DCIT, CIRCLE - 12, KOLKATA, KOLKATA vs. M/S. BERGER PAINTS INDIA LTD., KOLKATA

The ground of appeal

The facts and circumstances giving raise to the present appeal are that the assessee is engaged in the business of manufacture and sale of paints, enamels, varnishes, dry colours, synthetic resins etc. In the process of manufacture of the said products various types of acid, chemicals, resins, pigments, solvents, oils, extenders, water and other various ingredients are used as raw materials. The assessee manufactures different types of paints, enamels, varnishes, dry colours, synthetic resins etc. of various grades, quality and shades which necessarily require usage or consumption of various combination of basic raw material in the form of acid, chemicals, resins, pigments, oils, extenders, water and other various ingredients.

According to the assessee like any other manufacturing process in particular, that pertaining to a chemical industry, the assessee also incurs normal production loss in -B-JM 1 M/s. Berger Paints India Ltd consumption of acid, chemicals, resins, pigments, solvents, oils, extenders, water and other various ingredients while manufacturing its various products. Such normal production loss is incurred owing to various reasons in the manufacturing process of its products. For example, in paint manufacturing it incurs loss due to expelling of fine raw material particles(dust), during charging of powder raw materials to grinding mill which is recovered but is unusable in the paint manufacturing process and is disposed off as scrap, loss owing to drying/scaling/skin formation in grinding mill. Such normal production loss also occurs in the course of manufacturing of resin, which constitutes a primary ingredient in manufacturing of paints, enamels, varnishes etc. owing to elimination of water as by-product of chemical reaction in kettle, pipeline and filtering unit etc. The aforesaid production losses relating to consumption of raw material etc. are normal in the process of manufacturing of paints, enamels, varnishes etc. In the audited accounts of the assessee such normal production loss is duly taken into consideration as is also noted therein. Such normal production loss being routine to any manufacturing industry is to be allowed as deduction in computing the total income of any assessee and in the case of the assessee the same has been allowed consistently over the years.

The Assessing Officer called for and examined a number of details/documents in the course of the assessment proceedings including books of accounts etc of the assessee. One of the details called for by the Assessing officer was ‘details of co-efficient of consumption of raw materials ( or products manufactured) during the year under consideration’. The assessee vide its letter dated 15th December, 2010 pointed out to the Assessing Officer that the said details in the manner requested by him is already available as Appendix to the Form No.3CD (Audit report) submitted for the year under consideration. With the said letter and vide letter dated 21st December, 2010 the assessee also furnished recipes for different water based products, solvent based products and powder coating products manufactured by it at its various works including undertakings profits and gains derived from which are deductible while computing its total income. Again vide its letter dated 24th December, 2010 the assessee furnished co-efficient of consumption of raw material of its major products in the manner as explained subsequently by the Assessing Officer to the assessee during the course of the assessment proceedings. Thereafter, vide letter dated 28th December, 2010 as desired by the Assessing Officer the assessee also submitted a detailed statement showing reconciliation of raw material consumption on the basis of co-efficient of consumption insofar it relates to the products -B-JM 2 M/s. Berger Paints India Ltd manufactured during the year under its Berger Division. In the said statement submitted to the Assessing officer the assessee quantified the net normal product loss at 221MT out of the net consumption of 149230 MT of raw material etc. in the manufacturing process of its products. In percentage term the said loss amounted to a mere 0.148% of net consumption of raw materials. As desired by the Assessing Officer the assessee submitted a statement showing value in Rupees of the positive differences in the consumption of raw material comprised in the normal production loss quantity of 221 MT. In the order dated 29th December, 2010 passed u/s. 143(3) of the Act, the Assessing 6. Officer disallowed an amount of Rs.2,52,79,700 alleging that the same represents excess consumption of raw material of 221 MT not related to the cost of production of the assessee company.

According to the AO the assessee did not produce any evidence to substantiate its claim that the excess consumption of raw materials included by them is nothing, but processing loss, which is standard loss in the business of the assessee. The AO also observed that the assessee failed to give the approved rate of raw materials consumption and its standard processing loss. .

Before the ld. CIT(A) the assessee contended that the subject 221 MT of raw material represents net normal production loss incurred by the assessee in manufacturing of its products owing to various reasons including the ones noted above. It was pointed out that in the course of the assessment proceedings, the Assessing Officer never provided any opportunity to the assessee to explain the reasons behind incurring such production loss and that the impugned disallowance has been made by the Assessing Officer merely on conjecture, surmise and presumption rather than on any material on record and accordingly cannot be legally sustained.

The assessee has also filed before the ld.CIT(A) a certificate dated Dec 17, 2011 by its Sr. Vice President-R & D, M/s. Berger Paints India Limited. It has been mentioned therein that there is bound to be loss of raw materials in the course of production for various reasons. The percentage of standard loss in the paint manufacturing industry has, however, not been mentioned in the said certificate.

The ld.CIT(A) after considering the submissions of the assessee was of the view that in all manufacturing units there is bound to be manufacturing loss. The ld.CIT(A) also was of the view -B-JM 3 M/s. Berger Paints India Ltd that normal processing loss of raw materials could be different for various reasons as was contended by the assessee in its submissions. The ld.CIT(A) was of the view that the AO has accepted the financial statements of the assessee and therefore, it cannot be said that the consumption of raw materials was excessive. He was of the view that without rejecting the book result, the AO was not entitled to make the impugned addition. The ld.CIT(A) was also of the view that there was no material brought on record to prove either the purchase of raw materials were inflated or there was excess production of finished goods by consumption 221MT of raw materials. He also held that the AO has not given any comparative case of paint manufacturing company, wherein the production of various finished goods was done by consuming standard quantity of raw materials. The ld. CIT(A) also found that in certain item of raw materials the consumption was less than was shown in the books of account. According to the ld.CIT(A), if the AO goes by the standard consumption figures and actual consumption of raw materials, he should have taken the negative figures of differences for the purpose of calculation of excess consumption. For all the above reasons, the ld. CIT(A) deleted the addition made by the AO. Aggrieved by the order of the ld.CIT(A) the revenue is in appeal before the tribunal.

The ld.DR reiterated stand of the AO as reflected in the order of the AO. He brought our notice that excess consumption of raw materials in terms of quantity and value is not disputed by the assessee. According to him, the ld.CIT(A) has not explained as to how the excess consumption claimed by the assessee is owing to standard loss in the paint manufacturing industry.

The ld. Counsel for the assessee reiterated stand of the assessee as put forth before the ld.CIT(A).

We have heard the rival parties and given careful consideration to the rival submissions. In the course of assessment, the assessee submitted before the AO a chart, which is placed at Pg. 149 to 160 of assessee’s paper book. Perusal of the chart shows that the net consumption of raw materials by the assessee in various divisions was shown at 149009 MTs. As per audited accounts the net consumption of raw materials was 149230 MTs. The difference between the two was 221 MTs. The AO called upon the assessee to explain the above excess consumption of raw materials. The assessee explained that such excess consumption was owing to standard loss of raw materials in the course of manufacturing of paint, which is normal in the industry. The claim of the assessee as to whether it is correct or not has not been gone into either by the AO or the ld.CIT(A). In our -B-JM 4 M/s. Berger Paints India Ltd view this would be starting point of enquiry to be made by the AO. The AO has to give a finding as to what is the standard loss of raw materials in the process of manufacturing of paint before coming to a conclusion that there was excess consumption of raw materials not related to the production by the assessee. The ld.CIT(A) has also not given in such finding in this regard. The assessee has admittedly filed a certificate of Senior Vice President- R & D, Berger Paints India Limited dated 17th Dec, 2011 before the ld.CIT(A) as additional evidence. Though the ld.CIT(A) has not relied on this additional evidence in deleting the addition, we are of the view that the AO should have been afforded an opportunity to consider the aforesaid additional evidence. Once it is established that the consumption of raw materials in the process of manufacturing is in excess of the standard loss of raw materials in the course of manufacture, only then the question as to whether the consumption of raw materials by the assessee is excessive or in excess of standard loss in paint manufacturing can be ascertained. Even in such situation, the assessee should be afforded an opportunity to explain as to why such excess loss occurred in the course of manufacturing process. In this regard, the assessee is also entitled to rely on its past history of loss of raw materials in its own case, besides standard loss prevailing in the industry. The correctness and completeness of the books of account maintained by the assessee is also a relevant factor to be taken note in coming to a conclusion as to whether loss in question is an attempt by the assessee to reduce its taxable income. It is only when all the above factors are considered, the issue as to whether the addition could be made or not can be answered. For the reasons given above, we set aside the order of the ld.CIT(A) and remand the issue as raised by the revenue in this appeal to the file of the AO for fresh consideration. The assessee is at liberty to file such evidence/documents as it may be considered appropriate to substantiate its claim.

In the result, the appeal of the revenue is allowed for statistical purpose. Order Pronounced in the open court on 19-10 -2015 Sd/- Sd/- ( P.M Jagtap ) ( N.V. Vasudevan ) Accountant Member Judicial Member Date:19-10-2015 -B-JM 5 M/s. Berger Paints India Ltd