Hyundai Motor India Ltd. Vs ACIT (ITAT Chennai)
ITAT Chennai held that subsidy received from Government of India under the Focus Market Scheme is Revenue in nature. The same cannot be at any stretch of imagination considered as capital in nature.
Facts- The assessee is a wholly owned subsidiary of M/s. Hyundai Motor Company Ltd., South Korea. The assessee is in the business of manufacturing and selling passenger cars in domestic and export markets.
The case was taken up for scrutiny and during the course of assessment proceedings, a reference was made to JCIT (Transfer Pricing) for determination of Arm’s Length Price (ALP) of international transactions of the assessee with its AEs. The learned TPO vide its order dated 29.01.2016 has suggested certain transfer pricing adjustments towards downward adjustment to the value of imports and upward adjustment for brand development services.
AO, in pursuant to directions of the ld. TPO, has passed draft assessment order u/s.143(3) r.w.s.144C(1) of the Act on 29.03.2016 and made transfer pricing adjustments as suggested by the TPO at Rs.443,34,47,898/-. AO had also proposed certain Corporate Tax adjustments including disallowances u/s.14A, r.w.r.8D of IT Rules, 1962, disallowance of subsidy received towards capital expenditure, disallowance of Focus Marketing Scheme expenses, and disallowance of bonus / performance reward u/s.43B(c) of the Act.
DRP rejected the objections filed by the assessee. AO, in pursuant to the directions of the learned DRP has passed final assessment order incorporating directions of DRP. Aggrieved, the assessee has filed present appeal before the Tribunal.
Conclusion- Hon’ble jurisdictional High Court of Madras in the case of Marg Ltd.v.CIT held that disallowances contemplated u/s.14A of the Act, cannot exceed exempt income, and thus, directed the AO to restrict disallowance to the extent of exempt income.
Hon’ble Delhi High Court in the case of CIT v. BSES Yamuna Powers Ltd held that computer accessories and peripherals such as printers & scanners and UPS forms an integral part of computer system and eligible for higher rate of 60% depreciation. Therefore, we are of the considered view that the assessee is entitled for higher rate of 60% depreciation on UPS, printers & scanners, and thus, we direct the AO to delete disallowance of excess depreciation on UPS, printers & scanners.
The Tribunal in the assessee’s own case for AYs 2013-14 to 2016-17, where, it has been held that performance bonus paid to employees is in the nature of bonus which comes under the provisions of Sec.36(1)(ii) of the Act, and if such payment is not remitted on or before due date, then, same is covered u/s.43B(c) of the Act.
Held that subsidy received from Government of India under the Focus Market Scheme is Revenue in nature and the same was given to offset higher cost of freight and other disabilities of exporters to be more competitive in exports to certain regions. Thus, same cannot be at any stretch of imagination considered as capital in nature. Hence, we are inclined to uphold the findings of the DRP and reject the ground taken by the assessee.
FULL TEXT OF THE ORDER OF ITAT CHENNAI
This appeal filed by the assessee is directed against final assessment order passed by the Assessing Officer u/s.143(3) r.w.s.144C(13) of Income Tax Act, 1961, dated 27.09.2021, in pursuant to directions of the learned DRP-2, Bengaluru, dated 13.12.2016 u/s.144C(5) of Income Tax Act, 1961, and pertains to the assessment year 2012-13.
2. The assessee has raised following grounds of appeal:
1. Common Grounds
1.1. The lower authorities have erred in finalizing an order of assessment which suffers from legal defects such as being passed in violation of principles of natural justice and the provisions of the Act and is devoid of merits and are contrary to facts on record and applicable law and has been completed without adequate inquiries and as such is liable to be quashed.
1.2. The lower authorities have finalized their order with improper adjustments to the reported taxable profits of the Appellant, as a result of misapplying the provisions of the Act and by adopting faulty assessment procedure to finalize the adjustment, such as but not limited to, application of filters, analysis of the functions carried out by the Appellant and those of the comparable companies, analysis of the economic circumstances experienced by the Appellant, selection of comparable companies, computation of profit margins of the Appellant and comparable companies, usage of appropriate adjustments, and consideration of the information, arguments and evidence provided by the Appellant.
2. Disallowance under section 14A of the Act
2.1. The lower authorities have, in the facts and circumstances of the case and in law, erred in disallowing a sum of INR 93,44,170 under section 14A of the Act by applying provisions of Rule 8D of the Income tax Rules, 1962 (“Rules”).
2.2. The lower authorities have, in the facts and circumstances of the case and in law, erred in applying the provisions of under section 14A of the Act read with Rule 8D of the Rules, without sufficient satisfaction on record and without considering that the quantum of dividend received by the Appellant was only INR 52,773.
2.3. The lower authorities have failed to note that the issue is covered in Appellant’s favor vide order of this Hon’ble Tribunal for the AYs 2009-10 to 2011-12 and AYs 2013-14 and 2015-16, wherein the disallowance under section 14A was directed to be restricted to the amount of exempt income.
3. Disallowance of capital subsidy
3.1. The lower authorities, in the facts and circumstances of the case and in law, ought to have appreciated that the subsidy was a capital receipt not chargeable to tax and that it cannot also be adjusted against the cost of fixed assets in computing the depreciation allowable to the Appellant.
3.2. The lower authorities ought to have followed the order of this Hon’ble Tribunal for the AY 2013-14 and AY 2015-1 6, wherein the disallowance was directed to be deleted on the basis that the capital subsidy was a capital receipt.
4. Disallowance of excess depreciation claimed on UPS, Printers and Scanners under the block Computers
4.1. The lower authorities have, in the facts and circumstances of the case and in law ought to have appreciated that UPS, Scanners and Printers are integral part of Computer and as such depreciation should be allowed at the rate of 60%.
4.2. The lower authorities have, in the facts and circumstances of the case and in law, failed to appreciate that the Appellant is entitled to claim depreciation at the rate of 60% on UPS which is forming part of data processing equipment.
4.3. The lower authorities have, in the facts and circumstances of the case and in law, failed to appreciate that the Scanners and Printers should be treated as part of Computers block of assets as it cannot be operated without the aid of computers.
4.4. The lower authorities failed to follow the order of the Hon ‘ble DRP, wherein on identical facts, the impugned issue on quantum of depreciation on UPS, scanners and printers was allowed for the immediately preceding AY.
5. Disallowance of Bonus/ Performance reward under section 43B of the Act
5.1. The lower authorities have, in the facts and circumstances of the case and in law, erred in disallowing expenditure incurred by the Appellant towards “performance reward” as it is not in the nature of “bonus”.
5.2. Without prejudice to the above, the lower authorities ought to have appreciated that the employees of the Appellant are not covered by the provisions of Payment of Bonus Act, 1965 and as such the said expenditure cannot be disallowed under Section 43B read with section 36(i)(ii) of the Act.
6. Inadvertent addition of foreign exchange loss
6.1. The lower authorities have, in the facts and circumstances of the case and in law erred in not considering the claim of the Appellant regarding the inadvertent addition of INR 35,92,42,476 to its total income for the subject AY thus, resulting in payment of taxes on the escalated total income.
7. Tax Treatment of Output VAT Incentives
7.1. The lower authorities have, in the facts and circumstances of the case and in law, failed to appreciate that the output VAT incentive (Investment Promotion subsidy) granted for the purpose of setting up/expansion of its manufacturing facility is a capital receipt and hence, cannot be treated as income under the provisions of Income Tax Act applicable for the subject year.
7.2. The lower authorities have failed to note that the eligible amount of incentives under the Investment Promotion Subsidy was also quantified based on the investment in assets and thus, it cannot be a revenue receipt to be subjected to tax.
7.3. The lower authorities ought to have appreciated that if the object of assistance was to enable the Appellant to set up a new unit or expand the existing unit, then the receipt is on the capital account based on the settled principles of the Supreme Court.
7.4. The lower authorities failed to appreciate that mechanism for determination of the quantum of disbursement of the same by way of refund of taxes is only for administration purposes and cannot be the basis for deciding the tax treatment of its receipt.
8. Tax Treatment of Incentives received under the Focus Market Scheme
8.1. The lower authorities have, in the facts and circumstances of the case and in law, failed to appreciate that the export incentive viz., Focus Market Scheme and Market Linked Focus Product Scheme given for exploring new markets across the globe is a capital receipt and hence, cannot be treated as income under the provisions of Income tax Act applicable for the subject year.
8.2. The lower authorities ought to have appreciated that if the object of assistance was to enable the Appellant to set up a new unit or expand the existing unit, then the receipt is on the capital account based on the settled principles of the Supreme Court.
8.3. The lower authorities failed to note that the incentives received under the Focus Market Scheme was issued only to create and build a brand image for products manufactured with ‘Made in India’ tag and exported to overseas market and cannot be in the nature of profit or income to be subjected to tax.
9. Allowability of education cess under section 37 of the Act
9.1. The lower authorities have, in the facts and circumstances of the case and in law, erred in disallowing the Appellant’s claim of education cess paid under section 37 of the Act.
9.2. The Ld. AO ought to have appreciated that the word ‘cess’ has not been expressly stated in Sec.4o(a)(ii) of the Act and hence, has to be allowed as an eligible business expenditure.
9.3. On the facts and in circumstances of the case, the Ld. AO had failed to appreciate that it is a settled principle that the education cess is an allowable expenditure under section 37(1) of the Act.
9.4. On the facts and in circumstances of the case, the Ld. AO failed to note that the legislature had specifically dealt with the disallowance of cess in section 43B of the Act which denotes that cess is otherwise an allowable expenditure under section 37 of the Act.
9.5. On the facts and in circumstances of the case, the Ld. AO has erred in not considering the various judicial precedence in favour of the Appellant wherein it has been held that the education cess paid is an expenditure allowable under section 37(1) of the Act.
10. Adjustment for Brand development services
10.1. The lower authorities have, in the facts and circumstances of the case and in law, erred in making in adjustment towards brand building activity amounting to INR 304,76,47,898.
10.2. The lower authorities have, in the facts and circumstances of the case and in law, while acknowledging that the facts and circumstances are similar to the previous years, erred in not following the binding order of this Hon’ble Tribunal in the Appellant’s own case from AY 2007-08 to AY 2011-12 wherein similar adjustment towards brand adjustment has been deleted. It is also to be noted that the impugned adjustment was deleted by this Hon ‘ble ITAT for the AY 2013-14 and AY 2015-16
10.3. The lower authorities have, in the facts and circumstances of the case and in law, exceeded their jurisdiction and erred in making the adjustment towards a fees for a purported brand development service alleged to be provided by the Appellant to its AE, without first establishing that there was any international transaction in this regard between the Appellant and its AE, which can be subject to section 92 of the Act.
10.4. The Ld. TPO erred in adopting the sixth method without establishing the existence of a transaction and the methodology adopted to justify the arm’s length nature of such transaction.
10.5. The Ld. TPO erred in making the adjustment and the Hon ‘ble DRP erred in upholding the adjustment towards brand development fees without first establishing that a third-party manufacturer in India would have received a similar fee from a third party owner of the brand, which is used by the former for the manufacture and sale of goods. In the absence of any comparable transaction, the entire approach of the authorities fails the basic requirement of Transfer Pricing and the charging of the brand development fees in comparable circumstances is not even an arm’s length practice.
10.6. The lower authorities have erred in imputing an adjustment under section 92 of the Act towards brand development fees, when it is acknowledged by the TPO himself that the advertisement and marketing expenditure incurred by the Appellant as a proportion of its sales is not excessive as compared to the similar levels of expenditure incurred by comparable companies.
10.7. The lower authorities have, in the facts and circumstances of the case and in law, erred in making an adjustment for AMP expenses, without appreciating that such adjustment cannot be made to a full-fledged manufacturer.
10.8. Without prejudice to the other grounds, the lower authorities erred in imputing the adjustment under section 92 of the Act towards brand development fees on the basis of Spearman’s Rank Correlation method.
11. Downward adjustment to the value of imports to the extent included in the domestic car sales segment
11.1. The Ld. TPO erred in rejecting the transfer pricing study carried out by the Appellant without cogent reasons and erred in analyzing domestic segment on a standalone basis.
11.2. The Ld. TPO has erred in benchmarking the international transactions entered into by the Appellant with its AEs on the basis of the segment wise profitability details obtained during the assessment proceedings, without appreciating that the international transactions entered into by Appellant are closely linked and integrated and cannot be viewed in terms of separate segments for Transfer Pricing benchmarking.
11.3. The Ld. TPO has erred in benchmarking on the basis of the segment wise profitability details pertaining to ‘Domestic car sales’ obtained during the assessment proceedings, without appreciating that the ‘Domestic car sales’ is not considered as a separate reportable segment as per the Appellant’s audited financial statements and that the Appellant does not maintain segment wise books of accounts.
11.4. The Ld. TPO has erred in benchmarking on the basis of the segment wise profitability details pertaining to ‘Domestic vehicle sales’ obtained during the assessment proceedings, without appreciating that more than 62 % of the total costs (other than raw material cost) were common costs not identifiable with any particular segment and these were only allocated to the various segments on an estimate basis.
11.5. The Hon ‘ble DRP erred in upholding the actions of the Ld. TPO.
11.6. The Ld. TPO and Hon’ble DRP have, in the facts and circumstances of the case and in law, erred in computing the transfer pricing adjustment beyond the scope and jurisdiction of section 92 of the Act by not restricting the value of the adjustment to the Appellant’s international transactions with its Associated Enterprises (“AE”).
11.7. The Ld. TPO and Hon ‘ble DRP have erred in proposing the transfer pricing adjustment to the entire cost base of the Appellant which predominantly includes third party costs, on wrong basis and assumption of facts.
11.8. The Ld. TPO have, in the facts and circumstances of the case and in law, failed to follow the findings of the Hon ‘ble Madras High Court in WA No. 1344 of 2017 that the transfer pricing adjustments are to be restricted to international transactions and cannot be made towards third party transactions.
12. Exclusion/ Inclusion of certain operating income and non-operating expenses respectively while computing the operating margins
12.1. The Ld. TPO and Hon ‘ble DRP erred in excluding certain items of income which are operating in nature while computing the operating income and operating profits and erred in including certain items of expense/ losses, which are not operating in nature while computing the operating costs and operating
12.2. The Ld. TPO and Hon’ble DRP erred in not considering the royalty income received by the Appellant in consideration for the license of the trademarks and know-how transferred to MOBIS in relation to the distribution of after sales products, as operating income while computing the operating margins of the tested party.
12.3. The Ld. TPO and Hon’ble DRP erred in not considering the incentives received from the Government of Tamil Nadu for its Phase II investments under Ultra Mega Integrated Automobile Projects within Tamil Nadu and incentives received under Focus Market Scheme, as operating while computing the operating margins of the tested party.
12.4. The Ld. TPO and Hon’ble DRP erred in not considering the discounts from suppliers towards early payment for purchases and also the commission received towards car finance referrals and car insurance referrals as operating while computing the operating margins of the tested party.
12.5. The Ld. TPO and Hon ‘ble DRP erred in provision for doubtful advances/ deposits and contingencies as operating while computing the operating margins of the tested party.
13. Excess levy of interest under section 234C
13.1. The Ld. TPO and Hon ‘ble DRP erred in excluding certain items of income which are operating in nature while computing the operating income and operating profits and erred in including certain items of expense/ losses, which are not operating in nature while computing the operating costs and operating profits.
14. Short credit of Tax deducted at source
14.1. The Ld. AO has erred in giving credit for TDS to the extent of INR 22.11 crores, whereas the actual amount of TDS claimed by the Appellant in its return is INR 22.86 crores
The Appellant prays that directions be given to grant all such relief arising from the grounds of appeal mentioned supra and all consequential relief thereto.
The grounds of appeal raised by the Appellant herein are without prejudice to each other. The Appellant craves leave to add to and/or to alter, amend, rescind, modify the grounds herein above or produce further documents before or at the time of hearing of this Appeal.
3. Brief facts of the case are that the assessee, M/s. Hyundai Motor India Ltd., is wholly owned subsidiary of M/s. Hyundai Motor Company Ltd., South Korea. The assessee is engaged in the business of manufacturing and selling passenger cars in domestic and export market. The assessee company has filed its return of income for assessment year 2012-13 on 29.11.2012 admitting total income of Rs.1373,39,38,640/- under normal provisions of the Income Tax Act, 1961, (In Short “the Act”) and book profit u/s.115JB of the Act at Rs.836,20,32,607/-. The assessee had entered into various international transactions with its Associated Enterprises (AEs) and international transactions were duly reported in Form 3CEB filed in accordance with provisions of Indian Transfer Pricing Regulations contained in section 92, 92A to 92F of the Income Tax Act, 1961. The case was taken up for scrutiny and during the course of assessment proceedings, a reference was made to JCIT (Transfer Pricing) for determination of Arm’s Length Price (ALP) of international transactions of the assessee with its AEs. The learned TPO vide its order dated 29.01.2016 has suggested certain transfer pricing adjustments towards downward adjustment to the value of imports and upward adjustment for brand development services.
4. The Assessing Officer, in pursuant to directions of the ld. TPO, has passed draft assessment order u/s.143(3) r.w.s.144C(1) of the Income Tax Act, 1961 on 29.03.2016 and made transfer pricing adjustments as suggested by the TPO at Rs.443,34,47,898/-. The Assessing Officer had also proposed certain Corporate Tax adjustments including disallowances u/s.14A, r.w.r.8D of IT Rules, 1962, disallowance of subsidy received towards capital expenditure, disallowance of Focus Marketing Scheme expenses, and disallowance of bonus / performance reward u/s.43B(c) of the Income Tax Act, 1961. The assessee has filed objections before learned DRP against draft assessment order, but the learned DRP vide its directions dated 13.12.2016 has rejected objections filed by the assessee. The Assessing Officer, in pursuant to the directions of the learned DRP has passed final assessment order incorporating directions of the ld. DRP. Aggrieved, the assessee has filed present appeal before the Tribunal.
5. Ground No.1 filed by the assessee is general in nature and does not require specific adjudication and hence, the same is dismissed.
6. The next issue that came up for our consideration from Ground No.2 of assessee appeal is disallowances u/s.14A r.w.r.8D of Income Tax Rules, 1962, amounting to Rs.93,44,170/-. The facts with regard to impugned dispute are that during the year under consideration, the assessee has earned dividend income from mutual funds, which is exempt from tax amounting to Rs.50,000/-, however, did not made any suomotu disallowance of expenditure relatable to exempt income. Therefore, the Assessing Officer has invoked provisions of Rule 8D of Income Tax Rules, 1962, and determined disallowances of Rs.93,44,170/- u/s.14A of Income Tax Act, 1961.
6.1 The Ld. Counsel for the assessee submits that this issue is covered in favour of the assessee by the order of the ITAT Chennai Benches for AYs 2013-14 to 2016-17, where, disallowance u/s.14A of the Act, is restricted to exempt income.
6.2 The Ld.DR fairly agreed that this issue is covered in favour of the assessee by the decision of the ITAT Chennai Benches in the assessee’s own case for earlier assessment years.
6.3 We have heard both the parties and perused the materials available on record and we find the issue of disallowance u/s.14A of the Act r.w.r.8D of the IT Rules, 1962, is covered in favour of the assessee by the decision of the ITAT Chennai Benches in the assessee’s own case for AY 2013-14, where, the Tribunal by following the decision of the Hon’ble jurisdictional High Court of Madras in the case of Marg Ltd. v. CIT reported in [2020] 120 Taxmann.com 84, held that disallowances contemplated u/s.14A of the Act, cannot exceed exempt income, and thus, directed the AO to restrict disallowance to the extent of exempt income. The relevant findings of the Tribunal are as under:
10. We have heard both the parties, perused materials available on record and gone through orders of the authorities below. It is well settled principles of law that disallowances u/s. 14A cannot exceed amount of exempt income. The Hon’ble Supreme Court in the case of Pr. CIT Vs State Bank of Patiala (supra), while dismissing SLP filed by the Revenue against order of the Hon’ble Punjab & Haryana High Court in the case of Pr. CIT Vs State Bank of Patiala, held that disallowance u/s. 14A could be restricted to amount of exempt income only. The Hon’ble Jurisdictional High Court of Madras in the case of Marg Ltd Vs. CIT (2020) 120 Taxmann.com 84, has taken a similar view and held that disallowances under Rule 8D r. w.s 14A can never exceed exempt income earned by the assessee during particular assessment year. In this case, admittedly, exempt income for impugned assessment year was Rs.57,826/-, whereas the Assessing Officer has determined disallowance u/s. 14A at Rs. 86,54,491/- contrary to settled principle of law. Therefore, considering facts and circumstances of this case and also by following the decisions of Hon’ble Supreme Court and Hon’ble Madras High Court, we direct the Assessing Officer to restrict disallowances u/s. 14A to the extent of exempt income earned for the impugned assessment year.
6.4 In this view of the matter and considering the facts and circumstances of the case, we direct the AO to restrict disallowance u/s.14A of the Act, to the extent of exempt income earned for the impugned assessment year.
7. The next issue that came up for our consideration from Ground No.3 of assessee appeal is disallowance of depreciation on capital subsidy. During the financial year 2002-03, the State Industrial Promotion Corporation of Tamil Nadu (SIPCOT) had granted subsidiary of Rs.100 lakhs to encourage and recognize huge investments made for setting up of mega project viz., passenger car manufacturing unit in Irungattukottai. The assessee has treated subsidy received from SIPCOT as capital receipt and did not reduce the same from cost of assets, as it was not directly or indirectly used to purchase any asset. The Assessing Officer has held that capital subsidy received from SIPCOT being utilized by the assessee for capital expenditure, same ought to have been reduced from the cost of asset added in that year by contending that subsidy was directly or indirectly used to purchase asset and as per explanation (10) to section 43 of the Act, the same needs to be deducted from cost of assets and consequently, reworked depreciation by reducing amount of subsidiary and disallowed a sum of Rs.2,38,665/-.
7.1 The learned AR for the assessee submitted that this issue is covered in favour of the assessee by the decision of ITAT Chennai, in assessee’s own case for assessment year 2006-07, where, it was held that subsidiary received from SIPCOT is capital receipt not liable for tax.
7.2 The learned DR, on the other hand, fairly agreed that this issue is covered in favour of the assessee.
7.3 Having heard both the sides and considered relevant material on record, we find that the Tribunal had considered an identical issue in assessee’s own case for assessment year 2006-07 in IT(TP)A.No.14/Chny/2018 and after considering nature of subsidy, has allowed claim of the assessee by observing that for earlier years, the CIT(A) has allowed claim of the assessee and the Assessing Officer has accepted decision of the CIT(A) and deleted additions, while passing order giving effect to the order of the CIT(A). Therefore, consistent with the view taken by the coordinate Bench, we direct the Assessing Officer to delete additions made towards disallowance of depreciation on capital subsidy received from SIPCOT.
8. The next issue that came up for our consideration from Ground No.4 of assessee appeal is disallowance of excess depreciation claimed on UPS, Printers & Scanners under the block computers. The assessee has claimed depreciation on printers & scanners on the ground that printers & scanners and also UPS is an integral part of computer and computer software. The AO had restricted depreciation claimed on printers & scanners to 15% on the ground that these are only office equipments.
8.1 We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. We find that an identical issue had been considered by the Tribunal in the assessee’s own case for AYs 2009-10 to 2011-12, where, the Tribunal by following the decision of the Hon’ble Delhi High Court in the case of CIT v. BSES Yamuna Powers Ltd reported in [2013] 358 ITR 47 (Delhi) held that computer accessories and peripherals such as printers & scanners and UPS forms an integral part of computer system and eligible for higher rate of 60% depreciation. Therefore, we are of the considered view that the assessee is entitled for higher rate of 60% depreciation on UPS, printers & scanners, and thus, we direct the AO to delete disallowance of excess depreciation on UPS, printers & scanners.
9. The next issue that came up for our consideration from Ground No.5 of the assessee’s appeal is disallowance u/s.43B(c) of the Act, towards performance incentives paid to employees. Facts with regard to impugned dispute are that for the financial year relevant to the assessment year 2012-13, the assessee has paid performance reward to employees in the cadre of Executives and Senior Executives. The assessee has provided for expenses for the period beginning from January to March, 2011. However, payment was made only after due date of filing return of income for assessment year 2012-13. The Assessing Officer has disallowed performance incentive paid to staff u/s.43B(c) r.w.s.36(1)(ii) of the Act, amounting to Rs.13,08,30,410/- on the ground that as per section 43B(c), any sum referred to in clause (ii) of sub-section (1) of section 36, shall not be allowed as deduction, unless the same is paid on or before due date for furnishing return of income u/s.139(1) of the Act. The Assessing Officer further noted that as per section 36(1)(ii), any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profit or dividend, if it had not been paid as bonus or commission is covered. Therefore, he opined that any payment made to an employee which is in the nature of bonus or commission for services rendered is covered u/s.36(1)(ii) of the Act, and thus, if such payment is not made on or before due date of filing of return of income u/s.139(1) of the Act, then same cannot be allowed as deduction, as per section 43B(c) of the Act.
9.1 The Ld. Counsel for the assessee submits that this issue is covered against the assessee by the decision of the ITAT Chennai Benches in the assessee’s own case for AY 2013-14, where, it has been held that performance incentives paid to employees is in the nature of bonus which comes under the provisions of Sec.36 (1)(ii) of the Act r.w.s.43B(c) of the Act, and for belated payment deduction cannot be allowed.
9.2 The Ld.DR fairly agreed that this issue is covered against the assessee by the decision of the ITAT Chennai Benches for AYs 20 13-14 to 2016-17.
9.3 We have heard both the parties and perused the materials available on record and we find that an identical issue had been considered by the Tribunal in the assessee’s own case for AYs 2013-14 to 2016-17, where, it has been held that performance bonus paid to employees is in the nature of bonus which comes under the provisions of Sec.36(1)(ii) of the Act, and if such payment is not remitted on or before due date, then, same is covered u/s.43B(c) of the Act. The relevant findings of the Tribunal are as under:
24. We have given our thoughtful consideration to facts brought out by the ld. AO in light of arguments of the ld. AR for the assessee and we do not ourselves subscribe to the arguments of ld. AR for the assessee, for simple reason that once performance incentive is paid for rendering services, then such payment is in the nature of bonus or commission which comes under the provisions of section 36(1(ii) of the Act. It is immaterial whether the assessee terms it as performance reward or bonus. But, what is relevant is nature of payment and purpose of payment. In this case, it is in the nature of bonus or commission and such payment is for services rendered by employees. Just because nomenclature was changed to some other name, a particular expenditure would not change its original character. In this case, sum was paid to employees for services rendered and further, this sum would not have been paid as profits or dividend had it not been paid as commission or performance reward. Therefore, we are of the considered view that provisions of section 36(1)(ii) of the Act is squarely applicable and consequently, mischief of section 43B(c) would come into play, if such payment is not made on or before due date of furnishing of return of income. In this case, admittedly, the assessee has paid performance incentive only after due date of filing of income-tax return. Insofar as case laws relied upon by the assessee, we find that facts those case laws are different from facts of present case and has no application to case of the assessee. Therefore, we are of the considered view that there is no error in the reasons given by the Assessing Officer as well as learned DRP to disallow performance reward u/s.43B(c) of the Act. Hence, we are inclined to uphold the order of Assessing Officer as well as directions of learned DRP and reject ground taken by the assessee.
9.4 In this view of the matter and by following the decision of the ITAT Chennai Benches for AYs 2013-14 to 2016-17, we are inclined to uphold the findings of the DRP and reject the ground taken by the assessee.
10. The next issue that came up for our consideration from Ground No.6 of the assessee’s appeal is fresh claim of deduction towards foreign exchange loss on restatement of loans utilized for purchase of domestic assets to the extent of INR 17.96 Crs. Facts with regard to impugned dispute are that during the FY relevant to AY 2012-13, an amount of Rs.67.04 Crs. was debited in the P & L A/c towards loss on foreign currency transactions. The said loss was also entirely disallowed and added back in the statement of total income. The assessee has raised a fresh claim before the AO, on the ground that although, the assessee should have claimed a deduction while computing taxable income in respect of foreign exchange loss on restatement of loans for purchase of domestic assets, but by an inadvertent error, said loss was not claimed as deduction, which resulted in overstating the taxable profit. The AO did not entertain the claim made by the assessee for deduction towards foreign exchange loss on restatement of loss on the ground that any fresh claim can be raised through a return of income. Further, the DRP also rejected the claim of the assessee.
10.1. The Ld. Counsel for the assessee submitted that the assessee by an inadvertent error could not claim deduction towards allowable expenditure being foreign exchange loss on restatement of loans taken for purchase of domestic assets. Therefore, the claim made by the assessee may be admitted and the issue may be set aside to the file of the AO to decide the issue afresh in accordance with law.
10.2. The Ld. DR strongly opposing the fresh claim made by the assessee submitted that the assessee could not explain why it should not claimed deduction towards foreign exchange loss in the return filed for the relevant assessment year. Further, the assessee could not explain how such loss is allowable deduction. Therefore, the issue should not be set aside to the file of the AO.
10.3. We have heard both the parties and perused the materials available on record. It is an admitted legal position from the decisions of the Hon’ble Supreme Court and various High Courts that unless authority of law no tax can be collected. In other words, only legitimate tax payable by the assessee needs to be collected. Further, even in a case where the assessee has failed to make a claim towards any expenditure or allowance, it is the duty of the AO to compute correct taxable income after allowing deductible losses/expenses. Since, the assessee claims that foreign exchange loss on restatement of loans availed for purchase of domestic assets is allowable deduction, in our considered view, the AO ought to have admitted claim made by the assessee towards deduction for expenditure and decide the issue in accordance with law. Therefore, we admit the fresh claim made by the assessee and restore the issue to the file of the Assessing Officer. We, also direct the AO to verify the issue with reference to relevant materials that may be filed by the assessee and decide the issue in accordance with law.
11. The next issue that came up for our consideration from Ground No.7 of the assessee’s appeal is Investment Promotion Subsidy (in short “IPS”) received from Government of Tamil Nadu is capital receipt and not liable to tax. The facts with regard to impugned dispute are that the Government of Tamil Nadu has issued a GO on 26.02.2007 for Formulation of Ultra Mega Integrated Automobile Projects Policy, to bring out an exclusive policy for encouraging set up of major Integrated Automobile Projects in Tamil Nadu. The assessee had entered into a Memorandum of Understanding with the Government of Tamil Nadu on 22.01.2008 for setting up/expansion of its manufacturing facility. As per said Policy, incentive was granted for the purpose of setting up of Phase-II manufacturing facility (expansion along with a new engine and transmission plant with an installed capacity of 3.30 lakh cars per annum). The scheme further envisages that the incentive was given by way of refund of Output VAT under the state policy. The Government of Tamil Nadu agreed to provide a structured package of support to the assessee in the form of fiscal and other incentives subject to fulfilling of certain conditions within the investment period i.e. ‘7’ years from 01.06.2006. The obligations to be fulfilled by the assessee to avail the infrastructure support, utilities, and various incentives offered by the Government of Tamil Nadu is investment of INR 4,000 Crs., in eligible fixed assets within a period of ‘7’ years from 01.06.2006. Upon satisfaction of the foresaid criteria, the fiscal incentives available to the assessee consisted of Input VAT and Gross Output VAT for a period of 21 years from the date of commencement of commercial production or to the extent of 115% of eligible investment, whichever is earlier. Further, soft loan against Central Sales Tax repayable after a period of ‘14’ years along with nominal interest. In addition, as per the said policy, the assessee is entitled for exemption from entry tax, works contract tax and other state levies, and flexibility in labour laws.
11.1 The assessee claims that based on the satisfaction of the above conditions, an interim eligibility Certificate dated 23.07.2009 was issued by the State Industries Promotion Corporation of Tamil Nadu Ltd. (in short “SIPCOT”) considering the eligible investment made till such date. Further, after the completion of project on 31.03.2011, a final eligibility Certificate was issued by SIPCOT on 17.04.2014. As per said Certificate, eligible investment was at INR 4,373.22 crores (while the actual investment made by the assessee was INR 4,971 crores), and accordingly, quantified the subsidy receivable in the form of IPS of INR 4,023.36 crores. During the year under consideration, based on the sales, the assessee accrued refund of Output VAT amounting to INR 33 crores from the Government of Tamil Nadu and credited the same to P&L a/c under the head ‘Other Operating Revenue’. The assessee has included the above incentives as Revenue receipt in the original return of income filed for the impugned assessment year. However, the assessee has made an additional claim before the AO vide letter dated 27.09.2021, wherein, it was claimed that the IPS received from the Government of Tamil Nadu was capital in nature and not taxable. The AO after considering relevant submissions of the assessee and also by following certain judicial precedents, including the decision of the Hon’ble Supreme Court in the case of Sahaney Steel& Press Works Ltd.& Ors. v. CIT reported in [1997] 228 ITR 253 (SC) observed that IPS accrued to the assessee in the form of refund of Output VAT is Revenue in nature and the assessee has rightly treated it as income in the return of income filed for the relevant assessment year. Therefore, the Assessing Officer has rejected additional claim of the assessee for considering IPS as capital in nature and not liable for tax. The relevant findings of the AO are as under:
VAT expenditure is purely revenue expenditure. The assesseee company was not required to expend VAT refund money for any particular purpose as evident from the MoU between the state Govt. & HMIL. The assessee company had to invest Rs.4000/- crore in eligible fixed assets within 7 years, SIPCOT started payment of incentive in the form of refund of output VAT from 1st year of investment in fixed asset on the basis of interim eligibility certificate issued by Commercial Tax Dept. to SIPCOT on the condition that the assessee has to complete investment in eligible fixed assets as per clauses in MoUdtd: 22.01.2008. It was further mentioned in separate agreement between GoTN and HMIL that if assessee fails to. fulfill the condition as per MoU, the interim refund granted will be recovered from assessee.
It was stated by the assessee that there was no fixed purpose for utility of such incentive. It could have been utilized on any head which was not distinguishable.
This clearly shows that the incentive: was given for running of the business of assessee more profitably.
Thus, incentive received by assessee during the relevant assessment year as output VAT refund was not granted for production of or bringing into existence any new asset and in such circumstances the incentive amount is treated as revenue in nature and would have to be taxed accordingly. It was not realized to the assessee in acquiring it a new capital asset to meet part of cost of that asset. It was refunded to assessee only after the sale was made and the eligibility certificate was sent to SIPCOT by the Commercial Tax Dept.
Thus, the payment made to assessee was merely a supplementary trade receipt. The assessee was also free to use the incentive in the business as the assessee would like. The assessee was not required to spend the incentive amount for any particular purpose. Incentive was not given for bringing into existence any new capital asset but grant in aid was given after commencement of the businessto increase the profit in business. The amount of incentive was given equal to the output VAT (at a certain fixed percentage), if any, collected by the assessee, which was a part of trading receipt.
Further, it is to state that whether any subsidy/incentive given in relation to new industrial undertakings or subsequent expansion of existing capacities, from the state govt., inter alia, in the form of refund of sales tax paid on machinery or finished goods and subsidy on power consumed and an exemption or refund of water rate, would be an income. (Delhi High Court verdict in the case of Commissioner of Income Tax vs. Steel Authority of India Ltd. on 14th March, 2002).
In this regard, the judgment of Hon’ble Apex Court in the case of Sahney Steel and Press Works Ltd. and Ors. v. CIT (1997) 228 ITR 253 is relevant which is given as below:
it was held by Hon’bie Supreme Court that On the facts of that case and on the basis of the analyses of the Scheme therein that the subsidy given was on revenue account because it was given by way of assistance in carrying on of trade of business. On the facts of that case, it was held that the subsidy given was to meet recurring expenses. It was not for acquiring the capital asset. It was not to meet part of the cost. It was not granted for production of or bringing into existence any new asset The subsidies In that case were granted year after year only after setting up of the new industry and only; after commencement of production and, therefore, such a subsidy could only be treated as assistance given for the purpose of carrying on the business of the assessee, Consequently, the contentions raised on behalf of the assesses on the facts of that case stood rejected and it was held that the subsidy received by Sahney Steel and Press Works Ltd, could not be regarded as anything but a revenue receipt.
Order of Ld. 1 TAT Madras Chennai in the case of the M/s. Eastman Exports Global Clothing (P) Ltd in I. T.A. Nos. 47 & 48/Mds/201 6 is also relevant in the case of assessee. The same is reproduced hereunder: –
“This court examined tests laid down in various cases for distinguishing between capital expenditure and revenue expenditure. When an expenditure is made not only once and for all but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital. Whether by spending the money any advantage of an enduring nature has been obtained or not will depend upon the facts of each Case.
1. Outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business, or for a substantial replacement of equipment.
2, Expenditure may be treated as properly attributable to capital when it is made not only once and for all, but with a view to bringing into existence-am asset or an advantage for the enduring benefit of a trade”.
Assessee got refund of gross output VAT as incentive from/SiPCQT. The sole objective was to increase profit & to achieve the production target during a year which will be beneficial both for the assessee and the Govt.
In the case of SreeAyyahar Spinning And Weaving… vs Commissioner of income-Tax on 23 March, 1998, Hon ‘ble High Court (Mad) held as under:-
“The subsidy was not received as some ex-gratia payment but it was received by the assessee exclusively for carrying on its business and after the commencement of the business by the assessee. Therefore, we are of the opinion that the subsidy so received by the assessee was liable to be and rightly, was treated as the financial assistance rendered by the S1PCOT for the purpose of running its business and we are therefore of the opinion that the Tribunal was correct in holding that the subsidy amount received by the assessee should be treated as revenue receipt. This court in Saroja Mills Ltd. v. CST [1996] 220 ITR 626, has taken the view that the subsidy amount given to the assessee to meet the revenue expenditure should be assessable as revenue receipt. The apex court in Shaney Steel and Press Works Ltd, v. CiT[1 997] 228 1 TR 253, has taken a similar view and held that the subsidy granted to the assessee for the purpose of carrying on the business should be treated as revenue receipt.
3. Following the decision of the apex court in Sahney Steel and Press Works Ltd. v. CIT [1997] 228 ITR 253, and the decision of this court in Saroja Mills Ltd. v. CIT [1996] 220 ITR 626, we hold that the subsidy received by the assessee in the instant case by way of reimbursement of revenue expenditure, is a Revenue receipt and it was rightly taxed as such”.
Conclusion
Thus in the light of above discussion, case laws, facts and merit of the case of the assessee, it is concluded that refund of output VAT is revenue in nature only and assessee rightly treated it as income in its return of income.
Thus, the claim of assessee the receipt of Rs.32,75,60,000/- from Govt. as capital receipt is hereby rejected”.
In view of above, the claim of assesses that the “Output VAT subsidy of Rs. 33,00,82,506/- received by the assessee should be treated as a capitalreceipt not chargeable to tax” is not tenable at all and it was rightly treated by assessee as revenue receipt.
11.2. The Ld. Counsel for the assessee submitted that in order to treat any subsidy received from Central/State Government, the primary condition is purpose test. If any subsidy is primarily granted as in incentive for the purpose of setting up/expansion of its manufacturing activity to encourage huge investment, then, said subsidy will be in the form of capital receipt not chargeable to tax. The Ld. Counsel for the assessee further submitted that the form of receipt of subsidy would not change the character of receipt, because, in many case, the subsidy has been quantified in terms of fiscal incentives like VAT/Sales Tax, refund, etc., but what is required to be seen is purpose of granting such subsidy. In the present case, the Government of Tamil Nadu, has given subsidy to encourage investment in the field of integrated automobile manufacturing sector. If you go by the purpose test, then the subsidy is for setting up/expansion of manufacturing facility, and thus, same would partakes the nature of capital receipt. In this regard, he relied upon the following judicial precedents:
> Ruling of the Apex Court in the case of CIT vs. Chaphalkar Brothers Pune (400 ITR 279) (Page 139 of Case Law Compilation (‘CLC’))
> Ruling of the Apex Court in the case of Shree Balaji Alloys &Ors (80 taxmann.com 239) (Page 154 of CLC)
> Ruling of the Jammu and Kashmir HC in the case of Shree Balaji Alloys &Ors (333 ITR 335) (Page 156 of CLC)
> Ruling of the Apex Court in the case of Ponni Sugars and Chemicals Ltd. (306 ITR 392) (Page 148 of CL C)
> Ruling of the Gujarat High Court in the case of Garden Silk Mills Ltd.(394 ITR 192) (Page 172 of CLC)
> Ruling of the Calcutta High Court in the case of Shyam Steel Industries Ltd.(303 CTR 628) (Page 181 of CLC)
> Ruling of this Hon ‘ble Tribunal in the case of India Cements Limited – ITA 2210/CHNY/2017 (Page 184 of CLC)
> Ruling of this Hon ‘ble Tribunal in the case of Ford India Private Limited (156 TTJ 1) (Page 192 of CLC)
> Ruling of the Delhi Tribunal in the case of Ulflex Limited – ITA 1329/061/2015 (Page 205 of CLC)
> Ruling of the Mumbai Tribunal in the case of Mahindra & Mahindra Ltd. (117 taxmann.com 518) (Page 250 of CLC)
> Ruling of the Mumbai Tribunal in the case of JSW Steel Limited ((2020) 180 ITD 505) (Page 266 of CLC)
> Ruling of the Kolkata Tribunal in the case of Ankit Metal & Power Ltd.(92 LTR(T) 599) (Page 274 of CLC)
11.3. The Ld. Counsel for the assessee further referring to provisions of explanation 10 to Sec.43(1) of the Act, submitted that provisions of Sec.43(1) of the Act is not applicable to incentives received in the form of IPS, because, said incentive is not given to offset the cost of any particular asset and is merely issued with an objective of accelerating the industrial development. Though, for the purpose of determining the amount of subsidy to be given, the cost of eligible investment was taken as the basis, but the subsidy was not specifically intended to subsidized the cost of asset. Therefore, it is submitted that since the incentive in the form of IPS is not a payment received directly or indirectly to meet any portion of the actual cost, it falls outside the purview of Explanation 10 to Sec. 43(1) of the Act. In this regard, the assessee relied upon the decision of the Hon’ble Bombay High Court in the case of PCIT v.Welspun Steel Ltd. reported in 264 Taxman 252. The assessee had also relied upon the following judicial precedents:
