Sunday, 10 December 2017

I-T - Unutilised MODVAT Credit is not allowable deduction under provisions of Section 43B: HC

THE issue before the Bench is - Whether unutilised Modvat Credit is allowable as deduction u/s 43B. And the verdict is NO.
Facts of the case
The Assessee purchased raw materials and inputs that went into the manufacture of automobiles. The purchase price paid by the Assessee for raw material or inputs included excise duty. To the extent that such excise duty had been paid as part of the purchase price, the Assessee was entitled to MODVAT credit in terms of Rule 57A of the CE Rules. The excise duty paid by the Assessee was kept in a separate account, maintained as the RG23 register so that the Assessee could utilize that separate account or credit for payment of excise duty at the time of clearance of the automobiles manufactured by it from its factory. The controversy that arose was that as of 31st March 1999, the unutilized MODVAT credit stood, in the Assessee's books of accounts, at Rs. 69,93,00,428. That amount, having been paid by the Assessee on the raw material or input as excise duty, was not shown as expenditure and therefore, was not reflected in its P&L account. Instead, it was shown as a current asset in the balance sheet. The contention of the Assessee was that although the said amount was shown as unutilized MODVAT credit, it had been paid by the Assessee and should therefore be allowable as a deduction in terms of Section 43B of the Act.
However, the contention of the Revenue was that however, the Assessee might 
be the person who pays the excise duty, the liability was that of the manufacturer and that did not mean that the Assessee was the one who was liable to pay excise duty on such raw material or inputs. As per the Revenue, it was merely the incidence of excise duty that had shifted from the manufacturer to the purchaser and not the liability to pay the same. Accordingly, the AO made disallowance on that account. On Assessee's appeal, the CIT(A) upheld the decision of the AO. On further appeal by the Assessee, the Tribunal also upheld the disallowance and dismissed the appeal filed by the Assessee.
After hearing the parties, the High Court held that,
++ guidance Note issued by the ICAI answers both issues raised by the Revenue. One is that it clarified that MODVAT Credit is treated as a separate account where appropriate accounting entries will be made to adjust the excise duty paid out of the said account. It is clear that the debit balance in MODVAT/CENVAT Credit Receivable (Inputs) has to be shown on the assets side, under the head 'advances'. According to the accrual concept of accounting (mercantile system), credit is taken even after the documents evidencing payment of specific duty on inputs are received later than the physical receipt of the goods;
++ it must be noted at this stage that after hearing the arguments on 21st September 2017, an affidavit dated 6th November 2017 has been filed by the Assessee pointing out that out of the total amount of unutilized MODVAT credit of Rs. 69,93,00,428, an amount of Rs. 15,73,38,110 pertains to goods already consumed and which were, therefore, not includable in the closing stock of raw materials and inputs as on 31st March 1999. It is pointed out that this was noted by the CIT (A) in para 9.16 of the appellate order and that this finding was not questioned by the Revenue. It is accordingly submitted that even if the Revenue's contention on the interpretation of Section 43B was accepted, the Assessee is unquestionably entitled to deduction of the such amount of Rs. 15,73,38,110. It is further pointed out that out of the such unutilized MODVAT credit claimed as a deduction by the Assessee for the AY 1999-00, a further amount of Rs. 14,96,79,029 represents additional or countervailing duty which has been paid by the Assessee directly to the Customs Department on the import of raw materials, components and the inputs. This, according to the Assessee, is borne out by the RG-23 (Part-II) Register maintained by the Assessee and verified and audited from time to time by the excise authorities. It is asserted that the said amount "has actually been paid by the assessee to the customs authorities and therefore, this amount should also be allowed under Section 43B of the Act; 
++ the Court would only like to observe that it would be for the AO to give effect to the order pertaining to the such amounts paid by the Assessee to be made in respect of those goods already consumed as on 31st March 1999 and in respect of additional countervailing duty paid directly to the customs authorities. If indeed such payment has been made, the credit for the same would be allowable as a deduction under Section 43B of the Act;

++ it is also to be noted that in para 35 of the order, the ITAT has accepted the alternate contention of the Assessee that unutilized MODVAT credit of an earlier year which has been adjusted in the year in question should be allowed as a deduction in as much as such adjustment would have to be treated as an actual payment of excise duty. In view of the Court agreeing with the ITAT on the non-allowability of unutilized MODVAT credit as a deduction under Section 43B of the Act for the AY in question, this Court also agrees with the ITAT's acceptance of the Assessee's alternate contention with regards to the unutilized MODVAT credit of the earlier year being allowable as a deduction in the AY in question to the extent that it has been adjusted by treating as actual payment of the credit for the AY in question. As the ITAT has already pointed out, the Assessee would be entitled to such deduction "subject to verification provided the same was not allowed as deduction in the earlier year. An attempt was made by Mr. Ganesh to contend that it should now be allowed to be treated as unutilized MODVAT credit as part of the closing stock. An attempt was then made by Mr. Ganesh to contend that the amount of excise duty paid by the Assessee should be treated as expenditure and allowed under Section 37 of the Act as business expenditure. As rightly pointed out by Mr. Bhatia, the Assessee appears to have followed an exclusive method of valuation of stock as opposed to an inclusive stock valuation method. Such a plea was not taken at any stage of the present case before the AO, CIT (A) or the ITAT. As rightly pointed out, if the amount paid has to be allowed as a deduction under Section 37 of the Act then the inclusive method of valuation of stock has to be followed. The Assessee must opt to either treat the same as expenditure or treat it as forming part of current assets. If the plea of deduction under Section 37 is to be allowed then the question of utilising the unutilized MODVAT credit forpayment of excise duty would not arise at all;
++ after the insertion of Section 145A of the Act, with effect from 1st April 2010, an Assessee must now necessarily follow the inclusive method of valuation of stock. It was explained by the Bombay High Court in case of Cartini India Limited that as per the new provision of Section 145A of the Income-tax Act, 1961, the unutilized MODVAT credit had to be included in the closing stock of raw material and work in progress, whereas the excise duty paid on unsold finished goods had to be included in the inventory of finished goods. However, Section 145A of the Act is prospective and does not apply to the AY in question;
++ the Court is not inclined to permit the Assessee to raise the alternative plea for more than one reason. In the first place, it is a plea taken for the first time in these proceedings. It appears to be an afterthought. Secondly, the ITAT has already accepted another alternate plea made before it by the Assessee by allowing deduction in respect of the unutilized MODVAT credit of the earlier AY, the Court is not inclined to disagree with the reasoning and conclusion of the ITAT. The assessee cannot be allowed to go back and forth on the above plea. There has to be consistency. Thirdly, balance sheet of the Assessee for AY 1999-00 shows that the turnover for the year was over Rs. 8,000 crores. The corresponding sum claimed as deduction representing the unutilized MODVAT credit is not very significant in comparison. 

TDS - Premium paid by tourist operator, seperately to RMCs for purchase of foreign currency, cannot be treated as commission payment requiring TDS deduction u/s 194H: ITAT

THE ISSUE is - Whether premium paid by a tourist operator, seperately to RMCs for purchase of foreign currency, can be treated as commission payment requiring TDS deduction u/s 194H, when there is no principal agent relationship existing between the operator and the RMCs. NO is the answer.
Facts of the case:
A) The Assessee is in the business of tours and travels and in the course of such business it also engages itself in trading in foreign currency. During the assessment proceedings, the AO noticing that the assessee was also engaged in the business of trading in foreign exchange called for the details of such transactions. In response, the assessee furnished foreign exchange trading account wherein an amount of Rs. 51,13,680/- was debited towards commission payment. From the details submitted by the assessee, the AO found that assessee had not deducted tax at source on an amount of Rs. 19,09,775/-. When called upon to explain the reason for non deduction of tax at source on such amount, it was submitted by assessee that the payment was not in the nature of commission but premium paid separately to RMCs at Goa for purchase of foreign currency by the assessee from them and which they, in turn have purchased from foreign tourists. It was submitted, RMCs requested for reimbursement at card rate, i.e. the rate at which they paid to the tourists in order to keep track of profits earned by them on stock sold to the assessee. The AO was not convinced with the explanation of the assessee. He opined, though, the assessee had claimed to have entered into such transactions with RMCs on principal to principal basis, however the facts indicate a principal and agent relationship as the so called premium was debited under the head commission which was over and above the purchase price. Since, the assessee had not deducted tax at source on such payment, the AO disallowed the amount of Rs. 19,09,775/- u/s 40(a)(ia) of the Act. On appeal, the CIT(A) sustained the addition by holding that payment made by assessee was covered u/s 194H.
B) During the assessment proceedings, the AO having found that the assessee had debited expenditure amounting to Rs. 20,04,37,496/- on account of brokerage payment to various parties for arranging inter corporate deposits, called upon the assessee to furnish necessary details. After verifying party-wise details of brokerage payment furnished by the assessee, the AO alleged certain discrepancies in such payments and ultimately held that the payments are neither genuine nor for the purpose of assessee’s business. Accordingly, he disallowed an amount of Rs. 1,77,68,298/- out of the total expenditure claimed. On appeal, the CIT(A) deleted the addition made by AO.

the Tribunal held that,
++ as far as commission payment is concerned, the assessee has a foreign exchange division approved by the RBI and is authorised to buy foreign exchange and travellers cheques from RMCs and others and sell them to persons in need of them. RMCs are also authorised by RBI to buy foreign currency from non residents visiting various places in India. These facts would show that the RMCs are not agents of the assessee but are appointed by RBI. Though, it may be a fact that the assessee buys foreign currency from RMCs depending upon the needs, however, there is no principal agent relationship between the assessee and the RMCs. The RMCs are free to sell foreign currency bought from tourists to assessee, RBI or any other person authorised by the RBI to deal in foreign currency. It is also to be noted that both the RMCs as well as the assessee have shown foreign currency as their stock in trade. The assessee has no relationship with the persons from whom the RMCs purchase foreign currency and the assessee is no way connected to the concerned tourists. Therefore, in our view the transaction between the assessee and the RMCs is on principal to principal basis and there is no principal agent relationship existing between them. Merely because in the financial statement assessee has debited the amount as commission it cannot be treated so without looking at the real nature of the transaction. The AO must bring on record material to establish that there is a principal agent relationship existing between the assessee and the RMCs. No enquiry has been made by the AO with the RMCs to find out the real nature of transactions between them. Further, assessee’s contention that in no other place in India such premium paid has been disallowed requires to be taken note of. It is also relevant to observe, even in respect of premium payment in Goa, except, the impugned assessment year in no other assessment year such disallowance under section 40(a)(ia) has been made. That being the case, we are inclined to delete the addition made by the AO.

Deposit made by subscriber of Inter Corporate Deposit, issued by company on fixed rate of interest, cannot be treated as loan: ITAT

THE ISSUE is - Whether deposit made by the subscriber of the Inter Corporate Deposit, issued by a company on a fixed rate of interest, can be treated as a loan. NO is the answer.
Facts of the case:
The Assessee is a Non Banking Finance Company registered with RBI and is wholly owned subsidiary of Bennett, Coleman & Co. Ltd. (BCCL). During the year under consideration, the assessee had earned interest on Inter Corporate Deposit given to BCCL. The assessee had extended ICD amounting to Rs. 147 lacs to BCCL which was 100% holding company, initially @ 10% per annum for three years vide agreement. However in the late of the year 2009, BCCL proposed for reduction in the rate of interest to 7.25% per annum based on the then prevailing market rates. The assessee agreed to this reduction of rates, w.e.f., 1.1.2010 as it was not possible to obtain a better rate of interest from any safe source such as leading banks. The AO required the assessee to justify the reduction of rate of interest on the ICD from 10% to 7.25% per annum. In response to which, the assessee filed detailed reasons alongwith documents in support justifying the reduction of rate of interest on ICD. However the AO did not accept the assessee’s explanation and observed that rate of interest should be adopted at 15% on loans to BCCL as the charging of interest is not on arm’s length. Accordingly, he proceeded to compute the interest @ 15% per annum at Rs. 17,39,83,561/- thus making an addition of Rs. 6,77,97,413/-. 
And the Tribunal held that,
++ in any case the assessee has tried to justify the rate of interest agreed amongst the parties by bringing on record the various rate of interest on FDRs at the relevant time offered by different the bank which was far below than 7.25%, which in our opinion the onus on the assessee if any to prove the reasonableness too has been discharged, which though in our opinion was not required. AO has treated the subscription of ICD as a loan which in our understanding is not a correct way to interpret an ICD, because it is a deposit made by the subscriber of the ICD issued by a company on a fixed rate of interest and hence it cannot be treated as a loan. Thus such an enhancement of notional income as done by the AO cannot be appreciated, because the AO cannot step into the shoes of the businessman to hold that he should have maximum profit from the transaction. There is no real income which has accrued to the assessee and accordingly, the view taken by CIT(A) for deleting the addition is upheld. 

CBEC eases norms for bank guarantee & security by importers availing concessional duty

CBEC eases the norms for furnishing security / surety along with Bank Guarantee / bond by importers seeking to avail concessional duty benefit in terms of Customs (Import of Goods at Concessional Rate of Duty) Rules 2017; Accordingly, states that all importers who are manufacturers / service providers registered under GST and have been filing prescribed GST returns without fail and whose annual turnover in preceding year is above Rs. 1 Cr, shall give surety for the amount of duty foregone and where they are unable to do so, a Bank Guarantee (with self-renewal clause) / Cash security equivalent to not more than 5% of duty foregone shall be furnished; Dept. of Central Govt. / State Govt. / UT / PSU / autonomous institute under the said Govts. and all importers who are Authorised Economic Operators are exempt from such requirement; All other importers must furnish Bank Guarantee / Cash security for an amount not more than 25% of duty foregone; However, jurisdictional Commissioner may order for higher quantum subject to limit of 100% of duty foregone amount, and where importer so requests, the bank guarantee / cash security may be taken consignment-wise to obviate financial burden : CBEC Circular