ORDER
1. The instant appeal of the assessee and the cross appeal of the revenue filed against the order of the Ld. Commissioner of Income Tax, Appeal, 56, Mumbai [for brevity the “Ld. CIT(A)”], order passed under section 250 of the Income Tax Act 1961 (for brevity ‘the Act’) for Assessment Years 2012-13 and 2013-14, date of order 14.04.2025 for both the appeals. The impugned orders emanated from the orders of the Ld. Joint Commissioner of Income Tax (OSD) – 6(3)(2), Mumbai, order passed under section 143(3) r.w.s. 144C(3) date of order 22.04.2016 and order passed by Ld. Assistant Commissioner of Income Tax Circle 6(3)(2), Mumbai date of order 21.12.2016.
2. All the appeals pertain to the same assessee and have the common issues. For convenience all the appeals are taken together and disposed of by a consolidated order. ITA No. 4053 and 4054/Mum/2025 is related to assessee’s appeal and ITA No.4322 and 4323/Mum/2025 are related to appeal filed by the revenue. ITA No.4053 and ITA No.4322/Mum/2025 for AY 2012-13 are taken as lead case and the decision rendered therein shall be applicable to other appeals mutatis mutandis.
ITA No. 4053/Mum/2025; A.Y. 2012-13 (Assessee’s Appeal)
3. The brief facts of the case are that the assessee company is engaged in business of manufacturing of paints and varnishes. As per the Tax Audit Report, there has been no change in the business of company during the year. The assessee filed the return by declaring total income of Rs. 2,63,71,76,820/-. The return was possessed u/s 143(1). The return was selected under CASS scrutiny. The Ld. AO had preferred the case to TPO u/s 92CA(1) to determine the Arms Length Price (in short ‘ALP’). The Ld. TPO passed the order u/s 92CA(3) of the Act and confirmed the addition under different heads. Finally, the Ld. AO passed the final order and confirmed the additions. Being aggrieved, the assessee filed an appeal before the Ld. CIT(A). The Ld. CIT(A) partly allowed the appeal of the assessee. Being aggrieved, both the assessee and the revenue filed the appeal & cross appeal before us.
4. The Ld. AR advanced his arguments and filed a paper book comprising pages 1 to 108, which has been taken on record. The Ld. AR addressed the issues ground-wise and made detailed submissions in support of each ground. The grounds raised by the assessee are adjudicated hereunder:
Ground 1(a) and (b):
5. The Ld. AR contended that the assessee has made the valuation in TNMM Method for calculating the ALP in TP. The assessee has taken contribution margin of the concerned product also in domestic market as profit level indicator. The adjustment was made by the TPO by adopting CUP Method and accordingly, adjusted Rs. 8,88,796/- on account of export of water based paint. The Ld. AR contended that the assessee exported some water based paints for value of Rs. 1,02,54,000/- to Kansai Paints Philippines, Inc., Associated Enterprise (AE). The assessee in form no. 3CEB calculated the ALP of export of water based paints to AE by using TNMM by comparing contribution margin (sales minus direct cost). In respect of the same type of product or service sold to non-associated enterprise with contribution margin of sale made to the AE. Accordingly, the assessee calculated ALP of the transaction with AE amount to Rs. 26,11,447/-. The Ld. TPO not accepting the method adopted by the assessee used CUP of average sale price of the products sold to non-AE in India as ALP for export to AE and made addition Rs. 8,88,796/-.
6. The Ld. AR submitted that domestic sales and export sales operate under entirely different commercial and economic circumstances. The functions performed, risks assumed, market conditions, and terms and conditions governing the transactions are materially different, even where the same product is sold in both markets. In the absence of any comparable export transaction with a non-associated enterprise involving the same product, the CUP Method cannot be appropriately applied. Accordingly, it was contended that the TNMM constitutes the Most Appropriate Method (MAM) for determining the ALP, as against the CUP Method adopted by the Ld. TPO. The Ld. AR further submitted that the average contribution margin earned by the assessee on domestic sales made to non-associated enterprises represents a reliable Profit Level Indicator (PLI) for benchmarking the export of the same products to its AE. It was argued that the assessee had correctly determined the ALP by comparing the contribution margin earned from sales to non-AEs with that earned from exports to the AE. The Ld. AR further contended that an identical issue had been considered by the Coordinate Bench of the ITAT,
Mumbai in the assessee’s own case in
Kansai Nerolac Paints Ltd. v.
Addl. CIT (
Mumbai –
Trib.)/ITA No. 3384/Mum/2014 and connected matters, vide order dated 04.12.2023. The relevant observations of the Coordinate Bench are reproduced below:
“63. We heard the parties and perused the material on record. The assessee has exported the water based paints to its AE in Philippines and benchmarked the same by applying TNMM method. Average contribution margin is used as the PLI. The TPO rejected the bench marking and applied CUP to make an additional TP adjustment. The TPO has used the same comparables used by the assessee and compared the average rate per unit of domestic sales with the rate per unit charged to AE and accordingly arrived the additional TP adjustment. The argument of the Id AR is that the domestic pricing and export pricing cannot be compared as it is by applying CUP, since the FAR of both markets are different. In this regard we notice that a similar issue has been considered by the coordinate bench in the case of Dow Chemical International (P.) Ltd. v. Dy. CIT (Mumbai – Trib.) where it has been held that –
“15. We have considered rival submissions in the light of decisions relied upon and perused the material on record. The basic dispute between the parties is with regard to the most appropriate method for benchmarking the export of finished goods to the Aes. While the assessee has applied TNMM on segmental basis, the Transfer Pricing Officer has applied CUP to determine the arm’s length price of the transaction From the material placed on record, it is very much clear that the sales made to the non-Aes situated in India have been applied as CUP to determine the arm’s length price of the transaction. From the material placed on record, it is very much clear that the sales made to the non-Aes situated in India have been applied as CUP to determine the arm’s length price of export made to the Aes. It is the case of the assessee that no comparable export sales to non- Aes are available to apply as CUP. The aforesaid factual position has not been controverted by the Revenue. Therefore, the moot point which arises for our consideration is, whether the domestic sales can be applied as CUP for determining the arm’s length price of export sales. It is fairly well settled, CUP method requires strict comparability. It cannot be denied that the pricing of a product varies on the basis of geographical location. Thus, primarily, the price of products sold in domestic market cannot be compared with the price of the product sold in foreign country due to various factors. Therefore, if the Transfer Pricing Officer selects CUP as the most appropriate method to benchmark the transaction, it is his duty to find out and bring on record price charged for uncontrolled transactions carried out under similar circumstances. If, suitable comparable uncontrolled transaction is unavailable, CUP method cannot be applied.”
64. In assessee’s case we notice that the TPO has made a direct comparison without making any adjustments to the domestic price charged for the similar product in a non-AE transaction. Applying the ratio laid down by the coordinate in the above decision in our considered view the TPO is not correct in applying CUP which requires strict comparability and given that the geographical location would have an impact on the pricing the bench marking done by the TPO is not tenable. Accordingly we see no infirmity in the decision of CIT(A) and uphold the decision of the CIT(A). This ground of the revenue is dismissed.”
7. The Ld. DR relied upon and supported the orders of the revenue authorities. However, he was unable to rebut the submissions advanced on behalf of the assessee or bring on record any distinguishing facts or contrary material warranting a different view.
8. We heard the rival submissions and perused the material available on record. The assessee exported water-based paints to its AE in the Philippines and benchmarked the international transaction by adopting the Transactional Net Margin Method (TNMM) as the MAM, using contribution margin as the PLI. The Ld. TPO, however, rejected the methodology adopted by the assessee and applied the CUP Method by comparing the average domestic sale price of similar products sold to non-Aes in India with the export price charged to the AE, resulting in a transfer pricing adjustment of Rs.8,88,796/-. The assessee consistently contended that domestic sales and export sales operate under entirely different economic and commercial circumstances. The functions performed, assets employed, risks assumed, geographical markets, pricing policies, volume considerations, and terms and conditions governing domestic transactions are materially different from those applicable to export transactions. Therefore, a simple comparison of domestic sale prices with export sale prices, without making any adjustment for such material differences, cannot satisfy the strict comparability requirements mandated under the CUP Method. We find that an identical issue arose in the assessee’s own case before the Coordinate Bench of the ITAT, Mumbai in ITA No. 3384/Mum/2014 and connected matters, vide order dated 04.12.2023 (supra). The Coordinate Bench, after considering the decision in the case of Dow Chemical International (P.) Ltd. v. Dy. CIT (Mumbai – Trib.), held that domestic sales cannot be adopted as CUP for benchmarking export sales in the absence of comparable uncontrolled export transactions. The Tribunal further observed that geographical location and market conditions have a significant bearing on pricing and, therefore, strict comparability is a prerequisite for application of the CUP Method. Since the TPO had merely compared domestic and export prices without making any adjustment for the differences in market conditions and other relevant factors, the adoption of the CUP Method was held to be unsustainable. The facts of the present case are identical to those considered by the Coordinate Bench in the assessee’s own case. The revenue has not brought on record any distinguishing feature in the facts of the year under consideration, nor has the Ld. DR been able to place any contrary judicial precedent warranting a departure from the view already taken by the Coordinate Bench. Respectfully following the binding decision of the Coordinate Bench in the assessee’s own case, we hold that the Ld. TPO was not justified in rejecting TNMM and applying the CUP Method for benchmarking the impugned international transaction. Consequently, the transfer pricing adjustment of Rs.8,88,796/- made on account of export of water-based paints to the AE is directed to be deleted.
Accordingly, Ground Nos. 1(a) and 1(b) raised by the assessee are allowed.
Ground 1 (c) and (d):
9. The Ld. AR contended that the assessee had made exports of three consignments of goods totaling of Rs. 1,02,54,000/- to AE Philippines. There has been a delay of 11, 19, 21 and 22 days in receiving the export proceeds from AE. The Ld. TPO calculated notional interest Rs. 56,377/- on account of said delay. The Ld. TPO has applied the CUP Method and proceeded to determine ALP by bench marking on basis of Prime Lending Rate or Base Rate declared by SBI on 30th of June. Accordingly, the interest on delay in receipt of export proceeds which has lead to disallowance Rs. 56,377/-. The Ld. AR contended that the identical issue was duly considered by The Coordinate Bench of ITAT, Mumbai in assessee’s own case ITA No. 3384/Mum/2014 and connected matters, date of pronouncement 04.12.2023. The relevant observations of the bench are reproduced as below:
“26. The Id AR submitted that the assessee does not have any borrowings and that no interest on delayed payments is charged for the non-AE transactions. Given this it was submitted that there should not be any interest charged for relayed payments on AE transactions. Without prejudice the Id AR submitted that the rate applied by the revenue is the domestic rate which is not correct and that the LIBOR rate should be applied. Reliance in this regard is placed on The Bombay High Court in the case of Tecnimont
(2018) . The Id AR further prayed that the TPO has considered a credit period of 30 days and prayed that a credit period of 90 days be considered.
27. The Id DR relied on the order of the CIT(A) and the assessing officer.
28. We heard the parties and perused the material on record. It is settled positions that delay in receipt of receivables from AE is an international transaction. The Hon’ble Bombay High Court in the case of Tecnimont (P.) Ltd (supra) has held that the delay in receivables is in substance amounts to granting of loan to an AE so as to enjoy the funds, which the AE would otherwise have to repay and that interest needs to be charged based LIBOR rates as the rate prevailing in country where the loan is received/consumed by the AE. We therefore direct the assessing officer to charge interest at the rate of LIBOT +100basis points after considering a credit period of 60 days. This ground of the assessee is partly allowed.”
10. The Ld. DR relied upon and supported the orders of the revenue authorities. However, he was unable to rebut the submissions advanced by the Ld. AR or place on record any contrary judicial precedent warranting a departure from the view canvassed by the assessee.
11. We have heard the rival submissions and perused the material available on record. The Ld. TPO made an adjustment on account of notional interest attributable to the delay in realization of export proceeds from the AE and consequently made an addition of Rs.56,377/-. We find that an identical issue has already been considered and adjudicated by the Coordinate Bench of the ITAT, Mumbai in the assessee’s own case (supra). Respectfully following the decision of the Coordinate Bench, we hold that where there is a delay in realization of receivables from the AE beyond the agreed credit period, the benchmarking of such delayed receivables should be carried out by applying the LIBOR rate plus 100 basis points. Accordingly, we direct the Ld. AO/TPO to recompute the adjustment, if any, by adopting the LIBOR rate plus 100 basis points after granting the appropriate credit period in accordance with the directions of the Coordinate Bench.
Accordingly, Ground Nos. 1(c) and 1(d) raised by the assessee are partly allowed.
Ground 2: Disallowance of commission of Rs. 12,63,000/- considering Section 40(a)(ia) of the Act.
12. The Ld. AR contended that during the impugned assessment year, the assessee had made a provision of Rs.183.60 lakh and Rs.47.73 lakh towards commission payable to the Managing Director (MD) and Whole-Time Director (WTD), respectively, both of whom were employees of the assessee-company. The said commission was actually paid in April 2012 after deducting tax at source under Section 192 of the Act, and the corresponding TDS was deposited into the Government treasury on 07.05.2012. The Ld. AR submitted that the Ld. AO disallowed the entire provision of Rs.231.33 lakh (Rs.183.60 lakh + Rs.47.73 lakh) under Section 40(a)(ia) of the Act on the ground that tax had neither been deducted nor deposited during the relevant financial year. However, the Ld. AO simultaneously allowed a deduction of Rs.218.70 lakh representing a similar disallowance made in the immediately preceding assessment year, in respect of which TDS had been deducted and deposited during the year under consideration. Consequently, the net disallowance sustained by the Ld. AO amounted to Rs.12.63 lakh. The Ld. AR further contended that the provisions of Section 40(a)(ia) are not applicable to payments covered under Section 192 of the Act, i.e., salary payments made to employees. Since the commission paid to the MD and WTD formed part of their remuneration as employees and tax had been deducted under Section 192, no disallowance under Section 40(a)(ia) could be made. The Ld. AR also submitted that an identical issue had been considered by the Coordinate Bench of the ITAT, Mumbai in the assessee’s own case in ITA No. 3384/Mum/2014 and connected matters, vide order dated 04.12.2023. The relevant observations of the Coordinate Bench are reproduced below:
“42. We heard the parties and perused the materials. The case of the revenue is that the assessee has not deducted tax at source against the provision made towards commission payable to MD and that the commission payable is liable for tax deduction under section 194H of the Act. As per the submissions of the assessee, the allowability of commission in the subsequent year has not been questioned by the department and that since the provision of Rs.75 lakhs has been reversed on 01.04.2008, credited to the P & L A/c disallowance in the year under consideration would amount to double taxation. We notice that the assessing officer has notconsidered the submission of the assessee that the provision towards commission is reversed in the subsequent and paid as part of the salary on which tax was duly deducted. In our considered view, the submissions of the assessee with regard to provision made, subsequent reversal and tax deduction on actual payment etc., needs to be factually verified in order to decide the allowability of the claim. Therefore we deem it fit to remit the issue back to the assessing officer for a de-novo verification of the issue by calling for the relevant details as may be required in this regard. The assessee is directed to submit the details and cooperate with the proceedings. It is ordered accordingly.”
13. The Ld. DR argued and stands in favour of the order of the revenue authorities. The Ld. DR invited our attention in the observations of the Ld. CIT(A) which is contended in para no. 11.4 and 11.4.1 are reproduced as below:
“11.4 Decision: I have considered the fact of the case and the observations of the AO. It is important to analyze the stands of the AO vis a vis submissions of the appellant and the same is discussed herein below:
The question involved here is paid to the directors will be considered under the ambit of Section 40. Upon plain reading of the provisions of section 40 it can be noted that the section already covers the aspect of commission or brokerage.
11.4.1 This clears the position that, any payment in the nature of commission or brokerage is covered under the provisions of the section. Further, on perusal of the provisions of section 40(a)(ia) read with Explanation to section 194H, the position is clear that the section 40(a)(ia) applies to the commission paid to a person who is acting on behalf of others. Any amount payable by the way of commission or brokerage to any director is over and above the remuneration paid by the company. Such payments are made in order to compensate the director with the services rendered by them. Thus, the position is clear that the payments are made to the director for the additional services provided by them and accordingly it ought to be covered under the provisions of section 40(a) (ia). In view of the same, the views adopted by the AO in this regards is upheld. The AO allowed deduction of Rs. 218.70 Lacs to the appellant for similar disallowance made in the immediately preceding assessment year for which TDS was deducted and deposited during the previous year 2010-11. In view of the same, this ground of appeal is dismissed.”
14. We heard the rival submissions and perused the material available on record. During the assessment proceedings, the Ld. AO disallowed the provision for commission/salary payable to the MD and WTD aggregating to Rs.2,31,33,000/- on the ground that tax had not been deducted and deposited at source, thereby attracting the provisions of section 40(a)(ia) of the Act. However, the Ld. AO simultaneously allowed a deduction of Rs. 2,18,70,000/-, which had been disallowed in the immediately preceding assessment year and for which the corresponding tax was deducted and deposited during the previous year relevant to A.Y. 2012-13. We find that the issue is squarely covered by the decision of the Coordinate Bench of the ITAT, Mumbai, in the assessee’s own case (supra). Respectfully following the said decision, we hold that the impugned disallowance is unsustainable. The Ld. DR was unable to bring any material on record to distinguish the facts of the present case from those considered by the Coordinate Bench. Accordingly, the addition of Rs. 12,63,000/- sustained by the Ld. AO is hereby deleted.
Accordingly, the assessee’s appeal Ground 2 stands allowed.
Ground 3: Additional depreciation u/s 32(1)(iia)
15. The Ld. AR contended that for encouragement of investment in plant or machinery by the manufacturing and power sector, additional depreciation of 20% of cost of new plant or machinery acquired and installed is allowed under the existing provision of section 32(1)(ii)(a) of the Act over and above the general depreciation allowance. On lines of availability of the general depreciation allowance, the second proviso to section 32(1) inter-alia provides that the additional depreciation would be restricted to 50% when the new plant and machinery acquired and installed by the assessee is put to use for the purpose of business or profession for a period of less than 180 days. The Ld. AR contended that for removal of discrimination in matter of allowing additional depreciation on plant and machinery used for less than 180 days and used for 180 days or more, it is proposed to provide that the balance 50% of additional depreciation on new plant and machinery acquired the use for less than 180 days which has not been allowed in year of acquisition and installing to such plant and machinery shall be allowed in immediate succeeding previous year. So, the Ld. AR like to pray that the plant and machinery put to use for less than 180 days in A.Y. 2011-12 the balance deduction of additional depreciation at the rate of 10% shall be allowed in A.Y. 2012-13.
16. On strengthening her argument, the Ld. AR respectfully relied on the order of Hon’ble High Court of Karnataka in case of CIT v. Rittal India (P.) Ltd. 380 ITR 423 (Karnataka) held that if plant and machinery eligible for additional depreciation u/s 32(1)(iia) is put to use for less than 180 days in said financial year and, therefore, only 50% of additional deprivation can be claimed in that year, balance 50% be availed in subsequent years.
17. The Ld. DR argued and stands in favour of the orders of the revenue authorities. The Ld. DR was unable to bring any material on record to distinguish the facts of the present case from this considered by the Hon’ble Karnataka High Court.
18. We heard the rival submissions and perused the material available on record. It is an undisputed fact that the assessee had acquired and installed new plant and machinery and was, therefore, eligible to claim additional depreciation under section 32(1)(iia) of the Act. It is also not in dispute that the said plant and machinery was put to use for less than 180 days during the relevant previous year. Accordingly, the assessee was entitled to claim only 50% of the additional depreciation in the year under consideration, with the balance 50% being allowable in the immediately succeeding assessment year. Respectfully following the judgment of the Hon’ble Karnataka High Court in the case of Rittal India Pvt. Ltd. (supra), we hold that the assessee is entitled to claim the balance 50% of the additional depreciation in the impugned assessment year. Therefore, the disallowance made by the Ld. AO amounting to Rs. 32,31,200/- is unsustainable and is hereby deleted.
Accordingly, the assessee’s Ground No. 3 stands allowed.
Ground No. 4: Applicable Rate of DDT as per treaty.
19. The Ld. AR contended that the assessee is entitled to the benefit of the tax rate prescribed under the applicable Double Taxation Avoidance Agreement (DTAA) in respect of Dividend Distribution Tax (DDT). It was submitted that the assessee had paid DDT under section 115-O of the Act at a rate higher than that permissible under the relevant DTAA. According to the Ld. AR, the tax liability on distributed dividends ought to be restricted to the rate provided under the DTAA, in view of the judgment of the Hon’ble Bombay High Court in the case of Colorcon Asia (P.) Ltd. v. Jt. CIT [2026] 486 ITR 476 (Bombay). The Ld. AR further submitted that the assessee had raised this issue by way of an additional ground before the Ld. CIT(A). The additional ground as reproduced in the appellate order reads as under:
“I. Dividend Distribution Tax should be restricted to the rate specified in DTAA:
| 1. |
|
On the facts and circumstances of the case and in law, the assessing officer ought to have restricted the levy of the dividend distribution tax, on the dividend distributed/paid to Kansai Paint Co. Ltd. Japan and other the non-resident shareholder(s), to 10% in terms of Article 10 of the double taxation avoidance agreement (DTAA) between India and Japan. in case of dividend paid to Kansai Paint Co. Ltd, Japan and the DTAAs with the respective countries in case of other non-resident shareholders instead of 16.225% charged in terms of section 115-0 of the Act. |
| 2. |
|
Treaty rate to be applied for dividend distributed instead of rate prescribed in sec. 115-0. |
| 3. |
|
The ground raises a purely legal issue and deserves to be admitted in the light of the Apex Court judgment in the case of NTPC 229 ITR 383. |
| 4. |
|
On merits, the issue has been concluded against the appellant by the Special Bench decision in the case of Total Oil (P) Ltd., 104 ITR (T) 1. |
| 5. |
|
During the previous year relevant to the assessment year, the company declared and paid dividend to its shareholders; which includes Kansai Paint Co. Ltd, Japan and other the non-resident shareholders. The company has filed its return of income showing payment of dividend distribution tax at the rate of 16.225% on dividend declared and paid during the previous year. However, Article 10 of the double taxation avoidance agreement (DTAA) between India and Japan states that tax on dividend shall not exceed 10% of the gross amount of dividend. |
| 6. |
|
The scrutiny assessment was completed by the Jt. Commissioner of (OSD) 6(3)(2), Mumbai vide order under section 143(3) r.w.s 144C(3) dated 22.04.2016. Neither company nor Assessing Officer raised any issue regarding the dividend distribution tax during the assessment proceeding. |
| 7. |
|
The company is raising this issue for the first time by way of an additional ground in this appeal. The appellant submit that merely because the company itself applied an incorrect rate i.e. 16.225% u/s 115-O of the Act instead of the rate prescribed in the DTAA, shall not Act as an estoppel for not claiming lower rate of tax.” |
20. The Ld. AR submitted that the issue is no longer res integra and was initially decided by the Special Bench of the ITAT, Mumbai in the case of Dy. CIT v. Total Oil India (P.) Ltd. 104 ITR(T) 1 (Mumbai – Trib.), wherein it was held that the liability towards DDT was governed by the provisions of section 115-O of the Act. However, the Ld. AR pointed out that the Hon’ble Bombay High Court, in the case of Colorcon Asia Pvt. Ltd. (supra), subsequently decided the issue in favour of the assessee and held that where an Indian company distributes dividends to its UK parent company, such dividend falls within the scope of Article 11 of the India-UK DTAA and, therefore, the tax on dividend distribution under section 115-O is required to be restricted to the rate of 10% prescribed under the DTAA. It is also submitted that a Coordinate Bench of the Hon’ble Bombay High Court, in the case of Foseco India Ltd. Company v. Asstt. CIT (Bombay), has expressed a contrary view and referred the issue for consideration by a Larger Bench. It was also brought to our notice that both views have been challenged before the Hon’ble Supreme Court and the appeals have been admitted, as reported in Jt. CIT, Panji v. Colorcon Asia (P.) Ltd (SC). Accordingly, the issue is presently pending adjudication before the Hon’ble Apex Court.
21. Per contra, the Ld. DR submitted that since the issue is presently pending before the Hon’ble Supreme Court and has not yet attained finality, the matter should remain open and be decided in accordance with the law laid down by the Hon’ble Apex Court.
22. We have heard the rival submissions and perused the material available on record. The controversy before us relates to whether the rate of Dividend Distribution Tax is required to be restricted to the rate prescribed under the applicable DTAA or whether the provisions of section 115-O of the Act would exclusively govern the levy. We note that the Special Bench of the ITAT, Mumbai in the case of Total Oil India Pvt. Ltd. (supra) decided the issue against the assessee. However, the Hon’ble Bombay High Court in Colorcon Asia Pvt. Ltd. (supra) took a contrary view and held that the assessee is entitled to the benefit of the rate prescribed under the DTAA. Subsequently, another Coordinate Bench of the Hon’ble Bombay High Court in Foseco India Ltd. (supra) expressed a divergent view and referred the issue for consideration by a Larger Bench. It is an admitted position that both the competing views are presently under consideration before the Hon’ble Supreme Court. In view of the pendency of the matter before the Hon’ble Apex Court and in the interest of justice, we deem it appropriate to restore this issue to the file of the Ld. AO with a direction to decide the same afresh in accordance with the final outcome of the proceedings before the Hon’ble Supreme Court and any binding judicial precedent that may be rendered on the issue.
Accordingly, Ground No. 4 raised by the assessee is allowed for statistical purposes.
ITA No. 4322/Mum/2025; A.Y. 2012-13 (Revenue’s Appeal)
23. The revenue has challenged the order of the Ld. CIT(A) related to deleting the addition made by the Ld. AO and account of utilized by Modvat credit relying on the decision of Hon’ble High Court in case of
CIT v.
Diamond Dye Chem Ltd. [2017] 396 ITR 536 (Bombay) without appreciating that the said decision was based on the decision of Hon’ble Supreme Court in case of
CIT v.
Indo Nippon Chemicals Co. Ltd. 261 ITR 275 (SC) which pertains to A.Y. 1989-90, when the provision of section 145A were not inserted. The Ld. DR submitted a brief note which is reproduced as below:
“1. Grounds of Appeal: The grounds of appeal filed by the Revenue are identical for both Assessment Year 2012-13 and Assessment Year 2013-14. They are reproduced verbatim below:
Ground 1: “Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is justified in deleting the addition made by the A.O. on account of unutilized Modvat Credit relying on the decision of the Hon’ble High Court in the case of Diamond Dye Chem Ltd 396 ITR 536 (Bombay) without appreciating that the said decision was hased on the decision of the Hon’ble Supreme Court in the case of Indo Nippon Chemicals Co. Ltd 261 ITR 275 (SC) which pertained to A.Y. 1989-90 when the provisions of Section 145A were not inserted in the Statute/Act.”
Ground 2: “The appellant submits that the impugned order dated 14/04/2025 passed by the Ld. CIT(A) is bad-in-law and is liable to be quashed and/or setaside.”
2. Core Issue: The Revenue is challenging the orders of the CIT(A) dated April 14, 2025, which deleted additions of Rs. 29,05,96,117 (AY 2012-13) and Rs. 19,40,92,153 (AY 201314) made by the Assessing Officer (AO) on account of unutilized Modvat / Cenvat credit. The primary ground of appeal asserts that the CIT(A) erred in law by relying on judicial precedents that pertain to an era before Section 145A of the Income Tax Act was enacted. Section 145A, inserted with effect from April 1, 1999, strictly mandates an ‘inclusive method’ for inventory valuation, requiring any tax, duty, cess, or fee paid or incurred to be included in the valuation of goods and inventory.
3. Judgments Erroneously Relied Upon by the CIT(A): The CIT(A) deleted the additions by placing sole reliance on the Bombay High Court decision in Diamond Dye Chem Ltd., which in turn was anchored entirely upon the Supreme Court’s ruling in Indo Nippon Chemicals Co. Ltd. The Revenue submits that these rulings are inapplicable to the present Assessment Years:
CIT v.
Indo Nippon Chemicals Co. Ltd. 261 ITR 275 (SC) (SC) Relevant Paragraphs: In Paragraph , the Supreme Court held: “We are unable to accept the view of the Assessing Officer that merely because Modvat credit is an irreversible credit available to the manufacturers upon purchase of duty-paid raw material, it would amount to income which is liable to be taxed under the Act. in Paragraph 5. the Court ruled that applying a ‘gross method’ at purchase and a ‘net method’ at valuation was wholly erroneous’.
Revenue’s Submission: As explicitly noted in the Revenue’s grounds of appeal, the Indo Nippon judgment pertained strictly to AY 1989-90. Because it was delivered prior to the legislative insertion of Section 145A, it holds no benchmark authority for AVs 2012-13 and 2013-14.
3.2 CIT v. Diamond Dye Chem Ltd. (Bom)/396 ITR 536 (Bom) Relevant Paragraphs: In Paragraph 4, the Court noted the assessee’s reliance on the Indo Nippon judgment. In Paragraph 5, the Court observed that the assessee adopted the ‘exclusive method’ and, following the Apex Court, held that “the income was not generated to the extent of Modvat credit”. In Paragraph 6, the Court concluded that “the amount of the un utilized Cenvat credit could not have been directly added to the closing stock”.
Revenue’s Submission: The Bombay High Court in Diamond Dye Chem merely followed the pre-amendment principles set by the Apex Court in Indo Nippon. A judicial precedent analysing a pre-amendment context cannot override the clear, unambiguous statutory mandate of Section 145A, which was specifically introduced by the Legislature to block the ‘net-of-tax’ accounting loophole.
4. Judgment Relied Upon by the Revenue: To enforce the statutory position under Section 145A, the Revenue relies on the following precedent:
4.1
Commissioner of Income-tax v.
Mahalaxmi Glass Works (P.) Ltd. 318 ITR 116 (Bom)
Relevant Paragraphs: In Paragraph 2, the Hon’ble High Court explicitly addresses ‘the method of valuation of inventory as contemplated by section 145A of the Income-tax Act’, ruling that to give effect to Section 145A, a corresponding adjustment must be made. In Paragraph 3, the Court cites the Privy Council (CIT v. Ahmedabad New Cotton Mills Co. Ltd., AIR 1930 PC 56) to emphasise that ignoring true valuations misrepresents real profits. In Paragraph 5, the Court upholds the Tribunal’s approach whereby the closing stock valuation is adopted as the opening stock of the subsequent year to ensure consistency under the law.
Revenue’s Submission: This post-amendment judgment confirms that Section 145A strictly overrides general accounting conventions. If the Assessee accounts for its inventory valuation on a ‘net-of-tax’ basis, it is legally bound under Section 145A to make an upward adjustment to reflect the unutilized Modvat credit.
5. Prayer: The CIT(A)’s blanket deletion of the AO’s additions allows unutilized Modvat credit to escape tax entirely, artificially suppressing business profits, rendering the orders bad-in-law. If the Hon’ble Tribunal observes that an adjustment to closing stock requires an equitable cascading entry, the Revenue prays that the matter should not be deleted in toto. Instead, relying on the mechanism validated in Mahalaxmi Glass Works, the matter should be remanded to the Assessing Officer to ensure a synchronised, comprehensive Section 145A adjustment across all inventory parameters (opening stock, purchases, sales, and closing stock).”
24. The Ld. AR contended that the identical issue was duly considered by The Coordinate Bench of ITAT, Mumbai in assessee’s own case. ITA No. 3384/Mum/2014 and others, date of pronouncement 04.12.2023. The relevant observations of the bench in paragraph nos. 18 and 19 are reproduced as below:
“18. We heard the parties and perused the material on record. We notice that the coordinate while considering the similar issue for AY 2007-08, discussed the amended provisions of section 145A (which is relevant for the year under consideration) and held that –
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 the 1st and the last day of the previous year, the computation according to the method of accounting regularly employed by the assessee shall be adjusted to include the amount of any tax, duty, cess or fees paid or liability incurred for the same under any law in force.
It is proposed to amend the said section so as to provide that the interest received by an assessee on compensation or on enhanced compensation, as the case may be, shall be deemed to be the income of the year in which it is received.
This amendment will take effect from 1st April, 2010 and will, accordingly, apply in relation to the assessment year 2010-11 and subsequent years.”
The Memorandum to Finance Bill, 2009 also explain substitution of Section 145A as under which as we will see is concerned with insertion of new clause (b) to Section 145A of the 1961 Act, which is reproduced as under:
“Rationalization of provisions for taxation of interest received on delayed compensation or enhanced compensation
The existing provisions of Income-tax Act provide that income chargeable under the head “Profits and gains of business or profession” or “Income from other sources”, shall be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. Further, the Hon’ble Supreme Court, in the case of Rama Bai v. CIT (181 ITR 400) has held that arrears of interest computed on delayed or enhanced compensation shall be taxable on accrual basis. This has caused undue hardship to taxpayers.
With a view to mitigating the hardship, it is proposed to amend section 145A to provide that the interest received by an assessee on compensation or enhanced compensation shall be deemed to be his income for the year in which it is received irrespective of the method of accounting followed by the assessee.
Further, it is proposed to insert clause (viii) in sub-section (2) of section 36 to provide that income by way of interest received on compensation or on enhanced compensation referred to in sub-section (2) of section 145A shall be assessed as “income from other sources” in the year in which it is received.
This amendment will take effect from 1st April, 2010 and shall accordingly apply in relation to assessment year 1998-99 and subsequent assessment years.”
Thus, the amendment to Section 145A of the 1961 Act by Finance Act, 2009 w.e.f. 01.04.2010 so far 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 rawmaterials 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 purchase of duty paid raw-materials, that would not amount to income which was liable to be taxed under the Act. It is also held that whichever method of accounting is adopted, the net result would be the same.
6. Considering the above, the amount of the un-utilized Cenvat credit could not have been directly added to the closing stock.
The assessment year under consideration before Hon’ble Bombay High Court in the case of Diamond Dye Chem Limited (
supra) was AY 2008-09 which was post amendment by Finance Act, 1998 wherein Section 145A was inserted w.e.f. 01.04.1999. The Hon’ble Bombay High Court in the case of Diamond Dye Chem Limited (
supra) while adjudicating appeal relied upon decision of Hon’ble Supreme Court in the case of CIT v. Indo Nippon Chemicals Company Limited
(2003) 261 ITR 275(SC), wherein Hon’ble Supreme Court in the case of Indo Nippon Chemicals Limited (
supra) was seized of AY 1989-90 which was prior to introduction of Section 145A by Finance Act, 1998 w.e.f. 01.04.1999. Incidentally when earlier Hon’ble Bombay High Court was adjudicating appeal in the case of
CIT v.
Indo Nippon Chemicals Co. Limited reported in
(2000) 245 ITR 384 (Bom) which related to AY 1989-00, it was brought to the notice of Hon’ble Bombay High Court that there was newly inserted Section 145A of the 1961 Act by Finance Act(No. 2). 1998 w.e.f. 01.04.1999, where in Hon’ble Bombay High Court held in para 10, as under:
“10. Before concluding, we may mention that, in rejoinder, the learned counsel for the department has brought to our attention section 1454 of the Act. He has also invited our attention to the Subsequent Guidance Note issued by the Institute of Chartered Accountants of India on Tax Audit under section 44AB of the Act. It was contended that even the ICAI has subsequently declared that the net/exclusive method adopted by various assessees should be applied with adjustments on account of any tax, duty, cess or fee actually paid or incurred on inputs which should be added to the cost of the inputs if not so added in the books of account. He contended that in the Subsequent Guidance Note, the ICAI once again discussed the above two methods and, in the circumstances, it was urged that the net method followed by the assessee was wrong because the assessee has followed the net method without making any adjustments as required under 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 1454. 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 upon decision of Hon’ble Supreme Court decision in case of Indo Nippon Chemical(supra) which is prior to insertion of Section 145A of the 1961 Act. Under these circumstances as discussed by us elaborately above, we are inclined to restore this matter back to the file of the AO for denovo determination of the issue in the light of our above discussions as well decision referred to above. The assessee will be allowed to raise its defence in denovo proceedings. The AO shall provide proper and adequate opportunity of being heard in the set aside proceedings. The grounds of appeal are allowed for statistical purposes We order accordingly.
19. Respectfully following the above decision of the coordinate bench we remit the issue back to the assessing officer with similar directions.”
25. We heard the rival submissions and considered the documents available in the record. We find that the said issue is duly considered and adjudicated by The Coordinate Bench of ITAT, Mumbai. The Ld. DR was not able to distinguish the fact relying on the order by the Ld. AR considering this we find that there is no reason for intervening the observations made by Ld. CIT(A).
Accordingly, the Grounds taken by the revenue stands dismissed.
ITA No. 4054/Mum/2025; A.Y. 2013-14 (Assessee’s Appeal)
Ground No. 1 (c) and (d): Adjustment related to royalty received from AE amount to Rs. 11,22,762/-.
26. The Ld. AR contented that Kansai Nerolac Paints Ltd. (“KNPL”) is engaged in the business of manufacturing and sale of paints in India and operates in both the decorative and industrial paint segments. It was contended that while the decorative paint market in India is predominantly controlled by Asian Paints Ltd., which commands nearly 60% of the organized market, KNPL enjoys a dominant position in the industrial coatings segment and is the market leader in automotive coatings with approximately 56% market share. The Ld. AR further submitted that Kansai Paint Nepal Pvt. Ltd. (“KPN”), a company incorporated in Nepal, is engaged in the manufacture and sale of decorative paints in Nepal and that KNPL holds 68% of the paid-up equity share capital of KPN. The Ld. AR explained that the industrial coatings business is highly technology-driven and service-intensive in nature. In order to compete effectively in such a specialized segment, manufacturers are generally required to enter into technical collaborations or joint venture arrangements with globally recognized paint technology providers. In this regard, KNPL has entered into a Technical License Agreement with Kansai Paint Co. Ltd., Japan (“KPJ”), under which KNPL is granted the right to manufacture cationic electro-deposition coatings and systems, automotive coatings, industrial coatings and architectural coatings by utilizing the proprietary technical know-how developed by KPJ. It was submitted that under the said Technical License Agreement, KNPL is authorized to manufacture specified “Licensed Products” and, in consideration for the use of such sophisticated technology and know-how, pays royalty to KPJ at the rate of 3% of the net selling price of the licensed products sold by it. The Ld. AR further submitted that KNPL has, in turn, entered into a separate Technical License Agreement with KPN, whereby KPN has been granted the right to use certain technical information and know-how owned by KNPL for the manufacture of specified decorative paint products. The list of such licensed products has already been furnished before the revenue authorities and forms part of the record. The Ld. AR emphasized that the decorative paint business is fundamentally different from the industrial coatings business. Unlike industrial coatings, decorative paints are not highly technology intensive, do not involve complex manufacturing processes, and are generally not service-oriented in nature. Industrial coatings are supplied primarily to Original Equipment Manufacturers (OEMs), which prescribe stringent quality specifications, technical standards, and performance requirements. Consequently, continuous technological support, research inputs, and specialized know-how are essential for manufacturing industrial coatings.
In contrast, decorative paints are predominantly sold through dealer networks and retail outlets catering to household consumers. The technology involved in decorative paints is comparatively less complex and does not ordinarily require extensive technical collaboration or sophisticated know-how. Therefore, the value and commercial significance of technical know-how relating to decorative paints is substantially lower than that associated with industrial coatings. Accordingly, the Ld. AR submitted that the royalty rate of 1% charged by KNPL from KPN for the use of technical know-how relating to decorative paints is commercially justified, reasonable, and commensurate with the nature of the technology transferred. The said royalty rate is significantly lower than the royalty rate of 3% paid by KNPL to KPJ for highly specialized industrial paint technology, thereby demonstrating that the international transaction has been undertaken on an arm’s length basis and does not warrant any transfer pricing adjustment.
27. The Ld. AR respectfully relied on the order of The Coordinate Bench of ITAT, Mumbai in case of Unilever India Exports Ltd. v. Asstt. CIT (Mumbai – Trib.). The relevant paragraph no. 7 is reproduced as below:
“7. We have heard the rival submissions and perused the material available on record. The grievance of the assessee pertains to the action of the Transfer Pricing Officer (TPO) in proposing an ad-hoc transfer pricing adjustment of Rs.6,97,76,862/- on account of royalty payments for central services. The assessee has appropriately benchmarked the intra-group service payments by adopting the CUP method, which is one of the prescribed methodologies under the Income-tax Rules, and has furnished documentation substantiating the rendition of services for both assessment years under consideration. The TPO, although claiming to have applied the “Other Method,” has not brought on record any comparable transaction to substantiate the determination of the arm’s length price. Instead, the TPO has resorted to an ad-hoc benchmarking approach, which is contrary to the mandate of section 92C of the Act. The Hon’ble Bombay High Court has, in several decisions, categorically held that addition-hoc transfer pricing adjustments unsupported by any of the prescribed methods are legally unsustainable. We respectfully rely upon the decision in the case of Merck Ltd. (supra).
For AYs 2012-13 and 2013-14, in the assessee’s own case in Unilever India Exports Ltd. v. Dy. CIT [IT Appeal Nos. 2096 & 6648 (Mum.) of 2017, dated 31-7-2019), the Co-ordinate Bench of the ITAT, Mumbai (J-Bench) deleted the transfer pricing adjustment arising from an identical determination of the arm’s length price by the TPO. As the facts in the present appeals are materially identical, the ratio laid down in the said decision would apply mutatis mutandis to the assessment years under consideration
Similarly, for AYs 2015-16 and 2016-17, in the assessee’s own case reported at Unilever India Exports Ltd. v. Deputy Commissioner of Income-tax (Mumbai Trib.) by order dated 31/03/2023, the ITAT, Mumbai (J-Bench) deleted the transfer pricing addition made on identical grounds. Again, as the facts are identical, the findings therein shall equally apply to the present appeals.
Furthermore, for AYs 2017-18 and 2018-19, the Tribunal has also deleted the transfer pricing additions arising from identical determinations of the arm’s length price. In light of the factual parity with earlier years and the consistent view taken by the Co-ordinate Benches in the assessee’s own cases (supra), we find merit in the assessee’s contention.
Accordingly, the ad-hoc transfer pricing adjustment of Rs.6,97,76,862/- made by the Ld. AO/TPO on account of royalty for central services is deleted. The assessee’s appeal on Ground Nos. 1 to 5 stands allowed.”
28. The Ld. DR argued and stands in favour of the order of the revenue authorities. The Ld. DR invited our attention in para no. 7.4 of the impugned appellate order. Relevant paragraph is reproduced as below:
” 7.4 Decision: The Appellant has entered into technical license agreement with AE i.e. KPN with effect from 01st September, 2012. Thus, this is the first year in which transaction of royalty has been entered into for manufacture and sale of Decorative Licensed products by KPN. The KPN to pay royalty @ 1% on net selling price of licensed products sold by KPN in Nepal. The Appellant did not benchmark this transaction and did not submit any contemporaneous documentation as required by Section 92D of the Act read with Rule 100 of the Rules. Therefore, the TPO had benchmarked the same applying the CUP method.
Further, during the course of appellate proceedings the Appellant submitted the report for royalty benchmarking and concluded that royalty rate is between 1% 2.5%. The report was conducted in the Year 2017 and it is in relation the paints/decorative paints/industrial manufacture and sale of industrial chemicals/coatings and other such similar products within the territory of Sri Lanka as against royalty charged is for Decorative licensed products and from Nepal.
As the benchmarking study submitted by the appellant is not contemporaneous in nature and for difference product and region the same has been rejected. This ground of appeal is disallowed.”
29. We heard the rival submissions and perused the material available on record. The dispute relates to the transfer pricing adjustment of Rs. 11,22,762/- in respect of royalty received by the assessee from its AE, namely Kansai Paint Nepal Pvt. Ltd. (“KPN”). We find that the assessee had entered into a Technical License Agreement with KPN, whereby KPN was granted the right to use certain technical information and know-how owned by the assessee for the manufacture and sale of decorative paint products in Nepal. In consideration thereof, the assessee charged royalty at the rate of 1% of the net selling price of the licensed products sold by KPN. The assessee has explained the commercial rationale for charging royalty at such rate by demonstrating that decorative paints are comparatively less technology-intensive than industrial coatings and do not require the same degree of technical support, quality control, and specialized know-how as industrial paint products. It was further brought on record that the assessee itself pays royalty at the rate of 3% to Kansai Paint Co. Ltd., Japan, for highly specialized industrial coating technology, thereby indicating that the royalty rate of 1% charged from KPN for decorative paint technology is commercially reasonable. We further note that the TPO/CIT(A) rejected the assessee’s benchmarking analysis primarily on the ground that the contemporaneous documentation was not furnished and that the benchmarking report relied upon by the assessee pertained to a different geographical region and product mix. However, neither the TPO nor the Ld. CIT(A) has brought any comparable uncontrolled transaction on record to demonstrate that the royalty rate charged by the assessee was not at arm’s length. The adjustment has effectively been made without identifying any reliable comparable transaction as mandated under section 92C of the Act. The Coordinate Bench of the ITAT, Mumbai in the case of Unilever India Exports Ltd. (supra) has categorically held that a transfer pricing adjustment cannot be sustained in the absence of benchmarking based on any of the prescribed methods and that ad hoc determinations of arm’s length price are contrary to the scheme of Chapter X of the Act. The Tribunal further held that, unless supported by proper comparables and a valid benchmarking analysis, such adjustments are legally unsustainable. In the present case also, the revenue has failed to bring on record any cogent material, comparable uncontrolled transaction, or scientific benchmarking analysis to justify the determination of a different arm’s length royalty rate. Merely rejecting the assessee’s benchmarking study does not empower the TPO to substitute the arm’s length price on an ad hoc basis. In our considered view, the transfer pricing adjustment made by the TPO and sustained by the Ld. CIT(A) is not supported by any legally sustainable benchmarking exercise. Accordingly, respectfully following the ratio laid down by the Coordinate Bench in the case of Unilever India Exports Ltd. (supra), we hold that the transfer pricing adjustment of Rs. 11,22,762/- on account of royalty received from the AE is unsustainable. The same is directed to be deleted.
Accordingly, the Ground No. 1 (c) and (d) of the assessee’s appeal stands allowed.
Ground No. 3: Disallowance u/s 14A amount to Rs. 37,18,703/-.
30. The Ld. AR contended that the assessee to avoid dispute and penalty calculated disallowance u/s 14A Rule 8D amount to Rs. 37,18,703/- in return of income. However, the assessee’s claim made during the assessment process for calculation of disallowance based on method approved by the Coordinate Bench of ITAT, Mumbai in assessee’s own case for A.Y. 1999-2000 and not considered by the Ld. AO. Further relation to calculation of Rule 8D(2)(ii), the Ld. AR invited our attention in APB Page 196 and it is found that the assessee’s share holder’s fund in the balance-sheet as of 31st March, 2013 is Rs. 12,859.80 lakh whereas noncurrent investment amount to Rs. 480.98 lakh. So, the investment was made by the assessee from his own findings.
31. The Ld. DR argued and stands in favour of the revenue authorities. The Ld. DR has drawn our attention in impugned appellate order in paragraph no.13.4.2 which is reproduced as below:-
“13.4.2 Under subsection (2) of Sec 14A, the AO is required to determine the amount of expenditure incurred by an appellant in relation to such income which does not form part of the total income under the Act in accordance with such method as may be prescribed. Sub section (3) of Section 14A provides for the application of sub section (2) to a situation where the appellant claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under the Act. The Assessing Officer must, in the first instance, determine whether the claim of the appellant in that regard is correct and the determination must be made having regard to the accounts of the appellant. The satisfaction of the Assessing Officer must be arrived at on an objective basis. It is only when the Assessing Officer is no satisfied with the claim of the appellant, that the legislature directs him to follow the method prescribed. The same principle was discussed by the Hon’ble Bombay High Court in the case of Godrej and Boyce Mfg. Co. Ltd. In this case, since the AO was not satisfied with the claims made by the appellant. In view of above discussion, this ground of appeal is dismissed.”
32. We have carefully considered the submissions of the rival parties. The assessee has suo-moto disallowed the expenses related to exempted income amount to Rs. 37,18,703/-. It is also accepted that the Share holders’ fund is higher than the invested fund. We find that the assessee had contested the addition on basis of Rule 8D(2)(
ii) of the Income tax Rule, 1962 (Rules). Further, On presumptive basis, i.e. 0.5% of the annual average value of investments yielding exempt income under Rule 8D(2)(
iii) of the Rule is subject to consideration of the revenue. The Ld. AR contended that the investment of the assessee is in growth fund which is not yielding the dividend. So, we restore the ground to the file of the Ld. AO to compute the expenses related to earning exempted income u/s 14A r.w.r 8D(2)(
ii) & (
iii). The Ld. AO must consider the judicial rulings i.e. in the case of
South Indian Bank Ltd. v.
CIT [2021] 438 ITR 1 (SC), the Hon’able Supreme Court held that if an assessee can demonstrate that investments yielding exempt income were made out of their own funds and not from borrowed funds, no disallowance under Section 14A of the Act is warranted.
Further, in the case of Pr. CIT v. Punjab National Bank 449 ITR 468 (Delhi), the Hon’ble Delhi High Court ruled that Section 14A cannot be invoked in the absence of exempt income earned during the relevant financial year. No disallowance can be made merely because investments capable of generating exempt income exist.
Section 14A of the Act, read with Rule 8D of the Rules, is applicable where the assessee is unable to determine or allocate the correct expenses incurred to earn exempt income. As per the ratio laid down by above cited case laws, the disallowance u/s 14A is required to be made, when the assessee has earned any exempt income. In the instant case, it is submitted that the interest free funds available with the assessee is more than the value of investments. In that case, no disallowance out of interest expenses is called for. However, disallowance may be called for from out of administrative expenses in terms of sec.14A of the Act. For this purpose, we are of the view that the assessee may be provided with an opportunity to present the relevant facts before the AO. Accordingly, we set aside the order passed by Ld CIT(A) and restore this issue to file of the Ld. AO for examining this issue afresh. After providing adequate opportunity of being heard to the assessee. The Ld. AO may take appropriate decision. We also direct the assessee to present its working of expenses, if any, relating to exempt income.
Accordingly, the Ground No. 3 (a) and (b) taken by the assessee are allowed for statistical purposes.
33. In the result, the appeals of the assessee bearing ITA No. 4053 and 4054/Mum/2024 are partly allowed for statistical purposes and the appeals of the revenue bearing ITA No. 4322 and 4323/Mum/2025 are dismissed.
