Ciba India Ltd ( Through Their ... vs Assessee

M/s. Ciba India Limited, Deputy Commissioner of (through their successors BASF Income-tax, Circle-8(1), India Ltd.), Aayakar Bhavan, 1st Floor, Vibgyor Towers, M.K. Marg, Unit No.101, Plot No.C-62, Vs. Mumbai - 400020 G - Block, Bandra Complex, Bandra (East), Mumbai - 400 051 PAN: AAACC4147P (Appellant) (Respondent)

Assessee by : Shri Madhur Agrawal, A.R. Revenue by : Shri Narendra Kumar Chand, D.R.

Date of Hearing : 11.12.2014 Date of Pronouncement : 20.02.2015

ORDER

Per Sanjay Garg, Judicial Member:

The present appeal has been preferred by the assessee against the directions passed by Dispute Resolution Panel-I (hereinafter referred to as the DRP) dated 16.09.2010.

2. The assessee has taken the following grounds of appeal:

" 1 . (a ) T he D e p ut y C om m is s i o n e r o f I n c om e -t a x C i r c l e - 8( 1 ) , M u m ba i (hereinafter referred to as the AO) while passing the order dated 25 t h Oct obe r, 2010 unde r se ction 143(3) r.w. s 144C (13) purs ua nt t o t he directions of the Dispute Resolution Panel-II (hereinafter referred to as the DRP) dated 16 th September, 2010 erred in upholding the disallowance under section 14A of Rs.66,90,080, with respect to dividend income exempt under section 10(34).

ITA No.9128/M/2010 2 M/s. Ciba India Limited, (through their successors BASF India Ltd.)

(b) Without prejudice to the above, the DRP erred in directing the AO to calculate the disallowance under section 14A as under:

(i ) D is a llow a ll d ire ct e x pe ns e s re la t ing t o e x e m pt incom e i. e . div ide nd of Rs . 3,20 ,06 ,4 86.

(i i ) Disallow proportionate interest expenditure in ratio of average value of assets which may yield exempt income and total assets of the company.

(i i i ) Disallow reasonable indirect expenditure on account of managing the investments in assets, which will result into exempt income and such percentage may be 0.5% of average value of assets yielding exempt income.

(i v ) In this connection, the appellants submit that there are no direct and indirect expenses incurred in earning exempt income.

(c) Without prejudice to the above, in computing the amount of disallowance, the AO erred in including interest of Rs.6,417,729 paid on security deposits accepted from customers as part of expenditure by way of interest for the purpose of computing the amount of disallowance under section 14A.

2. (a) The AO erred in adding an amount of Rs. 14,728,838 to the value of closing stock under section 145A of the Act on account of cenvat credit in respect of inputs of Rs.10,042,664 and service tax credit in respect of inputs of Rs. 4,686,174.

(b) Without prejudice to above, AO ought to have added Rs. 11,801,670 to the opening stock on account of addition made to the closing stock for the assessment year 2005-06 per assessment order dated 15th December, 2006 under section 143(3) as against Rs.5,233,736.

3.The AO erred in wrongly considering the total income from business at Rs.56,67,10,742 as against the actual Rs. 55,56,59,639, thereby committing casting error of Rs. 11,051,103/-.

4. The AO erred in granting credit of Rs.45,29,685 for tax deducted at source as against Rs.45,41,317 claimed in the Return of Income (ROl), thereby granting short credit of Rs. 11,632.

5. The AO erred in charging interest under section 234C of Rs.601,401 as against 253,234 payable as per Return of Income (ROl).

6. The AO erred in charging interest under section 234D of Rs. 12,61,817 as against Rs.474,766 payable as per computation enclosed."

Ground No.1(a) : disallowance under section 14A

3. The ground No.1(a) is relating to disallowance under section 14A of the ITA No.9128/M/2010 3 M/s. Ciba India Limited, (through their successors BASF India Ltd.)

Income Tax Act. During the assessment proceedings the Assessing Officer (hereinafter referred to as the AO) noticed that the assessee has earned sufficient exempt income. He therefore made the disallowance under section 14A of the Income Tax Act applying Rule 8D of the Income Tax Rules. The DRP also directed the AO to compute the said disallowance as per the provision of Rule 8D of the Income Tax Rules.

4. We have heard the learned representatives of both the parties and have also gone through the records on this issue. It may be observed that in the case of Godrej & Boyce Manufacturing Co. Ltd. (supra) the Hon'ble Bombay High Court has held that Rule 8D r.w.s. 14A(2) is not arbitrary or unreasonable but can be applied only if the assessee's method is not satisfactory. It has been further held that Rule 8D is not retrospective and applies from A.Y. 2008-09. For the years for which Rule 8D is not applicable and in the event of that the AO is not satisfied with the explanation/working given by the assessee, disallowance under section 14A has to be made on a reasonable basis. Almost similar view has been expressed by Hon'ble Delhi High Court in the case of 'Maxopp Investment Ltd. & Others' vs. CIT (247 ITR 162).

5. It may be further observed that it is not a case where no exempt income was received by the assessee despite making investments for earning exempt income. It is also not the case of the Revenue that the exempt income earned by the assessee was very less or not in proportion to the investments made by the assessee for this purpose. Under such circumstances the different co- ordinate benches of this Tribunal have observed that in such cases certain percentage of exempt income can constitute a reasonable estimate for making disallowance for the years earlier to assessment year 2008-09. The Hon'ble Bombay High Court in the case of CIT vs. 'Godrej Agrovet Ltd.' (ITA No.934/2011) decided on 08.01.13 has upheld the order of the Tribunal ITA No.9128/M/2010 4 M/s. Ciba India Limited, (through their successors BASF India Ltd.)

directing the AO to restrict the disallowance to the extent of 2% of the total exempt income earned by the assessee.

6. In view of the above, the straightway application of rule 8D in the case of the assessee by the lower authorities is not sustainable. Taking into consideration the overall facts and circumstances of the case, in our view, the expenses equal to 4% of the exempt income earned by the assessee would constitute be reasonable disallowance and the same is restricted to that extent accordingly. This ground of appeal of the assessee is thus partly allowed.

Ground No.1(b) to 1(c) : disallowance under section 14A

7. The assessee has taken these grounds as alternative to ground No.1(a). In view of our findings given in the ground No.1(a), these grounds have become infructuous and do not require any adjudication.

Ground No.2(a) & 2(b) : addition of amount to the closing stock

8. The AO added an amount of Rs.14,728,838/- to the value of the closing stock under section 145A of the Act on account of CENVAT credit in respect of inputs of Rs.10,042,664/- and service tax credit in respect of inputs of Rs.4,686,174/- and after adding the preceding year's (A.Y. 2005-06) adjustment of Rs.5,233,736/- to the value of the opening stock of the current year the net addition of Rs.94,95,102/- was made under section 145A of the Act. The assessee contended before the DRP that credit for unutilized service tax should also be given in the opening stock of the current year. The DRP, however, held that since service tax does not form part of cost of goods, the AO's action for not adding the unutilized service tax to the value of the opening stock in the current year was correct and therefore was upheld. The assessee has, thus, come in appeal before us against the said directions.

ITA No.9128/M/2010 5 M/s. Ciba India Limited, (through their successors BASF India Ltd.)

9. Vide ground No.2(a), the assessee has agitated the addition of Rs.14,728,838/- to the value of the closing stock under section 145A of the Act on account of CENVAT credit and service tax credit. The assessee alternatively, vide ground No.2(b), has contended that if the above amount is to be added to the closing stock, the AO ought to have added Rs.11,801,670/- to the opening stock on account of addition made to closing stock for assessment year 2005-06 as per assessment order dated 15.12.06.

10. We find that the assessee had agitated such additions in the preceding assessment years. The Commissioner of Income Tax (Appeals) [hereinafter referred to as the CIT(A)], in its order in relation to assessment year 2005-06, has observed that it had been a recurring issue from the assessment year 2002- 03 onwards. The Ld. CIT(A), in view of the decision on this issue taken in the earlier assessment years and following the principle of judicial consistency, had deleted the additions made by the AO in respect of CENVAT credits etc. The Revenue though agitated the order of the Ld. CIT(A) before the ITAT on certain other issues, but did not agitate the action of the Ld. CIT(A) in deleting the addition in respect of this issue. The order of the Ld. CIT(A), thus, has become final in respect of assessment year 2005-06 and the same cannot be disturbed in this appeal.

11. However, as per the provisions of sec. 145A of the Act, the valuation of purchase and sale of goods and inventory for the purpose of determining the income under the head "Profits and gains of business or profession" shall be

(i) in accordance with the method of accounting regularly employed by the assessee; and

(ii) further adjusted to include the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of ITA No.9128/M/2010 6 M/s. Ciba India Limited, (through their successors BASF India Ltd.)

valuation.

In the instant case, the AO has added a sum of Rs.1,00,42,664/- towards CENVAT and Rs.46,86,174/- towards Service tax to the Closing stock of inventories. The AO has added a sum of Rs.52,33,736/-, being the adjustment made to the closing stock value of the immediately preceding year, to the Opening stock. Thus, the AO has made a net addition of Rs.94,95,102/- to the total income of the assessee.

12. The claim of the assessee is that it is following exclusive method for accounting the Cenvat and Service tax and there will not be any tax implication, if the inclusive method as prescribed u/s 145A of the Act is followed. Alternatively, it was contended that the amount adjusted to the Closing stock should be correspondingly allowed as deduction as expenditure. Another alternative contention was that the opening stock should have been increased by a sum of Rs.11,801,670/-, since the AO has increased the value of closing stock as on 31.3.2005 with the above said amount.

13. The DRP has however held that the opening stock should be increased by Rs.52,33,736/- only, since (the remaining amount apparently pertain to Service tax) does not form part of cost of goods.

14. We have already noticed that the valuation of purchase and sale of goods and inventory is required to be adjusted to include only with the amount of tax, duty, cess or fee (by whatever name called) actually paid or incurred to bring the goods to the place of its location and condition on the date of valuation. If the DRP is taking the view that "Service tax" does not form part of cost of goods, apparently meaning that the same was not incurred to bring the goods to the place of its location and condition on the date of valuation, then the DRP should not have upheld the adjustment of Rs.46,86,174/- pertaining to the ITA No.9128/M/2010 7 M/s. Ciba India Limited, (through their successors BASF India Ltd.)

Service tax portion to the value of closing stock. Thus, it is seen that there is apparent contradiction in the approach of the DRP.

15. The main contention of the assessee is that there is no tax implication even if the "inclusive method" prescribed in sec. 145A of the Act is followed. However, the assessee has not furnished workings to show that the "net profit"

remained the same under both "inclusive method" and "exclusive method".

Since the assessee has followed the guidance note issued by the ICAI, it would be in a position to demonstrate the above said fact before the AO, i.e., the assessee could establish that there was no change in the income under both the methods by furnishing necessary workings. Accordingly, we are of the view that the assessee should be given one more opportunity to demonstrate this fact.

16. If the assessee fails to furnish the workings discussed above, in our view, the AO should consider the alternative contention of the assessee, viz., to adjust the opening stock with the correct amount that was actually adjusted in the closing stock of immediately preceding year. We have already noticed that the there was contradiction in the stand of DRP. If the service tax is considered to the tax incurred in bringing the goods to the present location and condition, then the same is required to be adjusted both in the opening stock and closing stock. Otherwise, the same should not be adjusted in both the items.

17. The other alternative contention of the assessee is that the amount adjusted in the closing stock should correspondingly be allowed as deduction. We are unable to agree with this contention, since this claim would not fall either under inclusive method or exclusive method. Hence this claim would be against the guidance note issued by the ICAI.

ITA No.9128/M/2010 8 M/s. Ciba India Limited, (through their successors BASF India Ltd.)

18. In view of the foregoing, we set aside the order of DRP on this issue and restore the same to the file of the assessing officer with the direction to examine this matter afresh in the light of discussions made supra.

19. In view of the above, the appeal of the assessee is partly allowed for statistical purposes.

Order pronounced in the open court on 20.02.2015.

Sd/- Sd/- (R.C. Sharma) (Sanjay Garg) ACCOUNTANT MEMBER JUDICIAL MEMBER

Mumbai, Dated: 20.02.2015. * Kishore, Sr. P.S.

Copy to: The Appellant The Respondent The CIT, Concerned, Mumbai The CIT (A) Concerned, Mumbai The DR Concerned Bench //True Copy// [

By Order

Dy/Asstt. Registrar, ITAT, Mumbai.