Income Tax Appellate Tribunal - Pune
Bilcare Limited,, Pune vs Assistant Commissioner Of Income-Tax, ... on 26 October, 2021
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "C", PUNE
BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND
SHRI PARTHA SARATHI CHAUDHURY, JUDICIAL MEMBER
आयकर अपील सं. / ITA No.2720/PUN/2017
िनधा रण वष / Assessment Year : 2013-14
Bilcare Limited, Vs. ACIT,
6th Floor, B-Wing, Central Circle-2(2),
ICC Trade Tower, Pune
Senapati Bapat Road,
Pune - 411 016,
Maharashtra
PAN : AABCB2242F
Appellant Respondent
Assessee by Shri Kishor Phadke
Revenue by Smt. Divya Bajpai
Date of hearing 25-10-2021
Date of pronouncement 26-10-2021
आदेश / ORDER
PER R.S.SYAL, VP :
This appeal by the assessee is directed against the final assessment order dated 18-10-2017 passed by the Assessing Officer (AO) u/s.143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 (hereinafter also called 'the Act') in relation to the assessment year 2013-14.
2. The first issue raised in this appeal is against the disallowance of write off of obsolete stock of Rs.23,12,46,000/-. Briefly stated, the facts of the case are that the assessee is engaged in manufacturing and trading of Pharma packaging products. It filed its return declaring total loss at Rs.11,28,91,379/-. Certain 2 ITA No.2720/PUN/2017 Bilcare Limited international transactions of furnishing Corporate Guarantee were given in Form No. 3CEB, which issue will be dealt with later on. The AO notified the draft order with total income at Rs.1,52,57,620/-. Aggrieved thereby, the assessee approached the Dispute Resolution Panel (DRP), which found the Notes on financial statements that the assessee wrote off inventory of Rs.2312.46 lakh. After comparing the figure of inventory given in the balance sheet at Rs.138.72 crore with that given to the bank, for availing credit facilities, at Rs.185.43 crore, the DRP called upon the assessee to explain the difference. The assessee tendered a reconciliation explaining that a sum of Rs.23.58 crore was reduced from the value of stock given to bank on account of Excise duty and another sum of Rs.23.12 crore was reduced towards obsolete and non-moving inventory written off as extraordinary item so as to reach the figure of inventory in the balance sheet. To justify the write off of obsolete and non- moving inventory, the assessee stated that it was valuing the stock as per the method `Cost or Net realizable value, whichever is less'. The value of obsolescence of stock to the above tune was reflected in the balance sheet, signed on 28-05-2013. The ld. DRP observed that since the write off actually happened in the F.Y. 2013-14, there was no justification in 3 ITA No.2720/PUN/2017 Bilcare Limited allowing claim of write off in the F.Y. 2012-13 relevant to the assessment year under consideration, even though the audited accounts were signed on 28-05-2013. That is how, the DRP directed the AO to make enhancement by Rs.23.12 crore. The AO made the enhancement in the final assessment order. Apart from the challenging the making of the addition on merits, the assessee has also assailed the direction given by the DRP for enhancement on a preliminary legal issue of jurisdiction.
3. At this juncture, it is pertinent to mention that this appeal was earlier fixed for hearing before a different combination of the Division Bench, wherein the ld. AR argued that the DRP had no power to take up the issue of stock write off. It was put forth that the AO did not consider the issue of stock write off in the draft order and hence, the DRP lacked jurisdiction to direct enhancement on this score. To support this contention, the ld. AR relied on certain Tribunal orders. The Bench was not convinced with the assessee's submission in view of certain other decisions empowering the DRP to make enhancement in the situation as is obtaining in the instant case. The matter was adjourned at the request of the ld. AR, who requested for the constitution of a Special Bench on this issue. On such request, the Hon'ble President sought the comments of 4 ITA No.2720/PUN/2017 Bilcare Limited Division Bench (DB). The matter was fixed for hearing before the DB only for the limited purpose of considering the assessee's submission as to whether the DRP was justified in directing enhancement on an issue which was not there in the draft order and the consequential setting up of a special bench. Vide its order dated 27.07.2021, a copy of which has already been supplied to both the assessee as well as the Revenue, the Bench rejected the assessee's contention by taking note of Explanation to section 144C(8) inserted by the Finance Act, 2012 with retrospective effect from 01- 04-2009 providing that the power of the DRP to enhance the variation shall include and shall be deemed always to have included the power to consider any matter arising out of the assessment proceedings relating to a draft order notwithstanding that such matter was raised or not by the eligible assessee. Relevant discussion has been made by the DB in paras 5 to 9 of its interim order, which read as under :
"5. Being aggrieved by the final assessment order, the appellant filed an appeal before this Tribunal contesting inter-alia in respect of addition on account of obsolete and slow moving inventory items written off, and that the ld.D.R.P. has no power to make any addition which is not a part of any variations proposed by the Assessing Officer in the draft assessment order. In this connection, he relied on the decision in the case of Sava Healthcare Ltd., Vs. ACIT (ITA Nos.1062 to 1068/PUN/2017) reported in (2019) 107 taxmann.com 226 wherein it was held as under :
"114........... But where the TPO has not exercised his jurisdiction, the DRP in exercise of his powers cannot benchmark new transaction though reported by the assessee, in the hands of assessee."5 ITA No.2720/PUN/2017
Bilcare Limited
6. It is also brought to our notice that the Co-ordinate Bench of Delhi Tribunal in the case of Bausch & Lomb India Pvt Ltd., Vs. ACIT (ITA No.1399/Del/2017 dt.25.08.2017) reported in (2017) 85 taxmann. Com 163 (Delhi - Trib) upheld of power of DRP to make addition even in respect of items which is not subject matter of variations proposed by the Assessing Officer by holding as under :
"10. It is clear from the mandate of sub-section (8) that the DRP is empowered, inter alia, to enhance the variations proposed in the draft order. The Explanation to this sub-section inserted retrospectively from 1.4.2000 clarifies that the power of the DRP to enhance the variation shall include the power to consider any matter arising out of the assessment proceedings relating to the draft order, notwithstanding that such matter was not raised by the assessee. When we consider the language of sub-section (8) in conjunction with the Explanation, it clearly emerges that the DRP has a power to enhance variations proposed in the draft order on an international transaction, even if it was not raised by the assessee. `Enhance the variations' include not only increasing the amount of transfer pricing adjustment already proposed, but also making a new transfer pricing adjustment, which was omitted to be proposed/made by the AO/TPO. There is no doubt and cannot be that the power of the DRP is co-terminus with that of the AO/TPO. In other words, the DRP can also do all such things, which the authorities could have done but omitted to do. If the language of the provision is read as disabling the DRP to exercise the power of enhancement in the circumstances as are obtaining in the instant case, as has been canvassed on behalf of the assessee, it would amount to diluting the power, which the statute has expressly granted."
7. On noticing the divergent views taken by the Co-ordinate Benches of the Tribunals of Delhi and Pune Benches in the cases of Bausch & Lomb India Pvt. Ltd. (supra) and Sava Healthcare Ltd. (supra), respectively, the assessee company made the present application seeking constitution of Special Bench to resolve the conflict in the views of the above said co-ordinate benches. It is further submitted that the decision of Hon'ble Delhi High Court in the case of Lahmeyer Holding GMBH Vs. DDIT reported in 376 ITR 0070 (Del) has no application to the facts of the present case, in as much as, it is a case where the issue, which is the subject matter of addition proposed by the ld.D.R.P was not processed and examined by the Assessing Officer.
8. We have heard the rival submissions and perused the material on record and the relevant provisions of statute governing the powers of ld.D.R.P. in terms of Section 144C(8) of the and the explanation appended thereto. The Explanation was introduced by the Parliament by the Finance Act, 2012 with retrospective effect from 01.04.2009. The said provisions have come up before the Hon'ble Delhi High Court in the case of Lahmeyer Holding GMBH Vs. DDIT reported in 376 ITR 0070 (supra) for interpretation wherein the Hon'ble High Court held as follows : 6 ITA No.2720/PUN/2017
Bilcare Limited "24.... Reading the Explanation with sub-section 144C(8), it is evident that the Dispute Resolution Panel could examine the issues arising out of the assessment proceedings even though such issues were not part of the subject matter of the variations suggested by the Assessing Officer."
9. It must be noted that the explanation was inserted to provisions of sub-section (8) of Sec.144C to over-rule the decision of Hon'ble Karnataka High Court in the case of G.E. Electricals Ltd., Vs. CIT reported in 338 ITR 416 wherein the Hon'ble High Court held that the jurisdiction of the DRP would be confined to decide the variations that have been proposed in the draft assessment order and contested before it. Thus, it is clear that the Explanation was inserted by the Finance Act 2012 with retrospect effect from 01.04.2009 so as to empower the ld. D.R.P. to consider any issue arising out of the draft assessment order even if it is not in dispute. It is also equally settled position of law that the word "assessment" includes the "return of income" filed by the assessee. We do not find any contrary decision from any other Hon'ble High Court. Therefore, now the issue that boils down to single point i.e. whether the decision of non-jurisdictional High Court shall prevail over the decision of the Special Bench.
4. From the above extracts of the interim order passed by the DB rejecting the assessee's request for constitution of a Special Bench on the issue of power of the DRP to make enhancement on an issue which was not a part of the draft order, it is vivid that the Bench categorically held against the assessee by holding: `Thus, it is clear that the Explanation was inserted by the Finance Act 2012 with retrospect effect from 01.04.2009 so as to empower the ld. D.R.P. to consider any issue arising out of the draft assessment order even if it is not in dispute. It is also equally settled position of law that the word "assessment" includes the "return of income" filed by the assessee. We do not find any contrary decision from any other Hon'ble High Court'. The ld. AR, in the extant proceedings, 7 ITA No.2720/PUN/2017 Bilcare Limited ventured to re-argue the same issue with an attempt to persuade us to his line of thinking that the DRP cannot take cognizance of a new issue which is not part of the draft order. We do not find any rationale in permitting the parties to re-argue the same issue as has already been considered and decided by the Tribunal by means of an interim order passed in collateral proceedings of the same case. It is not a case where the DB simply discarded the request of the assessee for constitution of Special bench without delving into the issue. Rather, the Bench having initially expressed its prima facie opinion on not accepting the proposition, gave ample opportunity of hearing to both the sides on merits of the issue and thereafter passed a well reasoned speaking order rejecting the contention on merits and also the consequential proposal for constitution of special bench. The instant situation is not akin to letters patent appeal wherein the aggrieved party can once again approach the DB to have a second call on the matter. We are concerned with a situation in which the DB has already decided the issue on merits by means of its interim order. Once the decision of the DB is available on merits in the interim order, it is not open to re-agitate the same issue before the DB in the proceedings for final disposal of the appeal u/s 254(1) of the Act.
8ITA No.2720/PUN/2017
Bilcare Limited
5. Notwithstanding the foregoing, we consider it our duty to record the submission of the ld. AR that the issue has been decided by the Hon'ble Madras High Court in M/s Delphi-TVS Diesel Systems Ltd. VS., ITO(OSD)/Secretary, DRP (W.P. No. 26313 of 2017), which judgment dated 17.8.2021 was delivered after the passing of the interim order by the DB of the Tribunal. Relying on this judgment, he contended that the DRP was wholly unjustified in making the enhancement on account of stock written off which issue was not subject matter of the draft order.
6. We have perused the judgment of the Hon'ble Madras High Court. In that case, the draft order was notified on certain other issues but without any disallowance of expenditure u/s.40(a)(i) of the Act on Employees Secondment charges and Reimbursement of expenses. The assessee challenged the draft order before the DRP. The DRP issued enhancement notice in respect of disallowance u/s.40(a)(i) on Employees Secondment charges and Reimbursement of expenses. After entertaining the objections, the DRP directed the AO to make the disallowance u/s.40(a)(i). The assessee filed writ petition No.26313 of 2017 seeking to quash the direction of the DRP on the enhancement by urging that the DRP had no power to issue notice for enhancement as that issue was not considered by the 9 ITA No.2720/PUN/2017 Bilcare Limited AO in the draft order. The Hon'ble High Court considered the scope of the Explanation appended to section 144C(8) of the Act and rejected the assessee's writ petition by observing that: "Thus, there is no impediment as such for the Dispute Resolution Panel to consider any matter arising out of the assessment proceedings relating to the Draft Assessment Order and no matter, such an issue was discussed in the Draft Assessment Order or not, but it should not be totally unconnected with the assessment proceedings or the Draft Assessment Order". Thereafter, it observed that the:
"proposed notice issued to the writ petitioner is relatable to the assessment proceedings and to the Draft Assessment Order. Thus, there is no infirmity in respect of exercise of powers by the Dispute Resolution Panel and the notice issued for enhancement." It is emphatically clear that even though the question of disallowance u/s.40(a)(i) of the Act on Employees Secondment charges and Reimbursement of expenses was not subject matter of the draft order, still the Hon'ble High Court, considering the ambit of the Explanation to section 144C(8), held that the DRP rightly directed enhancement on it because it was relatable to the assessment proceedings and to the Draft Assessment Order. On a careful circumspection of the ratio decidendi laid down by the Hon'ble 10 ITA No.2720/PUN/2017 Bilcare Limited Madras High Court in the backdrop of the factual position prevailing in that case, there remains no doubt whatsoever that rather than justifying the stand of the assessee, this judgment fortifies the view taken by the DB in its interim order, rejecting the assessee's contention that the DRP was not empowered to consider the stock write off at Rs.23.12 crore which item was not considered by the AO in the draft order. Respectfully following the interim order passed by the DB, we jettison the assessee's contention on the preliminary jurisdictional legal issue and hold that the DRP was intra vires to espouse the issue of stock write off by means of enhancement notice.
7. Now we turn to the merits of the issue. The audited financial statements of the assessee for the year contained Note no.43 with the caption Extraordinary items reading: "During the year, the Company has written off obsolete (sic absolute) and non-moving inventory to the extent of Rs.2312.46 lakh". The figure of inventory given in the balance sheet at Rs.13872.53 lakh was determined after reducing, inter alia, Rs.23.12 core on account of write off of obsolete and non-moving inventory. The DRP, after entertaining objections from the assessee, decided the issue by giving following direction in para 9.3, as under :
11ITA No.2720/PUN/2017
Bilcare Limited "9.3 From the above, we find that in the audited accounts the assessee has under reported the value of closing stock vis-à-vis the statement filed before the bank as on 31/3/2013.
The difference between the two has been explained to be on account of considering the excise duty also as part of closing stock which was shown separately in the balance sheet and the difference on account of obsolete and non-moving inventory of Rs.23.12 crs. The assessee has explained that this slow moving inventory was informed to the bank in the month of April to June, 2013 and as the audited account were signed on 28-05-2013 (sic 2017), the assessee had considered the write- off in the audited accounts for the FY 2012-13 itself. As per the record the write-off has happened in FY 2013-14. Having considered the reasons given by the assessee we do not find any justification in claim of write-off in FY 2012-13 as even though the audited accounts were signed on 28/5/2013 the same pertained to F.Y.2012-13 closing on 31/3/2013. The event as in the present case of valuation of non-moving obsolete inventory and write off of Rs.23.12 cr. occurred only during F.Y. 2013-14. In light of the above the claim of write off of Rs.23.12 cr in FY 2012-13 is incorrect and is been disallowed. The AO is directed to incorporate the same while finalizing the assessment. This will result in enhancement of Rs.23.12 cr. The AO is directed to initiate penalty u/s.271(1)(c) for filing inaccurate particulars of income."
8. It is manifested on going through the above extracted direction that: "As per the record the write off has happened in F.Y. 2013-14. Having considered the reasons given by the assessee we do not find any justification in claim of write off in F.Y. 2012-13 as even though the audited accounts were signed on 28-05-2013 the same pertained to F.Y. 2012-13 closing on 31-03-2013. The event as in the present case of valuation of non-moving inventory and write off 12 ITA No.2720/PUN/2017 Bilcare Limited of Rs.23.12 crore occurred during F.Y. 2013-14." Two things emerge from the direction given by the DRP. First, that the bona fide and the value of loss on account of obsolescence of inventory have been accepted as correct; and second, that the dispute is only about the year in which such obsolescence in the inventory value should be written off. To be more precise, the only difference of opinion is as to whether such obsolescence in stock value should be written off in the year under consideration or in the next year. Whereas the assessee wrote off the loss of Rs.23.12 crore in its accounts on the ground that the loss pertained to the value of inventory as on 31-03-2013, the DRP espoused the view that since loss was quantified after 31-03-2013, the same should have been written off in the F.Y. 2013-14.
9. At this stage, it is imperative to mention that the assessee is valuing its inventory at: `Cost or Net realizable value, whichever is less'. Under this method, the inventory is valued in balance sheet at its net realizable value, if such value is less than the cost price. Net realizable value is determined by ascertaining the amount that the inventory will fetch if sold in the open market on the balance sheet date. If the inventory has become obsolete or has ceased to be marketable, fully or partly, the extent of such obsolescence needs to 13 ITA No.2720/PUN/2017 Bilcare Limited be reflected in the inventory value by appropriately reducing the cost price so as to bring it to the net realizable value. It is this diminution in the value of inventory due to obsolescence as on 31.3.2013, which has been quantified by the auditor at Rs.23,12,46,650/- by means of a certificate dated 02-04-2013, a copy of which has been placed at pages 203 onwards of the paper book. The auditor has certified: "that the value of total obsolete and non-moving inventory, which needs to be written off as on 31-03- 2013, is to the tune of Rs.23,12,45,650/- as detailed out in the annexure enclosed". Then, there is the annexure running into few pages giving item-wise write off in quantity as well as value. It is on the basis of this certificate issued by the auditor on 02-04-2013 that the assessee, while finalizing its balance sheet on 28.5.2013, gave effect to the method of stock valuation consistently followed and reduced the value of inventory as shown on 31.3.2013 by the amount of such obsolescence to bring it at net realizable value.
10. From the above discussion, it clearly transpires that the obsolescence in the inventory was qua the value of stock as on 31- 03-2013 and the assessee incorporated the effect of such reduction in the value of inventory by giving an appropriate note as an "extraordinary event". The reduction has the effect of representing 14 ITA No.2720/PUN/2017 Bilcare Limited the condition of stock existing as on 31-03-2013 at its realizable value. It is not as if there was some depletion in the value of inventory taking place after 31-03-2013 which the assessee accounted for in its annual accounts for the year ending 31-03-2013. Rather it is a case of the existing condition of diminution in the value of inventory as on 31-03-2013. As the exercise of valuing the obsolescence in stock took place after close of the year but before the signing of the balance sheet on 28.5.2013, the assessee depicted it as an extraordinary item by way of a note to accounts and reduced the value of closing stock accordingly. In view of the fact that the obsolescence affects the value of inventory as on 31-03-2013, the same was required to be taken into consideration for reflecting true and fair state of affairs of the company as on the balance sheet date. The direction of the DRP that the loss should be written off in the F.Y. 2013-14 on the raison d`etre that it was quantified after 31-03- 2013, cannot be countenanced. The relevant factor to be considered is the date with reference to which the value of stock is determined and not the date when the exercise of such value determination is carried out. Had it been a case of the assessee valuing its inventory on any date after 31-03-2013 but giving effect in the balance sheet as on 31.3.2013, that would have warranted addition. Au contraire, 15 ITA No.2720/PUN/2017 Bilcare Limited we are confronted with a situation in which depletion has taken place with reference to the value of inventory on 31-03-2013. We, therefore, hold that the AO was not justified in making addition of Rs.23,12,46,000/- in the impugned order. The same is, ergo, directed to be deleted.
11. The next issue raised in the appeal is against the transfer pricing addition amounting to Rs.12,81,49,000/- on account of Corporate Guarantee.
12. We have noted above that the assessee gave Corporate Guarantee for its Associated Enterprise, which was albeit reported in Form No.3CEB but neither any details were provided nor the benchmarking was done. On being called upon to furnish the details, the assessee gave requisite information in respect of Corporate Guarantee given to certain banks in respect of its AEs for a total sum of Rs.1,06,270.04 lakhs. In respect of the first transaction of Guarantee to SBIIFB, Pune for 5,50,00,000 Euros in favour of Bilcare AG, the assessee incurred a sum of Rs.291.93 lakhs, which was recovered from its AE. However, no guarantee fees was recovered for any of the five transactions. The TPO benchmarked these transactions by adopting Arm's Length rate at 1.75% as Corporate Guarantee fee and worked out the net transfer 16 ITA No.2720/PUN/2017 Bilcare Limited pricing adjustment at Rs.12,81,40,000/-, after reducing Rs.291.93 lakhs incurred in extending guarantee and recovered by the assessee from its AE. The assessee remained unsuccessful before the DRP, as a result of which the AO made the addition of Rs.12.81 crore in the final assessment order. The assessee has come up in appeal before the Tribunal on this issue.
13. We have heard both the sides and gone through the relevant material on record. At the outset, the ld. AR contended that similar issue has been considered and decided by the Tribunal in its order for the assessment year 2014-15. A copy of such order dated 26-03- 2021 passed in ITA No.1693/PUN/2018 and other was placed on record. We have gone through the order. The decision on the issue of corporate guarantee fee has been incorporated in paras 7.17 and 7.18 of the order. After considering the entire gamut of material, the Tribunal determined the Arm's Length fee from furnishing of the corporate guarantee at 0.5% as further increased by any expenditure actually incurred by the assessee in furnishing the guarantee. The ld. DR was fair enough to concede the position in this regard. Having regard to the rival but common submissions and respectfully following the order of the Tribunal for the immediately succeeding assessment year, we set aside the impugned order on 17 ITA No.2720/PUN/2017 Bilcare Limited this score and remit the matter to the file of AO/TPO for re- computing the ALP of the transaction. In doing so, he will first ascertain the amount of expenditure actually incurred by the assessee in furnishing the five corporate guarantees and thereafter add 0.5% as the service fee for furnishing the guarantee. Needless to say, the assessee will be allowed a reasonable opportunity of hearing in this regard.
14. In the result, the appeal is partly allowed.
Order pronounced in the Open Court on 26th October, 2021.
Sd/- Sd/-
(PARTHA SARATHI CHAUDHURY) (R.S.SYAL)
JUDICIAL MEMBER VICE PRESIDENT
पुणे Pune; िदनां क Dated : 26th October, 2021
सतीश
आदे श की ितिलिप अ ेिषत/Copy of the Order is forwarded to:
1. अपीलाथ / The Appellant;
2. थ / The Respondent;
3. The CIT(A)-13, Pune
4. The Pr.CIT-V, Pune
5. िवभागीय ितिनिध, आयकर अपीलीय अिधकरण, पुणे "सी" / DR 'C', ITAT, Pune;
6. गाड फाईल / Guard file.
आदे शानुसार/ BY ORDER, // True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune 18 ITA No.2720/PUN/2017 Bilcare Limited Date
1. Draft dictated on 25-10-2021 Sr.PS
2. Draft placed before author 26-10-2021 Sr.PS
3. Draft proposed & placed before JM the second member
4. Draft discussed/approved by JM Second Member.
5. Approved Draft comes to the Sr.PS Sr.PS/PS
6. Kept for pronouncement on Sr.PS
7. Date of uploading order Sr.PS
8. File sent to the Bench Clerk Sr.PS
9. Date on which file goes to the Head Clerk
10. Date on which file goes to the A.R.
11. Date of dispatch of Order.
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