Sunbeam Auto Ltd Vs ACIT ( ITAT Delhi)
It has been submitted by the Ld. AR that the assessee offered the amount of subsidy received by it in AY 2007-08, 200809, 2009-10 and 2010-11 as income which had been taxed under section 143(3) of the Act by the Ld. AO. Subsequently, the assessee filed an application under section 264 of the Act before the Principal Commissioner of Income Tax (Pr. CIT) pleading that the assessee had erroneously treated the subsidy received from Haryana Govt. as its income. The Ld. AO may, therefore, be directed to treat it as capital receipt not subject to tax. It is pointed out by the Ld. AR that the Ld. Pr. CIT vide order dated 30.03.2015 rejected the assessee’s application, holding that the subsidy was revenue receipt. Alternatively, the Ld. Pr. CIT also held that the Explanation 10 to section 43(6) was applicable.
The Ld. AR further submitted that the assessee filed writ petition before the Hon’ble Delhi High Court and the Hon’ble Delhi High Court set aside the order dated 30.03.2015 of the Ld. Pr. CIT passed under section 264 of the Act and resultantly the order(s) of the Ld. AO . The Hon’ble Delhi High Court held that the sales tax subsidy received by the assessee be treated as capital receipt and not be added to the income of the asseseee. The Hon’ble Delhi High Court went on to observe further that the consequential orders will now be passed by the Ld. AO.
The Ld. DR did not controvert the above submissions of the Ld. AR.
In the light of the factual matrix as submitted by the Ld. AR of the assesee we have no hesitation in holding that the issue that the sales tax subsidy received by the assesee from Haryana Govt. is capital receipt is covered in favour of the assesee and against the Revenue by the decision of Hon’ble Delhi High Court in the assessee’s own case in WP(C)8941/2015 dated 07.12.2017
FULL TEXT OF THE ORDER OF ITAT DELHI
The cross appeals by the assessee and the Revenue arise out of the order dated 12.07.2016 of the Ld. Commissioner of Income Tax (Appeals)-28, New Delhi (“CIT(A)”) pertaining to the assessment year (“AY”) 2011-12. Yet, another appeal by the assessee is directed against the order dated 19.12.2016 of the Ld. CIT(A) pertaining to the AY 2013-14. All the three appeals were heard together and are being disposed of by this consolidated order.
2. The assessee is a private limited company engaged in the business of manufacturing of automotive die cast components, IC engine parts and pistons for two wheelers and four wheelers.
2.1 For AY 2011-12 the assessee filed its return electronically on 26.09.2011 declaring income of Rs. 35,81,29,732/-. It was processed under section 143(1) of the Income Tax Act, 1961 (“the Act”) on 10.01.2012. The return was revised subsequently on 08.03.2013 declaring income of Rs. 33,51,24,893/-. The case was selected for scrutiny. The assessment was completed on total income of Rs. 38,18,77,830/- by the Ld. Assessing Officer (“AO”) on 20.03.2014 under section 143(3) of the Act wherein he rejected the claim of the assessee made in the revised return that the receipt by it of the sales tax subsidy of Rs. 2,32,51,000/- was capital subsidy and proceeded to compute the total income starting from income as per original return and making disallowance there from, penalty and interest in delayed payment of Rs. 2,95,940/-, disallowance of Rs. 2,54,561/- under section 14A and disallowance of foreign commission of Rs. 2,31,97,600/-.
2.2 On appeal, the Ld. CIT(A) held that the revised return filed by the assessee was valid return; that the subsidy of Rs. 2,32,51,000/- received by the assessee in the form of sales tax concession is capital receipt but for the purpose of depreciation the subsidy amount cannot be reduced from the cost of the capital asset as claimed by the assessee; that the disallowance under section 37(1) is restricted to the amount of Rs. 1505/- being penalty on excise duty giving relief of Rs. 2,94,436/- to the assessee; that the disallowance under section 14A be restricted to Rs. 1,42,229/- as made by the assessee itself giving relief of Rs. 2,54,561/-; that the disallowance of Rs. 2,31,97,600/- being commission paid to the parties resident of USA made by the Ld. AO under section 40(a)(i) of the Act is confirmed.
2.3 The assessee as also the Revenue being aggrieved are before the Tribunal.
3. The assessee has taken the following grounds of appeal:
“1. That the order passed by the Ld. CIT (Appeal)-XXVIII is bad in law and against the facts of the case.
2. That on the facts and in the circumstances of the case and in law the Ld. CIT(A) erred in holding that the capital subsidy received from the Government of Haryana should be deducted from the cost of assets under Explanatin-10 to section 43(1) of the Act.
3. That on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in sustaining the disallowance of Rs. 2,31,97,600/- u/s 40(a)(i)(B) of the aggregate amount of commission paid to U.S. resident agents for selling assessee’s products in U.S.”
4. The Revenue has taken only one ground of appeal which is as under:-
“Whether the Ld. CIT(A) was right in treating the sales tax subsidy as capital receipt particularly when the assessee has declared in the original return of income as well as in past it to be a revenue receipt.”
5. Let us take up the appeal of the Revenue first.
5.1 We have heard the Ld. Representative of the parties and perused the material on the records. It has been submitted by the Ld. AR that the assessee offered the amount of subsidy received by it in AY 2007-08, 200809, 2009-10 and 2010-11 as income which had been taxed under section 143(3) of the Act by the Ld. AO. Subsequently, the assessee filed an application under section 264 of the Act before the Principal Commissioner of Income Tax (Pr. CIT) pleading that the assessee had erroneously treated the subsidy received from Haryana Govt. as its income. The Ld. AO may, therefore, be directed to treat it as capital receipt not subject to tax. It is pointed out by the Ld. AR that the Ld. Pr. CIT vide order dated 30.03.2015 rejected the assessee’s application, holding that the subsidy was revenue receipt. Alternatively, the Ld. Pr. CIT also held that the Explanation 10 to section 43(6) was applicable.
5.2 The Ld. AR further submitted that the assessee filed writ petition before the Hon’ble Delhi High Court and the Hon’ble Delhi High Court set aside the order dated 30.03.2015 of the Ld. Pr. CIT passed under section 264 of the Act and resultantly the order(s) of the Ld. AO . The Hon’ble Delhi High Court held that the sales tax subsidy received by the assessee be treated as capital receipt and not be added to the income of the asseseee. The Hon’ble Delhi High Court went on to observe further that the consequential orders will now be passed by the Ld. AO.
5.3 The Ld. DR did not controvert the above submissions of the Ld. AR.
6. In the light of the factual matrix as submitted by the Ld. AR of the assesee we have no hesitation in holding that the issue that the sales tax subsidy received by the assesee from Haryana Govt. is capital receipt is covered in favour of the assesee and against the Revenue by the decision of Hon’ble Delhi High Court in the assessee’s own case in WP(C)8941/2015 dated 07.12.2017 (copy at pages 145-148 of Paper Book)
6.1 As regards, the objection of the Revenue that the assessee declared the impugned subsidy as its income in its original return for AY 2011-12 presently under consideration, it is an admitted fact that the assessee filed revised return under section 139(5) treating the same as capital receipt and that the Ld. CIT(A) has held the revised return as valid return in the eye of law. The Revenue has accepted this decision of the Ld. CIT(A) and is not in appeal before the Tribunal on the validity or otherwise of the revised return. Assessments of the past year(s) stand set aside by the decision (supra) of the Hon’ble Delhi High Court on this issue.
6.2 Accordingly, we hold that the Ld. CIT(A) has rightly treated the impugned sales tax subsidy as capital receipt and reject the appeal of the Revenue.
6.3 In the result, appeal of the Revenue in ITA No. 5127/Del/2016 for AY 2011-12 is dismissed.
7. We now take up the appeal of the assessee for AY 2011-12.
7.1 Ground No. 1 is of general nature.
7.2 Ground No. 2 relates to deduction of capital subsidy received by the assessee from Haryana Govt. from the cost of assets under Explanation 10 to section 43(1) of the Act. On query raised by the Ld. AO, the assessee explained that even though the amount of subsidy is linked to the fixed capital investment made by the assessee, the aim is not to subsidize the cost of the assets. It is not a case that the subsidy is being provided to the assessee to meet the cost of asset. Referring to the Explanation 10 to Section 43(1), the assesee submitted that the subsidy provided is not for acquiring the assets but for encouraging setting up of a new unit. Even though, the subsidy is quantified on the basis of the fixed capital investment but that does not mean that the subsidy is given to purchase the assets. Placing reliance on several decisions including the decision of Hon’ble Supreme Court in CIT vs. P.J. Chemicals Ltd. 210 ITR 830 (SC) it was submitted that the subsidy received by the assessee from Haryana Govt. cannot be reduced from the actual cost of the assets for the purpose of computing the depreciation. The explanation was not acceptable to the Ld. AO who held that the capital subsidy was liable to be reduced from the cost of the assets in terms of Explanation 10 to section 43(1) of the Act.
7.3 On appeal, the Ld. CIT(A) confirmed the view of the Ld. AO and observed in para 5.4 at page 10 of the appellate order as under:-
“5.4 From the above silent features it is apparent that not only the quantification subsidy was calculated on the percentage of investment made in plant and machinery but the benefit of the sales tax exemption was only allowable on the investment made in plant and machinery. Hence the subsidy received in question was both directly and indirectly linked to the investment in the plant and machinery made by the assessee company. Moreover in the Scheme of Incentive it has been specially clarified under a separate sub head “Sales Tax concession on expansion/ Diversification” that for the industrial unit undergoing expansion/diversification will get benefit of subsidy only on the investment made by the unit in plant and machinery. Since the subsidy in question is linked with the investment made in plant and machinery, hence, the said subsidy amount has to be adjusted against the cost of assets and the depreciation is to be allowed on the re-worked cost of assets . The decisions relied by the assessee is distinguishable and not applicable to the facts of the present case . Considering above, I am of the view that the incentive in the form of subsidy should be considered as reimbursement of amount directly or indirectly to meet any portion of the actual cost and thus it falls outside the ken of Expln. 10 to s.43(1) of the Act. Hence for the purpose of computing depreciation allowable to the assessee, the subsidy amount cannot be reduced from the cost of the capital asset. In result ground no 3(c) taken by the appellant is dismissed.”
7.4 This has brought the assessee before the Tribunal.
7.5 The Ld. AR submitted that neither the Ld. AO nor the Ld. CIT(A) have identified any asset, the cost of which was met directly or indirectly by the sales tax subsidy. As a matter of fact, the cost of assets acquired by the assessee for getting up new unit was incurred from the assessee’s own resources years before the subsidy was even sanctioned by the Govt. of Haryana. The subsidy was neither ‘used nor ‘utilised’ for acquiring assets and hence actual cost was not directly or indirectly met by the grant of subsidy.
7.5.1 The Ld. AR relied on the decision of Pune Bench of the Tribunal in Alkoplus Producers (P) Ltd. v. Dy. CIT reported in (2019) 106 taxmann.com 115 (Pune-Trib) wherein the Tribunal held that if the object of the scheme is to accelerate the industrial development of the State, then the case is not caught within the mandate of the Explanation 10. In this decision the Tribunal considered the amendment introduced by the Finance Act, 2015 w.e.f. 01.04.2016 whereby the definition of income under section 2(24)(xviii) has been enlarged and held that since the amendment is effective from AY 2016-17, it will not apply to a case prior thereto. The Ld. AR relied on many other decisions including the decision of Hon’ble Delhi High Court in its own case.
7.6 The Ld. DR supported the orders of the Ld. AO/CIT(A).
7.7 We have given our careful thought to the rival submissions and perused the material in the records. Perusal of the judgment of the Hon’ble Supreme Court in P.J. Chemicals Ltd. (supra) will reveal that the Hon’ble Supreme Court has laid down the guidelines /yardstick to find the answer to the vexed question of whether the subsidy received by an assessee is to be reduced from the actual cost of assets or not for the purpose of allowing depreciation. To quote: [From para 13 of the judgment]
“…The real question is as to the character and nature of a subsidy whether it was really intended to subsidize the cost of the capital or was intended as an incentive to encourage entrepreneurs to move to backward areas and establish industries, the specified percentage of the fixed capital cost which is the basis for determining the subsidy being only a measure adopted under the scheme to quantify the financial aid.”
7.7.1 Let us apply the above yardstick to the facts of the assessee’s case. Before the Ld. AO/CIT(A) the assessee submitted that the purpose/aim of the impugned subsidy was to promote industrial growth in the state. The main idea behind the subsidy scheme is overall economic development which directly or indirectly increase the employment opportunities. The basic objective of the scheme is to encourage establishment/expansion of new/existing undertaking by attracting new investment. It was thus explained that the object of grant of the impugned subsidy by way of sales tax concession under Rule 28C of the Haryana Sales Tax Rules was to promote industrial development in the State by promoting establishment of a new industrial unit or substantial expansion of an existing industrial unit.
7.8 On consideration of the above facts and the identical facts in DCIT vs. Maruti Suzuki India Ltd. in ITA No. 2188/Del/2010 decided by the Delhi Bench of the Tribunal, the Ld. CIT(A) held that the impugned subsidy is capital receipt after extracting inter alia the following observations of the Tribunal:
“the subsidy in question viewed from the angle of the provisions of Section 25A of The Haryana General Sales Tax Act, 1973 read with Industrial Policy 1999 of the Government of Haryana, the subsidy receipt in question are part of capital receipt given by the State Government for the purpose of meeting the objectives of Industrial Policy 1999, viz. to attract new investment and to ensure growth of existing industries so that they can generate employment in industrial and allied sector by 20%. The entire package of incentives should be read as focusing on providing 44 ITA No.1927 & 2188/Del/2010 incentives for investment of industrial sector to achieve effective, meaningful and speedy development of the state.”
7.9 In the backdrop of the above factual matrix, there is no doubt that the impugned subsidy was granted to the assessee to provide assistance to the assessee for substantial expansion of an existing industrial unit undertaken by the assessee under Rule 28C of the General Sales Tax Rules , thereby contributing towards the industrial development in the State of Haryana. This is, then obvious that the impugned subsidy was not given to the assessee to subsidize the cost of assets. Nonetheless the amount of subsidy granted to the assessee is linked with the fixed capital investment by the assessee. This, however, is not detrimental to the claim of the assessee which is supported by the judgment of the Hon’ble Supreme Court in P.J. Chemicals case (supra) wherein the Hon’ble Supreme Court held that Govt. subsidy, it is not unreasonable to say, is an incentive not for the specific purpose of meeting a portion of the cost of the assets, though quantified as or geared to a percentage of such cost. If that be so, it does not partake of the character of a payment intended either directly or indirectly to meet the actual cost.
8. The contention of the assessee before the Ld. AO/CIT(A) has been that the impugned subsidy granted to the assessee does not represent payment directly or indirectly to meet any portion of the ‘actual cost’ but it was intended as an incentive. However, the quantification of the amount of subsidy was determined at a percentage of the fixed capital cost. This is amply supported by the letter dated 29.11.2006 of the Director of Industries & Commerce Haryana to the assessee which is reproduced below:-
“Registered
From
The Director of industries & Commerce, Haryana.
To
. M/s. Sunbeam Auto Ltd.,
38/06 KM Stone, Deihi-Jaipur Highway,
Viii. Narsinghpur, Gurgaon.
Memo. No. FA/NSTE/ CCN/S-16/17817-A
Dated, Chandigarh the : 29.11.06
Subject: Sales Tax Concession – Case of M/s. Sunbeam Auto Ltd., 38/06 KM Stone, Delhi-Jaipur Highway, Vill. Narsinghpur, Gurgaon.
Your case was placed before High Powered Committee in its meeting held on 9.11.2006 under the Chairmanship of Hon’ble Chief Minister, Haryana. The decision of the High Powered Committee is reproduced below:-
“Director of industries & Commerce Haryana, explained to the committee that M/s. Sunbeam Auto Casting have invested Rs.43.47 crores on their 4tn expansion. The investment made by the unit is more than Rs.30,00 crores as this is a case to be decided by the High Powered Committee under Rule 28-C. The case fails under the unit in Pipeline under Sub Rule 3(1). The unit fulfills all the four conditions of the unit in Pipeline and High Powered Committee may declare it a “Unit in Pipeline”.
Financial Commissioner Excise & Taxation Department informed the committee that total investment verified by DETC is Rs. 29.64 crore. The Company has made investment in die and moulds to the extent of Rs.9.19 crore which has been included under plant & machinery. The dies and moulds though includable to compute fixed capita! within the meaning of definition of FCI 3(g) these can not be taken into account for quantification of tax benefit by virtue of provision made in the table-11 of sub rule 5(a).
Director of Industries & Commerce Haryana informed to the committee that die and moulds are integral part of fixed capital investment and the investment made by the company on Die and Moulds should be allowed.
Excise and Taxation Commissioner, Haryana informed the committee that under Rule 28-C, the High Powered Committee can take decision for the grant of tax concession on the basis of facts like employment generation, likely revenue, and impact on overall growth. The High Powered Committee shall have the powers to relax any of the conditions stipulated in the rules. No anneal shall be against the decision of High Powered Committee.
After due deliberations the High Powered Committee declared it a Pipeline case which fulfills all the four conditions and considered the investment of Rs.9.19 crores on Die and Moulds as a part of fixed capita! investment and decided to grant sales tax concession of Rs.29.64 crore which is 100% of Fixed Capital Investment on Plant and Machinery for a period of 5 years under rule 28- C from the date of issue of Entitlement Certificate”.
Sd/-
Joint Director (FA)
For Director of Industries & Commerce, Haryana Endst.No. FA/NSTE/
Dated:
A copy of the above is forwarded to the following for information and necessary action:-
1. Deputy Excise & Taxation Commissioner, Gurgaon.
2. General Manager, District Industries Centre, Gurgaon.
sd /
Joint Director (FA)
For Director of industries & Commerce, Haryana”
8.1 Hence, we do not agree with the view of the Ld. CIT(A) that since the subsidy is linked with the investment made in plant and machinery, it has to be adjusted against the cost of assets for the purpose of allowing depreciation. The Ld. AR has submitted that neither the CIT(A) nor the Ld. AO have identified any asset the cost of which was met directly or indirectly by the impugned subsidy. This is evident from the appeal effect order dated 06.09.2016 passed by the Ld. AO under section 250 of the Act brought on record by the Ld. AR.
8.2 Perusal of the Explanation 10 along with its proviso to section 43(1) would reveal that the provision requires that the subsidy will go to reduce the actual cost to the extent to which the cost is met directly or indirectly by the subsidy. The proviso enables pro rata allocation, where the subsidy does not directly relate to any particular asset.
8.3 The assessee’s case is that the impugned assets were acquired by the assesee during the period from 01.12.1999 to 27.04.2002 and the cost was met from assessee’s own funds whereas subsidy was sanctioned on 29.11.2006 and entitlement certificate under Rule 28C of the Haryana Sales Tax Rules Granting tax subsidy of Rs. 29.14 crores was issued on 01.02.2007 and the first tranche of subsidy was received in Financial Year 2006-07 relevant to AY 2007-08. These facts were on the records and very much verifiable. Thus, it is evident that the cost of assets acquired by the assesee to set up new unit was met by it out of its own resources years before the subsidy was even sanctioned by the Govt. of Haryana on 29.11.2006. The subsidy was, therefore, neither used nor utilized for acquiring the assets. If that be so it cannot be said that the actual cost was directly or indirectly met by the grant of subsidy as alleged by the Ld. AO/CIT(A). The factual position is that the total amount of investment in plant and machinery made by the assessee for setting up new unit was only a measure for determining the amount of subsidy. It was in such a scenario that the assesee had cited before the Ld. CIT(A) the decision of VisakhaPatnam Bench of the Tribunal in Sasisri Extractions Ltd. vs. ACIT (2008) 307 ITR (AT) 127 (Viskha) wherein the ITAT in para 12 held as under:-
“In our opinion, even after insertion of Explanation 10 to section 43(1) of the Act, the basic principle underlying in the decision of the Apex Court in the case of P J Chemicals Ltd. (1994) 210 ITR 830, still holds the field. Their Lordships analysed the expression “met directly or indirectly” to come to the conclusion that only in a case where a subsidy or other grant was given to offset the cost of an asset, such payment/grant would fall within the expression “met” whereas the subsidy received merely to accelerate the industrial development of the State cannot be considered as payments made specifically to meet a portion of the cost of the assets.”
8.4 Alkoplus Producers P. Ltd. (supra) the Pune Bench of the Tribunal analysed the provisions of Explanation 10 to section 43(1) of the Act and observed that this explanation gets activated where the subsidy is specifically relatable to cost of a particular asset; that proviso also refers to ‘such subsidy’ only. If the object of the scheme is to accelerate the industrial development of the State, then the case is not caught within the mandate of Explanation 10. Taking note of the amendment in Section 2(24) by insertion of clause (Xviii) w.e.f. 01.04.2016 by the Finance Act, 2015 the Tribunal held that the amendment is effective from AY 2016-17 and hence will not apply to a case prior thereto. Since the case at hand pertains to AY 2011-12, the above amended law will not apply to it.
8.5 We observe that the Pr. CIT’s order dated 30.03.2015 under section 264 of the Act in the case of the assessee pertaining to AY 2007-08 to 201011 wherein he held that the subsidy was liable to be reduced from the cost of the assets in terms of Explanation to section 43 stands set aside by the decision of Hon’ble Delhi High Court rendered on 07.12.2017 (copy at page 145-148 of Paper Book)
9. For the reasons recorded above, we decide ground No. 2 in favour of the assessee and hold that the impugned capital subsidy cannot be deducted from the cost of assets under Explanation 10 to section 43(1) of the Act.
10. Ground No. 3 relates to disallowance of Rs. 2,31,97,600/- under section 40(a)(i) of the Act. The Ld. AO discussed this issue in para 9 of his order. He found from the P & L Account that the assessee has debited the aforesaid sum as ‘foreign commission’. On being asked the assessee submitted two agreements with two parties, namely M/s. Asian Manufacturing LLC and M/s. ETCSLLC both of USA which were valid till 31.03.2012. The Ld. AO noted the salient point of these two agreements and rejecting the explanation of the assessee held that the services provided by the said parties fall within the purview of Fees for Technical Services (“FTS”) as per section 9(1)(vii) of the Act and Fees for Included Services (“FIS”) as per Article 12(4) of India-USA Double Taxation Avoidance Agreement (“India-USA DTAA”). Further, Explanation to section 9(2) clarified that the above shall be deemed to accrue or arise in India irrespective of where the services have been rendered. Accordingly, the assessee was liable to deduct tax under section 195 which it has failed to do. As such the claim of expenses of Rs. 2,31,97,600/- is disallowed under section 40(a)(i) of the Act.
10.1 The assessee challenged the impugned disallowance of commission paid to the parties resident of USA for sale of its products by treating the payment of export commission as a payment for technical services and applying the provisions of section 195 thereto before the Ld. CIT(A). He discussed the issue in para 9 at pages 20-24 of his appellate order and confirmed the order of the Ld. AO by recording the following finding:-
“9.5 However, from examination of the agreement of the assessee with M/s. Asian LLC and with M/s. ETCS LLC it emerges that the two foreign parties were not merely providing services for soliciting of business but were also providing services of prospecting, marketing, promotion and development of business which would give enduring benefit to the assessee. The aforesaid is discernible from the following points of the agreement:
Salient point of agreement with M/s. Asian Manufacturing LLC
