KANSAI NEROLAC PAINTS LTD,MUMBAI vs. ADDL CIT RG 6(2), MUMBAI

आयकर अपीऱीय अधिकरण “K” न्यायपीठ म ुंबई 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) बिाम/ DCIT Circle -6(2) M/s. Kansai Nerolac Paints Ltd., R.No. 563, Aayakar Bhavan, Nerolac House, K.G. Marg, M.K. Road, Churchgate, v. 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) बिाम/ M/s. Kansai Nerolac Paints Addl. CIT Circle -6(2) Ltd., R.No. 669, Nerolac House, K.G. Marg, Aayakar Bhavan, v. Lower Parel, Mumbai 400013 M.K. Road, 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 सुनवाई की तारीख /Date of Hearing : 15-02-2019 घोषणा की तारीख /Date of Pronouncement : 15 -05-2019 आदेश / O R D E R 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".

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 | P a g e

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.”

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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

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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.

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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

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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.”

Application Software Amount(Rs.) 1. Minitab latest Software M.E. Project 4,81,624

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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.

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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.

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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) 96,15,000 a) Expenditure by way of interest other than (i) above 1,043,315,111 Value of the investments as on 1st April 740,300,000 Value of the investments as on 31st March b) Average value of investments during the 891,807,555 year 5,158,278,000 Value of the total assets as on 1st April 6,217,300,000 Value of the total assets as on 31st March 5,687,789,000 c) Average value of total assets during the year Amount of disallowance [a ( b/c ) ] 1,507,568 4,459,038 iii) 0.5% of Average Investment 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/-“

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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.

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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

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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: A X B 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.”

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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

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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:-

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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.

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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.) .

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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.]"

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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

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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

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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,

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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

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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

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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

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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.

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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 :

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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

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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

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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

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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

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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.”

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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

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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

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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;

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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 .

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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

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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

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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 आदेश 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

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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

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