TaxTMI 
TaxTMI 
2017 (12) TMI 590
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....t of Rs. 3,27,83,128/- deposited by the Appellant in its Central Excise Personal Ledger Account (PLA) before 31st March 2000, i.e. the end of the relevant accounting year, even though the Assessee has already incurred liability of excise duty of Rs. 12.27 crores? Facts relevant to Question (i) 4. The Assessee is engaged in the manufacture of automobiles, chargeable to excise duty under the Central Excise Act, 1994 ('CE Act'). In terms of the Central Excise Rules ('CE Rules'), the Assessee was required to deposit, from time to time, the amounts representing excise duty payable on the automobiles manufactured by it in its Central Excise Personal Ledger Account ('PLA'). This PLA is debited by the excise authorities with the amounts of excise duty payable at the time of clearance of the manufactured automobiles from the Appellant's factory. 5. As of 31st March 1999, which was the last day of the accounting year relevant to the AY in question, a sum of Rs. 3,27,83,128 stood as balance in the PLA of the Appellant for vehicles. This amount has yet to be appropriated towards excise duty payable by the Assessee. According to the Assessee, as of this date, i.e. 31st March 1999, the ....
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....ght of this, it would be appropriate to consider the substance of Section 43B of the Act which reads as under: "43B. Certain deduction to be only on actual payment - Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of - (a) any sum payable by the Assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force, or (b) any sum payable by the Assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees, or (c) any sum referred to in clause (ii) of sub-Section (1) of Section 36, or (d) any sum payable by the Assessee as interest on any loan or borrowing from any public financial institution or a State Financial Corporation or a State Industrial Investment Corporation, in accordance with the terms and conditions of the agreement governing such loan or borrowing, or (e) any sum payable by the Assessee as interest on any term loan from a scheduled bank in accordance with the terms and conditions of the agreement governing such loan shall be allowed (irre....
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.... the assessment year commencing on the 1st day of April, 1988, or any earlier assessment year) in which the liability to pay such sum was incurred by the Assessee, the Assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the sum is actually paid by him. Explanation 3A -For the removal of doubts, it is hereby declared that where a deduction in respect of any sum referred to in clause (e) of this section is allowed in computing the income referred to in section 28 of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 1996, or any earlier assessment year) in which the liability to pay such sum was incurred by the Assessee, the Assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the sum is actually paid by him. Explanation 4-For the purposes of this section,- (a) "public financial institutions" shall have the meaning assigned to it in Section 4A of the Companies Act, 1956 (1 of 1956); (aa) "scheduled bank" shall have the mean....
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.... of sales made in the last quarter was held to be totally outside the purview of section 43B since the same is not statutorily payable in the financial year to which it relates. This is against the legislative intent and, therefore, by way of inserting an Explanation it has been clarified that the words "any sum payable" , shall means any sum, liability for which has been incurred by the taxpayer during the previous year irrespective of the date by which such sum is statutorily payable." Assessee's submissions on Question (i) 13. It was asserted by the Assessee before the ITAT that since the amount deposited by it in the PLA as on 31st March 1999 - which remained unappropriated towards excise duty - was far less than the total amount of excise duty liability that had already been incurred in respect of automobiles manufactured by the Assessee which remained un-cleared from its factory, the entire balance in the PLA was allowable as a deduction under Section 43B of the Act having regard, in particular, to Explanation 2 to Section 43B. 14. Further, the Assessee, in its written submissions before the ITAT on this aspect, stated as under: "In any case, without prejudice to ....
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....s incurred. The term "liability to pay such sum was incurred by the Assessee", together with the words "a sum for which the Assessee incurred liability" in Explanation 2, underline that payment must relate to the incurred liability to be called 'any sum payable'. 14. In the present case, the Assessee had no option but to keep the account in respect of each excisable product (evident from the mandate in Rule 173G that it "shall keep and account current"). The latter part of the main rule makes it clear beyond any doubt that the Assessee has no choice in the obligation, and cannot remove the goods manufactured by it, unless sufficient amounts are kept in credit: "...and the Assessee shall periodically made credit in such account-current, by cash payment into the treasury, so as to keep the balances, in such account-current sufficient to cover the duly due on the goods intended to be removed at any time, and every such Assessee shall pay the duty determined by him for consignment by debit to such account-current before removal of the goods" The revenue's contention that the amounts in credit also relate to goods not manufactured, and therefore not relatable to any "liab....
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....9, is contrary to the prescription of law. Section 43B in clear terms provides that the deduction claimed by the Assessee in respect of any sum paid by way of tax, duty, cess or fee, shall be allowed only in computing the income referred to in Section 28 of that previous year in which it was actually paid, irrespective of the previous year in which the liability was incurred for the payment of such sum as per the method of accounting regularly employed by the Assessee. For the purpose of claiming benefit of deduction of the sum paid against the liability of tax, duty, cess, fee, etc., the year of payment is relevant and is only to be taken into account. The year in which the Assessee incurred the liability to pay such tax, duty, etc. has no relevance and cannot be linked with the matter of giving benefit of deduction under Section 43B of the Act. In this view of the matter, the appeal deserves to be allowed." 18. The ITAT has, in the impugned order, opted not to follow the decision of C.L. Gupta (supra) which was affirmed by this Court in the Assessee's own case for AYs 1995-96 and 1996-97. Furthermore, the decision in Modipon (supra) has been upheld by the Supreme Court in its ....
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....ot reflected in its P&L account. Instead, it was shown as a current asset in the balance sheet. Assessee's submissions on Question (ii) 25. The case of the Assessee is that although the said amount is shown as unutilized MODVAT credit, it has been paid by the Assessee and should therefore be allowable as a deduction in terms of Section 43B of the Act. Mr. Ganesh, learned Senior Counsel for the Assessee, referred to Rule 57A to Rule 57I of the CE Rules and submitted that the liability to pay excise duty, although primarily on the manufacturer of the raw material, is passed on to the purchaser (in this case, the Assessee) and therefore, becomes the liability of the Assessee at the time of clearance of the raw material. He also referred to clause (e) of the first proviso to Section 11B (2) which envisages the refund of the excise duty being made not to the manufacturer but to the buyer to whom the duty may be passed on. 26. Mr. Ganesh also referred to the Accounting Standards-2 ('AS-2') issued by the Institute of Chartered Accountants of India ('ICAI') with regards to the treatment of cost of purchase as well as the Guidance Note issued by the ICAI on Accounting Treatment for....
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.... the claim of duty paid by it to the manufacturer of the raw materials/inputs under Rule 57A to Rule 57I of the CE Rules. It is also not in dispute that the Assessee was entitled to utilize MODVAT Credit towards payment of excise duty leviable on the final products manufactured by it. Mr. Bhatia further submitted that the liability under the CE Act to pay excise duty is only on the manufacturer of the excisable goods. While the Assessee may be the person who pays the excise duty, the liability is that of the manufacturer. The Assessee is merely required to pay excise duty on the value of raw material/inputs. This does not ipso facto mean that the Assessee is the one who is liable to pay excise duty on such raw material/inputs. It is merely the incidence of excise duty that has shifted from the manufacturer to the purchaser and not the liability to pay the same. 31. Mr. Bhatia submitted that the decision in Dai Ichi Karkaria (supra) does not lay down that the purchaser of the raw material/inputs is the person liable to pay excise duty for the purpose of Section 43B of the Act. Mr. Bhatia pointed out that on payment of excise duty to the supplier of raw material, the Assessee has ....
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.... (e) the expression 'any such sum payable' refers to a sum for which the Assessee "incurred liability in the previous year even though such sum might not have been payable within that year under the relevant law. 33. There are two kinds of payment envisaged by Section 43B of the Act. Tax payable could be in the form of excise duty on the raw material/inputs purchased by the manufacturer. The second kind of payment could be of excise duty that is payable by manufacturer on the final product at the time of clearance of such final products from the factory. 34. In Eicher Motors (supra), a challenge was raised to the validity of Rule 57F (4A) of the CE Rules under which credit which was lying unutilised as of 16th March 1995 with the manufacturers stood lapsed in the manner set out therein. The Supreme Court upheld the challenge by the manufacturers to the aforementioned Rule 57F (4A) of the CE Rules on the ground that under the MODVAT scheme as it existed on the date of change, i.e. 16th March 1995, MODVAT credit lying in the balance with the Assessee represented "a vested right accrued or acquired by the Assessee under the existing law". It was observed as under: "5............
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....t to use the raw material in its excisable product. The credit is, therefore, indefeasible. It should also be noted that there is no corelation of the raw material and the final product; that is to say, it is not as if credit can be taken only on a final product that is manufactured out of the particular raw material to which the credit is related. The credit may be taken against the excise duty on a final product manufactured on the very day that it becomes available. 19. It is, therefore, that in the case of Eicher Motors Ltd. vs. Union of India (1999) 2 SCC 361 this Court said that a credit under the MODVAT scheme was as good as tax paid." 37. Now turning to the treatment of the said payment of excise duty which has any MODVAT credit in the books of accounts, a reference may be made first to the AS-2 issued by the ICAI, para 7 of which reads as under: "Costs of Purchase 7. The costs of purchase consist 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. Trade discounts, rebates, duty drawbacks and othe....
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....bove decision were that the Appellant therein was engaged in the manufacture and trade of products like de-oiled meals, industrial hard oil, edible oils etc. The Assessee entered into agreements with other entities for the purchase of imported palm stearin fatty acid ('imported material') from the said importers. In terms of the said agreement, the imported material was to be purchased by the Appellant at landed cost, i.e. CIF price, customs duty, clearing charges, etc. and 3% of the total cost. Under Clause 11 of the agreements, any liability arising after the sale of the imported material in respect of customs duty, excise duty, penalty, sales tax, etc. would be paid by the appellant and included in the landed cost of imported material. 41.2 At the time of actual import of material, the Customs Department demanded 100% of the applicable customs duty as additional customs duty on the CIF value of the imported material. The additional demand was challenged by the importers before the Supreme Court. As an interim measure, the Supreme Court allowed the clearance of imported material on payment of 15% of the disputed additional customs duty. A stay was granted for the balance 85% s....
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.... ITR 62 (SC) where three conditions were laid down while considering where a provision made for future claims against warrantees was allowable as a deduction. On the facts of the case, this Court held that subject liability was a contingent liability in respect thereof could not be allowed as a deduction for the AY in question. 41.6 Specific to Section 43B, the Court considered whether it was in fact an obligation of the Appellant therein to pay additional customs duty and whether such obligation could be considered to be a 'statutory liability'. Answering the said question in the negative, this Court observed: "Although the Assessee is obliged to pay the additional customs duty as and when the importers are called upon to pay the same, nonetheless, it cannot be considered as a statutory liability because the same is not imposed on the Assessee by virtue of any statute. Customs duty is an incident of import of goods and an importer is obliged to pay the same under the Customs Act. Therefore, the liability to pay the additional customs duty is a statutory liability of the importers. However, in the hands of the Assessee, the liability to pay the quantum of custom duty impos....
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....w materials, components and the inputs. This, according to the Assessee, is borne out by the RG-23 (Part-II) Register maintained by the Assessee and verified and audited from time to time by the excise authorities. It is asserted that the said amount "has actually been paid by the Appellant to the customs authorities (and not to the Appellant's suppliers)" and therefore, this amount should also be allowed under Section 43B of the Act. 44. The Court would only like to observe that it would be for the AO to give effect to the order pertaining to the aforementioned amounts paid by the Assessee to be made in respect of those goods already consumed as on 31st March 1999 and in respect of additional countervailing duty paid directly to the customs authorities. If indeed such payment has been made, the credit for the same would be allowable as a deduction under Section 43B of the Act. 45. However, it is also to be noted that in para 35 of the impugned order, the ITAT has accepted the alternate contention of the Assessee that unutilized MODVAT credit of an earlier year which has been adjusted in the year in question should be allowed as a deduction in as much as such adjustment would....
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....." However, Section 145A of the Act is prospective and does not apply to the AY in question. 48. The Court is not inclined to permit the Assessee to raise the alternative plea for more than one reason. In the first place, it is a plea taken for the first time in these proceedings. It appears to be an afterthought. Secondly, the ITAT has already accepted another alternate plea made before it by the Assessee by allowing deduction in respect of the unutilized MODVAT credit of the earlier AY, the Court is not inclined to disagree with the reasoning and conclusion of the ITAT. The assessee cannot be allowed to go back and forth on the above plea. There has to be consistency. Thirdly, balance sheet of the Assessee for AY 1999-00 shows that the turnover for the year was over Rs. 8,000 crores. The corresponding sum claimed as deduction representing the unutilized MODVAT credit is not very significant in comparison. 49. Consequently, Question (ii) is answered in the negative, i.e. in favour of the Revenue and against the Assessee. Question (iii) 50. Question (iii) as framed by the order dated 24th April 2006 reads thus: "(iii) Whether the ITAT has committed an error of law in....
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....and irreconcilable with the evidence and material on record and, therefore, perverse? (vi) Has not the ITAT grossly erred in totally disregarding in evidence and materials on record which render the said remand order passed by the ITAT entirely unnecessary and superfluous? (vii) Whether the ITAT erred grossly in law in holding that the Appellant's books of account were liable to be rejected and its income computed on best judgment basis? (viii) Is not the impugned order of the ITAT laid down in a large number of judgments directly contrary to the settled legal position laid down in a large number of judgments, relating to the circumstances in which alone an assessee's books of account can be rejected by the AO and the assessee's income then determined on best judgment basis?" Facts pertaining to Questions (iv) to (viii) 57. All of the above-stated questions relate to the issue of consumption of raw materials by the Assessee. As explained by the Assessee, for the manufacture of automobiles, the Assessee is required to purchase about 12,000 different items of raw materials, components and inputs. For the purpose of payment of excise duty thereon, the Assessee was requi....
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....essee, the excise authorities threatened to deny the MODVAT credit to the Assessee on goods valued at an aggregate amount of Rs. 643.34 crores. The excise department issued to the Assessee a show cause notice ('SCN') dated 14th September 2001 in which the amount of excise duty equivalent to the MODVAT credit taken on the said raw materials and inputs was computed at Rs. 108.39 crores and demanded from the Assessee by exercising the power under the proviso of Section 11A (1) of the Central Excise Act. The SCN also proposed to levy interest and penalty from the Assessee as well as its directors/officials. 61. Mr. Ganesh explained that with a view to avoiding the coercive steps as proposed in the SCN, the Assessee, on advice, filed an application before the concerned Settlement Commission praying for grant of immunity and offering to pay the said amount of Rs. 108.39 crores. The said application was accepted by the Settlement Commission and corresponding orders were passed granting immunity to the Assessee from prosecution, penalties etc. Assessment order and subsequent appeals 62. The AO, in the assessment order for the AY 1999-00, referred to the above developments and proc....
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....Report, the total consumption of raw materials in the AY worked out to Rs. 3729.47 crores as against the amount of Rs. 3714.80 crores reflected in the Assessee's books of accounts. This was derived by applying the formula opening stock plus purchases minus closing stock which showed that the Assessee's accounts. 65. Mr. Ganesh submitted that the ITAT needlessly remanded the matter to the AO for determining the actual consumption of raw materials for each model of car. He pointed out that this was the precise exercise undertaken by PwC in its report. Proceedings in remand 66. At this stage, it requires to be noticed that pursuant to the remand order by the ITAT, the matter again went before the AO who reiterated the earlier order. The CIT (A) also dismissed the Assessee's appeal. When the matter went before the ITAT, by an order dated 31st October 2008 it allowed the Assessee's appeal on the reasoning that the AO had exceeded his jurisdiction in undertaking the exercise of determining the actual consumption of raw materials and inputs. According to the ITAT, all that the ITAT had done in the earlier round (i.e. in the order dated 11th October 2004 impugned in the present ap....
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....ne of Rs. 643.34 crores. The Assessee had on that basis offered to pay excise duty of Rs. 108.39 crores. The acceptance of this by the Settlement Commission meant that the above figure as disclosed by the Assessee as being the actual consumption of raw materials was accepted by the Excise Department to be correct. The second logical conclusion is that the said order of the Settlement Commission concerned the total figure of consumption for a period of 13 years i.e. 1986 to 1999. It obviously could not lead to the entire amount of Rs. 643.34 crores being added to the income of the Assessee for just one AY i.e. 1999-2000. 71. As regards the determination of the actual consumption of raw materials for this AY, the ITAT has by the impugned order proposed that the quantity of components and inputs require to be manufactured a car (model wise) be multiplied by the number of cars of that model actually manufactured. This indeed forms the basis of the exercise undertaken by PwC. The figures for this AY, as determined by the PwC Report, had been disclosed by the Assessee before the CIT (A). That has been accepted by the CIT (A) to be correct. 72. The Assessee is right in its contentio....
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.... 76. It is explained by the Assessee that the expenditure incurred on application software is in the nature of revenue expenditure. Factually, the Assessee had incurred, during AY 1999-00, a total expenditure of Rs. 1,39,91,022 on acquisition of the following items of software: 1. ERP Application software 91,36,496 2. Enterprise management application software 38,67,322 3. Application software for creation and management parts 8,25,000 4. Director multimedia software 48,000 5. Software for civil engineering 45,000 6. Software for sales incentive monitoring 30,600 7. Software for designing titles for captive consumption 13,650 8. Software for keeping records of development Spare in production division 12,954 9. Software for bills of entry processing 12,000 Total 1,39,91,022 77. As regards ERP software, part payments were made in the financial years 1996-97 and 1997-98. The Assessee had engaged the services of M/s. Arthur Anderson and Associates for the implementation of the software. However, during the course of implementation, it was realized that the said software did not fit with....