income earned which does not form
part of the total income and disallowance made by the
Assessing Officer u/s. 14A of the Act, you are requested
to submit the information as per the following format and
also show cause as to why the aggregate of amounts so
arrived at should not be disallowed ‘and added income.

(i) The amount of expenditure directly relating to income which does not form part of the total income.

(ii) In a case where the appellant has incurred expenditure by way of interest during the previous year which is not directly attributable to any 13 | P a g e I.T.A. No.6789/Mum/2013 I.T.A. No.7196/Mum/2013 particular income or receipt, an amount computed in accordance with the following formula, namely:

AXB C Where A = amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the previous year;

B = the monthly weighted average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee.

C= the average of total assets as appearing in the balance sheet of the assesses, on the first day and the last day of the previous year.

iii) An amount equal to one-half percent of the monthly weighted average of the value of investment, income from which does not or shall not form part of total income. ”

The information as aforesaid together with your say/submission on the proposed disallowance under section 14A be submitted on the date of next hearing. ”

In response to the above appellant submitted that method adopted by it to calculate disallowance u/s. 14A is correct and reasonable. However,, without prejudice in response to questionnaire the working of disallowance u/s. 14A was submitted as per which disallowance, has been worked out to Rs. 68,04,816. In view of the above facts AO is directed to disallow a sum Rs. 68,04,816/- resulting into enhancement of Rs. 9,88,935/-.

vi. This ground of appeal is dismissed with enhancement.”
16. Being aggrieved by the appellate order passed by learned CIT(A)
confirming disallowance of expenditure(including enhancement) to the tune
of Rs. 68,04,816/- by invoking provision of Section 14A of the 1961 Act, the
assessee carried the matter further in appeal before the tribunal and it was
submitted at the outset by learned counsel for the assessee that impugned
assessment year under consideration is AY 2007-08 which is prior to
assessment year 2008-09 , from where onwards Rule 8D of the 1962 Rules
is applicable and for impugned assessment year 2007-08 , Rule 8D of the
1962 Rules has no application. It was submitted that the assessee suo motto
disallowed sum of Rs. 1,50,725/- being expenditure incurred in relation to 14 | P a g e I.T.A. No.6789/Mum/2013 I.T.A. No.7196/Mum/2013 earning of an exempt income keeping in view provisions of Section 14A of
the 1961 Act. It was submitted that total exempt income of Rs. 7.18 crores
was received as dividend from Indian companies and mutual funds which
was claimed as an exempt income u/s 10(34) of the 1961 Act and it was
submitted that the assessee further received interest income from tax free
bonds to the tune of Rs. 1.02 crores which were claimed as an exempt
income u/s 10(15) of the 1961 Act. The assessee relied on the decision of
Hon‟ble Supreme Court in the case of CIT v. Essar Teleholdings Ltd., (2018)
90 Taxmann.com 2 (SC): (2018) 401 ITR 445(SC) to contend that Rule 8D of
the 1962 Rules is prospective in nature and shall be applicable from AY
2008-09 onwards .The assessee drew our attention to audited financial
account of the assesssee for financial year 2006-07 which are placed in file.
Our attention was drawn to Balance Sheet as at 31.03.2007 to contend that
assessee‟s own interest free funds available were to the tune of Rs. 511.73
crores (share capital + reserves and surplus) ( Preceding Year as at
31.03.2006-Rs.406.05 crores ) while the investment were only to the tune of
Rs. 154.82 crores as at 31.03.2007( Rs. 163.93 crores as at 31.03.2006) . It
was submitted by learned counsel for the assessee that since interest free
own funds are much higher than investments made by the assessee, then
presumption will apply that the assessee made investments out of own
interest free funds available with it. The learned counsel for the assessee
relied upon the decision of Hon‟ble Bombay High Court in the case of CIT v.
Reliance Utilities and Power Limited (2009) 313 ITR 340(Bom.) and CIT v.
HDFC Bank Limited (2014) 366 ITR 505(Bom.) to contend that no interest
expenditure can be disallowed as there will be presumption that the assessee
made investments out of own interest free funds available with it. The
learned counsel for the assessee also submitted that in AY 2004-05 in
assessee‟s own case in ITA no. 212/Mum/2008 vide appellate order dated
19.03.2018, the tribunal has upheld the disallowance u/s 14A of the 1961
Act to the tune of 2% of the exempt income. It was prayed that the
disallowance u/s 14A be restricted to 2% of exempt income.

17. The Ld. DR on the other hand relied upon the order of the Ld. CIT(A).

18. We have considered rival contention and perused the material on
record . We have observed that the assessee has made investment to the
tune of Rs. 154.82 crores as at 31.03.2007(Rs. 163.93 crores as at 15 | P a g e I.T.A. No.6789/Mum/2013 I.T.A. No.7196/Mum/2013 31.03.2006) and assessee has received dividend income of Rs. 7.18 crore
from Companies and Mutual Funds during the previous year relevant to
impugned assessment year which was claimed as an exempt income u/s
10(34) of the 1961 Act. The assessee has further received exempt income of
Rs. 1.02 crores by way of interest on tax free bonds during the previous year
relevant to assessment year which was also claimed as an exempt income
u/s. 10(15) of the Act. The assessee has own interest free funds available
with it to the tune of Rs. 511.73 crores as at 31.03.2007( Preceding year Rs.
406.05 crores as at 31.03.2006) as per audited financial statements, which
are far in excess of investments made by the assessee. The Revenue has not
shown that specific interest bearing funds were borrowed by the assessee to
make investments. The assessee has infact contended that no interest
bearing borrowed funds were used for making investments (Page 13/pb)
which could not be rebutted by Revenue with incriminating material. Thus,
at best it could be said to be deployment of mixed use funds from common
pool of funds . Then in that case of deployment of mixed use funds, the
presumption will apply as laid down by Hon‟ble Bombay High Court in the
case of Reliance Utilities and Power Limited(supra) and HDFC Bank
Limited(supra) that the assessee made investments in securities capable of
yielding an exempt income out of own funds and no disallowance of interest
expenditure is warranted u/s 14A of the 1961 Act. Further, we are of the
view that impugned assessment year is AY 2007-08 and Rule 8D of the 1962
Rules is not applicable. Decision of Hon‟ble Supreme Court in the case of
Essar Teleholdings Ltd. (supra) is applicable, wherein Hon‟ble Supreme
Court in para 50 held as under:

“50. In view of our opinion as expressed above, dismissal of the appeal by the Bombay High Court is fully sustainable. As held above, the Rule 8D is prospective in operation and could not have been applied to any assessment year prior to Assessment Year 2008-09.”
18.2 We have also observed that the tribunal in assessee‟s own case for AY
2004-05 in ITA no. 212/Mum/2008 vide orders dated 19.03.2018 has
upheld disallowance of expenditure u/s 14A of the 1961 Act to the tune of
2% of the total exempt income , by holding as under:-
16 | P a g e I.T.A. No.6789/Mum/2013 I.T.A. No.7196/Mum/2013 ” 5.5 We have heard the rival submissions and perused the relevant materials on record. We are concerned here with the assessment year 2004-
05. In M/s Godrej Agrovet Ltd. v. ACIT (ITA No. 1629/Mum/2009) for the assessment year 2005-06, the ITAT ‘G’ Bench Mumbai restricted the disallowance u/s 14A to 2% of the total exempt income on the reason that Rule 8D of the Income Tax Rules 1962 is applicable only prospectively from AY 2008-09 as held by the Hon’ble Bombay High Court in Godrej and Boyce Mfg. Co. Ltd. v. DCIT (2010) 194 Taxman 203 (Bom). The above decision of the ITAT has been confirmed by the Hon’ble Bombay High Court vide order dated 08.01.2013 in CIT v. M/s Godrej Agrovet Ltd. (ITA No. 934 of 2011).

As we are dealing with the assessment year 2004-05, following the above decisions, we direct the AO to restrict the disallowance u/s 14A to 2% of the total exempt income of the assessee, in place of the disallowance made by the AO and the enhancement done by the Ld. CIT(A). Thus the 4th & 5th grounds of appeal are partly allowed.”
18.3 We have no reason to take a different view than what was taken by
tribunal in assessee‟s own case for AY 2004-05 as facts are similar and also
with a view to maintain consistency( Ref: Hon‟ble Supreme Court decision in
the case of Radhasoami Satsang v. CIT reported in (1992)193 ITR 321(SC) )
we uphold disallowance of expenditure to the tune of 2% of exempt income.
Respectfully following the decision of the tribunal in assesses own case we
hold that disallowance of expenditure incurred in relation to earning of an
exempt income u/s 14A of the 1961 Act be restricted to 2% of exempt
income. The ground of appeal bearing number 3(a) to (d) filed by the
assessee in memo of appeal filed with the tribunal is partly allowed in the
manner indicated above. We order accordingly.

19. The next issue vide ground number 4(a) to (c) raised by assessee in its
appeal filed with tribunal concerns itself with disallowance having been
made with respect to addition of Rs. 5,12,27,909 u/s 145A of the 1961 Act
on account of differential Cenvat Credit in opening and closing stock. The
assessee is following exclusive method of accounting while valuing stock
while the Revenue is contending that only inclusive method of accounting
can be adopted while valuing stock keeping in view provisions of Section
145A of the Act while led to aforesaid additions which was later upheld by
learned CIT(A) and is now contested by the assessee before the tribunal. At
the outset our attention was drawn by learned counsel for the assessee to
the decision of the tribunal in assessee‟s own case in ITA No. 17 | P a g e I.T.A. No.6789/Mum/2013 I.T.A. No.7196/Mum/2013 212/Mum/2008 for AY 2004-05 vide appellate order dated 19.03.2018,
wherein tribunal held as under:

” 6.5 We have heard the rival submissions and perused the relevant materials on record. There is no dispute that the purchases made by the assessee are accounted for net of MODVAT credit. In M/s Diamond Dye Chem Ltd. (supra), the Hon’ble Bombay High Court held:

“5. We have considered the submissions. It is not disputed that the assessee was liable to excise duty. The assessee got credit in the excise duty already paid on the raw materials purchased by it and utilized in the manufacturing of excisable goods. The assessee was adopting the exclusive method i.e. valuing the raw-materials on the purchase price minus (-) the Modvat credit. The same would be permissible. The Apex Court in the case of Indo Nippon Chemicals Co. Ltd. (supra) while affirming the order of High Court, has observed that the income was not generated to the extent of Modvat credit or unconsumed raw-material. Merely because the Modvat credit was irreversible credit offered to manufacturers upon purchase of duty paid raw-materials, that would not amount to income which was liable to be taxed under the Act. It is also held that whichever method of accounting is adopted, the net result would be the same.

6. Considering the above, the amount of the un-utilized Cenvat credit could not have been directly added to the closing stock.”

6.5.1 Facts being identical, we follow the above decision of the Hon’ble Bombay High Court and delete the addition of Rs.3,93,57,123/- made by the AO. Thus the 6th ground of appeal is allowed.”
The assessee is contending that it is following exclusive method of
accounting while accounting for cenvat credits. Our attention was drawn to
the decision of Hon‟ble Bombay High Court in the case of CIT v. Diamond
Dye Chem Limited in ITA no. 146 of 2015 reported in 396 ITR 536(Bom.) .

20. The Ld. DR on the other hand relied upon the appellate order of the
Ld. CIT(A).

22. We have considered rival contentions and perused the material on
record. We have observed that the assessee is following exclusive method of
accounting for valuing closing stock wherein unutilised MODVAT/Cenvat
Credit is not added to the value of closing stock . We have observed that
Section 145A stipulates that the duties , taxes , fees and cess (by whatever
name called) paid to bring the inventory to present location is to be added to 18 | P a g e I.T.A. No.6789/Mum/2013 I.T.A. No.7196/Mum/2013 value inventory as on the date of valuation. We have observed that the
Mumbai-tribunal has passed an elaborate order in the case of Sunshield
Chemicals Private Ltd. v. ITO in ITA no. 5045/Mum/2010 vide order dated
09.12.2015 reported in (2016) 156 ITD 452(Mum-trib.) of which one of us
was part of DB pronouncing the said order , wherein tribunal held that per
Section 145A it is mandatory for taxpayers to follow inclusive method, by
holding as under:-

“16. We have heard both the parties and perused the material on record including case laws relied upon by the both the parties. We have observed that the whole controversy revolves around the method of accounting employed by the assessee company and valuation of purchases, sales and inventories as the assessee company is following ‘exclusive method’ also called as ‘net method’ of accounting consistently whereby purchases are reduced at inception by the Cenvat credit available and are accounted for in the books of account by the assessee company exclusive of Cenvat credit available and consequentially the assessee company has valued stock net of Cenvat without including taxes, duties, cess, fee etc. as provided u/s 145A of the Act while the authorities below have held that the closing inventories as on year end shall include taxes, duties, fee, cess as provided u/s 145A of the Act and no adjustment in the opening stock is called for . Before we proceed further it is important to understand the entire background to understand the dispute in the present appeal in the right perspective.
Firstly, we refer to the provisions of Section 145A of the Act as applicable for assessment year 2007-08 are reproduced below:
“Section – 145A, Income-tax Act, 1961 – 2006 [Method of accounting in certain cases.
145A. Notwithstanding anything to the contrary contained in section 145, the valuation of purchase and sale of goods and inventory for the purposes of determining the income chargeable under the head “Profits and gains of business or profession” shall be–

(a) in accordance with the method of accounting regularly employed by the assessee; and (b) further adjusted to include the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation.

Explanation.- For the purposes of this section, any tax, duty, cess or fee (by whatever name called) under any law for the time being in force, shall include all such payment notwithstanding any right arising as a consequence to such payment.]” 19 | P a g e I.T.A. No.6789/Mum/2013 I.T.A. No.7196/Mum/2013 The Section 145A of the Act was introduced by the Finance (No. 2)
Act,1998 w.e.f. April 1,1999 and starts with a non-obstante clause that
notwithstanding anything contained in Section 145 of Act, the valuation
of purchase and sales of goods and inventory for the purposes of
determining the income chargeable under the head “Profits and gains of
business or profession” shall be in accordance with the method of
accountancy regularly employed by the taxpayer and shall be further
adjusted to include the amount of any tax, duty, cess or fee (by
whatever name called) actually paid or incurred by the taxpayer to
bring the goods to the place of its location and condition as on the date
of valuation. The Explanation to Section 145A of the Act stipulates that
for the purposes of this section, any tax, duty, cess or fee under any
law in force shall include all payment notwithstanding any right arising
as a consequence to such payment.
It is important to understand the structure of various taxes, duties, cess
and fees which have bearing on bringing the goods to the place of its
location and conditions as on the date of valuation. There are broadly
two categories of taxes, duties, cess and fees based on chargeability
prevalent in India having bearing on bringing the goods to the place of
its location and conditions as on the date of valuation of the goods as
under:

1. First category of the taxes, duties, cess and fees having bearing on bringing the goods to the place of its location and conditions as on the date of valuation of the goods are those which are to be absorbed by the enterprise as part of the component of its costs as per prevailing relevant laws,rules and regulations, without any benefit granted by law of adjusting these taxes, duties, cess and fees against the final excise duty payable on the finished goods manufactured by the enterprise. For example, Custom duty payable on import of raw materials broadly has three elements of duties apart from education and secondary education cess viz. (a) Basic Custom Duty (b) Counter veiling Duty (CVD)(c) Special Additional duties(SAD). The basic custom duty paid on import of raw materials for manufacture of finished goods is not allowed as a credit of taxes to be set off against the excise duty payable on the finished goods manufactured by the enterprises under the current value added tax regime known as cenvat credit scheme and hence is to be absorbed as cost component by the enterprise while in the case of the CVD & SAD component in custom duty paid by the enterprise on import of raw materials for manufacture of finished goods, the same are allowed as cenvat credit to be set off/ utilized for payment of excise duty on the finished goods. Similarly, Central Sales Tax(CST) paid on purchase of raw material from another state, no offset is allowed against the State VAT or CST on finished goods sold by the enterprise as per current schemes pertaining to sales tax and hence is to be absorbed as part of component of cost by the enterprise while State VAT paid on purchase of raw material from supplier within the State is allowed to be set-off against the VAT/CST payable on sale of finished goods to avoid cascading effect of taxes.

2. The second categories of taxes, duties, cess and fees having bearing on bringing the goods to the place of its location and conditions as on the date of valuation of the goods are known as ‘Value Added Taxes’-These Value added taxes were introduced in India in 1986 to avoid cascading effect of taxes with an objective to reduce transaction cost and bring transparency in 20 | P a g e I.T.A. No.6789/Mum/2013 I.T.A. No.7196/Mum/2013 the system. The scheme allowed setting off of duties paid on procurements
of inputs against the duty payable on finished goods manufactured by the
enterprise thereby restricting the levy of tax to value addition done by the
enterprise in manufacturing the finished goods. The scheme when launched
in 1986 was called Modified Value Added tax scheme (popularly known as
MODVAT scheme) which allowed credit/set off of duties paid on specified
inputs used in manufacture of excisable goods against the excise duty
liability of the enterprise on manufacture of goods as per provisions of
Excise Laws, rules and regulations. The scheme was expanded and credit
of duty paid on capital goods was also brought under the ambit of the
scheme MODVAT in the year 1994. The scheme was later renamed CENVAT
Credit scheme in the year 2000. The ‘Service Tax’ was introduced in India
from the year 1994 and Service Tax Credit Rules, 2002 were introduced in
the year 2002 to allow credit on input services used in providing taxable
output services. In the year 2004, CENVAT Credit Rules, 2002 and Service
Tax Credit Rules, 2002 were unified and new CENVAT Credit Rules, 2004
were introduced. The new CENVAT Credit Rules, 2004 allowed both
manufacturers and service providers to take input credit on goods and
services apart from capital goods allowing cross sectorial availment and
utilization of credit. The Cenvat Credit Rules permit adjustment of excise
duties paid on inputs, CVD/SAD on imports of raw material, excise duties
on capital goods and service tax on input services against the excise duty
payable on finished goods manufactured by the enterprise without one to
one co-relation required by the enterprise to establish before availing the
cenvat credit. The Central Government has now announced its intention to
introduce unified Goods and Service Tax, popularly known as ‘GST’ which is
likely to be rolled out shortly which is likely to further unify and merge
various indirect taxes both Central and State levies into an unified tax to be
known as ‘GST’ and allow credit of various indirect taxes across goods and
services both Central and State levies as per scheme to be notified which
will further help in cutting down transaction costs and bring in transparency
into the system. The Hon’ble Supreme Court in the case of Eicher Motors v.
Union of India 1999 (106) ELT 3 has observed that credit once validly taken
by the manufacturer cannot be effaced. The relevant extract of decision of
Hon’ble Supreme Court is as under:–

♦ “5. Rule 57-F(4-A) was introduced into the Rules pursuant to the Budget for 1995-96 providing for lapsing of credit lying unutilised on 16-3-1995 with a manufacturer of tractors falling under Heading No. 87.01 or motor vehicles falling under Heading Nos. 87.02 and 87.04 or chassis of such motor vehicles under Heading No. 87.06. However, credit taken on inputs which were lying in the factory on 16-3-1995 either as parts or contained in finished products lying in stock on 16-3-1995 was allowed. Prior to the 1995-96 Budget, the Central excise/additional duty of customs paid on inputs was allowed as credit for payment of excise duty on the final products, in the manufacture of which such inputs were used. The condition required for the same was that the credit of duty paid on inputs could have been used for discharge of duty/liability only in respect of those final products in the manufacture of which such inputs were used. Thus it was claimed that there was a nexus between the inputs and the final products. In the 1995-96 Budget, the MODVAT Scheme was liberalised/simplified and the credit earned on any 21 | P a g e I.T.A. No.6789/Mum/2013 I.T.A. No.7196/Mum/2013 input was allowed to be utilised for payment of duty on any final product manufactured within the same factory irrespective of whether such inputs were used in its manufacture or not. The experience showed that credit accrued on inputs is less than the duty liable to be paid on the final products and thus the credit of duty earned on inputs gets fully utilised and some amount has to be paid by the manufactured by way of cash. Prior to the 1995-96 Budget, the excise duty on inputs used in the manufacture of tractors and commercial vehicles varied from 15% to 25%, whereas the final products attracted excise duty of 10% or 15% only. The value addition was also not of such a magnitude that the excise duty required to be paid on final products could have exceeded the total input credit allowed. Since the excess credit could not have been utilised for payment of the excise duty on any other product, the unutilised credit was getting accumulated. The stand of the assessees is that they have utilised the facility of paying excise duty on the inputs and carried the credit towards excise duty payable on the finished products. For the purpose of utilisation of the credit, all vestitive (sic) facts or necessary incidents thereto have taken place prior to 16-3-1995 or utilisation of the finished products prior 16-3- 1995. Thus the assessees became entitled to take the credit of the input instantaneously once the input is received in the factory on the basis of the existing Scheme. Now by application of Rule 57- F(4-A), the credit attributable to inputs already used in the manufacture of the final products and the final products which have already been cleared from the factory alone is sought to be lapsed, that is, the amount that is sought to be lapsed relates to the inputs already used in the manufacture of the final products but the final products have already been cleared from the factory before 16-3-1995. Thus the right to the credit has become absolute at any rate when the input is used in the manufacture of the final product. The basic postulate that the Scheme is merely being altered and, therefore, does not have any retrospective or retroactive effect, submitted on behalf of the State, does not appeal to us. As pointed out by us that when on the strength of the Rules available, certain acts have been done by the parties concerned, incidents following thereto must take place in accordance with the Scheme under which the duty had been paid on the manufactured products and if such a situation is sought to be altered, necessarily it follows that the right, which had accrued to a party such as the availability of a scheme, is affected and, in particular, it loses sight of the fact that the provision for facility of credit is as good as tax paid till tax is adjusted on future goods on the basis of the several commitments which would have been made by the assesses concerned. Therefore, the Scheme sought to be introduced cannot be made applicable to the goods which had already come into existence in respect of which the earlier Scheme was applied under which the assessees had availed of the credit facility for payment of taxes. It is on the basis of the earlier Scheme necessarily that the taxes have to be adjusted and payment made complete. Any manner or mode of application of the said Rule would result in affecting the rights of the assessees.

♦ 6. We may look at the matter from another angle. If on the inputs, 22 | P a g e I.T.A. No.6789/Mum/2013 I.T.A. No.7196/Mum/2013 the assessee had already paid the taxes on the basis that when the goods are utilised in the manufacture of further products as inputs thereto then the tax on these goods gets adjusted which are finished subsequently. Thus a right accrued to the assessee on the date when they paid the tax on the raw materials or the inputs and that right would continue until the facility available thereto gets worked out or until those goods existed. Therefore, it becomes clear that Section 37 of the Act does not enable the authorities concerned to make a rule which is impugned herein and, therefore, we may have no hesitation to hold that the Rule cannot be applied to the goods manufactured prior to 16-3-1995 on which duty had been paid and credit facility thereto has been availed of for the purpose of manufacture of further goods ♦ 7. There are several decisions referred to by the learned counsel on either side but we do not think that those decisions have any relevance to the point under discussion ♦ 8. We allow the petitions filed by the assessees and declare that the said Rule cannot be applied except in the manner indicated by us above. No orders as to costs”
Thus in nut-shell, it can be said that the cenvatable duties and
taxes paid on procurement of inputs and services which are
used in or in relation to manufacture of finished goods are
allowed to be set off against the liability of excise duty
determined on the finished goods manufactured by the
enterprise and Hon’ble Apex Court has already held that Cenvat
credit once validly taken cannot be effaced. Thus, it can be said
that Cenvat credit once validly taken creates an accrued right in
favour of the enterprise to get it adjusted against the excise duty
payable on the finished goods manufactured by the enterprise,
which is well known to the enterprise in advance ab-initio at the
stage of procuring inputs and services itself that these taxes on
inputs and services on procurement paid by the enterprise shall
be set off against the liability for excise duty payable on finished
goods manufactured by the enterprises to avoid cascading effect
of multiple taxes at multiple stages. The Cenvat Credit Rules
also permit refund of taxes and duties on inputs and services
used in case of export of goods on fulfilment of stipulated
conditions as stipulated under excise laws, rules and
regulations.
The Accounting Standard AS-2 issued by the Institute of
Chartered Accountants of India(ICAI) which is a mandatory
standard stipulates that the Cost of Inventories should comprise
all costs of purchase, costs of conversion and other costs
incurred in bringing the inventories to their present location and
condition. The costs of purchase is defined in the AS-2 which
consists of the purchase price including duties and taxes (other
than those subsequently recoverable by the enterprise from the
taxing authorities), freight inwards and other expenditure
directly attributable to the acquisition. Thus AS-2 which is a
mandatory standard requires that duties and taxes paid on
purchase are to form part of cost of purchases but other than 23 | P a g e I.T.A. No.6789/Mum/2013 I.T.A. No.7196/Mum/2013 those duties and taxes subsequently recoverable by the enterprise from the taxing authorities meaning thereby that the cenvat credit of duties and taxes paid on inputs which is recoverable from the revenue authorities by way of set off against the excise duty payable on finished goods manufactured by the enterprise shall not form part of the cost of purchase of the inventories in bringing the same to their present location and condition. Thus, the ICAI stipulated enterprises to follow ‘exclusive method’ also called as ‘net method’ of accounting (which in the instant case, the assessee company is also following) whereby the taxes and duties paid which are recoverable from revenue authorities shall not be included in the cost of purchases and in valuing inventories . On the other hand Section 145A of the Act requires following the ‘inclusive method’ also called as ‘gross method’ of accounting whereby it requires the valuation of purchase, sale and inventory to be further adjusted to include the amount of any tax, duty, cess or fee actually paid or incurred by the taxpayer to bring the goods to the place of its location and condition as on the date of valuation notwithstanding any right arising as a consequence to such payment of taxes, duties, cess or fee. Hon’ble Supreme Court in the case of Indo Nippon Chemicals Co. Ltd. (supra) has observed that under both the methods viz ‘gross method’ or ‘net method’ as discussed above, the trading results shall be same by observing as under:
‘The High Court has taken the several illustrations in the charts placed before it by both sides and demonstrated that there are two possible methods of valuation of stock. The first would be the “gross method” , in which the stock is valued at cost price inclusive of the excise duty element. If this method is adopted , then the unconsumed stock also must necessarily be valued in the same manner. The other method is the “net method” , in which the raw material purchased is valued at the actual cost,that is the actual purchase price and , on this, Modvat credit would be available. If this method is to be adopted, then uniformly the same method must be adopted while valuing the unconsumed stock at the end of the year. Whichever method one adopts, the result would be the same.’
Similarly, ICAI has also in the guidance note on tax audit u/s 44AB of
the Income Tax Act,1961 at para 23.23 has demonstrated with
practical examples that under both the methods i.e. ‘inclusive method’
also called as ‘gross method’ or ‘exclusive method’ also called as ‘net
method’, the gross profits in trading account shall be the same . It is
difficult to believe that the enterprise will make profits on taxes, duties ,
cess and fee payable to Government in the midst of prevailing law’s
concerning and with reference to doctrine of unjust enrichment. The
relevant extracts from the Guidance note on Tax Audit u/s 44AB of the
Income Tax Act,1961 issued by ICAI are reproduced below:
‘23.11 It may be pointed out that the “inclusive method” is not permitted by AS-2 which is made mandatory from accounting year beginning on or after 01.04.1999. Further, in the Guidance Note on Accounting for CENVAT the second method (inclusive 24 | P a g e I.T.A. No.6789/Mum/2013 I.T.A. No.7196/Mum/2013 method) has been withdrawn with effect from accounting year commencing from 1.4.1999. In view of the above, the adjustments under section 145A will have to be made in all cases where ‘exclusive method’ is followed.
23.12 In this connection, it is worthwhile to note that the Memorandum explaining the provisions of section 145A inserted by the Finance (No.2) Bill, 1998 states as follows: “Computation of value of inventory. The issue relating to whether the value of closing stock of the inputs, work- in-progress and finished goods must necessarily include the element for which MODVAT* credit is available has been the matter of considerable litigation. In order to ensure that the value of opening and closing stock (bold for emphasis) reflect the correct value, it is proposed to insert a new section to clarify that while computing the value of the inventory as per the method of accounting regularly employed by the assessee, the same shall include the amount of any tax, duty, cess or fees paid or liability incurred for the same under any law in force. The proposed amendment which is clarificatory in nature shall take effect retrospectively from the 1st day of April, 1986 and will accordingly apply in relation to assessment year 1986-87 and subsequent years. [Clause 45]”
*Now CENVAT. (Section 145A was initially proposed to be applicable in relation to assessment year 1986-87 and subsequent years. However, later on, when the Finance (No.2) Bill, 1998 was enacted into law the provision was made applicable from 1.4.1999 i.e. assessment year 1999-2000) 23.13 It may be noted that when the adjustments are made in the valuation of inventories, this will affect both the opening as well as closing stock. Whatever adjustment is made in the valuation of closing stock, the same will be reflected in the opening stock also. Question for consideration is whether the opening stock as on 1.4.1998 should be adjusted as required under section 145A. It is now well settled that if any adjustment is required to be made by a statute, effect to the same should be given irrespective of any consequences on the computation of income for tax purposes. Section 145A starts with the non obstante clause “Notwithstanding anything to the contrary contained in section 145″. Therefore, to give effect to section 145A, the opening stock as on 1.4.98 will have to be increased by any tax, duty, cess or fee actually paid or incurred with reference to such stock if the same has not been added for the purpose of valuation in the accounts. 23.14 It may be noted that while making the adjustments stated in Para 23.8 and 23.13 above, the tax auditor should ensure that if any deduction is claimed for any tax, duty, cess or fee on the items covered by these two paragraphs by way of debit in the profit and loss account, either in the earlier year or in the year under report, adjustment for the same should be made in such a manner that no double deduction is claimed for the same expenditure. Similarly, adjustment should be made for any item of income to ensure that the same item is not treated as income twice.

** ** ** 23.22 Section 145A of the Income-tax Act provides that the valuation of purchase and sales of goods and inventory for the purpose of computation of income from business or profession shall be made on 25 | P a g e I.T.A. No.6789/Mum/2013 I.T.A. No.7196/Mum/2013 the basis of method of accounting regularly employed by the assessee but this shall be subject to certain adjustments. Therefore, it is not necessary to change the method of valuation of purchase, sale and inventory regularly employed in the books of account. The adjustment provided for in this section should be made while computing the income for the purpose of preparing the return of income. Therefore, the recommended method for accounting of VAT will not result in non- compliance of section 145A of the Income-tax Act.
23.23 The adjustments envisaged by section 145A will not have any impact on the trading account of the assessee. In other words both under exclusive method of accounting and inclusive method of accounting, the gross profit in the trading account will remain the same.’
The present regime of value added taxation has progressed way ahead now
as compared to the year 1998 when Section 145A of the Act was introduced
whereby now the Cenvat Credit Scheme is allowing across the board credit of
various taxes, duties, cess, fee as per applicable laws, rules and regulation
like excise duty on inputs, CVD/SAD on import of inputs, service tax on
services utilized for manufacturing of finished goods, excise duty on capital
goods etc. paid to be set off against liability of excise duty on finished goods
manufactured by the enterprise without any one to one co-relation which is
likely to be further revolutionized with the introduction of ‘GST’ shortly with an
intent and purpose of eliminating cascading effect of taxes levied at multiple
stages to reduce transaction cost and bring in transparency into the system
and Apex Court has already held in the case of Eicher Motors (supra) that
cenvat credit once validly taken cannot be effaced and creates an accrued
right in favour of enterprise, it becomes apparent that ‘exclusive method’ also
called as ‘net method’ appears certainly to be better choice in the present
scenario vis-à-vis ‘inclusive method’ also called ‘gross method’ of accounting
for maintaining books of account for accounting for cost of purchases which is
also stipulated by ICAI because these cenvatable duties and taxes on
procurement of goods and services paid by the enterprise are payments made
by the enterprise with an attached and accrued right in favour of the
enterprise that these cenvatable taxes so paid on raw materials, input
services once validly taken cannot be effaced and shall be paid back to the
enterprise by the Government by way of set off against the excise duty
liability on finished goods manufactured by the enterprise and these ‘cenvat
credit’ is more akin to ‘current assets’ rather than part of the cost of purchases
and inventory being taxes recoverable from Government by way of adjustment
against the excise duty payable on finished goods manufactured by the
enterprise , more-so the result by the both the methods of accounting viz. ‘gross method’ or ‘net method’ will be same as observed by Apex Court in the
judgment of Indo Nippon Chemicals Co. Ltd. (supra) and also demonstrated by
ICAI in its guidance note as detailed above. The ICAI in view of divergence
between AS-2 and mandatory requirements of Section 145A of the Act has
stipulated in the guidance note on tax audit at para 23.22 that books of
account are to be maintained by the enterprise following ‘exclusive method’
also called as ‘net method’, while due to mandatory requirement of Section
145A of the Act while preparing return of income to be filed with Revenue, it is
stipulated by ICAI to follow ‘inclusive method’ also called as ‘gross method but
the gross profits under both the methods will yield same profits which in any
case will not cause any prejudice to the Revenue. The provisions of Section 26 | P a g e I.T.A. No.6789/Mum/2013 I.T.A. No.7196/Mum/2013 43B of the Act also protect the interest of Revenue that the taxes, duties, fee
and cess payable as at the year end by the taxpayer shall only be allowed as
deduction from the income under the Act if the same are actually paid to the
credit of Government before the due date of filing of return of income as
stipulated u/s 139(1) of the Act. The Excise laws, rules and regulation also
requires the records to be maintained in an prescribed manner whereby
cenvat credit availed and utilized can be clearly demarcated to establish that
correct cenvat credit is availed and utilized by the Enterprise. The Income Tax
Act,1961 cannot work in vaccum in isolation but has to progress along-with
the rapid development taking place in the economy as it is a living Act and
harmonization of various laws is the need of the hour to reduce complexities
and bring in the ease of doing business, of course, without compromising /
sacrificing with the basic intent and mandate of the Income Tax Act, 1961 to
collect correct taxes as per provisions of the Act. During the last few decades,
things have radically and drastically changed in the economy the way
businesses are conducted as now e-commerce and international transactions
have taken primacy in the economy which are now the key areas of challenge
under the Income Tax Laws. It is for the Parliament to frame and amend laws
to keep pace with the fast changing environment in the economy. We have
seen above that Section 145A of the Act was brought into statute in 1998
when MODVAT scheme was prevalent which allowed credit / set off on
specified inputs used in manufacture of excisable goods apart from capital
goods but now with Cenvat Scheme in operation which allows both
manufacturers and service providers to take input credits on goods and
services apart from capital goods across cross sectors without any one to one
correlation and the Apex Court already holding in Eicher Motors (supra) that
cenvat credit once validly taken cannot be effaced and creates an accrued
right in favour of the enterprise, there is a need to align Section 145A of the
Act with the present regime of indirect taxation which Parliament alone in its
wisdom can do to keep pace with the developments taking place in economy.
As far as the first category of taxes, fees, duties, cess having bearing on
bringing the goods to the place of its location and conditions as on the date of
valuation of the goods discussed in the preceding para’s above are concerned
which are paid on raw materials and also during WIP stage on which no
cenvat credit is allowed by the law under cenvat scheme and are absorbed in
the Profit and Loss Account by the enterprise as one of the components and
item of the cost, we are of the considered opinion that such taxes, duties, fees,
cess (by whatever name called) having bearing on bringing the goods to the
place of its location and conditions as on the date of valuation of the goods
has to be included in the cost of purchase and valuation of the goods
irrespective of whether the enterprise is following ‘exclusive method’ or ‘inclusive method’ of accounting to satisfy the mandatory requirement of
Section 145A of the Act. Similarly, for valuation of finished goods
manufactured by the enterprises, the excise duty on finished goods
manufactured by the enterprises is to be added to value of finished goods as
the excise duty on finished goods is actually paid or incurred by the taxpayer
to bring the goods to the place of its location and conditions as on the date of
valuation irrespective of whether the enterprise is following ‘exclusive method’
or ‘inclusive method’ of accounting.
As per Section 145A of the Act as it exists in the statute, the assessee
company has to mandatorily prepare its accounts as per ‘inclusive method’ or ‘gross method’ to compute profit chargeable to tax in accordance with Section 27 | P a g e I.T.A. No.6789/Mum/2013 I.T.A. No.7196/Mum/2013 145A of the Act while filing return of income with the Revenue . Thus as per
Section 145A of the Act as it exists in the statute, we hold that the assessee
company has to compulsorily value the purchase and sale of goods and
inventory for the purposes of determining the income chargeable to tax under
the head ‘profit and gains of business or profession’ in accordance with the
method of accounting regularly employed and further adjusted to include
taxes, duties, cess or fee(by whatever name called) under any law for the time
being in force, actually paid or incurred to bring the goods to the place of its
location and condition as on the date of valuation notwithstanding any right
arising as a consequence to such payment. This is the mandate of Section
145A of the Act which we hold is mandatory.
At this stage we are reminded of the decision of the Privy Council, in the case
of CIT v. Ahmedabad New Cotton Millls Co. Ltd. AIR 1930 PC 56 that while
considering the effect of altering the method of valuation, Privy Council held
that whenever there is a change in the valuation at one end (on 31-3-2007 in
the instant case), then there must necessarily be a corresponding change at
the other end (on 1-4-2006 as in the instant case) otherwise, the true profit
would not be reflected. This view of Privy Council is further fortified and
supported by the decision of Hon’ble Supreme Court in the case of CIT v.
Dynavision Ltd. [2012] 348 ITR 380/210 Taxman 239/26 taxmann.com 40.
The reliance of the Revenue on the decision of Hon’ble Bombay High Court in
Molmould Corporation (supra) is devoid of merits as in the said case the
taxpayer was regularly following method of valuation of inventory at cost plus
overhead and then during the impugned assessment year, the taxpayer chose
to change method of valuation of closing inventory at cost whereby overheads
were not included in the valuation of inventory and then in the context and
light of change of method of valuation of inventory by the taxpayer itself, the
Hon’ble Bombay High Court held that there is no change called for in the
opening stock while changing the method of valuation of closing stock at cost
excluding overhead as otherwise it will lead to chain reaction as in the earlier
years also the values of inventory will be changed. However, in the instant
case, the assessee company is consistently and regularly following the
method of accounting by following ‘exclusive method’ also called ‘net method’
which is one of the accepted method of accountancy whereby the taxes paid
on purchase of raw material are not included in the cost of purchase on the
premise that the assessee company is entitled for Cenvat credit on the same to
be adjusted against the excise duty liability on finished goods manufactured
by the assessee company, while the basic fallacy in contention of the Revenue
is that the Revenue is contemplating adding the excise duty paid to the value
of closing inventory following the ‘inclusive method’ also called as ‘gross
method’ and not to the totality of all relevant transactions during the previous
year to arrive at a correct income chargeable to tax as per the Act and hence,
in our considered view, the ‘inclusive method’ also called as ‘gross method’ as
mandated by Section 145A of the Act, is to be applied to the totality of all
relevant transactions during the previous year to arrive at a correct income
chargeable to tax as per the Act and the same cannot be applied in a
piecemeal and ad-hoc manner to a few handful chosen and selected
transactions as is done by the revenue in the instant case which will lead to
distortion of income chargeable to tax which is not permissible under the Act.
Our above observations and discussions in preceding para’s are equally
applicable to VAT/sales tax on the raw materials, WIP and finished goods.
28 | P a g e I.T.A. No.6789/Mum/2013 I.T.A. No.7196/Mum/2013 In our considered view , the interest of justice will be best served , if the matter
is restored to the file of the AO to re-determine the correct income chargeable to
tax as per the Act after considering the provisions of Section 145A of the Act in
light of our observations as contained in the preceding para’s. Needless to say
that proper and adequate opportunity will be given to the assessee company
by the AO in accordance with the principles of natural justice as enshrined in
doctrine of audi alteram partem in accordance with law and the assessee
company will be allowed to produce necessary evidence in support of its
defense. We order accordingly.
17. In the result, the appeal filed by the assessee company is allowed for
statistical purposes.”
Thus, in the aforesaid decision in the case of Sunshield Chemicals(supra),
the tribunal held that in view of provisions of Section 145A of the 1961 Act,
the tax-payers are mandatorily required to follow inclusive method while
valuing stock as on valuation date wherein taxes, duties, cess or fee(by
whatever name called) actually paid or incurred to bring the goods to the
place of its location and condition as on date of valuation shall be added to
the value of the stock . It is also to be noted that Section 145A of the 1961
Act was brought into statute by Finance Act, 1998 w.e.f. 01.04.1999. At this
stage it is important to refer to decision of Hon‟ble Delhi High Court in the
case of Maruti Udyog Limited v. CIT reported in (2018) 406 ITR 562(Delhi)
wherein assessment year under consideration before Hon‟ble Delhi High
Court was AY 1999-00, wherein Hon‟ble Delhi High Court after considering
decision of Hon‟ble Bombay High Court in the case of Cartini India Limited
v. ACIT reported in (2007) 291 ITR 355(Bom.), held as under :

47. It may be noted that after the insertion of Section 145A of the Act, with effect from 1st April 2010, an Assessee must now necessarily follow the inclusive method of valuation of stock. It was explained by the Bombay High Court in Cartini India Ltd. v. Asstt. CIT [2007] 291 ITR 355 (Bom.), that “as per the new provision of Section 145A of the Income-tax Act, 1961, the unutilized MODVAT credit had to be included in the closing stock of raw material and work in progress, whereas the excise duty paid on unsold finished goods had to be included in the inventory of finished goods.” However, Section 145A of the Act is prospective and does not apply to the AY in question.

The Hon‟ble Bombay High Court in the case of Cartini India Limited v. ACIT reported in (2007) 291 ITR 355(Bom.) while adjudicating appeal for AY 1999-

00 held at para 24 that inclusive method while valuing stock is mandatory under new provision as are contained in Section 145A of the 1961 Act, by 29 | P a g e I.T.A. No.6789/Mum/2013 I.T.A. No.7196/Mum/2013 holding as under:

“24. As per the new provisions of section 145A of the Income-tax Act, 1961, the unutilised Modvat credit had to be included in the closing stock of raw material and work in progress, whereas the excise duty paid on unsold finished goods had to be included in the inventory of finished goods. Therefore, the decision of the Commissioner of Income- tax (Appeals) and the subsequent decision of the Tribunal reversing the decision of the Commissioner of Income-tax (Appeals) were only related to unutilised Modvat credit.”

It is to be noted that Section 145A of the 1961 Act was inserted by Finance
(No. 2) Act, 1998 w.e.f. 1.4.1999 and later there has been substitution of
Section 145A of the 1961 Act by Finance(No. 2) Act, 2009, w.e.f.
01.04.2010, wherein new clause (b) is inserted in the provisions of Section
145A and new clause (a) in amended Section 145A concerns with valuation
of inventory which is exactly similarly worded to Section 145A as was
inserted by Finance (No. 2) Act, 1998, w.e.f. 01.04.1999 . The notes on
clause explain the substitution of Section 145A of the 1961 by Finance Act(
No.2 ), 2009 w.e.f. 01.04.2010 as under:
“Clause 56 of the Bill seeks to substitute section 145A of the Income-tax Act, which relates to method of accounting in certain cases.

The existing provisions contained in said section 145A provides that while computing the value of the inventory as on the 1st and the last day of the previous year, the computation according to the method of accounting regularly employed by the assessee shall be adjusted to include the amount of any tax, duty, cess or fees paid or liability incurred for the same under any law in force.

It is proposed to amend the said section so as to provide that the interest received by an assessee on compensation or on enhanced compensation, as the case may be, shall be deemed to be the income of the year in which it is received.

This amendment will take effect from 1st April, 2010 and will, accordingly, apply in relation to the assessment year 2010-11 and subsequent years.”
The Memorandum to Finance Bill , 2009 also explain substitution of Section 145A as under which as we will see is concerned with insertion of new clause (b) to Section 145A of the 1961 Act, which is reproduced as under :

“Rationalization of provisions for taxation of interest received on delayed compensation or enhanced compensation 30 | P a g e I.T.A. No.6789/Mum/2013 I.T.A. No.7196/Mum/2013 The existing provisions of Income-tax Act provide that income chargeable under the head “Profits and gains of business or profession” or “Income from other sources”, shall be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. Further, the Hon’ble Supreme Court, in the case of Rama Bai v. CIT (181 ITR 400) has held that arrears of interest computed on delayed or enhanced compensation shall be taxable on accrual basis. This has caused undue hardship to taxpayers.

With a view to mitigating the hardship, it is proposed to amend section 145A to provide that the interest received by an assessee on compensation or enhanced compensation shall be deemed to be his income for the year in which it is received, irrespective of the method of accounting followed by the assessee.

Further, it is proposed to insert clause (viii) in sub-section (2) of section 56 to provide that income by way of interest received on compensation or on enhanced compensation referred to in sub-section (2) of section 145A shall be assessed as “income from other sources” in the year in which it is received.

This amendment will take effect from 1st April, 2010 and shall accordingly apply in relation to assessment year 1998-99 and subsequent assessment years.”
Thus, the amendment to Section 145A of the 1961 Act by Finance Act, 2009
w.e.f. 01.04.2010 so far as valuation of inventories was similarly worded as
the provision existed vide Finance Act, 1998 wef 01.04.1999. The assessee
has heavily relied upon the decision of Hon‟ble Bombay High Court in the
case of CIT v. Diamond Dye Chem Limited(supra), wherein Hon‟ble Bombay
High Court held that the tax impact will be neutral under both inclusive and
exclusive method and held that cenvat credit could not have been added to
value of closing stock, by holding as under:

“5. We have considered the submissions. It is not disputed that the assessee was liable to excise duty. The assessee got credit in the excise duty already paid on the raw materials purchased by it and utilized in the manufacturing of excisable goods. The assessee was adopting the exclusive method i.e. valuing the raw-materials on the purchase price minus (-) the Modvat credit. The same would be permissible. The Apex Court in the case of Indo Nippon Chemicals Co. Ltd. (supra) while affirming the order of High Court, has observed that the income was not generated to the extent of Modvat credit or unconsumed raw-material. Merely because the Modvat credit was irreversible credit offered to manufacturers upon purchase of duty paid raw-materials, that would not amount to income which was liable to be taxed under the Act. It is also held 31 | P a g e I.T.A. No.6789/Mum/2013 I.T.A. No.7196/Mum/2013 that whichever method of accounting is adopted, the net result would be the same.

6. Considering the above, the amount of the un-utilized Cenvat credit could not have been directly added to the closing stock.”

The assessment year under consideration before Hon‟ble Bombay High
Court in the case of Diamond Dye Chem Limited(supra) was AY 2008-09
which was post amendment by Finance Act, 1998 wherein Section 145A was
inserted w.e.f. 01.04.1999. The Hon‟ble Bombay High Court in the case of
Diamond Dye Chem Limited(supra) while adjudicating appeal relied upon
decision of Hon‟ble Supreme Court in the case of CIT v. Indo Nippon
Chemicals Company Limited (2003) 261 ITR 275(SC) , wherein Hon‟ble
Supreme Court in the case of Indo Nippon Chemicals Limited(supra) was
seized of AY 1989-90 which was prior to introduction of Section 145A by
Finance Act, 1998 w.e.f. 01.04.1999. Incidentally when earlier Hon‟ble
Bombay High Court was adjudicating appeal in the case of CIT v. Indo
Nippon Chemicals Co. Limited reported in (2000) 245 ITR 384(Bom.) which
related to AY 1989-00, it was brought to the notice of Hon‟ble Bombay High
Court that there was newly inserted Section 145A of the 1961 Act by Finance
Act(No. 2) , 1998 w.e.f. 01.04.1999, where in Hon‟ble Bombay High Court
held in para 10 , as under:

“10. Before concluding, we may mention that, in rejoinder, the learned counsel for the department has brought to our attention section 145A of the Act. He has also invited our attention to the Subsequent Guidance Note issued by the Institute of Chartered Accountants of India on Tax Audit under section 44AB of the Act. It was contended that even the ICAI has subsequently declared that the net/exclusive method adopted by various assessees should be applied with adjustments on account of any tax, duty, cess or fee actually paid or incurred on inputs which should be added to the cost of the inputs if not so added in the books of account. He contended that in the Subsequent Guidance Note, the ICAI once again discussed the above two methods and, in the circumstances, it was urged that the net method followed by the assessee was wrong because the assessee has followed the net method without making any adjustments as required under section 145A. In this connection, we may point of that section 145A was introduced by the Finance (No. 2) Bill 1998. Originally, the Bill contemplated the proposed amendment to apply from 1-4-1986 in relation to the assessment year 1986-87 and subsequent years. However, later on, when the said Bill was enacted into law, the provision was made applicable from 1-4-1999, i.e., assessment year 1999-2000. In this appeal, we are concerned with the assessment year 1989-90. In the circumstances, we are not inclined to go into the provisions of section 145A. We are also not examining, therefore, the 32 | P a g e I.T.A. No.6789/Mum/2013 I.T.A. No.7196/Mum/2013 Subsequent Guidance Note issued by the ICAI which is based on section 145A. The Legislature clearly intended, therefore, that the computation made by the assessees prior to the assessment year 1999- 2000 should not be disturbed and, therefore, the Legislature has brought the said section 145A into force only from 1-4-1999.”

Hon‟ble Bombay High Court while adjudicating appeal in the case of
Diamond Dye Chem Limited(supra) did not consider the Co-ordinate Bench
decision in the case of Catrini India Limited(supra) as well amended
provisions of Section 145A of the 1961 Act. It relied upon decision of Hon‟ble
Supreme Court decision in case of Indo Nippon Chemical(supra) which is
prior to insertion of Section 145A of the 1961 Act. Under these
circumstances as discussed by us elaborately above, we are inclined to
restore this matter back to the file of the AO for denovo determination of the
issue in the light of our above discussions as well decision referred to
above.The assessee will be allowed to raise its defence in denovo
proceedings. The AO shall provide proper and adequate opportunity of being
heard in the set aside proceedings. The grounds of appeal are allowed for
statistical purposes We order accordingly.

23. The next issue raised by the assessee in its appeal filed with tribunal
vide Ground No. 5(a) and (b) concerns itself with additions made by the AO
which was later confirmed by learned CIT(A) as to making transfer pricing
adjustment/addition of Rs. 53,16,420/- on account of guarantee fee for
counter guarantee given by assessee to its associated concern(AE). The brief
facts are that reference u/s 92CA(1) of the 1961 Act was made by the AO to
the TPO for computing Arms Length Price(ALP) of its international
transactions with its AE. The TPO observed that the assessee has given an
counter guarantee to its AE namely Kansai Paints Company Limited , Japan
for the bank guarantee given by Kansai Paints Company Limited, Japan to
the AE of the assessee in Malyasia. It was observed that the assessee and
Kansai Paint Co. Limited, Japan which is also an AE of the assessee formed
a joint venture to take over asset and liabilities of Sime Darby Malyasia Bhd.,
a Malyasian Company. The new company was formed as Joint Venture
Company in Malayasia named Kansai Coating Malayasia Sd. Bhd. with
contribution of 55% and 45% shares respectively of assessee and the Kansai
Paint Company Limited, Japan for achieving the said purpose of takeover of
business assets and liabilities of Sime Darby Malyasia Bhd. The aforesaid
new Malaysian Company arranged for a credit facility from RBH Bank 33 | P a g e I.T.A. No.6789/Mum/2013 I.T.A. No.7196/Mum/2013 Berhad , a Malaysian Bank for its working capital , which was guaranteed
by Kansai Paints Company Limited, Japan to the extent of Ringitt Malaysia
(RM 24 Million). The Japanese company did not charge any guarantee fee
from its Malaysian AE. The assessee company shared the guarantee amount
with its Japanese AE to the extent of 55% i.e. in the ratio of its shareholding
in Malaysian Company. Thus, the assessee issued letter dated 7th August
2006 wherein it gave counter guarantee of RM 13.2 Million to Kansai Paint
Company Limited, Japan its AE. The relevant documents including Board
Resolutions are filed by assessee in paper book filed with tribunal. The
assessee contended that said counter guarantee of RM 13.2 Million (Rs.
17,12,14,000/- ) given by it will not amount of rendering of any service by
assessee to Kansai Paint Company Limited, Japan. The TPO held that said
counter guarantee given by assessee to Kansai Paint Company Limited,
Japan is an international transaction as defined u/s 92B with its AE within
meaning u/s 92A which is subject to transfer pricing regulation wherein ALP
of the aforesaid transaction has to be computed. The TPO computed ALP of
the aforesaid international transaction of giving counter guarantee to its AE
in Japan at 3% p.a. of the amount of counter guarantee, which led to the
additions to the income of the assessee to the tune of Rs. 53,16,420/- . The
assessee challenged the said additions to its income before learned CIT(A)
but without any success. The learned CIT(A) dismissed the appeal of the
assessee by holding as under:

“8.3 I have considered the facts of the case, submission of the appellant as against the findings / observations of the AO in his order u/s 143(3)/144C(3) of the I.T. Act. The contentions and submissions of the appellant are being discussed and decided here in under:

i. The appellant has given an undertaking to Kansai Paint Co. Ltd. Japan for the bank guarantee given to the AE of the appellant in Malaysia, for which guarantee @ 3% was charged.

ii. The appellant argued that counter guarantee is not an international- transaction. In this regard it is mentioned that as per explanation to Sec. 92B capital investment including guarantee falls under definition of international transaction. The case law relied by appellant related to the pre-amendment period and hence not relevant. iii. The appellant contended that TPO has exceeded his jurisdiction in absence of reference by TPO. In this regard it is 34 | P a g e I.T.A. No.6789/Mum/2013 I.T.A. No.7196/Mum/2013 stated that a reference was made u/s. 92A(1) vide letter dated
18.07.2008. . However, neither before TPO nor before AO any
such objection was raised by the appellant. Further Sub. sec. 2A
has been brought on the statute which being procedural in
nature is applicable for the case of the appellant as well. The
judgment relied upon by the appellant relates to the pre
amended period and hence not applicable.

iv. The appellant further contended that it has written a
letter to its JV counterpart for which no benefit has been availed
by Kansai Nerolac Paints Ltd. Japan. However from T.P. angle,
the benefit is looked into to its AE which has definitely accrued
in the case of Malaysian AE since based on guarantee only,
funds, were made available by the bank to it.

v. The appellant also asked that the letter given was a
voluntary letter issued to the shareholders which is prevalent
practice in the commercial world. In this connection it is
mentioned that commercial expediency or business needs are not
the considerations to be considered under Transfer Pricing
regulations.

vi. The appellant argued that since it is not in the business of
lending and borrowing or giving a guarantee, the amended
provision of Sec. 92B would not apply to this case. This
contention of the appellant has no force since the definition of
international transactions includes lending , borrowing or
guarantee.

vii. The appellant contended that the letter given was not
truly a counter guarantee. In this connection1’it is mentioned that
the letter dated 07.08.2006 clearly makes reference to the
counter guarantee and hence there is no scope for the assessee
to argue otherwise.

viii. Further in the letter there is a reference of Board
resolution dated 19.04.2006. In the said resolution it is clearly
mentioned that the company will issue a counter guarantee of
RM 13.2 million favouring Kansai Paint Co. Ltd. , Japan (KP) in
regard to the corporate guarantee of the like amount provided to
RHB Bank Bhd. by KP for the credit facility, sanctioned by the
bank to Kansai Coatings Sdn. Bhd. Malaysia (AE). In view of
these facts the contentions of the appellant is not acceptable.

ix. The appellant, argued, that there is no prescribed method
for benchmarking the guarantee given by the appellant since the
CUP could not be applied as no comparable instance is available.
The contention of the appellant is factually incorrect since the
TPO in para 10 of his order as compared the transaction of the 35 | P a g e I.T.A. No.6789/Mum/2013 I.T.A. No.7196/Mum/2013 comparables of HSBC Ltd. Dutch State, FMO, Allahabad Bank and PLR and thereafter rate of 3% was held as reasonable. Accordingly argument of the appellant is not acceptable.

x. The Appellant argued that it has paid guarantee 0.4% p.a. However it is noted that the bank guarantee given by it to the ST Department as the rate of 0.4%. However the transaction bench marked by the TPO relates to the international transaction where risk involved is substantial and also market conditions in international market are to be taken into account. Hence this argument of the appellant has no force.

xi. In view of the above facts and the legal position charging of corporate bank guarantee commission @ 3% per annum made by the AO/TPO resulting into adjustment of Rs. 53,16,420/- is upheld. This view of mine is supported by decision of Hon’ble ITAT Mumbai vide order dated 06.06.2012 in case of Mahindra & Mahindra.

xii. This ground of appeal is dismissed.”
24. The assessee company being aggrieved by the appellate order passed by
learned CIT(A) has filed an appeal before the tribunal. It was submitted by
learned counsel for the assessee that the assessee has merely given
corporate guarantee by way of counter guarantee to its AE in Japan in
proportion to its shareholding in Malaysian JV against Guarantee given by
its AE in Japan for bank loan advanced to their AE in Malaysian company
by a Malaysian Bank in which assessee holds 55% share while balance 45%
shares are held by its AE in Japan namely “Kansai Paints Company Ltd.,
Japan” . It was submitted that there is not any actual movement of funds
from the assessee and merely counter guarantee is given of which ALP was
computed @3% p.a. of the amount of counter guarantee. On being asked by
Bench, it was fairly submitted by learned counsel for the assessee that if the
aforesaid guarantee given by Japanese AE to Bank in Malayasia devolves
owing to default of Malaysian Company with its Bankers , then in that
situation the assessee will be liable to pay the aforesaid amount of counter
guarantee given by it in favour of its AE in Japan. The assessee relied upon
the decision of Mumbai-tribunal in the case of Bombay Dyeing and
Manufacturing Company Ltd. v. DCIT reported in (2017) 87 taxmann.com
213(Mum-trib.) and decision of Hyderabad-tribunal in the case of DCIT v.
36 | P a g e I.T.A. No.6789/Mum/2013 I.T.A. No.7196/Mum/2013 Cyient Ltd. (2018) 91 taxmann.com353(Hyd-trib.) to contend firstly that
giving of corporate guarantee to an AE will not constitute International
Transaction u/s 92B and secondly that the term „guarantee‟ was inserted in
definition of international transaction u/s 92B by Financial Act 2012, w.e.f
01.04.2002 by way of an explanation to Section 92B will only be prospective
in nature albeit the explanation was inserted w.e.f. 01.04.2002 to clarify the
definition of international transaction. The assessee also relied upon the
decision of Micro Ink Ltd. v. ACIT 157 ITD 132(Ahd.) and DCIT v. Spentex
India Ltd.,(2018) 94 Taxmann.com 419(Del-trib).

25. The Ld. DR on the other hand relied upon the order of the TPO and
the appellate order passed by Ld. CIT(A) . It was prayed that additions made
towards corporate guarantee commission @3% of the corporate guarantee
issued be upheld.

26. The Ld. AR on the other hand submitted in rejoinder that computation of
ALP @ 3% is higher and the additions be upheld to the tune of computing
ALP @ 0.5% of corporate guarantee/undertaking given by the assessee .

27. We have considered rival contentions and perused the material on
record.We have observed that the assessee alongwith its AE namely Kansai
Paints Company Ltd., Japan jointly promoted a company in Malaysia namely
Kansai Coatings Sdn. Bhd. Malaysia which is also AE of the assessee
wherein the assessee held 55% of share while the Japanese company held
45% share in the Malaysian JV Company. The said Malaysian company
acquired business assets and liabilities of Sime Darby Malaysia Bhd. for
which Malaysian company obtained loan mainly for working capital of RM 24
Million from RBH Bank Berhad , a Malaysian Bank. As a condition for grant
of loan, the Japanese AE of the assessee who was co-promoter of the
Malaysian Company stood guarantor to the Bank. The Japanese Company
required assessee to give counter guarantee to it in the ratio of 55% which
was in the ratio of shareholding of the assessee in Malaysian Company. The
assessee gave counter guarantee to its Japanese AE to the tune of RM 13.2
Million (Rs. 17.72 crores) towards it share in the JV company. The assessee
is contemplating that this is a non fund based liability as there is no outflow
of funds. On being asked by the Bench, it was fairly admitted by learned
counsel for the assessee that in case of default by Malaysian Company with 37 | P a g e I.T.A. No.6789/Mum/2013 I.T.A. No.7196/Mum/2013 their bankers in Malaysia , the guarantee issued by Japanese AE in favour
of Malaysian Bank will devolve and then assessee may in that eventuality
will be asked to contribute its share by way of outflow of funds to meet its
obligation under counter guarantee and this non fund based liability will get
converted into fund based liability. Once corporate guarantees are issued ,
then the capacity of the issuer to raise further loans from banks, financial
institutions etc. will get reduced as the corporate guarantee will certainly
lead to higher debt to equity ratio which will lead to reduction in the
capacity of issuer to borrow money from Banks, FI etc which could also lead
to higher rate of interests charged by the bankers in case borrower become
over leveraged due to higher debts including guarantees issued . Thus, in
our considered view, the issue of corporate guarantee by taxpayer in favour
of its AE is certainly an international transaction covered by provisions of
Section 92B and in our considered view provisions of un-amended provisions
of Section 92B duly covered liability created by a taxpayer in favour of its AE
which was even by way of non fund based liability such as corporate
guarantee issued by taxpayer in favour of AE. Explanation inserted in
Section 92B by Finance Act, 2012 w.e.f. 01.04.2002 also clarified the
position that guarantees issued by taxpayer in favour of its AE shall also be
covered as an international transaction. Section 92B was amended by
Finance Act, 2012 w.e.f. 01.04.2012 wherein an Explanation was inserted to
clarify the position that international transaction would included guarantee
also. The provisions of Section 92B are reproduced hereunder:

“Meaning of international transaction .
92B. (1) For the purposes of this section and sections 92, 92C, 92D and 92E, “international transaction” means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. (2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be [deemed to be an international transaction] entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise [where the enterprise or the 38 | P a g e I.T.A. No.6789/Mum/2013 I.T.A. No.7196/Mum/2013 associated enterprise or both of them are non-residents irrespective of whether such other person is a non-resident or not].
[Explanation.–For the removal of doubts, it is hereby clarified that–
(i) the expression “international transaction” shall include–

(a) the purchase, sale, transfer, lease or use of tangible property including building, transportation vehicle, machinery, equipment, tools, plant, furniture, commodity or any other article, product or thing;

(b) the purchase, sale, transfer, lease or use of intangible property, including the transfer of ownership or the provision of use of rights regarding land use, copyrights, patents, trademarks, licences, franchises, customer list, marketing channel, brand, commercial secret, know-how, industrial property right, exterior design or practical and new design or any other business or commercial rights of similar nature;

(c) capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business;

(d) provision of services, including provision of market research, market development, marketing management, administration, technical service, repairs, design, consultation, agency, scientific research, legal or accounting service;

(e) a transaction of business restructuring or reorganisation, entered into by an enterprise with an associated enterprise, irrespective of the fact that it has bearing on the profit, income, losses or assets of such enterprises at the time of the transaction or at any future date;

(ii) the expression “intangible property” shall include–

(a) marketing related intangible assets, such as, trademarks, trade names, brand names, logos;

(b) technology related intangible assets, such as, process patents, patent applications, technical documentation such as laboratory notebooks, technical know-how;

(c) artistic related intangible assets, such as, literary works and copyrights, musical compositions, copyrights, maps, engravings;

(d) data processing related intangible assets, such as, proprietary computer software, software copyrights, automated databases, and integrated circuit masks and masters;

(e) engineering related intangible assets, such as, industrial design, product patents, trade secrets, engineering drawing and schema-tics, blueprints, proprietary documentation;

(f) customer related intangible assets, such as, customer lists, customer contracts, customer relationship, open purchase orders;
39 | P a g e I.T.A. No.6789/Mum/2013 I.T.A. No.7196/Mum/2013 (g) contract related intangible assets, such as, favourable supplier, contracts, licence agreements, franchise agreements, non-compete agreements;

(h) human capital related intangible assets, such as, trained and organised work force, employment agreements, union contracts;

(i) location related intangible assets, such as, leasehold interest, mineral exploitation rights, easements, air rights, water rights;
(j) goodwill related intangible assets, such as, institutional goodwill, professional practice goodwill, personal goodwill of professional, celebrity goodwill, general business going concern value;

(k) methods, programmes, systems, procedures, campaigns, surveys, studies, forecasts, estimates, customer lists, or technical data;

(l) any other similar item that derives its value from its intellectual content rather than its physical attributes.]”

Notes on clauses to Finance Bill, 2012 also clarified that explanation
is clarificatory in nature and shall be applicable from 01.04.2002,
which is reproduced hereunder:

“Clause 34 of the Bill seeks to amend section 92B of the Income-tax Act relating to meaning of international transaction.

The existing provisions of the aforesaid section 92B provide the definition of “international transaction” for the purposes of the said section and sections 92, 92C, 92D and 92E.

It is proposed to insert an Explanation to the aforesaid section so as to clarify the definition of the expressions “international transaction” and “intangible property”.

This amendment will take effect retrospectively from 1st April, 2002 and will, accordingly, apply in relation to the assessment year 2002-2003 and subsequent assessment years.”
We have also observed that Mumbai-tribunal has consistently held that
issuance of corporate guarantee by a taxpayer in favour of its AE within
meaning u/s 92A is an international transaction which is covered u/s 92B
of the 1961 Act. Reference is drawn to decision of Mumbai-tribunal in the
case of Piramal Glass Limited v. DCIT reported in (2017) 80 taxmann.com
68(Mum-trib,) and decision of Mumbai-tribunal in the case of Videocon
Industries Limited v. DCIT reported in (2017) 79 taxmannn.com 216(Mum-
trib.) and there are several other decision of Mumbai-tribunal .
40 | P a g e I.T.A. No.6789/Mum/2013 I.T.A. No.7196/Mum/2013 We have also noted that recently Hon‟ble Bombay High Court in the case of
CIT v. Glenmark Pharmaceuticals Limited reported in (2019) 101 taxmann.
com 84(Bombay) had held that ALP of the corporate guarantee can not be
determined on the basis of charges as were prevailing for issuance of Bank
Guarantee. The Hon‟ble Bombay High Court held that no substantial
question arose in this appeal. The Assessment year before Hon‟ble Bombay
High Court was AY 2009-10 and it based its decision on its earlier order in
taxpayer‟s own case for AY 2008-09, dated 02.02.2017 in ITA no. 1302 of
2014. The order of Hon‟ble Bombay High Court for AY 2009-10, dated
10.12.2018 in the case of Glenmark Pharmaceuticals Limited (2019) 101
taxmann.com 84(Bom.), is reproduced hereunder:

“3. Regarding Question No. (1):–

(a) We note that the impugned order of the Tribunal allowed the appeal of the respondent – assessee holding that Arm’s Length Price of corporate guarantee cannot be determined on the basis of the Bank Guarantee. This by following its order dated 13.11.2013 in respect of the same respondent – assessee for the assessment year 2008-09.

(b) Mr. Tejveer Singh, the learned counsel for the Revenue, very fairly points out that being aggrieved by the above order dated 13.11.2013 of the Tribunal for the assessment year 2008-09, Revenue had filed an appeal to this Court being Income Tax Appeal No. 1302 of 2014. The appeal of the Revenue on this issue was dismissed by the order dated 2.2.2017 by this Court as it did not give rise to any substantial question of law.

(c) No distinguishing feature in fact or in law in this appeal from that in Income Tax Appeal No. 1302 of 2014 is shown to us.

(d) Therefore, for the reasons recorded in our order dated 2.2.2017, this question also does not give rise to any substantial question of law. Thus, not entertained.”
The Hon‟ble Bombay High Court has consistently held that comparison cannot be
done while computing ALP of international transaction by way of corporate
guarantee with bank guarantee. The similar stand was taken in CIT v. Everest Kento
Cylinders Limited reported in (2015) 378 ITR 57(Bom.) , wherein Hon‟ble Bombay
High Court held as under:

“10. Having considered submissions of Mr. Malhotra for the revenue and Mr. Pardiwalla for the assessee, we are of the view that the order of the Tribunal as regards disallowance under section 14A and restricting the same to Rs. 1 lac was justified in view of the material before the Tribunal. Furthermore, having considered the fact that a sum of Rs. 4,47,649/- was not conceded in the return but was adhoc acceptance during the course of assessment, the assessee could not be bound by it. The Tribunal as the second fact finding authority had gone into factual aspects in great detail and therefore having interpreted the law as it stood on the relevant date the order passed cannot be faulted. In the matter of guarantee commission, the adjustment made by the TPO were based on instances restricted to the commercial banks providing guarantees and did not contemplate the issue of a Corporate Guarantee. No 41 | P a g e I.T.A. No.6789/Mum/2013 I.T.A. No.7196/Mum/2013 doubt these are contracts of guarantee, however, when they are Commercial banks that issue bank guarantees which are treated as the blood of commerce being easily encashable in the event of default, and if the bank guarantee had to be obtained from Commercial Banks, the higher commission could have been justified. In the present case, it is assessee company that is issuing Corporate Guarantee to the effect that if the subsidiary AE does not repay loan availed of it from ICICI, then in such event, the assessee would make good the amount and repay the loan. The considerations which applied for issuance of a Corporate guarantee are distinct and separate from that of bank guarantee and accordingly we are of the view that commission charged cannot be called in question, in the manner TPO has done. In our view the comparison is not as between like transactions but the comparisons are between guarantees issued by the commercial banks as against a Corporate Guarantee issued by holding company for the benefit of its AE, a subsidiary company. In view of the above discussion we are of the view that the appeal does not raise any substant”

We have further noted that Hon‟ble Supreme Court admitted SLP (Refer
(2017) 85 taxmann.com 359(SC) )against order of Hon‟ble Bombay High
Court in the case of CIT v. Glenmark Pharmaceuticals Limited reported in
(2017) 85 taxmann.com 349(Bom.) for AY 2008-09 which is now decided by
Hon‟ble Supreme Court vide orders dated 11.12.2008 in CIT(LTU) v.
Glenmark Pharmaceuticals Limited reported in (2018) 103 CCH 0314(SC) for
AY 2008-09, wherein Hon‟ble Supreme Court held as under:

“1. The following two questions arise for determination in this appeal filed by the Revenue.

(i) With respect to addition of Rs.11,51,24,333/- to the income of the assessee (respondent herein) made by the Assessing Officer (A.O.) on account of guarantee commission chargeable to its Associate Enterprises, whether the benchmark fixed by the Transfer Pricing Officer (TPO) for the international transaction by considering arm’s length rate of the bank guarantee at 3% under Section 92CA(3) of the Income Tax Act, 1961 was correct?

(ii) Whether interest was not payable by the assessee/respondent under Section 234B of the Income Tax Act, 1961 on failure to deposit the advance tax in respect of tax payable under Section 115JB of the Income Tax Act, 1961?

2. Insofar as question No.(i) is concerned we have perused the order of the learned Tribunal and the order of the High Court affirming the view taken by the learned Tribunal.

3. On such consideration we find that question No.1 has been rightly decided by the High Court in favour of the Assessee and against the Revenue. The same would, therefore, not require reopening in this appeal. Insofar as question No.(ii) i.e. interest payable under Section 234B of the Income Tax Act, 1961 is concerned, the matter will require an in-depth hearing.”

The Hon‟ble Bombay High Court had earlier held in the case of Glenmark
Pharmaceuticals Limited (2017) 85 taxmann.com 349(BOM) for AY 2008-09
that no comparison can be made while determining ALP of commission on 42 | P a g e I.T.A. No.6789/Mum/2013 I.T.A. No.7196/Mum/2013 corporate guarantee with bank guarantee. The Hon‟ble Bombay High Court
held as under:

“3. Regarding question no.(i):–

(a) We note that the impugned order of the Tribunal while allowing the assessee’s appeal holding that the Arms Length Price of Corporate Guarantee cannot be determined on the basis of comparison with Bank Guarantee and relied upon the decision of its Co-ordinate bench in the case of Everest Kento Cylinder Ltd. v. Dy. CIT [2013] 34 taxmann.com 19 (Mum. – Trib.). Mr. Suresh Kumar, the learned counsel appearing for the Revenue very fairly states that being aggrieved with the above order in M/s. Everest Kento Cylinders Ltd., the Revenue had filed an appeal to this Court raising an identical issue viz. CIT v. Everest Kento Cylinders Ltd. [2015] 378 ITR 57/232 Taxman 307/58 taxmann.com 254 (Bom.). By an the above appeal was not entertained.
(b) As no distinction in facts and/or law has been shown to us in this appeal which would warrant taking a different view on this very issue from that taken by this Court in Everest Kento Cylinders Ltd. (supra), we follow the same.
(c) Accordingly, question no.(i) as proposed does not give rise to any substantial question of law for the reasons indicated in our order dated 8th May, 2015 in Everest Kento Cylinders Ltd. (supra). Therefore not entertained.”
The rate of guarantee commission varies depending upon several factors
depending upon risk factor, period involved, amount involved, state of
financial health of borrower, prevailing cost of funds in domestic and
international market , state of economy where borrowers are located so on
and so forth. The TPO applied CUP method to benchmark international
transactions to compute ALP. It is observed vide TPO benchmarking that tax
court of Canada while giving decision in the case General Electric Capital
Canada Inc. v. The Queens (2009 TCC 563) based on facts and
circumstances upheld ALP of guarantee commission @1% p.a. . On the other
hand the TPO has also referred to guarantee commission charged by banks
which is to the tune of 3%p.a. on bank guarantee issued by bankers.While it
is also benchmarked that in a case of the Dutch State, FMO had charged
guarantee commission of 2.5% in the case of Rabo India Finance Pvt. Limited
wherein both were related parties. Thus, what emerges is that providing of
corporate guarantee by a taxpayer to its AE within meaning of Section 92A is
an international transaction u/s 92B which need to be benchmarked using
CUP method to compute ALP of the said transaction of furnishing of
corporate guarantee. The ALP to be computed will vary depending upon 43 | P a g e I.T.A. No.6789/Mum/2013 I.T.A. No.7196/Mum/2013 several internal as well external factors . In our considered view, end of
justice will be met if the ALP be determined @ 0.5% p.a. of corporate
guarantee issued by assessee in favour of Kansai Paint Company Limited,
Japan. The Mumbai-tribunal has computed ALP@ 0.5% in the case of
Piramal Glass Limited v. DCIT reported in (2017) 80 taxmann.com
68(Mumbai) , in the case of Videocon Industries Limited v. DCIT reported in
(2017) 79 taxmann.com 216(Mum-trib.) , in the case of Zee Entertainment
Enterprises Limited v. ACIT reported in (2018)100 taxmann.com 479(mum-
trib) and in the case of DCIT v. Rolta India Limited reported in (2019) 101
taxmann.com 40(mum-trib.).In view of our aforesaid discussions in detail,
we are not inclined to accept the plea of the assessee that providing of
corporate guarantee by tax-payer to its AE within meaning of Section 92A
can be taken as international transaction u/s 92B only with effect from AY
2013-14 as the insertion of explanation to Section 92B By Finance Act, 2012
is w.e.f. 01.04.2002 . The said explanation was declared to be clarificatory in
nature. This ground number 5 (a) and (b) are partly allowed. We order
accordingly.

28. Thus , the appeal filed by the assessee is partly allowed while the
appeal filed by Revenue is dismissed.

Order pronounced in the open court on 15.05.2019 आदे श की घोषणा खुऱे न्यायाऱय में ददनांकः 15.05.2019 को की गई ।
Sd/- Sd/- (MAHAVIR SINGH ) (RAMIT KOCHAR) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai, dated: 15.05.2019
Nishant Verma
Sr. Private Secretary 44 | P a g e I.T.A. No.6789/Mum/2013 I.T.A. No.7196/Mum/2013 copy to… 1. The appellant 2. The Respondent 3. The CIT(A) – Concerned, Mumbai 4. The CIT- Concerned, Mumbai 5. The DR Bench, 6. Master File // Tue copy// BY ORDER DY/ASSTT. REGISTRAR ITAT, MUMBAI 45 | P a g e

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