ITAT Mumbai Ruling in Asian Paints Ltd. Vs ACIT: Detailed Analytical Summary

This article provides a structured, practitioner-focused summary of the decision of the Income Tax Appellate Tribunal, Mumbai Bench, in Asian Paints Ltd. Vs ACIT (ITAT Mumbai) for Assessment Year 2013–14. The Tribunal disposed of cross-appeals filed by the assessee and the Revenue, addressing a wide spectrum of issues including:

  • Disallowance under Section 14A read with Rule 8D
  • Transfer pricing adjustments for support/intragroup services and letters of comfort
  • Deduction under Section 35(2AB)
  • Valuation of damaged stock
  • Additional depreciation
  • Dealer trip-scheme expenditure
  • Waiver of royalty
  • CSR expenditure and applicability of Explanation 2 to Section 37(1)
  • Sundry balances written off
  • Taxability and character (capital vs revenue) of subsidy under Maharashtra’s Package Scheme of Incentives, 2007

The Tribunal partly allowed the assessee’s appeal and partly allowed the Revenue’s appeal for statistical purposes.

1. Background of the Case

Asian Paints Ltd., a company engaged in manufacturing paints and enamels, filed its original return of income for AY 2013–14 on 28/11/2013, declaring a total income of Rs.1259,97,53,980. A revised return showed income of Rs.1248,74,49,480.

The case was taken up for scrutiny and culminated in an assessment under Section 143(3) read with Section 144C(3) assessing income at Rs.1351,78,51,596 after various additions and disallowances.

On appeal, the CIT(A) granted partial relief. Both the assessee and the Revenue carried the matter to the ITAT Mumbai.

The decision also relies heavily on earlier orders in the assessee’s own case and important precedents such as:

  • Maxopp Investment Ltd v. CIT, [2018] 402 ITR 640 (SC)
  • Godrej & Boyce Manufacturing Company Ltd. Vs DCIT, [2017] 394 ITR 449 (SC)
  • CIT v/s M/s Asian Paints Ltd., ITA No.1564 of 2016 (Bombay High Court)
  • Pr.CIT v/s PEC Ltd., [2023] 146 taxmann.com 407 (Delhi High Court)
  • CIT v/s Ponni Sugars and Chemicals Ltd., [2008] 306 ITR 392 (SC)
  • CIT v/s Kirloskar Oil Engines Ltd., [2014] 364 ITR 88 (Bombay High Court)
  • Sahney Steel & Press Works Ltd. v. CIT, [1997] 228 ITR 253 (SC)

2. Disallowance under Section 14A read with Rule 8D

2.1 Facts

  • The assessee earned:
    • Dividend from domestic companies/mutual funds: Rs.31,69,67,788 (claimed exempt under Section 10(34))
    • Interest on tax-free REC bonds: Rs.2,16,86,381
  • The assessee made a suo motu disallowance of Rs.23,86,531 as expenditure relatable to exempt income, supported by a working and an accountant’s report.
  • The Assessing Officer invoked Rule 8D and computed disallowance under Section 14A at Rs.1,82,91,196, after adjusting the assessee’s own disallowance.
  • The CIT(A) restricted the disallowance to Rs.93,30,985, excluding a portion of interest considered attributable to normal business operations, following earlier years.

Both sides appealed: the assessee challenged any enhancement beyond its suo motu disallowance; the Revenue challenged the restriction by CIT(A).

2.2 Tribunal’s Analysis

The Tribunal noted that the core requirement under Section 14A(2) is that the AO must, having regard to the accounts, record dissatisfaction about the correctness of the assessee’s claim before resorting to the prescribed method (Rule 8D).

Relying on:

  • Maxopp Investment Ltd v. CIT, [2018] 402 ITR 640 (SC)
  • Godrej & Boyce Manufacturing Company Ltd. Vs DCIT, [2017] 394 ITR 449 (SC)
  • CIT v/s M/s Asian Paints Ltd., ITA No.1564 of 2016 (Bombay High Court)
  • The coordinate bench decision in Asian Paints Ltd. v/s ACIT, ITA No.5363/Mum./2017, order dated 01/03/2024, AY 2012-13

the Tribunal reiterated that:

Invocation of Rule 8D is impermissible unless the AO first records a proper, cogent dissatisfaction with the assessee’s working, based on examination of the accounts.

In the present year (AY 2013–14), the AO directly applied Rule 8D without recording such satisfaction.

2.3 Decision on Section 14A

  • Following the binding precedents and its own order for AY 2012–13, the Tribunal deleted the entire disallowance made under Section 14A read with Rule 8D.
  • Consequently:
    • Ground on Section 14A in the assessee’s appeal was allowed.
    • The related ground in the Revenue’s appeal (challenging restriction by CIT(A)) was also effectively rejected in line with this conclusion.

3. Transfer Pricing – Support and Intragroup Services

3.1 Nature of Transactions

The assessee had two categories of support/intragroup service transactions with its associated enterprises (AEs):

  1. Support services charged on a cost + 12% markup, including:

    • Time cost for engineering, legal, HR and miscellaneous support functions
    • Software support for book-keeping and other systems for overseas AEs

  2. Centralised intragroup services (supply chain, marketing, HR, legal, systems, etc.):

    • No separate charge to AEs, but the assessee itself computed and offered arm’s length income on cost plus 12% basis in its return.

The assessee applied TNMM as the Most Appropriate Method, using OP/OC as PLI and five comparables with an average margin of 8.46%.