TaxTMI 
TaxTMI 
TaxTMI 
2019 (6) TMI 31
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....he 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". 3. The grounds of appeal raised by the assessee in the memo of appeal filed with the tribunal in ITA ....
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.... 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 28.02.2003 passed by the AO u/s. 143(3) for AY 2000-01, vide assessment orde....
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.... 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 ....
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....red 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....
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.... / 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 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." 11. The assessee being aggrieved by appellate order passed by learned CIT(A) on this issue against the assessee carried the matter further in appeal before the tribunal. The Ld. Counsel for the assessee submitted that tribunal while adjudicating assessee‟s appeal for AY 2004-05 in IT....
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....ar 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 ....
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.... as was made by the assessee.The AO held as under vide assessment order dated 18.02.2011 passed u/s 143(3) read with Section 144C(3) of the 1961 Act:- " 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) a) Expenditure by way of interest other than (i) above 96,15,000 Value of the investments as on 1st April 1,043,315,111 Value of the investments as on 31st March 740,300,000 b) Average value of investments during the year 891,807,555 Value of the total assets as on 1st April 5,158,278,000 Value of the total assets as on 31st March 6,217,300,000 c) Average value of total assets during the year 5,687,7....
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....d 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. 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 s....
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....hly 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." 16. Being aggrieved by the appellate order passed by learned CIT(A) confi....
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....m.) 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 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 whic....
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....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 exemp....
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....d 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.). 20. The Ld. DR on the other hand relied upon the appellate order of the Ld. CIT(A). 22. We have considered rival contentions and perused the material on record. We have observed that the assessee is following exclusive method of accounting for valuing closing stock wherein unutilised MODVAT/Cenvat Credit is not added to the value of closing stock. We have observed that Section 145A stipulates that the duties, taxes, fees and cess (by whatever name called) paid to bring the inventory to present location is to be added to 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 Priva....
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....tanding any right arising as a consequence to such payment.]" 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.....
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....xes with an objective to reduce transaction cost and bring transparency in 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 uni....
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....at 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 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 d....
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....other angle. If on the inputs, 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 ....
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.... 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 ....
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....ng 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 s....
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.... 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....
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.... 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 ....
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....ing. 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 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....
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.... 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. 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 ....
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....ise 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....
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....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 purcha....
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....der 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 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 upo....
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....alaysian 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....
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..... 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 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 Appell....
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....ransaction 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 compan....
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....ional 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 o....
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....ow; (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; (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....
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....k 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....
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.... 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 ....
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...., 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 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 corporat....