ASST CIT (LTU) 2, MUMBAI vs. ASIAN PAINTS LTD, MUMBAI

The learned assessing officer preferred appeal in ITA number 4675/M/2015 raising following grounds of appeal:-

The assessee in ITA number 3290/M/2015 has raised following grounds of appeal:-

Aggrieved, assessee preferred an appeal before the learned CIT – A. The learned CIT – A confirmed the adjustment on account of the arm‘s-length price of ₹ 0.90 lakhs for non-recovery of charges for providing letter of support/comfort, ₹ 885.23 lakhs with respect to buyback of shares. He also confirmed disallowance u/s 14 A of the act of ₹ 5,823,000 and disallowance on account of non inclusion of damaged stock in the valuation of closing stock amounting to ₹ 63.27 lakhs. Before the learned CIT – A the assessee also raised an additional ground with respect to the claim for non taxability of royalty income received from one entity in Egypt which was rejected as same was not raised before the assessing officer, hence, it did not arise from the Assessment order. Therefore, on these issues the assessee is aggrieved and has preferred appeal in 3290/M/2015 before us.

At the time of hearing of the appeal, by letter dated 5 February 2021, assessee raised two additional grounds of appeal as Under:-

For both the above grounds, assessee submitted that these are only legal issues, which can be permitted to be raised at any time during the pendency of the appeal, those grounds do not require any fresh investigation of facts, and therefore it may be admitted.

The learned authorised representative reiterated the same argument for admission of the above two additional grounds of appeal. It was also stated that

The learned departmental representative objected to the admission of additional ground stating that those grounds were never before the learned assessing officer or never been raised before the lower appellate authorities and therefore they cannot be admitted now.

We have carefully considered the rival contention. We find that assessee did not raise these additional grounds of appeal at the time of filing of the original appeal or before the lower authorities because of the subsequent judicial precedents, the assessee came to know about allowability of the above claim. The grounds raised before us are purely legal in nature and does not require any fresh adjudication of facts. Any legal ground can be raised at the time of pendency of appeal in view of settled judicial precedents. Therefore, we admit both these grounds of appeal raised by the assessee.

Coming to the appeal of the revenue, at the time of commencement of the hearing, the learned authorised representative submitted a detailed chart on each of the grounds involved in the appeal stating that these are covered in case of the assessee itself by the

The learned departmental representative submitted that the issues are already decided in the case of the assessee for the earlier years, however he supports the order of the learned assessing officer

Both the parties confirmed that their arguments with respect to the grounds of appeal already covered in the order of the coordinate benches in assessee‘s own case remains the same.

Now we come to the appeal of the learned assessing officer. The first ground of appeal is with respect to the deletion of the adjustment on account of corporate guarantee at the rate of 1% made by the learned transfer-pricing officer as against 0.20% charged by the assessee.

We find that identical issue arose in the case of the assessee for assessment year 2006 – 07 in ITA number 7801 – M – 2010 and the coordinate bench dealt with this issue as Under:-

In the impugned assessment year, we find that assessee has granted corporate guarantee on behalf of its associated enterprises outstanding as on 31/3/2010 amounting to ₹ 140.81 crores. The assessee has charged 0.20% of the guarantee amount as commission to the associated enterprise. The learned transfer-pricing officer noted that the associated enterprise to which corporate guarantee has been issued by the assessee has paid interest to the bank in the range of 1.71% – 2.32%. The appropriate rate to be charged by the assessee to its associated enterprise cannot be more than the rates charged by the banks to the associated enterprise for loans availed by it. The AO further noted that overall risk as exposure of the assessee company is very high by the amount of corporate guarantee and the company becomes more leveraged to that extent thereby increasing the debt equity ratio, which will ultimately affect the cost of borrowing. The assessee in its own case has been charged commission at the rate of 0.25% by the banks, however, in the instant

Ground number 2 is with respect to restricting the disallowance on account of non-recovery of service charge for giving letter of comfort to the subsidiary company at the rate of 0.04% as against 0.50%. The fact shows that the assessee has issued non- contractual letters of comfort/support to the banks on behalf of its subsidiaries from time to time and has not charged any commission from its associated enterprises. The learned transfer-pricing officer noted that the associated enterprises has availed a loan amounting to ₹ 226,227,282/– based on the letters of comfort issued by the assessee. The learned transfer pricing officer was of the view that as assessee has provided comfort letters to its associated enterprises without charging any fee thereon wherein the issuing guarantees or letter of comfort is not one of the main business of the taxpayer and also in uncontrolled transaction, it would have been charged , taking into account the creditworthiness of associated enterprises, margins, security or any other consideration for deciding the financial solvency of the

On appeal before the learned CIT – A, he followed the decision of his predecessor in assessee‘s own case for

We find that identical issue arose in case of the assessee for assessment year 2009 – 10 wherein the coordinate bench on identical facts and circumstances in ITA number 2754/M/2014 and ITA number 4203/M/2014 has decided this issue as Under:-

We do not find any difference in the facts and circumstances of the case except to the extent of amount of letter of comfort issued by the assessee. The learned CIT – A has also followed the decision rendered by the learned CIT – A for assessment year 2009 – 10 which has been confirmed by the coordinate bench per its order dated 3 February 2021. Therefore, respectfully following the decision of the coordinate bench, we also hold that there cannot be any addition in the hands of assessee on account of comfort letter issued. Accordingly, ground number 2

Ground number 3 is with respect to the direction of the learned CIT – A to the assessing officer to verify the allowability of expenditure incurred u/s 35 (2AB) with respect to the expenditure disallowed by DSIR for research and development purposes. The fact shows that the assessee has Department of scientific and industrial research recognized research and development unit situated at Bhandup in Mumbai. Assessee also built its own new research and development facility, which was also approved. The assessee has incurred both revenue and capital expenditure on in-house research and development facilities during the year and therefore assessee claimed that he it is entitled to weighted deduction u/s 35 (2AB) of the income tax act. The assessee incurred an expenditure of ₹ 22.97 crores; however, as per the certificate issued the eligible expenditure was reduced from ₹ 22.97 crores 222.19 crores. Based on the certificate the learned assessing officer allowed the claim to the extent of ₹ 22.19 crores and thus the claim of the assessee was reduced by ₹ 38.76 lakhs being 50% of the differential research and development expenditure of ₹ 77.42 lakhs incurred by the assessee.

The revenue is aggrieved with this direction of the learned CIT – A. We find that identical issue arose in the case of the appeal of the assessee for assessment year 2007 – 08, where the coordinate bench decided this issue as Under:-

On appeal before the learned CIT – A wherein he found that identical issue in case of the assessee in earlier years has been decided in favour of the assessee and therefore following those decisions he deleted the disallowance of the expenditure.

The learned authorised representative has stated that for assessment year 2008 – 09 in ITA number 7253 – M— 2012 the coordinate bench has decided this issue in favour of the assessee and the same decision has been confirmed by the honourable Bombay High Court in ITA number 1564/2016. However we find that such issue arose in the case of the assessee for assessment

As no difference in facts and circumstances, have been pointed out before us, respectfully following the decision of the coordinate bench, we also confirmed the order of the learned CIT – A in deleting the television advertisement expenditure with related to brand expenditure holding that the same are revenue expenditure and cannot be held to be capital expenditure as held by the learned assessing officer. Accordingly, ground number 4 of the appeal is dismissed.

Ground number 5 is with respect to the disallowance u/s 14 A restricted by the learned CIT – A to ₹ 5,823,458/–. The fact shows that assessee has earned a dividend of ₹ 224,021,852, which is exempt u/s 10 of The Income Tax Act. The learned AO invoked the provisions of rule 8D and computed the disallowance of Rs 1,00, 26,816/–. The assessee preferred an appeal before the learned CIT – A and submitted that it has computed the disallowance to the extent of ₹ 1,650,877 being the expenditure

The learned authorised representative submitted that in the case of the assessee for assessment year 2008 – 09, 2009 – 10 the identical issue arose and same has been decided by the coordinate bench. He further stated that for assessment year 2008 – 09 the honourable High Court has confirmed the order of the coordinate bench. In that case, in absence of any satisfaction recorded by ld AO, disallowance was deleted.

We find that honourable High Court in INCOME TAX APPEAL NO. 1564 OF 2016 in case of assessee has considered this issue and has upheld the order of the coordinate bench for the reason that there is no satisfaction recorded by the learned assessing officer before applying provisions of rule 8D for making disallowance u/s 14 A of the act. The honourable High Court held as Under:-

Ground number 6 is in relation to allowing the additional depreciation at the rate of 10% amounting to Rs 1,51,65,251/–. The claim of the assessee is that

Therefore, respectfully following the decision of the coordinate bench in assessee‘s own case for assessment year 2009 – 10, ground number 6 of the appeal is dismissed holding that the learned CIT appeal is correct in allowing additional depreciation at the rate of 10% for asset purchased in the earlier year amounting to Rs 1 51,65,251/–.

Ground number 7 of the appeal is against the decision of the learned CIT – A in allowing deduction of ₹ 252,660,686/– on account of expenditure incurred on trip scheme. The learned assessing officer noted that

On appeal before the learned CIT – A the disallowance was deleted holding that the intention behind organizing such foreign trip is to ensure promotion of sales of the appellant company. He further held that as the payment has been made to various travel agencies the same cannot be said to be a gift or a commission payment to the dealers from the appellant

It is also stated before us that the issue squarely covered in favour of the assessee for assessment year 2009 – 10 in ITA number 2754/M/2014 and ITA number 4203/M/2014 wherein the coordinate bench held as Under:-

Therefore respectfully following the decision of the coordinate bench in assessee‘s own case for assessment year 2009 – 10, in absence of any contrary evidence, we uphold the order of the learned CIT – A deleting the above disallowance of ₹ 252,660,686/–. Accordingly, ground number 7 of the appeal is dismissed.

In the result, appeal of the learned assessing officer is dismissed.

Beforehand, the learned counsel for the assessee submitted that he does not want to press ground number 4 with respect to the addition of ₹ 63.27 lakhs on account of non-inclusion of damage stock in valuation of closing stock. Accordingly, ground number 4 of the appeal of the assessee is dismissed

He further submitted that ground number 1 of the appeal is linked to ground number 2 of the appeal of the learned assessing officer. Therefore, the decision in the ground number 2 of the appeal of the learned assessing officer will cover this ground of appeal of assessee. While deciding ground number 2 of the appeal of the assessee we have followed the order of the coordinate bench in assessee‘s own case in earlier years holding that issuance of letter of comfort/support does not result into an international transaction and therefore there cannot be any addition in the hands of the assessee. Accordingly, for the similar reasons we allow ground number 1 of the appeal.

Ground number 3 of the appeal is with respect to the disallowance retained by the learned CIT – A u/s 14 A of the act. While deciding the ground number 5 in appeal filed by the learned assessing officer, we have already held that the learned assessing officer has

Ground number 5 is with respect to the rejection of additional ground raised by the assessee with respect to the claim for non-taxability of royalty income received from SCIB chemicals SAE, Egypt. The learned CIT – A did not admit the same, as according to him it did not arise from the order of d AO.

The fact shows that the assessee has credited royalty income in the books of accounts amounting to ₹ 7.90 crores from the above subsidiary company. The same was offered for taxation in the return of income. However, later on, assessee contended that as per article 13 of The Double Taxation Avoidance Agreement [DTAA] royalty income is not liable to tax in India and therefore the same needs to be reduced from the total taxable income.

We have carefully perused the order of the learned CIT – A wherein paragraph number 14 the issue is dealt with and the learned CIT has held that on

The learned authorised representative submitted that identical issue arose in case of the assessee company for assessment year 2006 – 07, 2008 – 09 and 2009 – 10 wherein the claim of the assessee was allowed. It was further stated that the learned assessing officer himself allowed the above claim for assessment year 2012 – 13 while passing an order u/s 143 (3) of the act.

The coordinate bench for assessment year 2009 – 10 on the identical facts and circumstances has held as Under:-

Therefore respectfully following the decision of the coordinate bench in earlier year in assessee‘s own case we also set-aside this issue back to the file of the learned assessing officer to decide it in accordance with the law. Thus, ground number 5 of the appeal of the assessee is allowed for statistical purposes.

Now we come to ground number 2, where the assessee challenges the order of the learned CIT – A in disallowing the claim for long-term capital loss arising on account of buyback of shares amounting to ₹ 885.23 lakhs on transfer pricing adjustment.

The fact shows that on 25/9/2009, the associated enterprise of the assessee namely, Asian paints International Ltd, a foreign subsidiary of assessee, has brought back 41 lakhs equity shares at $ 1/- per share at par. Assessee did not report the same in form no 3CEB for the reason that there was no amendment at the time of filing that form and amendment was made The Finance Act 2012 with retrospective effect. The learned transfer-pricing officer noted that the infusion of share capital is an international transaction

When the matter reached before the learned CIT – A, he held that the learned transfer pricing officer has adopted very justified method for valuation of the

The learned authorised representative submitted that

Therefore he argued that matter may be set aside to the file of the ld TPO leaving all arguments open, including the issue whether buy back of shares is an international transaction or not.

We have carefully considered the rival contention and perused the orders of the lower authorities. Fact shows that as on 1 April 2009 Assessee was holding 2,80,45,444 shares in its wholly owned subsidiary company namely Asian paints International Ltd Mauritius. During the year under consideration the AE bought back 41 lakh shares at the rate of 1 US$ per share and thereby received ₹ 19.36 crores. Assessee did not report the above transaction in form number

By the finance act 2012, explanation was added, wherein clause (c) provides as under :-

Thus 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 of deferred payments or receivable or any other debt arising during the course of business is also considered as the deemed ‗international transactions‘. Buyback is a share repurchases transaction when a company buys its own outstanding shares to reduce the number of shares available in the open market. There may be several reasons for the buy back. It is an investment made by the company in itself by reducing the number of shares, which increases the proportion of shares owned by investors. Thus, it is a transaction of purchases of shares by subsidiary from its holding company through buyback route. There is also no

Now the issue arises that how this international transaction is required to be benchmarked. Looking to the Indian legislation no methodologies prescribed for fixing the buyback price as per The Income Tax Act as well as The Companies Act 2013. However, with reference to the provisions of Section 115 QA rule 40 BB prescribes that what is the amount received by the

In the present case the buyback of the shares by the overseas associated enterprises from the assessee is at par value i.e. one US dollar per share, which is also the face value of that share.

On asking by the learned transfer-pricing officer, assessee submitted as per letter dated 27 December 2013 that for arm‘s-length price the associated enterprise has obtained a valuation report from an independent chartered accountant. Assessee submitted valuation report dated 14 September 2009 from Shah & co based on (i) audited financial statement of Asian paints (International) Ltd and all of its subsidiaries as on 31st of December 2008, (ii) audited financial statement of subsidiary as on 31st of July 2009 and (iii) projected cash flow of that company along with its subsidiary for financial year 2009 – 2011. The valuer valued the investment held by the subsidiary on net asset value and discounted cash flow basis, each of the method was given an appropriate weightage, and final value of the target

On 6 January 2014, once again as per the net asset value method the valuation of the shares was made. On the basis of the net asset value, total value of the subsidiary company along with the step down subsidiary is was determined at US$ 20,664,912 and the number of shares issued as on 31st of December 2008 were 2,80,45,444 and thereby the NAV per share were shown as US$ 0.74. In that report it was

On 9 January 2014, assessee once again submitted a certificate providing the valuation of the shares according to the discounted cash flow method. According to which the discounted cash flow value of the subsidiaries was determined at US$ 49,908,750. The other assets and net of liabilities was determined at US$ 5,26,330. Thereby the value for equity shares was determined at US$ 50,435,080 and the number of equity shares was 2,80,45,444 and thereby resulting the value per share of $ 1.80 per share. As per the certificate the cash flow discounted by 25% to take care of the uncertainties in meeting the cash flow. It was one pager excel sheet. Regarding the discounted

We note that as per the schedule given to us at page number 275 which is annexure 2 of valuation report shows that the subsidiary company has a further 10 subsidiary companies. There is no indication that whether these subsidiary companies are ‗investment companies‘ and how their values are derived at. Naturally if these are Investment Company the investment of the step down subsidiaries are also required to be valued for determination of fair market value of those shares. There is no explanation coming from the assessee that if those companies are manufacturing companies how their valuations are derived at. Further the valuation report dated 14 September 2009, by Shah and Co which is submitted before us from page number 272- 275 of paper book

Further coming to another report dated 6 January 2014 of Shah and Co shows that the valuation as per NAV method is US$ 0.74 per share. We failed to understand that in buyback of shares how the net asset value method will give the fair market value of the shares bought back by the company.

Further, according to the certificate of chartered accountant dated 8 January 2014 placed at page number 286 of the paper book shows that adopting

As per the valuation certificate dated 8 January 2014 the valuer gave the weight age of ¾ to the valuation derived as per the net asset value method of US$ 0.74 per share and weight age of ¼ rd to the valuation as per DCF method of US$ 1.80 per share and thereafter it was stated that the weighted equity value is fair market value of the shares of the subsidiary company at one US dollar per share. As per explanation assessee applied less weightage to discounted cash flow method and more weightage to NAV method. There is no justification coming from the assessee for giving ¾ weightage to NAV method and ¼ to DCF method.

Therefore, it is apparent that the assessee does not have any benchmarking the buyback of the shares to determine its arm‘s-length price. The learned transfer-pricing officer proceeded to value/compute the valuation on his own. He adopted the discounted cash flow method of valuation and thereafter made the addition of the net current assets to arrive at the

In the present case before us, the assessee has also adopted changing stands and no justification was given for 30 % discount on cash flow claimed The learned transfer-pricing officer also did not allow any discount in the valuation of subsidiaries. There are no details available of the financials of the subsidiary companies and what are the natures of activities carried out by those subsidiaries companies. It is also not clear whether the subsidiary companies have further subsidiaries and how their valuation has been made to arrive at the value of shares of those companies. The annual accounts of all of the subsidiary companies were placed on record. Assessee has justified the valuation made by chartered accountant by merely providing numbers. No assumptions, basis for impairment, basis for discount and weightage is provided. Therefore, this matter needs to set-aside to the file of the learned assessing officer/transfer pricing officer for determination of the arm‘s-length price of the buyback of 41 lakh shares of a foreign subsidiary. In view of this we set-aside this issue back to the file of the learned transfer pricing officer with a direction to the assessee to 1st show the fair market value of the

Now we come to the additional ground raised by the assessee with respect to the deduction of education cess as business expenditure. After hearing the arguments of rival parties, and perusal of the orders of the coordinate bench in assessee‘s own case, we set-aside the whole issue back to the file of the learned assessing officer to determine the deductibility of the same in accordance with the law.

The second additional ground is with respect to the dividend distribution tax. This ground arose in the case of the assessee for assessment year 2009 – 10 wherein the coordinate bench decided it is Under:-

Before us, there is no information about the country of residence of those shareholders, whether those shareholders have Tax Residency certificate of that country, there is no submission whether the dividend income is income of shareholders and about how the assessee will claim refund of the taxes , if same is income of the shareholders. Further the host of issues with respect to applicable of DTAA as stated in grounds of appeal by assessee are required o be addressed. Therefore, respectfully following the decision of the coordinate bench in case of assessee itself for assessment year 2009 – 10 we also set-aside this issue back to the file of the learned assessing officer with direction to the assessee to submit its claim with all necessary supporting evidences and

In the result, appeal filed by the assessee is partly allowed as directed above.