BILCARE LIMITED,,PUNE vs. ASSISTANT COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE - 2(2),, PUNE

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH “C”, PUNE BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND SHRI PARTHA SARATHI CHAUDHURY, JUDICIAL MEMBER आयकर अपील सं. / ITA No.2720/PUN/2017 िनधा�रण वष� / Assessment Year : 2013-14

Bilcare Limited, Vs. ACIT, 6th Floor, B-Wing, Central Circle-2(2), ICC Trade Tower, Pune Senapati Bapat Road, Pune – 411 016, Maharashtra PAN : AABCB2242F Appellant Respondent Assessee by Shri Kishor Phadke Revenue by Smt. Divya Bajpai Date of hearing 25-10-2021 Date of pronouncement 26-10-2021 आदेश / ORDER PER R.S.SYAL, VP :

This appeal by the assessee is directed against the final

assessment order dated 18-10-2017 passed by the Assessing Officer

(AO) u/s.143(3) r.w.s. 144C(13) of the Income-tax Act, 1961

(hereinafter also called ‘the Act’) in relation to the assessment year

2013-14.

of write off of obsolete stock of Rs.23,12,46,000/-. Briefly stated,

the facts of the case are that the assessee is engaged in

manufacturing and trading of Pharma packaging products. It filed

its return declaring total loss at Rs.11,28,91,379/-. Certain

2 ITA No.2720/PUN/2017 Bilcare Limited

international transactions of furnishing Corporate Guarantee were

given in Form No. 3CEB, which issue will be dealt with later on.

The AO notified the draft order with total income at

Rs.1,52,57,620/-. Aggrieved thereby, the assessee approached the

Dispute Resolution Panel (DRP), which found the Notes on

financial statements that the assessee wrote off inventory of

Rs.2312.46 lakh. After comparing the figure of inventory given in

the balance sheet at Rs.138.72 crore with that given to the bank, for

availing credit facilities, at Rs.185.43 crore, the DRP called upon

the assessee to explain the difference. The assessee tendered a

reconciliation explaining that a sum of Rs.23.58 crore was reduced

from the value of stock given to bank on account of Excise duty and

another sum of Rs.23.12 crore was reduced towards obsolete and

non-moving inventory written off as extraordinary item so as to

reach the figure of inventory in the balance sheet. To justify the

write off of obsolete and non- moving inventory, the assessee stated

that it was valuing the stock as per the method `Cost or Net

realizable value, whichever is less’. The value of obsolescence of

stock to the above tune was reflected in the balance sheet, signed on

28-05-2013. The ld. DRP observed that since the write off actually

happened in the F.Y. 2013-14, there was no justification in

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allowing claim of write off in the F.Y. 2012-13 relevant to the

assessment year under consideration, even though the audited

accounts were signed on 28-05-2013. That is how, the DRP

directed the AO to make enhancement by Rs.23.12 crore. The AO

made the enhancement in the final assessment order. Apart from the

challenging the making of the addition on merits, the assessee has

also assailed the direction given by the DRP for enhancement on a

preliminary legal issue of jurisdiction.

earlier fixed for hearing before a different combination of the

Division Bench, wherein the ld. AR argued that the DRP had no

power to take up the issue of stock write off. It was put forth that the

AO did not consider the issue of stock write off in the draft order

and hence, the DRP lacked jurisdiction to direct enhancement on

this score. To support this contention, the ld. AR relied on certain

Tribunal orders. The Bench was not convinced with the assessee’s

submission in view of certain other decisions empowering the DRP

to make enhancement in the situation as is obtaining in the instant

case. The matter was adjourned at the request of the ld. AR, who

requested for the constitution of a Special Bench on this issue. On

such request, the Hon’ble President sought the comments of

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Division Bench (DB). The matter was fixed for hearing before the

DB only for the limited purpose of considering the assessee’s

submission as to whether the DRP was justified in directing

enhancement on an issue which was not there in the draft order and

the consequential setting up of a special bench. Vide its order dated

27.07.2021, a copy of which has already been supplied to both the

assessee as well as the Revenue, the Bench rejected the assessee’s

contention by taking note of Explanation to section 144C(8)

inserted by the Finance Act, 2012 with retrospective effect from 01-

04-2009 providing that the power of the DRP to enhance the

variation shall include and shall be deemed always to have included

the power to consider any matter arising out of the assessment

proceedings relating to a draft order notwithstanding that such

matter was raised or not by the eligible assessee. Relevant

discussion has been made by the DB in paras 5 to 9 of its interim

order, which read as under :

“5. Being aggrieved by the final assessment order, the appellant filed an appeal before this Tribunal contesting inter-alia in respect of addition on account of obsolete and slow moving inventory items written off, and that the ld.D.R.P. has no power to make any addition which is not a part of any variations proposed by the Assessing Officer in the draft assessment order. In this connection, he relied on the decision in the case of Sava Healthcare Ltd., Vs. ACIT (ITA Nos.1062 to 1068/PUN/2017) reported in (2019) 107 taxmann.com 226 wherein it was held as under : “114……….. But where the TPO has not exercised his jurisdiction, the DRP in exercise of his powers cannot benchmark new transaction though reported by the assessee, in the hands of assessee.”

ITA No.2720/PUN/2017 Bilcare Limited

“10. It is clear from the mandate of sub-section (8) that the DRP is empowered, inter alia, to enhance the variations proposed in the draft order. The Explanation to this sub-section inserted retrospectively from 1.4.2000 clarifies that the power of the DRP to enhance the variation shall include the power to consider any matter arising out of the assessment proceedings relating to the draft order, notwithstanding that such matter was not raised by the assessee. When we consider the language of sub-section (8) in conjunction with the Explanation, it clearly emerges that the DRP has a power to enhance variations proposed in the draft order on an international transaction, even if it was not raised by the assessee. `Enhance the variations’ include not only increasing the amount of transfer pricing adjustment already proposed, but also making a new transfer pricing adjustment, which was omitted to be proposed/made by the AO/TPO. There is no doubt and cannot be that the power of the DRP is co-terminus with that of the AO/TPO. In other words, the DRP can also do all such things, which the authorities could have done but omitted to do. If the language of the provision is read as disabling the DRP to exercise the power of enhancement in the circumstances as are obtaining in the instant case, as has been canvassed on behalf of the assessee, it would amount to diluting the power, which the statute has expressly granted.”

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“24…. Reading the Explanation with sub-section 144C(8), it is evident that the Dispute Resolution Panel could examine the issues arising out of the assessment proceedings even though such issues were not part of the subject matter of the variations suggested by the Assessing Officer.”

rejecting the assessee’s request for constitution of a Special Bench

on the issue of power of the DRP to make enhancement on an issue

which was not a part of the draft order, it is vivid that the Bench

categorically held against the assessee by holding: `Thus, it is clear

that the Explanation was inserted by the Finance Act 2012 with

retrospect effect from 01.04.2009 so as to empower the ld. D.R.P. to

consider any issue arising out of the draft assessment order even if

it is not in dispute. It is also equally settled position of law that the

word “assessment” includes the “return of income” filed by the

assessee. We do not find any contrary decision from any other

Hon’ble High Court’. The ld. AR, in the extant proceedings,

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ventured to re-argue the same issue with an attempt to persuade us

to his line of thinking that the DRP cannot take cognizance of a new

issue which is not part of the draft order. We do not find any

rationale in permitting the parties to re-argue the same issue as has

already been considered and decided by the Tribunal by means of an

interim order passed in collateral proceedings of the same case. It is

not a case where the DB simply discarded the request of the

assessee for constitution of Special bench without delving into the

issue. Rather, the Bench having initially expressed its prima facie

opinion on not accepting the proposition, gave ample opportunity

of hearing to both the sides on merits of the issue and thereafter

passed a well reasoned speaking order rejecting the contention on

merits and also the consequential proposal for constitution of

special bench. The instant situation is not akin to letters patent

appeal wherein the aggrieved party can once again approach the DB

to have a second call on the matter. We are concerned with a

situation in which the DB has already decided the issue on merits by

means of its interim order. Once the decision of the DB is available

on merits in the interim order, it is not open to re-agitate the same

issue before the DB in the proceedings for final disposal of the

appeal u/s 254(1) of the Act.

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record the submission of the ld. AR that the issue has been decided

by the Hon’ble Madras High Court in M/s Delphi-TVS Diesel

Systems Ltd. VS., ITO(OSD)/Secretary, DRP (W.P. No. 26313 of

2017), which judgment dated 17.8.2021 was delivered after the

passing of the interim order by the DB of the Tribunal. Relying on

this judgment, he contended that the DRP was wholly unjustified in

making the enhancement on account of stock written off which

issue was not subject matter of the draft order.

Court. In that case, the draft order was notified on certain other

issues but without any disallowance of expenditure u/s.40(a)(i) of

the Act on Employees Secondment charges and Reimbursement of

expenses. The assessee challenged the draft order before the DRP.

The DRP issued enhancement notice in respect of disallowance

u/s.40(a)(i) on Employees Secondment charges and Reimbursement

of expenses. After entertaining the objections, the DRP directed the

AO to make the disallowance u/s.40(a)(i). The assessee filed writ

petition No.26313 of 2017 seeking to quash the direction of the

DRP on the enhancement by urging that the DRP had no power to

issue notice for enhancement as that issue was not considered by the

9 ITA No.2720/PUN/2017 Bilcare Limited

AO in the draft order. The Hon’ble High Court considered the

scope of the Explanation appended to section 144C(8) of the Act

and rejected the assessee’s writ petition by observing that: “Thus,

there is no impediment as such for the Dispute Resolution Panel to

consider any matter arising out of the assessment proceedings

relating to the Draft Assessment Order and no matter, such an issue

was discussed in the Draft Assessment Order or not, but it should

not be totally unconnected with the assessment proceedings or the

Draft Assessment Order”. Thereafter, it observed that the:

“proposed notice issued to the writ petitioner is relatable to the

assessment proceedings and to the Draft Assessment Order. Thus,

there is no infirmity in respect of exercise of powers by the Dispute

Resolution Panel and the notice issued for enhancement.” It is

emphatically clear that even though the question of disallowance

u/s.40(a)(i) of the Act on Employees Secondment charges and

Reimbursement of expenses was not subject matter of the draft

order, still the Hon’ble High Court, considering the ambit of the

Explanation to section 144C(8), held that the DRP rightly directed

enhancement on it because it was relatable to the assessment

proceedings and to the Draft Assessment Order. On a careful

circumspection of the ratio decidendi laid down by the Hon’ble

10 ITA No.2720/PUN/2017 Bilcare Limited

Madras High Court in the backdrop of the factual position

prevailing in that case, there remains no doubt whatsoever that

rather than justifying the stand of the assessee, this judgment

fortifies the view taken by the DB in its interim order, rejecting the

assessee’s contention that the DRP was not empowered to consider

the stock write off at Rs.23.12 crore which item was not considered

by the AO in the draft order. Respectfully following the interim

order passed by the DB, we jettison the assessee’s contention on the

preliminary jurisdictional legal issue and hold that the DRP was

intra vires to espouse the issue of stock write off by means of

enhancement notice.

statements of the assessee for the year contained Note no.43 with

the caption Extraordinary items reading: “During the year, the

Company has written off obsolete (sic absolute) and non-moving

inventory to the extent of Rs.2312.46 lakh”. The figure of inventory

given in the balance sheet at Rs.13872.53 lakh was determined after

reducing, inter alia, Rs.23.12 core on account of write off of

obsolete and non-moving inventory. The DRP, after entertaining

objections from the assessee, decided the issue by giving following

direction in para 9.3, as under :

11 ITA No.2720/PUN/2017 Bilcare Limited

“9.3 From the above, we find that in the audited accounts the assessee has under reported the value of closing stock vis-à-vis the statement filed before the bank as on 31/3/2013.

The difference between the two has been explained to be on account of considering the excise duty also as part of closing stock which was shown separately in the balance sheet and the difference on account of obsolete and non-moving inventory of Rs.23.12 crs. The assessee has explained that this slow moving inventory was informed to the bank in the month of April to June, 2013 and as the audited account were signed on 28-05-2013 (sic 2017), the assessee had considered the write- off in the audited accounts for the FY 2012-13 itself. As per the record the write-off has happened in FY 2013-14. Having considered the reasons given by the assessee we do not find any justification in claim of write-off in FY 2012-13 as even though the audited accounts were signed on 28/5/2013 the same pertained to F.Y.2012-13 closing on 31/3/2013. The event as in the present case of valuation of non-moving obsolete inventory and write off of Rs.23.12 cr. occurred only during F.Y. 2013-14. In light of the above the claim of write off of Rs.23.12 cr in FY 2012-13 is incorrect and is been disallowed. The AO is directed to incorporate the same while finalizing the assessment. This will result in enhancement of Rs.23.12 cr. The AO is directed to initiate penalty u/s.271(1)(c) for filing inaccurate particulars of income.”

that: “As per the record the write off has happened in F.Y. 2013-14.

Having considered the reasons given by the assessee we do not find

any justification in claim of write off in F.Y. 2012-13 as even

though the audited accounts were signed on 28-05-2013 the same

pertained to F.Y. 2012-13 closing on 31-03-2013. The event as in

the present case of valuation of non-moving inventory and write off

12 ITA No.2720/PUN/2017 Bilcare Limited

of Rs.23.12 crore occurred during F.Y. 2013-14.” Two things

emerge from the direction given by the DRP. First, that the bona

fide and the value of loss on account of obsolescence of inventory

have been accepted as correct; and second, that the dispute is only

about the year in which such obsolescence in the inventory value

should be written off. To be more precise, the only difference of

opinion is as to whether such obsolescence in stock value should be

written off in the year under consideration or in the next year.

Whereas the assessee wrote off the loss of Rs.23.12 crore in its

accounts on the ground that the loss pertained to the value of

inventory as on 31-03-2013, the DRP espoused the view that since

loss was quantified after 31-03-2013, the same should have been

written off in the F.Y. 2013-14.

valuing its inventory at: `Cost or Net realizable value, whichever is

less’. Under this method, the inventory is valued in balance sheet at

its net realizable value, if such value is less than the cost price. Net

realizable value is determined by ascertaining the amount that the

inventory will fetch if sold in the open market on the balance sheet

date. If the inventory has become obsolete or has ceased to be

marketable, fully or partly, the extent of such obsolescence needs to

13 ITA No.2720/PUN/2017 Bilcare Limited

be reflected in the inventory value by appropriately reducing the

cost price so as to bring it to the net realizable value. It is this

diminution in the value of inventory due to obsolescence as on

31.3.2013, which has been quantified by the auditor at

Rs.23,12,46,650/- by means of a certificate dated 02-04-2013, a

copy of which has been placed at pages 203 onwards of the paper

book. The auditor has certified: “that the value of total obsolete and

non-moving inventory, which needs to be written off as on 31-03-

2013, is to the tune of Rs.23,12,45,650/- as detailed out in the

annexure enclosed”. Then, there is the annexure running into few

pages giving item-wise write off in quantity as well as value. It is

on the basis of this certificate issued by the auditor on 02-04-2013

that the assessee, while finalizing its balance sheet on 28.5.2013,

gave effect to the method of stock valuation consistently followed

and reduced the value of inventory as shown on 31.3.2013 by the

amount of such obsolescence to bring it at net realizable value.

obsolescence in the inventory was qua the value of stock as on 31-

03-2013 and the assessee incorporated the effect of such reduction

in the value of inventory by giving an appropriate note as an

“extraordinary event”. The reduction has the effect of representing

14 ITA No.2720/PUN/2017 Bilcare Limited

the condition of stock existing as on 31-03-2013 at its realizable

value. It is not as if there was some depletion in the value of

inventory taking place after 31-03-2013 which the assessee

accounted for in its annual accounts for the year ending 31-03-2013.

Rather it is a case of the existing condition of diminution in the

value of inventory as on 31-03-2013. As the exercise of valuing the

obsolescence in stock took place after close of the year but before

the signing of the balance sheet on 28.5.2013, the assessee depicted

it as an extraordinary item by way of a note to accounts and reduced

the value of closing stock accordingly. In view of the fact that the

obsolescence affects the value of inventory as on 31-03-2013, the

same was required to be taken into consideration for reflecting true

and fair state of affairs of the company as on the balance sheet date.

The direction of the DRP that the loss should be written off in the

F.Y. 2013-14 on the raison d`etre that it was quantified after 31-03-

2013, cannot be countenanced. The relevant factor to be considered

is the date with reference to which the value of stock is determined

and not the date when the exercise of such value determination is

carried out. Had it been a case of the assessee valuing its inventory

on any date after 31-03-2013 but giving effect in the balance sheet

as on 31.3.2013, that would have warranted addition. Au contraire,

15 ITA No.2720/PUN/2017 Bilcare Limited

we are confronted with a situation in which depletion has taken

place with reference to the value of inventory on 31-03-2013. We,

therefore, hold that the AO was not justified in making addition of

Rs.23,12,46,000/- in the impugned order. The same is, ergo,

directed to be deleted.

pricing addition amounting to Rs.12,81,49,000/- on account of

Corporate Guarantee.

Guarantee for its Associated Enterprise, which was albeit reported

in Form No.3CEB but neither any details were provided nor the

benchmarking was done. On being called upon to furnish the

details, the assessee gave requisite information in respect of

Corporate Guarantee given to certain banks in respect of its AEs for

a total sum of Rs.1,06,270.04 lakhs. In respect of the first

transaction of Guarantee to SBIIFB, Pune for 5,50,00,000 Euros in

favour of Bilcare AG, the assessee incurred a sum of Rs.291.93

lakhs, which was recovered from its AE. However, no guarantee

fees was recovered for any of the five transactions. The TPO

benchmarked these transactions by adopting Arm’s Length rate at

1.75% as Corporate Guarantee fee and worked out the net transfer

16 ITA No.2720/PUN/2017 Bilcare Limited

pricing adjustment at Rs.12,81,40,000/-, after reducing Rs.291.93

lakhs incurred in extending guarantee and recovered by the assessee

from its AE. The assessee remained unsuccessful before the DRP,

as a result of which the AO made the addition of Rs.12.81 crore in

the final assessment order. The assessee has come up in appeal

before the Tribunal on this issue.

material on record. At the outset, the ld. AR contended that similar

issue has been considered and decided by the Tribunal in its order

for the assessment year 2014-15. A copy of such order dated 26-03-

2021 passed in ITA No.1693/PUN/2018 and other was placed on

record. We have gone through the order. The decision on the issue

of corporate guarantee fee has been incorporated in paras 7.17 and

7.18 of the order. After considering the entire gamut of material,

the Tribunal determined the Arm’s Length fee from furnishing of

the corporate guarantee at 0.5% as further increased by any

expenditure actually incurred by the assessee in furnishing the

guarantee. The ld. DR was fair enough to concede the position in

this regard. Having regard to the rival but common submissions and

respectfully following the order of the Tribunal for the immediately

succeeding assessment year, we set aside the impugned order on

17 ITA No.2720/PUN/2017 Bilcare Limited

this score and remit the matter to the file of AO/TPO for re-

computing the ALP of the transaction. In doing so, he will first

ascertain the amount of expenditure actually incurred by the

assessee in furnishing the five corporate guarantees and thereafter

add 0.5% as the service fee for furnishing the guarantee. Needless

to say, the assessee will be allowed a reasonable opportunity of

hearing in this regard.

Sd/- Sd/- (PARTHA SARATHI CHAUDHURY) (R.S.SYAL) JUDICIAL MEMBER VICE PRESIDENT पुणे Pune; िदनांक Dated : 26th October, 2021 सतीश आदेश की �ितिलिप अ�ेिषत/Copy of the Order is forwarded to: अपीलाथ� / The Appellant; 1. ��थ� / The Respondent; 2. 3. The CIT(A)-13, Pune 4. The Pr.CIT-V, Pune िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, पुणे “सी” / 5. DR ‘C’, ITAT, Pune; 6. गाड� फाईल / Guard file. आदेशानुसार/ BY ORDER, // True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune

ITA No.2720/PUN/2017 Bilcare Limited

Date 1. Draft dictated on 25-10-2021 Sr.PS 2. Draft placed before author 26-10-2021 Sr.PS 3. Draft proposed & placed before JM the second member 4. Draft discussed/approved by JM Second Member. 5. Approved Draft comes to the Sr.PS Sr.PS/PS 6. Kept for pronouncement on Sr.PS 7. Date of uploading order Sr.PS 8. File sent to the Bench Clerk Sr.PS 9. Date on which file goes to the Head Clerk 10. Date on which file goes to the A.R. 11. Date of dispatch of Order.

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