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Income Tax Appellate Tribunal, “J” BENCH, MUMBAI
Before: SHRI PRASHANT MAHARISHI, AM & SHRI PAVAN KUMAR GADALE, JM
1. This appeal is filed by Piramal Glass Pvt. Ltd. [Assessee/ Appellant] in Asst. Commissioner of Income Tax, Circle-7(3) (2), Mumbai [The Ld AO] for A.Y. 2006-07 under Section 143(3) read with section 144C (13) read with section 254 of the Income tax Act [The Act] dated 29th November, 2019.
Assessee has raised the following grounds of appeal:-
“GROUND I: DISALLOWANCE OF DEPRECIATION ON ADOPTION OF WRONG ACTUAL COST OF VARIOUS FIXED ASSETS:
1. on the facts and circumstances of the case and in law, the AO erred in adopting wrong "actual cost" of the assets vested in pursuance of Scheme of Arrangement by relying on his predecessor's assessment order for A.Y. 1999-2000.
3. He failed to appreciate and ought to have held that:
(i) The Appellant had acquired the 'Glass Division' under a slump sale and not under amalgamation and consequently Explanation 7 to Section 43(1) is not applicable;
(ii) Allocation over various assets was carried out on a fair basis arrived at by technical experts, and (iii) the said allocation was in accordance with Accounting Standard 10 issued by the Institute of Chartered Accountants of India, the apex accounting body, which requires a company to allocate the composite slump consideration paid for a bunch of assets on a fair basis.
4. The Appellant prays that depreciation as claimed by the Appellant be accepted.
GROUND II: ADDITION ON ACCOUNT OF UNUTILISED CREDIT FOR CENTRAL VALUE ADDED TAX CENVAT") U/S 145A OF THE ACT AMOUNTING TO ₹19,82,740/-:
1. On the facts and circumstances of the case and in law, the A.O. erred in including in CENVAT credit in both opening and closing stock and take the net impact in respect of Unutilised CENVAT of 19,82,740 to the income of the appellant on the alleged ground that the Appellant has not included it in closing stock following exclusive method and hence the same is not in accordance with section 145A of the Act.
2. The Appellant prays that the AO be directed to delete the aforesaid addition of 19,82,740/- u/s 145A.
On the facts and in circumstances of the case and in law, the AO while giving effect to the order of the Hon'ble Tribunal has exceeded its jurisdiction and thus, the additions made by the AO are to be set-aside and/or to be quashed.
2. The Appellant prays that the AO be directed to delete the aforesaid addition.
WITHOUT PREJUDICE TO GROUND NO.III.
GROUND NO.IV: DISALLOWANCE OF CLAIM FOR WRITE OFF OF NON-MOVING AND OBSOLETE FINISHED GOODS:
1. On the facts and circumstances of the case and in law, the A.O. erred in making a disallowance of 71,25,000/- of write-off of non-moving an obsolete finished goods without appreciating the fact that the allow ability of expenditure is to be examined in the light of findings of the DRP whereby the DRP had directed examine the issue of double disallowance.
2. He further erred in observing that no concrete evidence was brought on record which is factually incorrect since proper documentary evidence was submitted before the AO to justify the claim.
3. The Appellant thus, prays that the AO be directed to delete the double addition and also be allowed the deduction for w/off claimed.
GROUND V: CLAIM FOR ADDITIONAL DEPRECIATION
1. On the facts and in circumstances of the case and in law, the AO erred in not granting deduction for additional
2. He failed to appreciate and ought to have held that in the subsequent assessment year, since the opening WDV of the block has been determined after computing the additional depreciation @20% on the additions to plant and machinery, made in the current assessment year and the same ought to be allowed as a deduction.
3. The Appellant prays that the AO be directed to allow the claim of additional depreciation.
GROUND VI: ADDITION TO ARM'S LENGTH PRICE OF CORPORATE GUARANTEE COMMISSION
1. On the facts and in the circumstances of the case and in law, the AO erred in making an Arms length adjustment of 8,70,041/- on account of Corporate guarantee and Counter guarantee commission provided by it on behalf of its subsidiary company as the said transaction does not fall within the ambit of section 92 of the Act.
2. The Appellant prays that the aforesaid adjustment to arms length price be deleted.
GROUND VII: ADDITION TO ARM'S LENGTH PRICE OF INTERNATIONAL TRANSACTIONS FOR INTEREST FREE LOAN ADVANCED TO SUBSIDIARY:
1. On the facts and in the circumstances of the case and in law, the AO erred in making an adjustment of 24,21,663/- of interest on interest free loan advanced to subsidiary as the same has been given by the Appellant to increase and expand the business and thus, doesn't warrant any Transfer pricing adjustment.
2. The Appellant prays that the aforesaid adjustment of arm's length price therefore to be deleted.
1. On the facts and circumstances of the case and in the law, the AO erred in levying interest u/s.234D of the Act amounting to Rs. 46,34,039/-
2. The Appellant prays that the AO be directed to delete the interest levied.
GENERAL IX:
The Appellant craves leave to add and/or to amend and/or to alter the above ground(s) of appeal.”
The brief facts of the case show that assessee is a company engaged in the business of manufacturing and dealing in glass containers and vials for pharma and non-pharma industries. These glasses are manufactured for Cosmetic and Perfumery markets also. The assessee is also engaged in the business of power and investment activities.
Assessee filed its return of income on 14th November, 2006, declaring income of ₹29,34,01,925/- as per the normal provisions of computation of total income. The book profit was computed at ₹33,07,31,397/-. The return was revised on 1st November, 2007, at ₹ nil as per normal computation and book profit was computed at ₹18,26,32,081/-. The case was selected for scrutiny.
Assessee has entered into an international transactions and therefore, reference was made to the learned Transfer Pricing Officer for determination of Arm's Length Price vide order under section 92CA(3) dated 29th October, 2009 an upward adjustment of ₹2,62,05,329/- was proposed. Draft assessment order was passed on 30th November, 2009, wherein the above addition was made. The objections were filed before the learned Dispute Resolution Panel. The learned Dispute Resolution Panel issued direction on 30th August, 2010, based on that, final assessment order was passed on 24th September, 2010. The total income was computed at ₹41,83,66,485/- and after setting of depreciation, total income was computed at ₹ nil. The book profit under Section 115JB of the Act was computed at ₹33,07,39,288/-.
The learned Assessing Officer disallowed the depreciation of ₹7,25,28,816/-. The depreciation is with respect to the amount of ₹18 crores paid to Piramal Enterprises Ltd., which was allocated and capitalized over other assets in A.Y. 1999-2000 on acquisition of the Glass division from Nicholas Piramal India Ltd. (NPIL). In 1999-2000, the learned Assessing Officer disallowed the depreciation, which travelled upto the co-ordinate Bench, it allowed the claim of the assessee. However, the Revenue is in appeal before the Hon'ble High Court and therefore, the learned Assessing Officer allowed the depreciation only to the extent of ₹27,67,97,279/- against the actual claim of the assessee of ₹34,93,26,095/-. The second issue is with respect to the depreciation on the Written-Down Value (WDV) as recorded in the books of Seller Company.
The learned Assessing Officer disallowed a sum of ₹71,25,000/- on account of provision made for non moving an obsolete inventory of ₹1.40 crores out of which a sum of ₹ 71.25 lacs were written off. The learned Assessing Officer disallowed the sum. The co-ordinate Bench restored the issue back to the file of the learned Assessing Officer. The ld AO made the same disallowance once again.
Assessee has included unutilized CENVAT credit in the value of the closing stock. According to Provision of Section 145A of the Act, the learned Assessing Officer asked the assessee why the same should not be added. After taking the explanation of the assessee, Assessing Officer made the addition of ₹19,82,740/-, which travelled to the co-ordinate Bench. The matter was set aside to the file of the learned Assessing Officer for fresh consideration. The learned Assessing Officer repeatedly made addition.
The original assessment also had the transfer pricing adjustment on account of interest free loan and corporate guarantee issue. The matter was set aside by ITAT to the file of the learned Dispute Resolution Panel for adjudication.
With respect to corporate guarantee in earlier years in assessee’s own case the ITAT has directed the learned Transfer Pricing Officer to consider 0.5% as arm's length of corporate guarantee rate. Therefore, out of the total adjustment of ₹52,20,246/-, the addition of ₹8,70,041/- was retained with respect to corporate guarantee commission and adjustment on account of interest originally made of ₹4,85,083/- was retained at ₹4,21,663/-. Accordingly, the adjustment of ₹12,91,704/- was made by the learned Assessing Officer on account of Arm's Length Price of international transaction.
As per ground no.1, the assessee has challenged the disallowance of depreciation on adoption of incorrect actual cost of various fixed assets. The learned Authorized Representative submitted that identical issue arose in the case of A.Y. 1999-2000 to A.Y. 2013-14, where the co-ordinate Bench restored issue back to the file of the learned Assessing Officer for the computation. Therefore, this matter as per this ground should also be restored to the file of the learned Assessing Officer.
The learned Departmental Representative also reiterated the same.
We have carefully considered the rival contentions. We find that the issue first arose in the case of the assessee for A.Y. 1999-2000. The matter reached before the ITAT that was restored back to the file of the learned CIT (A). Still, the learned CIT (A) has not disposed off the issue. Similarly, for A.Y. 2001-02 to 2005-06 and 2007-08 to 2013-14, the matter was restored to the file of the learned Assessing Officer, which is still not adjudicated upon. For some of the assessment years the appeal is still pending before the learned CIT (A). In view of this fact, the assessment year in this appeal is also having impact of the decision in the first year i.e. AY 1999-2000. Accordingly, we
Ground no.2 is with respect to the CENVAT credit addition of ₹19,82,740/-. During the year, the assessee company has followed the inclusive method for valuation of inventory. Accordingly, the opening stock and closing stock of finished goods are inclusive of excise duty. Therefore, the fact of increase or decrease in the profit on account of element of excise duty has already been taken care of in the books of accounts and therefore, no adjustment was required under Section 145A of the Income-tax Act, 1961 (the Act). The learned Assessing Officer rejected the contention of the assessee and made the addition of the above sum.
The learned Authorized Representative submitted that for A.Y. 2005-06 to 2007-08 to 2009-10, identical issue arose in the case of assessee , wherein the co-ordinate Bench in dated 30th April, 2019, has allowed the claim of the assessee. The Revenue has accepted the above decision and has not preferred any appeal against the same. Several other judicial precedents were relied upon. Therefore, it was submitted that this issue is squarely covered in favour of the assessee.
The learned Departmental Representative vehemently supported the order of the learned Assessing Officer.
We have carefully considered the rival contentions. We find that the assessee has followed the inclusive method of accounting and valuation of inventory. Accordingly, in the opening and closing stock, both, the assessee has included the amount of excise duty. Therefore, the effects of excise duty in the closing stock in pursuance of provisions of Section 145A of the Act were already included in the profit offered by the assessee. Accordingly, there was no adjustment / addition was required to be made. The learned Assessing Officer made the adjustment. This issue is already decided by the co-ordinate Bench and therefore, respectfully following the decision of the co-ordinate Bench in assessee’s own case for A.Y. 2005-06 and 2007-08 to 2009-10, the addition deserves to be deleted. Accordingly, we direct the learned Assessing
Ground no.3 of the appeal was not pressed. Hence dismissed.
Ground no.4 of the appeal is with respect to the disallowance of claim of writing off non-moving and obsolete finished goods. The facts shows that assessee has claimed ₹1,76,00,000/-under this head. As per revised computation out of total provision of ₹1,50,00,000/- for non moving of obsolete inventories for A.Y. 2005-06, a sum of ₹71.25 lacs has actually been written off during the year under consideration and accordingly, same is claimed as deduction. During the course of assessment proceedings, assessee submitted list of such items which were written off. Identical issue arose in the case of the assessee. The learned Assessing Officer after considering the explanation of the assessee held that there is no concrete evidence of any write off or co-relation of sale out of such alleged written off material, made the addition. The learned Dispute Resolution Panel also confirmed the adjustment and therefore, it was made in the final order also. The mater reached to the co-ordinate Bench. The co-ordinate bench as per Para no.37 of the order for A.Y. 2006-07 has decided this issue. ITAT held that learned Dispute Resolution Panel noted that a sum of ₹1.76 crores has already been added back to the income of the assessee and out of that only ₹75.25 lacs have actually been written off during the year which is also disallowed, the learned Assessing Officer was directed to examine the issue of double disallowance. The co-ordinate Bench held that the learned Assessing Officer did not consider the same. Despite the above direction of the learned Dispute Resolution Panel, the learned Assessing Officer made the disallowance and therefore, the co-ordinate Bench held that the learned Assessing Officer has not properly implemented the direction of the learned Dispute Resolution Panel. The co-ordinate Bench also noted that if the inventory has been written off in the books of account, only the sale of such inventory could be brought to the taxation. Pursuant to the above direction, the learned Assessing Officer repeated the same addition.
Before the learned Assessing Officer, assessee submitted that assessee has debited to the profit and loss account provision for obsolete inventory is made. Such provision is added to the total income of the assessee at the time
Ground no.5 of the appeal is with respect to the claim of additional depreciation. We do not find that this ground is arising out of the order of the learned Assessing Officer or the order of the co-ordinate Bench pursuant to which the assessment order is passed. Accordingly, ground no.5 of the appeal is dismissed.
Ground no.6 is with respect to the addition on account of the Arm's Length Price of interest on interest free loan given by the assessee to Piramal Glass, UK Limited. The fact shows that assessee has one wholly owned subsidiary in United Kingdom under the name of Piramal Glass UK, Limited. To meet its working capital, the assessee has granted an interest free loan amounting to 2,65,000/- GBP to that company. The learned Transfer Pricing Officer benchmarked the interest income by taking the interest rate of libor +300 basis points. The learned Dispute Resolution Panel following the order of the co-ordinate Bench in assessee’s own case held that the interest is required to benchmarked by taking interest rate of libor + 200 basis points. However, the claim of the assessee is that in assessee’s own case for A.Y. 2011-12, the Hon'ble High Court has admitted the issue as a question of law that no transfer pricing adjustment is required to be made when the loans are given to subsidiary company to increase and expand the business of the assessee. Therefore, the assessee still contested that no interest can be imputed on the interest free advances given to the above company. Without prejudice, the assessee submitted that transfer-pricing adjustment on loan can be restricted to only libor rates. Assessee also submitted that giving an interest free loan to its subsidiary company for expansion of the business of the
During the course of hearing, the co-ordinate Bench asked for several documents however, the assessee submitted that as the matter pertains to A.Y. 2006-07 which is almost a 15 year old matter, therefore, the assessee is not in a position to give all the details asked by the Bench. However, assessee submitted the financial statements of its subsidiary and the transfer pricing study report for the relevant year. The assessee also relied heavily on the decision of the co-ordinate Bench in case of Crest animation studios Limited vs. ACIT 42 taxmann.com 222.
We have carefully considered the rival contentions and perused the orders of the lower authorities. The fact shows that assessee has one subsidiary in United Kingdom. Assessee has given loan of ₹20.85 million to Piramal Glass, UK Limited. This fact is available at page no.14 of the annual financial statements of the assessee. The UK subsidiary has the paid up equity share capital of 1,50,000/- GBP amounting to ₹1,16,65,500/-. The UK company has asset based of ₹2,59,80,320/- and the deficit of shareholders fund amounting to ₹ 1,34,21,971/-. As per note no.6, the creditors where the amounts owned to the parent undertaking was shown at ₹5,09,44,019/-. It is shown that the loan from parent undertaking, which is unsecured, interest free and repayable between 2 and five years. In the transfer pricing study report, assessee did not disclose any interest receivable from the subsidiary company, however, the loan provided was disclosed in table-4. It was stated that as the assessee has provided loan to its wholly owned subsidiary company none of the five prescribed methods are applicable. The learned Transfer Pricing Officer held that provision of Section 92 of the Act, in chapter X , clearly provides that all international transactions have to be at Arm’s Length Price. The learned Transfer Pricing Officer noted that if the " we have considered the submission made. In this case, the TPO has adopted LIBOR +300 rate, vile as stated by the assessee, honourable ITAT in the assessee's own case for assessment year 2007 – 08 to 2009 – 10 and in assessment year 2012 – 13 has adopted LIBOR + 200 points. It is also stated in assessment year 2011 – 12 the TPO himself has adopted LIBOR +1.738%. In fact, the said adjustment is made by the TPO in her order dated 28/8/2018 in compliance of the ITAT direction. We have considered the submission made. Looking into the facts of the case, we are of the considered opinion that LIBOR +200 base points justified for benchmarking the transaction. However, the orders of the appeal are not longer appealable by the Department. Therefore, we are of the view that LIBOR +200 points should be used for benchmarking the transaction in case the decisions of the honourable ITAT are accepted by the Department, hence, the rate applied by the TPO may be considered in case the Department has not accepted the decisions of the honourable ITAT."
Accordingly, respectfully following the decision of the coordinate bench in assessee's own case in many assessment years, we do not find any infirmity in the order of the learned assessing officer/transfer pricing officer in adopting interest on interest for loan to the UK subsidiary company at arm's length at LIBOR +200 points. Accordingly, the adjustment made by the learned AO/TPO of ₹ 4,021,663/– on this count is confirmed.
The issue of commercial expediency can also not be tested in transfer pricing because the assessee has given loan to an independent entity, may be subsidiary of the assessee, however in normal course the assessee would not have given any sum to an independent party without charging interest. Further, the reliance placed by the learned and authorized representative on the decision of coordinate bench in 42 taxmann.com 222 is also not correct because the fact in that case shows that the advances were given only for the period of six months. Further, in that decision in para number 2.4.4 it has been categorically held that the coordinate bench agreed with the submission of the revenue that commercial expediency is not relevant in making transfer-pricing adjustments.
The assessee has also raised an issue that it was an initial year of the subsidiary company and assessee has advanced interest-free funds to its subsidiary as a matter of commercial production by fulfilling the shareholder obligation. Any financial incapacitation of the subsidiary would joke arise the appellant's investment. Accordingly, the appellant's expectation from granting of loan is not on interest but to protect its investment interest and help the subsidiary company achieve its business objectives thus the said loan was granted in the nature of shareholder activity. It was further stated that though the said interest free loan is a loan in a legal firm but in substance is in the nature of quasi equity. The assessee has merely made the submission however has not substantiated it by putting any financial data to justify the above claim. In the transfer pricing study report also assessee has not given any justification on these grounds.
The assessee has also submitted that it had sufficient own funds available at its disposal out of which the loan was given to the subsidiary company to
Accordingly, ground number 7 of the appeal is dismissed.
Ground number seven is with respect to the addition on account of compensation for providing corporate guarantee to Piramal glass USA and Grammar Glass Europe. Assessee has given corporate guarantee on 21/1/2006 amounting to US$ 2 crores to export import Bank of India and also US$ 50 lakhs to export import Bank of India on 20/3/2006. Assessee has treated the provision of guarantee is an international transaction but has not made the same. The learned TPO adopted compensation at the rate of 3% per annum and computed the arm's-length price of the guarantee commission at ₹ 5,220,246/–. When the matter was set aside by the coordinate bench back to the file of the learned dispute resolution panel, has per direction dated 30/9/2019 found that in the assessee's own case for assessment year 2007 – 08, 2009 – 10 and 2011 – 12 to 2012 – 13 the arm's-length rate of 0.5% was considered at arm's length. The learned dispute resolution panel also followed the decision of the honourable Bombay High Court in adopting such rate. We do not find any infirmity in such direction. Based on the same the guarantee commission amounting to ₹ 870,041/– was considered at arm's length. We do not find any infirmity in the direction of the learned dispute resolution panel and consequent adjustment made by the learned TPO/AO. Accordingly, ground number 6 is dismissed.
In the result, appeal of the assessee is partly allowed.
Order pronounced in the open court on 10.02.2023.