Case Law Details

Case Name : Greenply Industries Limited Vs ACIT (ITAT Kolkata)
Appeal Number : I.T.A. No. 232/GAU/2019
Date of Judgement/Order : 21/06/2022
Related Assessment Year : 2014-2015

Greenply Industries Limited Vs ACIT (ITAT Kolkata)

ITAT find that the excise duty exemption has been admittedly the capital receipt and the finding of the ld. CIT(Appeals) that the excise duty exemption is not liable to be taxed under the normal provisions of the Income Tax Act being not in dispute for us, the alleged capital receipt cannot be categorised as part of the book profit. In the case of assessee being covered by the excise duty notification, such sum collected on the goods manufactured and sold is in the nature of incentive subsidy given for establishing the units in backward areas and to generate employment opportunities. The said fact is evident from the office memorandum dated 07.01.2003 of Ministry of Commerce and Industry, which reads as under:-

3.4 On perusal of the above, it can be seen that incentive in the form of Excise Duty Exemption has been given with an objective to achieve industrialization in the backward areas of Himachal Pradesh and Uttaranchal and to generate employment opportunities. The object of the assistance was not to enable the businessman to run the business more profitably but encourage a businessman to set up a new unit or expand the existing unit for overall economic development of the state. Hence, the incentives granted by the Government of India vide Office Memorandum No. 1(10)/2001-NER issued by DIPP, Ministry of Commerce and Industry, GOI dated 07-01-2003 read with Notification No. No.50/2003- CE dated 10-06-2003, will be treated as capital receipt and not liable to tax. In this regard, statement showing computation of excise duty exemption received during the year aggregating to Rs. 87,98,09,432/- alongwith copy of Excise Returns (in case of Rudrapur Unit 1) and copy of Form A (in case of Rudrapur Unit 2) has been enclosed (Refer Page No. 599-683 of Paper Book).

In the light of above decision as well as the Memorandum issued by the Ministry of Commerce & Industry, we find that the excise duty exemption is purely capital receipt and is neither chargeable to tax under the normal provisions of the Income Tax Act nor is to be included as part of the book profit for computing the minimum alternative tax as per the provisions of section 115JB of the Act.

FULL TEXT OF THE ORDER OF ITAT KOLKATA

The above captioned cross appeals are directed against the order of Id. Commissioner of Income Tax (Appeals), Dibrugarh both dated 25.03.2019, which are arising ITA No. 232/GAU/2019 and ITA No. 359/GAU/2019.

2. First we will take up the assessee’s appeal in ITA No. 232/GAU/2019, wherein the assessee has raised the following grounds of appeal:-

“(1) That on the facts and in the circumstances of the case, the ld. CIT(A) was not justified and grossly erred in not allowing claim of education cess on Income Tax and Dividend Distribution Tax amounting to Rs.66,87,361/-, in computing total income under the normal provisions of the Act.

(2) That on the facts and in the circumstances of the case, the ld. CIT(A) was not justified and grossly erred in not allowing exclusion of Excise Duty Exemption as capital receipt amounting to Rs.87,98,09,432/- availed during the year under consideration in computing book profit as per section 115JB of the Act”.

2(i). The assessee has also raised an additional ground of appeal on 29th September, 2021, which reads as follows:-

“Claim for deduction of Amortization of Leasehold Land expenses Rs.18,73,242/-

In the computation of total income for the instant assessment year, the assessee has debited Amortization of Leasehold land expenses amounting to Rs.18,73,242/-. The Assessing Officer in the assessment order has disallowed the above expenditure. The disallowance made by the ld. Assessing Officer was upheld by the ld. CIT(Appeals). However, ld. CIT(Appeals) gave relief to the appellant by correspondingly increasing the deduction under section 80IC/80IE of the Act for the lease rentals attributable to the units eligible for deduction under section 80IC/80IE of the Act The assessee pleads that the expenditure shall be allowed as a deduction in view of the following decisions:-

DCIT –vs.- M/s. Adani Gas Ltd. (2018) ITA No. 775/AHD/2014 (Ahmedabad Tribunal);

DCIT –vs. – Sun Pharmaceuticals Industries Limited (2009) 227 CTR 206 (Guj.);

ACIT –vs.- Balmer Lawrie & Co. Ltd. (2019) ITA No. 2264/KOL/2017 (Kolkata Trib.);

Balmer Lawrie & Co. Ltd. –vs.- SIT (2019) 111 taxmann.com 316 (Calcutta)”.

3. Brief facts of the case are that the assessee is a Limited Company engaged in the business of manufacturing and trading of plywood, laminate and allied products. The assessee filed e-return of income of Rs.49,12,19,250/-on 29.11.2015. The case was selected for scrutiny through CASS under complete scrutiny category followed by serving of notices under section 143(2) and 142(1) of the Act. Various details as called for by the ld. Assessing Officer were filed by the assessee. During the course of assessment proceedings, ld. Assessing Officer observed that the assessee has entered into an international transaction of Rs.195.93 crores (approx.) and also specified domestic transaction at Rs.149.48 crores (Approx.). The case was referred to the Transfer Pricing Officer (in short ‘TPO’) within the meaning of section 92CA of the Income Tax Act after necessary approval. Subsequently ld. TPO passed the order under section 92CA of the Act on 27.10.2017 suggesting the upward adjustment of Rs.43,67,295/- for Corporate Guarantee given by the assessee to its Associated Enterprises (AE) and downward adjustment in respect of purchase of eligible unit from non-eligible unit at Rs.4,67,33,912/-. Apart from the adjustment suggested by the TPO, ld. Assessing Officer also disallowed the amortization of leasehold land at Rs.18,73,242/- and made disallowance under section 14A of the Act at Rs.31,038/-. Ld. Assessing Officer assessed the income of the assessee at Rs.54,42,24,737/- and income computed under section 115JB of the Act at Rs.3,23,17,984/-(after giving set off of the MAT credit of Rs.18,49,81,989/-). Aggrieved, the assessee preferred appeal before the ld. CIT(Appeals) and partly succeeded. Now both the assessee and Revenue are in appeal before the Tribunal.

4. ITA No. 232/GAU/2019: Ground No. 1 relates to allowing claim of education cess. At the outset, ld. counsel for the assessee requested for not pressing this ground. We, therefore, dismiss Ground No. 1 as not pressed.

5. Ground No. 2: Through this ground, it is claimed that the ld. CIT(Appeals) grossly erred in not allowing exclusion of Excise Duty Exemption as capital receipt amounting to Rs.87,98,09,432/- availed during the year under consideration in computing book profit as per section 115JB of the Act.

6. Brief facts relating to the issue are that the assessee claimed excise duty exemption in terms of Excise Notification No. 50/2003 dated 10.06.2003, as for the Manufacturing units of the appellant namely Rudrapur Plywood Unit and Rudrapur MDF Unit located at Plot No. 2, Sector 9, IIE, Pantnagar, Rudrapur, Uttrakhand, which commenced commercial production on 02.05.2006 and 31.03.2010 respectively, and are thus eligible for 100% excise duty exemption in respect of goods manufactured and cleared from such units for a period of 10 years from the date of commencement of commercial production. In the impugned order, ld. CIT(Appeals) has allowed the deduction under the normal provisions of the Act but the order is silent on the exclusion of the said incentive while computing book profit under section 115JB of the Act.

7. counsel for the assessee stated that the two units owned by the assessee namely Rudrapur Plywood Unit and Rudrapur MDF Unit are covered by the Excise Notification No. No.50/2003- CE dated 10-06-2003 and the said excise duty exemption are given as the units owned by the assessee are located in the backward areas in the State of Himachal Pradesh and Uttranchal in terms of the observation of the then Hon’ble Prime Minister for generation of employment opportunities and local resources.

Reference was also made to the Office Memorandum of Ministry of Commerce & Industry dated 07.01.2003. Referring to the decision of the Hon’ble Mumbai Tribunal in the case of DCIT –vs.-(ITA No. 5725/MUM/2015), it was claimed that the excise duty and sales tax exemption are capital receipt and to be excluded in computation of income. Reliance was further placed on the judgment of the Hon’ble Apex Court in the case of CIT –vs.- Ponni Sugars & Chemicals Limited (2008) 306 ITR 392 (SC), Sahney Steel & Press Works Ltd. –vs.- CIT (1997) 228 ITR 253 (SC), judgment of the Hon’ble Jammu & Kashmir High Court in the case of Shree Balaji Alloys & ors –vs.- CIT (2011) 51 DTR 217 (J&K), judgment of the Hon’ble Jurisdictional High Court in the case of PCIT –vs.-Ankit Metals & Power Ltd. (2019) ITA 155 of 2018 (Cal.) and in the case of CIT –vs.- Rasoi Limited (335 ITR 438 (Cal.). Further reliance was placed on the judgment of the Hon’ble Special Bench decision of Mumbai Tribunal in the case of DCIT –vs.- Reliance Industries Limited (2004) 88 ITD 273 (MUM)(SB), wherein it was held that where the object of the subsidy was to encourage the settling up of industries in the backward area and the incentive was not given to the assessee for assisting it in carrying out its business operations, the same is capital in nature. This decision of Special Bench was affirmed by the Hon’ble Bombay High Court in the case of CIT –vs.- Reliance Industries Limited (2010) 339 ITR 632.

8. Ld. counsel for the assessee further submitted that appellant has availed the incentive being capital receipt for setting up a new unit or carry out expansion of existing unit and not for running the business more profitably. Such receipt does not have any income or profit element. Referring to the judgment of the Hon’ble Supreme Court in the case of Indo Rama Synthetics (I) Limited –vs.- CIT (2011) 330 ITR 363 (SC), it was submitted that the object of MAT provisions is to bring out the real profit of the companies and inclusion of capital receipt in the form of excise duty exemption in the computation of MAT would defeat the very objective of introduction of section 115JA and 115JB of the Act. Further Coordinate Bench of this Tribunal in the case of Sunrise Biscuit Co. Pvt. Limited –vs.-ITO (ITA No. 92/GAU/2019) held that source of subsidy is immaterial, form of subsidy is equally immaterial and the time at which the subsidy is paid is also immaterial. Reliance was also placed on the decision of the Coordinate Bench of Kolkata in the case of DCIT –vs.- M/s. Century Plyboards (I) Limited (ITA No. 2149/KOL/2019), wherein it was held that subsidies cannot be regarded as income even for the purpose of book profits u/s 115JB of the Act though credited in the profit and loss account and have to be excluded for arriving at the book profits under section 115JB of the Act. Reliance was further placed on the following decisions:-

(i) Uflex Limited –vs. ACIT (2022) (1) TMI 731- ITAT, Delhi,

(ii) M/s. BR Agrotech Limited –vs.- ACIT (2021 (9) TMI 233- ITAT, Delhi;

(iii) ACIT –vs.- Shree Cement Limited (ITA No. 614/JP/2010) order dated 09.09.2011;

(iv) CIT –vs.- Harinagar Sugar Mills Limited (ITA No. 1132 of 2014) order dated 04.01.2017 (Bombay High Court);

(v) ACIT –vs.- the Nilgiri Tea Estate Limited (2014) 65 SOT 14 (Cochin) (URO); &

In the following cases, the Hon’ble Kolkata Tribunal held that sales tax incentives/excise subsidy to be capital in nature and needs to be excluded in computing book profit under section 115JB of the Act:

(vi) Tata Metaliks Ltd. –vs.- ITO (2018) ITA No. 439 & 478/KOL/2016);

(vi) DCIT –vs.- M/s. Emami Biotech Limited (2019) ITA No. 1915/KOL/2017);

(vii) DCIT –vs.- Sanghi Industries Limited (2018) ITA No. 999/HYD/2017;

(viii) ACIT –vs.- JSW Steel Limited 112 com 55 92019) (Mumbai-Trib.);

(ix) Krishi Rasayan Exports Pvt. Ltd. –vs.- PCIT (2020) (ITA No. 742 & 743/KOL/2019).

To conclude it was stated that the excise duty being capital receipt and given with the object to achieve industrialization in the backward areas of Uttaranchal and to generate employment opportunities, the same is not liable to be taxed under the normal tax Rules and under section 115JB of the Act.

9. Per contra, ld. D.R. vehemently argued supporting the order of lower authorities but could not controvert the fact that the issue in hand is settled in favour of the assessee by various Hon’ble Courts and the decision of the Tribunal.

10. We have heard the rival contentions and perused the relevant material available on record. We note that the assessee runs two manufacturing units in the name of Rudrapur Plywood Unit and Rudrapur MDF Unit and both are covered by the Excise Notification No.50/2003 dated 10.06.2003. Both the units are located in backward areas and are eligible for 100% excise duty exemption in respect of goods manufactured and cleared from such units for a period of 10 years from the date of commencement of commercial production. The assessee has claimed the excise duty exemption from these two units at Rs.87,98,09,432/- which is in the nature of capital receipt not liable to be taxed. We also find that though the said amount is reflected in the Profit & Loss Account of the assessee and the amount being capital receipt has not been objected by the ld. CIT(Appeals) also, who has allowed deduction of the said amount vide his order dated 25.03.2019 under normal provisions of the Act, however, the order is silent on the exclusion of the said amount while computing the book profit under section 115JB of the Act, therefore, the issue is for our examination that “whether the excise duty exemption which is a capital receipt and not chargeable to tax under the normal provisions of the Act, is to be considered as a part of book profit for computing the book profit under section 115JB of the Act”.

11. We will like to first go through the judicial jurisprudence available for the issue in hand. We find that in the case of Sunrise Biscuit Co. Pvt. Limited –vs.- ITO, ward -1(5), Guwahati ITA No. 92/Gau/2019 (page 87­102 of the case law paper book), the Hon’ble Guwahati Tribunal was dealing with the issue whether subsidy received by the assessee was capital in nature and, therefore, not exigible to income-tax, both under normal computational provisions as well as book profit u/s 115JB. The Hon’ble ITAT relied upon of the judgement of the Hon’ble Supreme Court in the cases of Sahney Steel & Press Works (supra) & Ponni Sugar & Chemicals Ltd. (supra) and had held that the object or purpose for which the subsidy was given was relevant. It was held that the source of subsidy is immaterial, form of subsidy is equally immaterial and the time at which the subsidy is paid is also immaterial. It was held that the purpose of the scheme which enabled the grant of subsidy to the assessee was the only material factor in determining the taxability of such receipts. Further, placing reliance on the decision of the Hon’ble Kolkata Tribunal in case of DCIT vs. M/s. Century Plyboards (I) Ltd, in ITA  No. 2149/Kol/2019 (Refer Page 103-122 of the Case Law Paperbook), it was held that such capital subsidy received by the assessee is also liable to be excluded from the computation of book profit. Relevant extract of the order of the Hon’ble Tribunal is reproduced below:

“24. As regards the issue relating to treatment of this VAT subsidy while computing book profit u/s 115JB of the Act, we note that this exact issue was considered by us while deciding the case of DCIT vs. M/s. Century Plyboards (!) Ltd. in ITA No. 2149/Kol/2019 (supra) and it was held that such capital subsidy received by the assessee is also liable to be excluded from the computation of book profit. The relevant findings are as follows:

45. Now coming to the issue relating to treatment of these subsidies while computing book profit u/s 115JB, we note that the Hon’ble Apex Court in the case of Apollo Tyres Ltd. vs. CIT (255 ITR 273) held that the AO has the power to rework the book profit if the profits are computed not in accordance with Part II and Part III of Schedule VI to the Companies Act, 1956. The Hon’ble Supreme Court in their subsequent decision rendered in the case of Indo Rama Synthetics (!) Ltd vs. CIT (330 ITR 363) further held that, the object of MAT provisions is to bring out the true working result of the companies. As held in the preceding paras, the subsidies received by the assessee were capital in nature and therefore not liable to tax. In the circumstances therefore, inclusion of such capital receipt in the computation of book profit u/s 115JB would defeat two fundamental principles. Firstly, it would levy tax on receipt which is not in the nature of income at all and secondly it would not result in arriving at real working results of the company. We thus find merit in the assessee’s claim that the said subsidies being capital in nature, deserves to be excluded from the computation of book profit u/s 115JB of the Act.

46. It is noted that in the context of similar State Industrial Scheme, the Jurisdictional Hon’ble Calcutta High Court in the case of Pr.CIT Vs Ankit Metal and Power Ltd (416 ITR 591) held that subsidies received for setting up new industry is not in the nature of income and therefore cannot be deemed as income for the purposes of computing book profit u/s 115JB of the Act. In the decided case the assessee had received interest subsidy under the WB Incentive Scheme, 2000 and power subsidy under the Power Intensive Industries Scheme, 2005 for setting up Sponge Iron Plant in Bankura. Before this Tribunal, the assessee claimed that receipt of such subsidies in form of remission of interest and power/electricity duty payments etc. was capital receipt not liable to tax both under the normal computational provisions as well as book profit u/s 115JB of the Act. The Tribunal answered the issue in favour of the assessee. On appeal by the Revenue, the Hon’ble High Court upheld the order of this Tribunal by observing as under:

“26. Now the second issue which requires adjudication is as to whether the aforesaid incentive subsidies received by the assessee from the Government of West Bengal under the schemes in question are to be included for the purpose of computation of book profit under Section 115JB of the Income Tax Act, 1961 as contended by the revenue by reiving on the decision in the case of Apollo Tyres Ltd, (supra).

27. In this case since we have already held that in relevant assessment year 2010-11 the incentives ‘Interest subsidy’ and ‘Power subsidy’ is a ‘capital receipt’ and does not fall within the definition of ‘Income’ under Section 2(24) of Income Tax Act, 1961 and when a receipt is not on in the character of income it cannot form part of the book profit under Section 115JB of the Act, 1961.

In the case of Apollo Tyres Ltd, (supra) the income in question was taxable but was exempt under a specific provision of the Act as such it was to be included as a part of the book profit. But where a receipt is not in the nature of income at all it cannot be included in book profit for the purpose of computation under Section 115JB of the Income Tax Act, 1961. For the aforesaid reason, we hold that the interest and power subsidy under the schemes in question would have to be excluded while computing book profit under Section 115 JB of the Income Tax Act, 1961.”

26. The admitted factual and legal position in the present case is that subsidies in question is not in the nature of income. Therefore they cannot be regarded as income even for the purpose of book profits u/s.115JB of the Act though credited in the profit and loss account and have to be excluded for arriving at the book profits u/s. 115JB of the Act. We hold accordingly and confirm the order of the CIT(A) in this regard. In light of the aforesaid discussion, we are of the view that the subsidies in question should be excluded for the purpose of determination of book profits u/s. 115JB of the Act. We hold accordingly and dismiss Gr.No.2 raised by the Revenue.

……………….

25. For the reasons set out above therefore, we allow the grounds taken by the assessee and direct the AO to deduct the VAT subsidy of Rs.8,78,84,902/- both while computing income under normal computational provisions and book profit u/s 115JB of the Act for the relevant AY 2014-15.”

12. The Hon’ble Kolkata ITAT in case of DCIT -vs.- M/S Century Plyboards (I) Ltd. (ITA No. 2149/Kol/2019 And C.O. No. 22/Kol/2020 In ITA No.2149/Kol/2019) relied upon finding of its coordinate bench in the case of Sicpa India (P) Ltd. – vs.- DCIT T20171 186 TTJ 289 (Kol.) (Refer Page 123-150 of the Case Law Paper book) wherein it has been held that subsidies cannot be regarded as income even for the purpose of book profits u/s.115JB of the Act though credited in the profit and loss account and have to be excluded for arriving at the book profits u/s. 115JB of the Act.

13. Coordinate Bench Delhi in case of Uflex Limited -vs.- ACIT 2022 (1) TMI 731 – ITAT Delhi held that CENVAT credit, as received by the Assessee, in accordance with the incentive scheme for J & K as formulated by the Central Government is a capital receipt not liable to tax, accordingly the same cannot be part of book profit under Section 115JB also. Relevant extract of the order of the Hon’ble ITAT is reproduced below:

“14. Regarding issue raised vide Ground No. 7, that the aforesaid subsidy being capital in nature it will also not form part of the book profit u/s 115JB. Before us the Ld. Counsel for the assessee submitted that the CENVA T credit as received by the appellant under the incentive scheme for J&K as formulated by the Central Government and treated the same as a capital receipt not liable to tax by the J&K High Court in the case of Shree Balaji Alloys (supra) and also affirmed by the Hon’ble Supreme Court, that it will not form part of the income chargeable to tax u/s 4 of the Act and once the same is treated as capital receipt not chargeable to tax under the Income-tax Act, then same has to be excluded while computing the income under the MAT provisions in terms of Section 115-JB of the Act. Because Section 115-JB is also meant for the purpose of levy of tax on income and the basic things will have to be kept in mind that receipts which have to be included in the profit should be having the characteristic of income. There is a fundamental difference between the income and capital that the income is liable to tax, whereas capital is not liable to tax. In the case of Padmaraje R. Kadambande vs. CIT in 195 ITR 877, the Hon’ble Supreme Court held that the capital receipts are not income within the definition of Section 2(24) of the Act and hence are not chargeable under the Income Tax Act. The learned counsel further stated that the provision of Section 115-JB of the Act is alternative mechanism for computation of income based on book profit without claiming any deduction or incentive allowable under the Act, but the fact remains that taxability has to be restricted to the income and once a receipt is considered as capital, it should be excluded even while computing book profit u/s. 115-JB of the Act. He relied upon the following judgments:

(i) ITA No. 923/Bang/2009 dated 13th January 2017 JSW Steels Ltd. -vs. ACIT

(ii) ITA No. 5124/Del/2011 dated 29th June 2018 Montage Enterprises Pvt. Ltd. vs. DCIT

(iii) ITA No. 2199/Del/2009 dated 20th March 2019 Ultimate Flexipack Ltd. vs. DCIT

(iv) 416 ITR 591 (Cal) Pr. CIT vs. Ankit Metal and Power Ltd.

(v) Appeal No. 1132 of 2014 dated 4th January 2017 CIT vs. Harinagar Sugar Mills Ltd. (Bombay)

(vi) ITA Nos. 614, 615 & 635/JP/2010 dated 9th September 2011 – Shree Cement – Appeal by Revenue, the Hon’ble Rajasthan High Court in Appeal Nos. 204 of 2010 and 85 of 2014 vide order dated 22nd August 2017 has not admitted any question of law in appeal filed by Revenue.

15. Since we have already held that the CENVAT credit, as received by the appellant, in accordance with the incentive scheme for J & K as formulated by the Central Government is a capital receipt not liable to tax, accordingly the same cannot be part of book profit under Section 115JB also. Consequently, ground No. 7 is also allowed. ”

14. Coordinate Delhi ITAT in case of M/S BR Agrotech Ltd, -vs.- ACIT (2021 (9) TMI 233 – ITAT DELHI) decided in favour of the Assessee holding that only that receipt which forms part of the “income” are to be taxed. The capital receipts which are otherwise not subject to tax under the normal provisions of the Act are not envisaged to be taxed under the provisions of “Minimum Alternate Tax”. Once a receipt is not considered as income, the same cannot be subjected to tax under this Act as such receipt naturally classified under capital receipt, which was never meant to be taxed cannot be taxed even u/ s 115 JB. Relevant extract of the order of the ITAT is reproduced below:

“23. The similar view has been taken by various Co- ordinate Benches of IT AT, to mention a few, IT AT Delhi in the case of Montage Enterprises Pvt. Ltd. vs. DCIT in IT A No 5124/Del/2011, in the case of Malana Power Co. Ltd. in ITA No. 3957 & 1550/Del/2015 and ITAT Mumbai in the case of Shivalik Venture Pvt. Ltd. vs. DCIT in ITA No. 2008/ Mum/2012 wherein it was held that capital subsidy shall be excluded in computing book profit u/ s 115JB of the Act.

24. To conclude,

(a) Not considering the subsequent interpretation of law through the judgment of the Hon’ ble Supreme Court or the Hon’ ble jurisdictional High court would constitute a mistake apparent from record.

(b) The Excise subsidy refund is to be treated as capital receipt.

(c) Capital receipts are liable to be excluded for the purpose of computation of book profit u/s 115”

15. In case of ACIT -vs.- Shree Cement Ltd (ITA No. 614/JP/2010) order dated 09­09-2011. (Refer Page No. 716-751 of Paper Book), the Coordinate Jaipur Bench of ITAT was dealing with the issue as to whether subsidy received which was admittedly capital in nature can be subject to MAT. The ITAT held that there was never any intention behind introduction of section 115JB to tax something which is not taxable at all. It was held that tax incentives needs to be excluded in computing Book Profits u/s 115JB being capital receipt not having any element of income embedded therein and not representing the real working results of the company. The Tribunal further held that:-

With the above discussions, the only issue left to be considered is whether exclusion of the above capital receipt is in line with the principles as laid down by Hon’ble Apex Court in the case of Apollo Tyres (supra). In the case of Apollo Tyres (supra), the question before the Apex Court was whether an AO can, while assessing a company for income tax u/s 115J of the IT Act, question the correctness of the P&L a/c prepared in accordance with requirements of Parts II and III ofSch. VI to the Companies Act. From the question as framed before the Apex Court it is clear that the issue before the Hon’ble Court was with regard to power of the AO to recast audited accounts prepared in accordance with Part II and Part III of the Sch. VI to the Companies Act. Therefore, for applicability of the decision of the Apex Court the prerequisite is that the accounts are prepared in accordance with Part II arid Part III to Sch. VI of the Companies Act. If however the P&L accounts are not in accordance with Part II and III of Sch. VI to the Companies Act, the said decision cannot be applied and in that situation it does not prohibit the needful adjustment.

16. By placing reliance on the above decision in the case of Shree Cement Limited (Supra), carbon credit being a capital receipt was held to be excludible while computing Book Profit in the following cases-

ACIT -vs.- Shree Cement Ltd. NTA No. 504/JP/2012, order dtd. 27-01- 2014

ACIT -vs.-M/s L.H. Sugar Factory Limited NTA No. 417 & 418/LKW/2013, order dtd. 09-02-2016.

17. Hon’ble Bombay High Court in the case of CIT -vs.- Harinagar Sugar Mills Ltd. (ITA No. 1132 of 2014), order dtd. 04-01-2017 (Refer Page No. 752-755 of Paper Book) has held that the object or purpose of the subsidy decides its character – whether on revenue or capital account. The point of time at which subsidy is paid and the source of subsidy are immaterial. Where the receipt was on capital account, the same needs to be excluded in computing Book Profit u/s 115JB.

Excise Duty Exemption not chargeable to Tax & cannot be categorised as Book Profit

18. In the case of DCIT -vs.- Binani Industries Ltd. (ITA No. 144/Kol/2013, order dtd 02-03-20161. (Refer Page No. 772-789 of Paper Book), it was held that receipt from forfeiture of share warrants credited to the P & L A/c and disclosed in the notes to accounts being a capital receipt shall be excluded in computing Book Profit. It held that in order to determine the real profit of the assessee as laid down by the Hon’ble Apex Court in the case of Indo Rama Synthetics (supra) adjustment need to be made to the disclosures made in the notes on accounts forming part of the profit and loss account of the assessee and the profits arrived after such adjustment should be considered for the purpose of computation of book profits u/s 115JB of the Act.

19. In the case of ACIT -vs.- The Nilgiri Tea Estate Ltd. (2014) 65 SOT 14 (Cochin) (URO) (Refer Page 151 -156 of the Case Law Paperbook) wherein it was held that any income, which does not fall within the purview of Total Income u/s 5 of the IT Act, cannot be taxed under any other provisions of the Act. Further, the Hon’ble Tribunal held that the provisions of Chapter Xll-B of the Act do not operate to extend the scope of Total Income but provides an alternative basis for computing the income and hence income which is not chargeable to tax cannot be included in the computation of Book Profit u/s 115JB.

20. In the case of Sutlej Cotton Mills Ltd -vs.- ACIT (1993) 45 ITD 22 (Cal) (SB) (Refer Page 157-201 of the Case Law Paperbook), it was held that according to standard accounting practice, capital receipt cannot be part of the profit. Therefore, capital receipts which do not have the character of income cannot be liable to income-tax by adding it to the book profit. When an amount which forms part of the book profit itself cannot be taxed under s. 115J, when it does not have the income character it has to be accepted that when what is routed through the P&L account and carried to reserve is of a capital receipt and does not have an income character. It cannot be added back to the book profits merely because of the enabling provision in the Expln. to s. 115J for the purpose of imposing a tax thereon.

21. After going through the above referred judgments and decisions and on examining the facts of the instant case, we find that the excise duty exemption has been admittedly the capital receipt and the finding of the ld. CIT(Appeals) that the excise duty exemption is not liable to be taxed under the normal provisions of the Income Tax Act being not in dispute for us, the alleged capital receipt cannot be categorised as part of the book profit. In the case of assessee being covered by the excise duty notification, such sum collected on the goods manufactured and sold is in the nature of incentive subsidy given for establishing the units in backward areas and to generate employment opportunities. The said fact is evident from the office memorandum dated 07.01.2003 of Ministry of Commerce and Industry, which reads as under:-

3.4 On perusal of the above, it can be seen that incentive in the form of Excise Duty Exemption has been given with an objective to achieve industrialization in the backward areas of Himachal Pradesh and Uttaranchal and to generate employment opportunities. The object of the assistance was not to enable the businessman to run the business more profitably but encourage a businessman to set up a new unit or expand the existing unit for overall economic development of the state. Hence, the incentives granted by the Government of India vide Office Memorandum No. 1(10)/2001-NER issued by DIPP, Ministry of Commerce and Industry, GOI dated 07-01-2003 read with Notification No. No.50/2003- CE dated 10-06-2003, will be treated as capital receipt and not liable to tax. In this regard, statement showing computation of excise duty exemption received during the year aggregating to Rs. 87,98,09,432/- alongwith copy of Excise Returns (in case of Rudrapur Unit 1) and copy of Form A (in case of Rudrapur Unit 2) has been enclosed (Refer Page No. 599-683 of Paper Book).

22. In the light of above decision as well as the Memorandum issued by the Ministry of Commerce & Industry, we find that the excise duty exemption is purely capital receipt and is neither chargeable to tax under the normal provisions of the Income Tax Act nor is to be included as part of the book profit for computing the minimum alternative tax as per the provisions of section 115JB of the Act. Thus Ground No. 2 raised by the assessee is allowed.

23. Apropos to the additional ground raised by the assessee for claim of deduction of amortisation of leasehold land expenses at Rs.18,73,242/-the assessee claimed the same as per the Accounting Standard 19 as deduction for amortisation of leasehold land and land development charges for various lands taken on lease by the assessee for the periods upto 99 years for carrying on the business. The ld. Assessing Officer rejected the assessee’s claim on the ground that the amortisation of leasehold land does not specify the conditions laid down in section 35D(2) of the Act and is also not liable to deduction under section 37 of the Income Tax Act. This view of the ld. Assessing Officer was confirmed by the ld. CIT(Appeals). However, ld. CIT(Appeals) gave a relief to the assessee by increasing the quantum of deduction under section 80IC/80IE of the Act for the lease rental attributable to the units eligible for deduction under section 80IC and 80IE of the Act. Aggrieved, the assessee is in appeal before the Tribunal.

24. The ld. counsel for the assessee referring to the decision of the Hon’ble Supreme Court in the case of Empire Jute Co. Limited –vs.- CIT (1980) 124 ITR 1 (SC), the decision of the Coordinate Bench of Delhi in the case of ACIT –vs.- NIIT Technologies Limited (2021) 123 com 135 (Delhi), decision of Coordinate Bench Ahmedabad in the case of DCIT –vs.- M/s. Adani Gas Limited (2018) ITA No. 775/Ahd./2014 (Ahmedabad-Tribunal); judgment of the Hon’ble Gujarat High Court in the case of DCIT-vs.- Sun Pharmaceuticals Industries Limited (2009) 227 CTR 206 (Guj.), submitted that the assessee deserves to be allowed the claim of amortisation of leasehold claimed as it is consistently claimed proportionately on the lease rents paid for various lands and other immovable properties taken on lease for a long period.

25. Per contra, ld. D.R. vehemently argued supporting the order of the lower authorities.

26. We have heard the rival contentions and perused the relevant material available on record. The issue raised in the additional ground by the assessee is that the ld. CIT(Appeals) erred in not allowing the claim of expenses of RS.18,73,242/- for amortisation of leasehold land. We notice that the appellant has taken various lands on lease for a long period ranging upto 99 years, which are used to carry out on business. Upfront lease premium is paid in the first year and, therefore, normal lease rentals are paid every year. The assessee follows Accounting Standard 19 issued by the Institute of Chartered Accountants of India which provides for mechanism of amortising such lease premium. A detailed calculation of amortisation of lease premium paid during the year along with the yearly rental is placed before us in paper book at pages 30 and 31.

27. The ld. Assessing Officer has denied the claim stating that the assessee’s such claim cannot be made under section 35D of the Act and the said expense is also not allowable under section 37 of the Act. Section 35D of the Act deals with the amortisation of certain preliminary expenses. Before us, the issue is amortisation of lease amount and the lease premium paid by the assessee. It cannot be equated to preliminary expenses. Therefore, the said expense is not allowable under section 35D of the Act. The question is whether such expenses in the nature of amortisation of lease rental is allowable as revenue expenditure under section 37(1) of the Act? Section 37(1) of the Act provides that any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “profits and gains of business or profession”.

28. What needs to be examined whether the alleged expense has been expended wholly and exclusively for the purposes of business. In the instant case, it is not in dispute that the leasehold lands taken by the assessee on lease are used for carrying out business operation and the lumpsum lease money was paid as per the agreement and was required to be paid at the beginning of the lease term but the said sum is spread over the entire lease term. Now what is the mechanism to quantify the amount and how to spread the amount across the lease period. For this purpose, the assessee has taken guidance from the Accounting Standard 19 issued by the Institute of Chartered Accountants of India and in accordance with the procedure laid down therein and principal of accounting has debited the annual amount of lease in the profit & loss account and balance prepaid lease money is shown on the assets side in each year. The amount of amortisation debited to profit & loss account is reduced from the advance lease money paid. We find no error in this way of accounting treatment of the amortisation of the leasehold expenses and thus the same being spent exclusively for the business purposes has been rightly claimed as expenditure by the assessee under Section 37 of the Act. Our view is supported by the decision of the Coordinate Bench of Delhi in the case of NIIT Technologies Ltd.(supra), wherein it was held that the assessee would be entitled to claim 1/90th of amount of total lease rent every year till period of lease of 90 years as revenue expenditure and entire lease rent amount would not be allowed during the relevant year.

29. Similarly Coordinate Bench Ahmedabad in the case of Adani Gas Limited (supra) confirmed the decision of ld. CIT(Appeals) relying on the judgment of the Hon’ble Gujarat High Court in the case of DCIT –vs- Sun Pharmaceuticals Industries Limited (2009) 227 CTR 206 (Guj.) holding that – “Amortization is an accounting term that refers to the process of allocating the cost of an asset over a period of time and hence it is nothing else than depreciation. The allowability of costs towards amortization of leasehold land is in question. Having heard the rival submissions on the issue, we find that the CIT(A) has rightly appreciated the facts lin perspective and concluding the issue in favour of assessee in the light of decision of Hon’ble Gujarat High Court in the case of DCIT –vs.- Sun Pharmaceuticals Industries Ltd. (2009) 227 CTR 206 (Guj.). We do not see any infirmity in the reasoning given by the CIT(A) while deleting the aforesaid disallowance of amortization leasehold lands. We thus decline to interfere”.

30. We, therefore under the given facts and circumstances of the case and respectfully following the decisions referred hereinabove, are of the view that the amortization of leasehold land and land development charges of Rs.18,73,242/- deserves to be allowed as an expenditure under section 37 of the Act. Thus the finding of the ld. CIT(Appeals) is reversed and the additional ground raised by the assessee is allowed.

31. In the result, the appeal of the assessee is partly allowed.

32. Now we take up the Revenue’s appeal, wherein the Revenue has raised the following grounds:-

Corporate Guarantee

(i) The Ld. CIT(A) has erred on the facts and in law by restricting the guarantee fee rate to 0.5% which is much lower than the CG rate of 1.22%, 1.69% & 1.27% respectively as determined by the TPO, for a non-refund based financial assistance.

(ii) The Ld. CIT(A) has erred on the facts and in law in stating that the CG fee should be benchmarked by the TPO at 0.5% without giving any scientific or logical reason for the same while the TPO had determined the rate based on the information available on record.

(iii) The Ld. CIT(A) has erred on the facts and in law by restricting the CG rate 0.5% without considering the credit rating of the AE which is a vital factor while availing loan from a financial institution, and accordingly, the effective rate of interest was calculated and CG rate was determined accurately.

(iv) The Ld. CIT(A) has erred on the facts and in low in determining the arm’s length rate of interest on adhoc basis and not in accordance with 92C of the Income-tax Act, 1961 (the Act) read with Rule 10B & Rule 10C of the Income- tax Rules, 1962 (the Rules).

Inter-unit transaction

(v) The Ld. CIT(A) has erred on facts and low in the circumstances of the case in deleting the arm’s length price adjustment of Rs. 2,48,39,215/- made by the TPO as per section 92CA(3) of the Income Tax Act, 1961 on account of purchase transaction between the assessee and its AE i.e. purchase by the eligible units from the non-eligible units of the same assessee.

(vi) The Ld. CIT(A) has erred on facts and law in the circumstances of the case by not appreciating the fact apparent from record that, in reply of the assessee dated 13.10.2017 in response to the show cause notice, no mention was made anywhere regarding higher profitability of the eligible unit on account of Excise duty exemption, VAT and lower cost of production.

(vii) The Ld. CIT(A) has erred on facts and law in the circumstances of the case by admitting new facts based on new evidence/document which has not passed the test of Rule 46A of the Income Tax Rules, 1962.

(viii)The Ld. CIT(A) has erred on facts and law in the circumstances of the case without showing the sufficient cause which prevented the assessee from production such facts and evidences during the Transfer Pricing Audit proceeding before the TPO and thereby violates Rule 46A of the Income Tax Rules, 1962.

(ix) The Ld. CIT(A) has erred on facts and low in the circumstances of the case by accepting PLI (Profit Level Indicator) of 17.64% and 19.35% of the eligible units and not considering that it is diversion of profit from non-eligible to eligible unit.

(x) The Ld. CIT(A) has erred on facts and law in the circumstances of the case by accepting higher profit margin of the eligible units by only examining some limited factors namely Excise Duty, VAT & Lower cost of production without giving an opportunity of examining assessee’s claim by the TPO.

33. First we will take up the issue of addition made by the ld. Assessing Officer towards Corporate Guarantee given by the assessee to its Associated Enterprises.

34. Brief facts relating to this issue are that during the year under appeal, the assessee-company had following inter-company guarantee arrangements for its Associated Enterprises:-

(i) Providing a Corporate Guarantee to Standard Chartered Bank (SCB) for a term loan/letter of credit facility on behalf of Greenlam Asia Pacific Pte. Ltd. (“Greenlam Asia”) (referred to pages 446 to 461 of the paper book);

(ii) Providing a Corporate Guarantee to United Overseas Bank (UOB) for a commercial property loan on behalf of Greenlam Asia (referred to pages 462 to 471 of the paper book); and

(iii) Providing a standby Letter of Credit (SBLC) to City Bank N.A. for on behalf of Greenlam America Inc. (“Greenlam USA”) and Greenlam Asia (referred to pages 478 to 485 of the paper book).

Ld. Assessing Officer during the course of assessment proceedings observed that international transaction has taken place and referred the matter to Transfer Pricing Officer, who after considering the submission of the assessee, held that Corporate Guarantee fees @ 1.22%, 1.69% and 1.27% of the respective loan amounts should be treated as income of the assessee. Ld. Assessing Officer accordingly made the addition of Rs.43,67,295/-. Aggrieved, the assessee preferred appeal before the ld. CIT(Appeals) firstly claiming that the said Corporate Guarantee given to the Associated Enterprises do not come under the purview of international transactions and also raising an alternative plea that in view of the settled judicial precedence and looking to the facts of the case, the estimated Corporate Guarantee fees can be charged within the range of 0.3% to 0.5% and the same would meet the arm’s length criteria based on various Tribunal Rulings. However, ld. CIT(Appeals) brushed aside the assessee’s contention that the said transaction does not fall under the purview of international transaction. As regards the quantum of Corporate Guarantee fee is concerned, ld. CIT(Appeals) confirmed the same @ 0.5% taking support from the decision of various Tribunals. Aggrieved, Revenue is in appeal before the Tribunal.

35. D.R. vehemently argued supporting the orders of ld. Transfer Pricing Officer and the ld. Assessing Officer.

36. Per contra, ld. counsel for the assessee reiterated the submissions made before the ld. CIT(Appeals), the finding of the ld. CIT(Appeals) are also referred to the following decisions of Coordinate Benches determining the arm’s length guarantee fees within the range of 0.3% to 0.5% of the amount:-

Sr. No.

None of the Hon’ble Tribunal Ruling Citation No. Guarantee fee
1. CIT (LTU) vs Glenmark Pharmaceuticals vs Addl CIT (Refer to page 385 to 387 of the Legal Compendium to TP) TS-1268-SC-2018- T P 0.50%
2. Pr. CIT vs. Couceutrix Services India Pvt. Ltd.
(refer to page 388 to 396 of the Legal Compendium to TP)
TS-960-HC- 2018(BOM)-TP 0.50%
3. Everest Kento Cylinders ltd. (Refer to page 397 to 408 of the Legal
Compendium to TP)
TS-200-HC- 2015(Mum)-TP 0.50%
4. Reliance Industries Ltd. (Refer to page 409 to 490 of the Legal Compendium to TP) TS-260-ITAT- 2013(Mum) -TP, 2013-TII-185-ITAT Mum-TP 0.38%
5. Asian Paints Limited ITA No. 408/Mum/2010 and ITA No. 1937/Mum/2010 0.25%, 0.35%
6. Everest Kanto Cylinder Limited TS-714-ITAT- 2012(Mum)-TP 0.50%
7. Nimbus Communication Limited TS-167-ITAT- 2013(Mum)- TP, ITA No. 6816/Mum/2010 and ITA No.

7105/Mum/2011

0.50%
8. Glenmark Pharmaceuticals Limited ITA No. 5013/Mum/2012 and ITA No.

5488/Mum/2012

0.53%
9. Godrej Household Products Ltd. (earlier
Godrej Sara Lee Ltd.)
TS-330-ITAT- 2013(Mum)-TP TS-68-ITAT-2014(Mum)-TP 0.50%
10. Mahindra & Mahindra Limited TS-324-ITAT- 2013(Mum)-TP 0.20% – 0.50%
11. Prolifics Corporation Limited 55 taxmann.com 226 (Hyderabad-Trib.) 0.53%
12. Aditya Birla Minacs Worldwide Ltd. [2015] 56 taxmann.com 317 (Mumbai Trib.) 0.50%
13. Cox and Kings Ltd. –vs.- DCIT TS-540-ITAT- 2015(Mum)-TP 0.50%
14. Manugraph India Ltd. TS-463-ITAT- 2015(Mum)-TP 0.50%
15. Hindalco Industries Ltd. TS-431-ITAT- 2015(Mum)-TP 0.50%
16. Mylan Laboratories Ltd. TS-399-ITAT- 2015(Hyd)-TP 0.53%
17. Xchanging Solutions Ltd. TS-910-ITAT- 2016(Bang)-TP 0.50%
18. Laqshya Media Pvt. Ltd. – vs. -ACIT TS-20-ITAT- 2018(Bang)-TP 0.50%
19. Jindal Steel Limited –vs.- ACIT TS-1231-ITAT- 2018(Delhi)TP 0.50%
20. Aster Pvt. Ltd. –vs.- DCIT TS-446-ITAT- 2017(HYD)-TP 0.25%

37. We have heard the rival contentions and perused the relevant records placed before us and carefully gone through the decisions referred and relied upon by the ld. counsel for the assessee. We note that the assessee-company had following inter-company guarantee arrangements for its Associated Enterprises:-

(i) Providing a Corporate Guarantee to Standard Chartered Bank (SCB) for a term loan/letter of credit facility on behalf of Greenlam Asia Pacific Pte. Ltd. (“Greenlam Asia”);

(ii) Providing a Corporate Guarantee to United Overseas Bank (UOB) for a commercial property loan on behalf of Greenlam Asia; and

(iii) Providing a standby Letter of Credit (SBLC) to City Bank N.A. for on behalf of Greenlam America Inc. (“Greenlam USA”) and Greenlam Asia.

38. Inter-corporate guarantees are a common business practice. Within an affiliated corporate group, some entities represent higher credit risks than others. The weaker entities may either be unable to obtain financing or may be able to obtain credit facilities only upon unfavourable terms. When a corporate borrowing group includes multiple businesses, it is common for lenders to look to guarantees of corporate affiliates to support the credit facility. In the instant case, the corporate guarantee has been provided by the assessee on behalf of the Associated Enterprise and is in the nature of a downstream guarantee, where the guarantee is provided by the parent company for obligations of its subsidiary. So far as the issue that the present transaction of giving corporate guarantee falls under the category of international transaction, it is not under the dispute before us, as it was held against the assessee by the ld. CIT(Appeals) and against the said view, the assessee has not filed any appeal or Cross Objection.

39. The only issue remains is the computation of quantum of Corporate Guarantee fee adjustment to be made in the hands of assessee. Transfer Pricing Officer levied the Corporate Guarantee fees @ 1.22%, 1.69% & 1.27% on the above referred three loans, which has been guaranteed by the assessee. For computing the Corporate Guarantee Fees, ld. TPO selected the comparables from USA, whereas Associated Enterprises are not operating in USA but are operating in Asia Pacific Region. Ld. TPO failed to bring any comparable form to this region. Considering these facts and the non-availability of comparables in the Asia Pacific Region, the ld. CIT(Appeals) observed as under:-

“5.3. I have carefully considered the matter. Assessee’s contention regarding CG being beyond the pall of international transaction is not correct. Finance Act, 2014 had amended the provision of Section 92B with retrospective effect. Present position of law is that Corporate Guarantee is part of international transaction consequent to amendment introduced by Finance Act, 2014. Hence the objection has not basis.

5.3.1. Appellant’s argument that the CG given by it to AE did not bring any benefit to AEs is fallacious. In this regards, it may be stated that the lending banks to AEs had insisted on guarantee from appellant. There will be definite benefit to AEs due to guarantee given by appellant. Without the guarantee the interest rate charged will be more only. This aspect of CG had been dealt with by Hon’ble Mumbai Tribunal in the case of ACIT Vs. Nimbus Communications Ltd. (2014) 30 ITR 0349 (Mum). Para 9 of the said order is extracted as under:

“9. We have considered the rival submissions and also perused the relevant material available on record. For the guarantee given to the bank against the financial assistance given to its AEs, no commission was charged by the assessee company on the ground that the said AEs were not benefited by the guarantee so given and it was the assessee who benefited as a result of commercial benefits secured for future. In support of this stand of the assessee, the Id. counsel for the assessee has contended that business strategy should be taken into consideration while making any TP adjustments in respect of such transactions and has relied on the OECD Transfer Pricing Guidelines issued in 2010. As stated in para 1.59 of the said guidelines, the business strategies should also be examined in determining comparability for transfer pricing purposes and certain illustrations of such business strategies are also given therein. As stated in para 1.60 of the said guidelines which has been relied upon by the Id. Counsel for the assessee, business strategies also could include market penetration schemes and taxpayer seeking to penetrate a market or to increase its market share might temporarily charge a price for its product that is lower than the price charged for otherwise comparable products in the same market. As explained further, a tax payer seeking to enter a new market or expand (or defend) its market share might temporarily incur 4 ITA 6816/M/10 & 7105/Mum/2011 higher costs and hence achieve lower profit levels than other taxpayers operating in the same market. In our opinion, the relevant facts of the present case do not indicate that there was any such business strategy adopted by the assessee in not charging commission in respect of guarantees issued for its Associated Enterprises. As a matter of fact, there is nothing to suggest that any such business strategy was adopted by the assessee with specific intention or motive and the case has been sought to be made out merely on the basis of commercial expediency by claiming that the assessee was benefited as a result of giving the guarantees in the form of commercial benefits secured for future. In our opinion, such commercial expediency cannot be equated with business strategy, which is specific and well laid out.

As rightly held by the Id. CIT(A), a financial loan guarantee is a commitment entered into by the assessee company with a third party lender of its Associated Enterprises which obliges the assessee company to cover the risk of default by its Associated Enterprise and this act thus involves performance or carrying out of service to cover the risk of default for which “price” has to be charged. Even the OECD Transfer Pricing Guidelines 2010 supports this view in para 7.13 where it is explained that where higher credit rating of Associated Enterprise is due to a guarantee by another group member, such association positively enhances the profit making potential of that Associated Enterprise. We, therefore, find ourselves in agreement with the contention of the Id. D.R. that there was a clear benefit accrued to the Associated Enterprises by the guarantee provided by the assessee and when such benefit was passed on by the assessee to the said Associated Enterprises, guarantee commission should have been charged at arm’s length price. The commercial relationship between the assessee and its Associated Enterprises is distinct and separate from the transactions of giving guarantee and such transactions have to be considered and examined independently in order to determine the arm’s length price.”

Respectfully following the decision of Hon’bie Tribunal as noted above, it is held that CG given by assessee has a cost and TP adjustment on the issue is required.

5.3.2 Next issue to be decided is the quantum of adjustment to be made in case of assessee. According to appellant, comparables selected by it were from areas not far from Singapore and having similar economic situations, whereas cases selected by TPO were from America where AEs were not operating. Had the case selected by appellant being considered, there would have been no requirement TP adjustment. Alternative argument was put forth stating that Arm’s Length guarantee fee should not exceed 0.5%. Further alternative argument given was that the adjustment should not exceed the difference between interest determined by the TPO and the actual cost incurred by the subsidiaries. As noted earlier, in contrast to appellant’s comparables drawn by Asia Pacific Region, the TPO had taken comparables from America. There, it is seen that comparables taken by assessee as well as TPO were not from Singapore. In view of non-availability of comparables from Singapore, it may be appropriate to delve into judicial pronouncements on rate of Guarantee fee for TP adjustment.

i) In the case of Everest Kento Cylinder Ltd (Supra), assessee’s AE availed loan from ICICI Bank for which assessee gave corporate guarantee. The loan was for working capital as well as capital expenditure. Assessee had charged guarantee commission @ 0.5%. The AO took external comparable and benchmarked the rate at 3%. Before the Hon’bie Tribunal, it was stated that assessee itself paid 0.6% to ICICI Bank for guaranteeing a separate loan for assessee. Hon’bie Tribunal took the view that 0.5% guarantee fee is reasonable in view of the fact that rate of interest paid by AE was much lower than interest paid by assessee itself. TP adjustment made by TPO was accordingly deleted. The rate of 0.5% was followed by Hon’bie Mumbai Tribunal in the case of Nimbus Communication (Supra). Series of decisions have been rendered by the different benches of Mumbai Tribunal wherein it is held that arm’s length guarantee commission charge should be taken at 0.5%. Some of the cases decided are given below:

(i) Glenmark Pharmaceuticals Ltd. (ITA No. 5031/M/2013 dated 13.11.2013)

(ii) Godrej Household Products Ltd. (ITA Nos. 7369/M/2010)

(iii) Prolific Corporation Ltd. (ITA No. 237/Hyd/2014 dated 31.12.2014).

(iv)Manugraph India Ltd. ACIT(TS-330-ITAT, 2013 (Mum)-TP)

In view of substantial numbers of decisions of Hon’bie Tribunal in similar matter, CG fee should be benchmarked at 0.5% in the guarantee amount”.

40. The above finding of the ld. CIT(Appeals) is duly supported by the settled judicial precedence and the ld. D.R. failed to bring before us any other binding precedence in favour of the revenue. Therefore, respectfully following the decision of the Coordinate Bench, Mumbai in the case of Everest Kento Cylinder Ltd. (supra), we confirm the view taken by the ld. CIT(Appeals), who has rightly held that the arm’s length guarantee commission charge should be restricted at 0.5% of the guaranteed amount. Thus no interference is called for in the order of ld. CIT(Appeals) and the grounds no. 1 to 4 raised by the revenue on the issue of Corporate Guarantee Fees are dismissed.

41. Next issue raised by the Revenue is regarding downward adjustment in respect of purchases made by eligible unit from non-eligible unit. Based on the ld. TPO’s report, ld. Assessing Officer made the addition of Rs.4,67,33,912/- which was subsequently rectified to Rs.2,48,39,215/-.

The same was deleted by the ld. CIT(Appeals). Against which Revenue has preferred this appeal before the Tribunal.

42. Brief facts relating to this issue are that the assessee-company operates various units of which some units eligible for deduction under section 80IA(10) of the Act (hereinafter called as “eligible units”) and some are non-eligible units. During the year under consideration, non-eligible units at Kriparampur and Rajkot Units are engaged in the manufacturing of veneer and the same was supplied to various buyers including the eligible unit located at Rudrapur Plywood Unit and Tizit Unit. Eligible units utilized veneer procured from other units for the purposes of manufacturing the finished product, i.e. plywood. The following inter-unit transfers of veneer were undertaken between non-eligible units and eligible units:-

Transacting Eligible Units
(purchaser)

Other Units (Seller) Product Amount (INR)
Rudrapur Plywood Unit Kriparampur
Unit
Veneer 108,225,391
Tizit Unit Kriparampur
Unit
Veneer 98,070,637
Rudrapur Plywood Unit Rajkot Unit Veneer 63,491,305

43. Based on these details, ld. Assessing Officer referred the matter to the ld. TPO, who issued a show-cause notice for the calculation of downward adjustment in respect of purchase of eligible units from non-eligible units alleging that the eligible units of the assessee has earned more than the ordinary profit than it could have actually earned had the transaction between eligible and non-eligible units were undertaken at an arm’s length. In reply, the assessee filed detailed submission stating that raw material was utilized for the purpose of manufacturing finished products and these were procured from third parties also and were transferred between different units on need basis. To benchmark the said transaction, the CUP method was considered as the most appropriate method for determining the arm’s length nature of the purchase/sale of raw materials and in support for this, details were filed. Details of purchase of veneer were also filed. But later on in the proceedings itself before the ld. Assessing Officer, the assessee stated that application of the CUP method becomes unviable in view of the differences in the products and the said transaction was benchmarked by application of internal TNMM instead of the CUP method in the transfer pricing report maintained by the assessee. However, ld. TPO was not satisfied for the reason that firstly the assessee in the form 3CEB claimed the CUP method for benchmarking in the transactions between eligible and non-eligible units and subsequently as per ld. TPO’s study report, the assessee has taken TNMM method as most appropriate method and secondly observed that the margin in non-eligible units is lower than that of eligible units. As per the TPO, operating profit margin of the eligible unit (Tizit Unit) is 24.41% and that of non-eligible unit is 4.65%. Ld. TPO suggested for the downward pricing adjustment at Rs.5,11,01,207/- and the same was confirmed by the ld. Assessing Officer but thereafter certain apparent mistakes were found in the calculation of the said downward adjustment, which was accepted by the ld. Assessing Officer and the revised amount of downward adjustment was calculated at Rs.2,48,39,215/-.

44. When the matter travelled before the ld. CIT(Appeals), the assessee provided the necessary details of eligible units of Rudrapur and Tizit and also gave the calculation of percentage of operating profit from third parties before adjustment of the arm’s length price and after adjustment of the arm’s length price, the same showed that the eligible units were earning higher price than the benchmark rate. The ld. CIT(Appeals) was satisfied with the said details and deleted the downward adjustment of Rs.2,48,39,215/-.

45. Aggrieved, the Revenue is now in appeal before the Tribunal.

46. The ld. D.R. vehemently argued supporting the finding of the ld. Assessing Officer as well as ld. TPO. Per contra, ld. counsel for the assessee reiterated the submissions made before the ld. CIT(Appeals) as well the finding of the ld. CIT(Appeals). Reference was also made towards the fact that the percentage of veneer purchased by the eligible units i.e. Rudrapur constituted a meagre percentage of 5.82% of its total cost operation and that of Tizit Unit constituted only 9.33% of its total cost of operation. It was also submitted that the reasons for higher profit margin of the eligible units were on account of various other reasons including exemption from central excise levy, VAT and lower cost of production. It was also submitted that ld. TPO had agreed with the TNMM method adopted by the assessee and only reason for adjustment was higher profit margin of the eligible units to that of non-eligible units.

47. We have heard the rival contentions, perused the relevant material available on record and carefully gone through the submissions made by the assessee before the lower authorities and before the Tribunal. Revenue is aggrieved with the finding of the ld. CIT(Appeals) deleting the arm’s length price adjustment of Rs.2,48,39,215/- made by the ld. Assessing Officer on the basis of report of ld. Transfer Pricing Officer as per section 92CA(3) of the Act on account of purchase transaction of the product veneer between the assessee an eligible units and its non-eligible Associated Enterprises.

48. We observe that the eligible units run by the assessee claiming deduction of profits under section 80IA(10) of the Act, purchased raw material, namely Vineer from non-eligible units located at Kriparampur and Rajkot Unit. The assessee while furnishing the annual audited accounts along with the relevant report on Form 3CEB adopted the CUP method for computing the arm’s length price of the transactions between the eligible and non-eligible units. But subsequently during the course of proceedings before the ld. TPO, the assessee has adopted TNMM method to compute the arm’s length price. It is not in dispute that the percentage of total purchase of veneer at Rudrapur eligible units and Tizit eligible unit is 5.82% and 9.33% of the total cost operation. The operating profit margin of Rudrapur Unit is 19.35 and that of Tizit Unit is 17.64. Even after making the arm’s length adjustment, the operating profit of the two units would remain 18.49 and 16.43 respectively. We also note that the purchase of veneer from non-eligible units had a nominal impact upon the operating margins of the eligible units due to very low volume of purchases. Eligible units were earning higher profit than the benchmark rate of 4.65%.

49. We further find that the ld. TPO failed to take note of the fact that the eligible units were newly established in the industrial area developed by Uttranchal Pradesh, Industrial Development Corporation Ltd., which is stated to have modern and better infrastructural facilities resulting into lower cost of production. Source of most of the raw material requirement of the eligible units is local vendors which is not so in the case of non-eligible units. Eligible units were not dependent upon the non-eligible units and earned profit due to incentives available to them in the form of central excise duty exemption, refund of excise duty, absence of cascading impact on VAT, infrastructure facilities, etc.

50. In view of the above stated facts and circumstances of the case as rightly observed by the ld. CIT(Appeals), the impugned transfer pricing adjustment was deleted by the ld. CIT(Appeals) by observing as follows:-

“6.3. I have carefully considered the matter. It is seen that the TPO had agreed with TNMM method adopted by assessee. The only reason given by the TPO for making TP adjustment is that the profits of eligible units are much more than non-eligible unit. He himself has not given any analysis as to how the purchase of veneer by eligible unit from non-eligible unit amounting to Rs. 26,97,87,333/- could have yielded excess profit of Rs. 4,67,33,912/-. In the written submission, appellant had given reason as to how the profit of eligible unit was more than that of non-eligible unit. Major reason was Excise Duty Exemption enjoyed by eligible unit which accounted for 12% of additional margin of profit. Cascading effect of VAT accounted for approximately 1.8% of additional profit. Eligible units were also relatively new and they enjoyed lower cost of productions.

6.3.1. From data analysis given, it is seen that purchases of eligible units from related parties were 5.82% and 9.33% respectively by Rudrapur Unit & Tizit Unit. Therefore, statistically speaking, 94.18% and 90.67% respectively of Rudrapur & Tizit Unit was attributable unit of purchases from non-related parties. The units at Rudrapur and Tizit incurred operational cost of Rs. 365.6 crore & Rs. 127.52 crore respectively. In view of scale of Operation, it will not be fair to conclude that out of operational profit of Rs. 93 odd crore, Rs. 4.67 crore arose out of purchase of Rs. 17,17,16,696/-. From this angle also, the TP adjustment cannot be sustained.

6.3.2. From the above discussion, it is seen that the downward adjustment of profit of eligible cannot be sustained. The TPO had not disagreed with the TNMM method adopted by assessee. Only reason given was that eligible units were earning more profit than that of non-eligible unit. The standpoint taken by the AO on the matter had been repelled by facts and figures furnished. In view of this, the reduced adjustment of Rs. 2,92,06,510/- also cannot be sustained.

Ground taken is allowed.

51. The above finding of the ld. CIT(Appeals) stands uncontroverted by the ld. representatives to the extent that the ld. TPO had agreed with the TNMM method adopted by the assessee. The reasons given for TPO adjustment is very general in nature merely referring to the profit margin of the eligible units to the non-eligible units. Ld. TPO has not given any analysis to demonstrate that how the purchase of any material by eligible units from non-eligible units could have yielded extra profits. We, therefore, are in conformity with the finding of the ld. CIT(Appeals) that no downward adjustment of profit of eligible units be sustained.

52. As far as the ground raised by the Revenue on account of Rule 46A of the Act, ld. D.R. failed to file the necessary evidences to indicate as to what new documents were filed before the ld. CIT(Appeals) which were not placed before the ld. TPO and the ld. Assessing Officer. Therefore, all the grounds raised by the Revenue on account of issue of inter-corporate transactions in the grounds no. 5 to 10 deserve to be dismissed.

53. In the result, the appeal of the assessee for A.Y. 2014-15 is partly allowed, and the cross appeal of the Revenue is dismissed.

Order pronounced in the open Court on June 21st , 2022.

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