Case Law Details
DECIDED BY: ITAT, DELHI BENCH `D’, DELHI,
IN THE CASE OF: LG Electronics India Pvt. Ltd. Vs. Addl. CIT, APPEAL NO: ITA No. 1404 (Del) of 2007, DECIDED ON February 26, 2010
RELEVANT PARAGRAPH
9. We have heard both the parties and gone through the material available on record. In this case the assessee had collected sales tax as a part of dealers’ price. At the year end the sales tax portion, which formed the part of dealers’ price had been bifurcated and has been claimed as capital subsidy. We have also gone through the Notification No. 1179 dated 31.03.1995 issued by the State Government of Uttar Pradesh. The State Govt, has provided sales tax exemption with an objective to promote the development of certain industries which have been set up or undertaken modernisation, diversification, backward integration by way of fixed capital investment of Rs. 50 crores or more. The exemption of from sales tax or benefit of reduced rate of tax is available to those units which have started production or have carried out expansion or modernisation or backward integration etc. between 1.12.1994 and 31.03.2000. Para 2 of the notification specifies that the exemption or reduction in the rate of sales tax including the additional tax would not be more than 5 per cent of sale of goods. In case where tax rate was more than 5 per cent including additional tax, the balance was to be paid by the unit. Para 7 (2) of the notification provides for the exemption of sales tax to the extent of exemption or reduction in tax. Item (2) of the Schedule includes Greater Noida Industrial Development Area wherein exemption from sales tax to the extent of 200 per cent of capital investment has been provided. None of the clauses of the Notification authorises the assessee to collect the sales tax and retain the same with it. The exemption of sales tax was available from the date of first sale or the date within the period of six months from the date of production, whichever is earlier. The said notification also provided that the eligibility certificate to the assessee will be issued by the joint/additional director of concerned Development Authority and the same will be produced before the concerned assessing officer. The Addl. Director Industries, Greater Noida Industrial Development Authority, vide letter No. 1344 dated 23/06/1999 issued eligibility certificate to the assessee. As per this certificate fixed capital investment is of Rs.51,57,95, 446/-. The date of commencement of production is 9/03/1998 and the first sale was affected on 27th March, 1998. The assessee applied for exemption from trade tax [sales tax] vide application dated 10/09/1998. The exemption from trade tax [sales tax] was provided from 27th March, 1998 to 26th March, 2013 for a period of 15 years or till the time the exemption of sales tax was availed of to the extent of 200 per cent of fixed capital investment i.e. Rs. 1,02,75,90,892/ -whichever was earlier. This certificate also provided the items i.e. Colour TV, Washing machine and Air-conditioners on which exemption from sales tax was provided. Another certificate was issued on 27th September, 2000 vide letter No. 1519 in respect of printed circuit voice for CTV number 8,12,000 and Micro-wave Oven 1,00,000. In this certificate, the sales tax exemption in first three years has been provided to the extent of 100 per cent, next three years 75 per cent, next two years 50 per cent and next two years 25 per cent. In all exemption from sales tax was provided for 10 years.
10. Neither the certificates issued by Greater Noida Industrial Development Authority nor the Notification issued by the State Govt, authorises the assessee to collect sales tax from its customers. The assessee has been exempted from collecting the sales tax from customers on the sales made with effect from 27th March, 1998. In fact, the Id. counsel for the assessee made a statement at the bar, during the course of hearing, that neither the Notification has authorised the assessee to collect sales tax nor the assessee had collected the sales tax as such. The assessee had included the element of sales tax in the dealers’ price as a sale price of the product. In the States other than Uttar Pradesh, the sales tax so collected as a part of dealers’ price has been paid to respective State Governments, whereas in the case of the assessee, since the assessee was not liable to pay sales tax, as exemption has been provided to the extent of 200 per cent of fixed capital investment, the sales tax element which is embedded in the sale price have been retained by the assessee as excess sales consideration. At the year-end the assessee has allocated the sales tax element from dealer’s price and has claimed the same as capital subsidy. Therefore, the collection of dealers’ price has been made in the ordinary course of trading activities. When the assessee is not permitted to collect the sales tax under the notification issued by the State Govt, the collection of sales tax as a part of dealers’ price is nothing but constitutes a trading receipt.
11. Our view that the sales tax collected by the assessee as a part of dealer’s price would constitute trading receipt is supported by the decision of Honourable Supreme court in the case of Sinclair Murray and Co. P. Ltd. Vs. CIT (1974) 97 ITR 615 (SC). In this case during the accounting period relevant to the assessment year 1953-54, the assessee company, with its head office in Calcutta, sold jute in Orissa to certain mills for being used in Andhra Pradesh and charged sales tax under a separate head in the bill as “Sales tax : Buyer’s account to be paid to the Orissa Government”. The sales tax was not paid to the Orissa Government on the ground that the sales were inter-State sales. The Appellate Tribunal held that where a dealer collected sales tax under section 9-B(3) of the Orissa Sales Tax Act, 1947, as it then stood, the amount of the tax did not form part of the sale price and the dealer did not acquire any beneficial interest therein and that the sum of Rs. 7,14,398/ – collected by the appellant did not form part of its total income. On a reference, the High Court held that the sales tax collected was part of the trading receipt and was to be included in the appellant’s total income since the money realised from the purchaser was employed by the appellant for the purpose of making profit and the appellant did not earmark the amount realised as sales tax and did not put it in a different account or deposit it with the Government in terms of section 9-B(3). On further appeal the Hon’ble Supreme Court held as under :-
Held, affirming the decision of the High Court,
(i) that, assuming that section 9-B(3) of the Orissa Sales Tax Act, 1947, was valid, the fact that the dealer was compelled to deposit the amount of sales tax in the State exchequer did not prevent the applicability of the principle laid down by the Supreme Court in Chowringhee Sales Bureau P. Ltd. Vs. CIT (1973) 87 ITR 542;
(ii) that the amount collected by the appellant as sales tax constituted its trading receipt and had to be included in its total income;
(iii) that if and when the appellant paid the amount collected to the State Government or refunded any part thereof to the purchaser, the appellant would be entitled to claim deduction of the sum so paid or refunded. “
From the Notification issued by State Government, as discussed above, it is clear that exemption from Sales tax / trade tax or reduction in sales tax / trade tax has been provided to the industrial units, which have been set up or carried out expansion, modernisation or backward integration. The sales tax exemption is available from the date of first sale of eligible units. In the case of the assessee the production of expended unit started from 9th March, 1998 and the first sale was effected on 27th March, 1998. The assessee had made application for the purpose of exemption on 19/09/1998. It is a undisputed fact that none of the clause of the Notification issued under section 4-A of Trade Tax Act, 1948 had authorised the assessee to collect sales tax / trade tax. It is also a fact that the collection of sales tax / trade tax has been made after the eligible industrial unit started production. Nowhere in the Notification has it been stated that exemption from sales tax / trade tax was provided for the setting up of the eligible unit. Therefore, the exemption from sales tax was granted in the course of carrying out of the business of the assessee. Hence, the grant of exemption from sales tax cannot be treated for the purpose of setting up of the industry. In other words, the industry was to be first set up and after it went into production and made the first sale, the assessee became eligible for exemption of sales tax / trade tax. The eligibility certificate was to be produced before the sales tax authorities in order to enable the assessee to claim exemption from sales tax. Since the assessee has collected the sales tax as part of dealer’s price, the sales tax element will be trading receipt in the hands of the assessee. Our view is supported by the decision of Honourable Allahabad High Court in the case of CIT Vs. K. M. Sugar Mills Ltd. 164 Taxman 562 (All.) as discussed below.
12.1 In the case of CIT Vs. K. M. Sugar Mills Ltd. (supra) the assessee had paid purchase tax of Rs. 20,12,046/ – against which it had received a subsidy of Rs. 20,11,000/-. The claim of the assessee was that the amount received on account of subsidy was a capital receipt and not liable to tax. This was negative by the assessing officer. In appeal, the Id. CIT (Appeals) observed that the nature of subsidy received by the assessee was different from the subsidy which was held to be a capital receipt by the Madhya Pradesh High Court in the case of CIT Vs. Dusadh Industries (1986) 162 ITR 784 because it was neither for encouragement of industries in the backward areas nor for setting up of industries. After referring to the relevant Notification and the fact that the purchase tax, when paid, was claimed as deduction, the Id. CIT (A) held that the refund of the same purchase tax received by the assessee as subsidy was taxable as a trading receipt. On further appeal the Tribunal upheld the findings of the Id. CIT (A) that the subsidy received by the assessee against the payment of purchase tax was a trading receipt in its hands and, therefore, liable to tax.
12.2 At the instance of the assessee the following question was referred to Their Lordships of Hon’ble Allahabad High Court for consideration:
” Whether on a true and correct interpretation of the scheme under which the subsidy was granted by the Govt, of Uttar Pradesh, read with the provisions of section 28 of the Income Tax Act, the Tribunal was legally correct in holding that the sum of Rs. 20,11,000/- receivable from the State Govt, was taxable as revenue receipt? “
Honourable Allahabad High Court held as under :-
” 15. So far as the question referred at the instance of the assessee is concerned, we find that under the Govt, order dated 24/08/1984 issued by the State Govt, providing aid was to be given to the extent of the purchase tax paid by the sugar mill on purchase of sugar cane in order to facilitate payment of cane price. It may be mentioned here that the cane price paid by the assessee is a revenue expenditure and, therefore, any amount provided as aid for making revenue expenditure, would partake the nature of revenue receipt. “
12.3 Similar view has been taken by Honourable Punjab & Haryana High Court in the case of CIT Vs. Abhishek Industries Ltd. (supra). The facts of this case were that the assessee initially while filing the return of income treated the sales tax subsidy as a revenue receipt. Even though a revised return was filed by the assessee on 12/08/1994, still no claim was made for treating the sales tax subsidy as capital receipt as against the revenue receipt. However, it was only at the time of framing the assessment the assessee changed its stand where vide letter dated 29/2/1996, a plea was sought to be raised that the sales tax subsidy was inadvertently treated as revenue receipt. The claim of the assessee was that the sales tax subsidy was in the form of sales tax exemption granted by the State of Punjab under the 1991 Rules, as amended by Notification dated 29th September, 1992. The relevant Rule as was sought to be relied upon by the counsel for the assessee is extracted below:-
” 4. A (1) Notwithstanding anything contained in any provisions of these Ruyles and subject to provisions of sub rule (2),
(i) Group of industries which are set up in A category area on or after the 1st day of October, 1992 and the goods produced by them shall be exempt from the payment of sales tax for a period of 10 years commencing from the date of production for the first time in the State of Punjab, subject to condition that total sales tax exemption shall not exceed 300 per cent of their fixed capital investment;
(ii) Group of industries which are set up in B category area on or after the 1st day of October, 1992 shall be exempt from the payment of sales tax for a period of 7 years from the date of production for the first time in the State of Punjab, subject to the condition that the total sales tax exemption shall not exceed 150 per cent of their fixed capital investment. “
12.4 Honourable Punjab & Haryana High Court after examining the contention of the assessee and also various decisions at page 25 observed as under :-
” In the present case, all that is claimed and is put on record by the assessee is that the sales tax subsidy is being received by it from the State. It is not disputed that the same is being received on recurring basis after the unit came into production. There is no document or material placed on record by the assessee to substantiate its plea that subsidy of the kind under consideration was to enable it to acquire new plant and machinery or as an aid to set up the industry. Rather, it is quite evident that subsidy in the present case is in the form of an operational subsidy provided by the State after the industry had been set up and commenced commercial production. The subsidy is not in the form of a financial assistance granted to the assessee for setting up of the industry. The endeavour of the State was to provide the newly set up industries, a helping hand for specified period to enable them to be viable and competitive vis-a-vis the industries were already set up and were in production since long. The assessee has failed to establish on record that the kind of subsidy involved in the present case was in the form of a subsidy to enable it to carry out capital investment. In the absence thereof, it cannot possibly be presumed by the authorities that such a subsidy would be in the nature of capital subsidy. The onus to provide the same strongly lay on the assessee, which it had failed to discharge. “
12.5 Likewise in the case of Mudit Refrigeration P. Ltd. Vs. ACIT (2003) 84 I.T.D. 289 (All.) according to scheme notified by State Govt, the assessee company, a cinema owner was entitled to grants-in-aid or subsidy by way of adjustment of Entertainment Tax, which was treated as paid by way of adjustment and retained by the assessee. The assessee claimed it as a capital receipt, on plea that subsidy was paid to carry on trade and that its quantification on the basis of entertainment tax was only a measure to determine it and that it was not a fact that entertainment tax was not payable by the assessee to the Govt. The assessing officer treated it as revenue receipt. The question before the Bench was whether if grants in aid were given by way of assistance to the assessee in carrying on of his trade or business and for purpose of making cinema business more profitable in backward areas, and not to acquire any asset or against capital outlay it had to be treated as a trading receipt and the source of funds was quite immaterial. It was also held that grant in aid received by way of adjustment of Entertainment Tax, which was treated as paid by way of adjustment and retained by the assessee could not be regarded anything, but a revenue receipt. If the facts of the case are examined in the light of decision of the ITAT, Allahabad Bench in Mudit Refrigeration P. Ltd. Vs. ACIT (supra) the collection of sales tax as part of dealer’s price would be a trading receipt in the hands of the assessee even if it is assumed that the assessee was authorised to collect and retain with it the sales tax as part of dealer’s price. Moreover, there is nothing on record to suggest that sales tax exemption was granted for acquiring of capital assets. Similar view has been taken in the case of U. P. State Handloom Corporation Vs. DCIT 42 I.T.D. 436 (All). In this case the assessee received subsidy amount from Govt, under a specified scheme called “Janta Cloth Scheme” in the capacity of trader and it was compensation for loss of profit or for loss on cost of production. It was held that subsidy received by trader under “Janta Cloth Scheme” to compensate trader for loss on cost of production was a revenue receipt.
13.1 In the case of Sahney Steel & Press Works Ltd. & Others (supra) a notification was issued by the Andhra Pradesh Government that certain facilities and incentives were to be given to all the new industrial undertakings, which commenced production on or after 1st January, 1969 with investment capital (excluding working capital) not exceeding Rs.5 crores. The incentives were to be allowed for a period of five years from the date of commencement of production. Concession was also available for subsequent expansion of 50 per cent and above of the existing capacity provided in each case, the expansion was located in a city or town or panchayat area other than that in which existing unit was located. The salient features of the scheme formulated by the Andhra Pradesh Govt, were that the incentives were not available unless and until the production had commenced; the availability of incentive would be limited to a period of five years from the date of commencement of production; the incentives were to be given by way of refund of sales tax and also by way of subsidy on power consumed for production to the extent stated in the notification; the exemptions were given from payment of water drawn from Govt, sources. The assessee-company, S, set up a factory at P which went into production in the year 1973. The assessee maintained its accounts according to the calendar year. It was, therefore, entitled to the benefits of the said Government order in the calendar year 1973, which meant the assessment year 1974-75. In the said accounting year, the assessee obtained refund totalling Rs. 14,665.70 being refund of sales tax on purchase of machines, purchase of raw materials and sale of finished goods. The Income-tax Officer, while making the assessment for the year 1974-75, included the said amount in the asses sable income of the assessee which was confirmed on appeal by the Commissioner of Income-tax (Appeals). On further appeal, however, the Tribunal upheld the assessee’s contention and held that the amount of Rs. 14,665.70 refunded to the assessee in terms of the said Government order “did not represent refund of sales tax” but was a development subsidy in the nature of a capital receipt. The High Court held that the amount was assessable. On appeal to the Supreme Court by the assessee :
” Held, dismissing the appeal, that, under the notification in question the payments were made to assist the new industries at the commencement of business to carry on their business. The payments were nothing but supplementary trade receipts. It was true that the assessee could not use this money for distribution as dividend to its share-holders. But the assessee was free to use the money in its business entirely as it liked and was not obliged to spend the money for a particular purpose. The subsidies had not been granted for production of, or bringing into existence any new asset. The subsidies were granted year after year, only after the setting up of the new industry and commencement of production. Such a subsidy could only be treated as assistance given for the purpose of carrying on of the business of the assessee. The subsidies were of revenue nature and would have to be taxed accordingly. “
13.2 The principle laid down in the case of Sahney Steel and Press Works (supra) is that if the purpose of subsidy is to help the assessee to set up its business or complete a project, the moneys must be treated as having been received for capital purposes. But if moneys are given to the assessee for assessing him in carrying out the business operations and the moneys are given only after and conditional upon commencement of production, such subsidies must be treated as assistance for the purpose of the trade. The facts of the case before us are similar to the facts of Sahney Steel and Press Works (supra). The purpose of notification issued by Uttar Pradesh Government was to provide sales tax exemption to all new industrial undertakings or the industrial undertakings which have been expanded or modernised or went in backward integration between 1/12/1994 to 31st March, 2000. The assessee had collected the amount of sales tax equal to exemption granted in the course of carrying out business. The assessee was not obliged to spend the sales tax collected for any particular purpose. The notification as stated above has neither authorised the assessee to collect the sales tax nor has the assessee collected sales tax as such. The sales tax element is embedded in dealer’s price and has been collected as part of dealer’s price. Even if it is assumed that the assessee was authorised to collect sales tax and retain with it, the same will be chargeable to tax as trading receipt in view of decision of Honourable Supreme Court in the case of Sahney Steel and Press Works (supra).
