Excise duty refund under Incentive Scheme 2001 is capital receipt: ITAT Delhi

DCIT Vs Jindal Saw Ltd (ITAT Delhi)

ITAT Delhi by applying purpose test held that excise duty refund under Incentive Scheme 2001 received by company is not liable to tax as it is in the nature of capital receipt.

Facts- The assessee is in the business of manufacture of pipes used in supply of oil / gas and water pipelines, having plants at various locations ie. Kosi, Mundra, Nashik apart from a stainless steel cold rolling plant. It has got an Export Oriented Unit (EOU) at Mundra since 25.11.2000 and an overseas branch in United States of America (USA) whose financial results were merged into the accounts of the assessee. The translation income / loss arrived at while converting the balance sheet and profit and loss account of the US Branch from USD to INR , being notional in nature, was not given effect to while computing the taxable income by the assessee company. During the year under consideration, the conversion resulted in translation gain of Rs 3,32,46,356/- which was excluded by the assessee while computing the taxable income as it being notional in nature. However, the same was disallowed by AO. CIT(A) deleted the disallowance.

Further, revenue also contested that whether the ld. CIT(A) was justified in treating the excise duty refund of Rs 1,63,15,661/- as capital receipt, which were earlier treated as revenue receipt, in the facts and circumstances of the case.

Conclusion- Held that this issue is no longer res integra in view of the CBDT Circular No. 10 of 2017 dated 23.3.2017 wherein it was held that the losses / gains arising by valuation of monetary assets and liabilities of the foreign operations as at the end of the year cannot be treated as real income of the assessee. This Circular has been heavily relied upon by the Hon’ble Jurisdictional High Court in the case of Chamber of Tax Consultants vs Union of India reported in 400 ITR 178 (Del). We do not find any infirmity in the said action of the ld. CIT(A) granting relief to the assessee.

Held that it was clearly held by the Hon’ble Gujarat High Court that the purpose of the original notification issued in the year 2001 was to incentivize and promote setting up of industries in the Kutch Region of Gujarat thereby clearly satisfying the ‘purpose test’ thereon. Hence it could be safely concluded that the excise duty refund received is clearly in the nature of capital receipt not chargeable to income tax.

FULL TEXT OF THE ORDER OF ITAT DELHI

1. The appeal in ITA Nos. 3934/Del/2014, ITA No. 3848/Del/2014 and ITA No. 3437/Del/2014 for AYs 2005-06 and 2006-07, arises out of the order of the Commissioner of Income Tax (Appeals)-V, New Delhi [hereinafter referred to as ‘ld. CIT(A)’, in short] dated 30.04.2014 and 13.03.2014 against the order of assessment passed u/s 143(3) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) dated 30.12.2009 and 29.12.2008 by the Assessing Officer, Addl. CIT, Range-7, New Delhi and Addl. CIT, Range-4 (hereinafter referred to as ‘ld. AO’).

2. Identical issues are involved in these appeals and hence they are taken up together and disposed of by this common order for the sake of convenience.

ITA No. 3437/Del/2014 – Asst Year 2005-06 – Revenue Appeal

3. The first issue to be decided in this appeal is as to whether the ld. CIT(A) was justified in deleting the addition on account of translation gain in the facts and circumstances of the case.

3.1. We have heard the rival submissions and perused the materials available on record. The assessee is in the business of manufacture of pipes used in supply of oil / gas and water pipelines, having plants at various locations ie. Kosi, Mundra, Nashik apart from a stainless steel cold rolling plant. It has got an Export Oriented Unit (EOU) at Mundra since 25.11.2000 and an overseas branch in United States of America (USA) whose financial results were merged into the accounts of the assessee. The translation income / loss arrived at while converting the balance sheet and profit and loss account of the US Branch from USD to INR , being notional in nature, was not given effect to while computing the taxable income by the assessee company. This conversion of the balances from USD to INR were indeed made in accordance with Accounting Standard – 11 (AS 11) – “The Effect of Changes in Foreign Exchange Rates’ issued by Institute of Chartered Accountants of India (ICAI) . The conversion made at different exchange rates may either result in translation loss / gain – such transaction loss / gain being notional in nature is neither claimed as deduction nor offered to tax in the return of income. This method has been consistently followed by the assessee from the beginning and accepted by the revenue in earlier and subsequent years. During the year under consideration, the conversion resulted in translation gain of Rs 3,32,46,356/- which was excluded by the assessee while computing the taxable income as it being notional in nature. The workings for the said translation gain are enclosed in Page 24 of the Paper Book, wherein only the Reserves and Surplus , Fixed Assets and Head Office Balance were sought to be converted resulting in translation gain of Rs 3,32,46,356/-. From the same, it is very clear that the translation gain had arose only on capital items and not on revenue items and hence in any case, the same would not affect the computation of taxable income. The assessee pleaded that in Asst Years 2004-05 and 2006-07, the conversion of US Branch financials resulted in translation loss which was also excluded by not claiming as deduction in the computation of taxable income. This was accepted by the revenue in Asst Years 2004-05 and 2006-07 u/s 143(3) proceedings towards translation loss as notional in nature. However, the ld. AO resorted to give a differential treatment in Asst Year 2005-06 by incorrect assumption of fact that the assessee had claimed translation loss of Rs 3,32,46,356/- as deduction and sought to disallow the same. Factually there was only translation gain of Rs 3,32,46,356/- during Asst Year 2005-06 which was ignored by the assessee company in the computation of taxable income, being notional in nature. The assessee has been consistently giving the treatment of notional translation loss / notional translation gain from the computation of taxable income. The ld. CIT(A) had deleted the said disallowance made by the ld. AO on the ground that translation gain had not arose out of any revenue transaction but is merely as a result of merger of the US Branch Balance Sheet converted from USD to INR with the balance sheet of the assessee as per AS 11 issued by ICAI. We find from the financials of the assessee, the translation gain arising out of revenue transactions had been duly offered to tax by the assessee in the return of income. Further the ld. CIT(A) held that the disallowance is to be deleted even on the principles of consistency as the revenue cannot be allowed to take a divergent stand for translation loss and translation gain. We find that this issue is no longer res integra in view of the CBDT Circular No. 10 of 2017 dated 23.3.2017 wherein it was held that the losses / gains arising by valuation of monetary assets and liabilities of the foreign operations as at the end of the year cannot be treated as real income of the assessee. This Circular has been heavily relied upon by the Hon’ble Jurisdictional High Court in the case of Chamber of Tax Consultants vs Union of India reported in 400 ITR 178 (Del). We do not find any infirmity in the said action of the ld. CIT(A) granting relief to the assessee. Accordingly, the Ground No.1 raised by the revenue is dismissed.

4. The next issue to be decided in the appeal of the revenue is as to whether the ld. CIT(A) was justified in treating the excise duty refund of Rs 1,63,15,661/- as capital receipt, which were earlier treated as revenue receipt, in the facts and circumstances of the case.

4.1. We have heard the rival submissions and perused the materials available on record. In the wake of devastation caused by earthquake in the Kutch District of Gujarat, the Central Government, in public interest, issued Notification No. 39/2001 –Central Excise dated 31.7.2001. The salient features of the said Incentive Scheme and behavior of the assessee qua the same are as under:-

a) It shall apply only to new industrial units which are set up on or after 31.7.2001 in the Kutch District but before 31.7.2003.

b) The assessee had undisputedly set up an eligible unit and entitled to the incentive under Notification No. 39/2001 dated 31.7.2001.

c) The manufacturer shall produce a certificate from a Committee consisting of the Chief Commissioner of Central Excise, Ahmedabad and the Principal Secretary to the Government of Gujarat, Department of Industries, to the jurisdictional Central Excise Officer certifying that the unit in respect of which exemption is claimed is a new unit and has been set up on or after 31.7.2001 but not before 31.7.2003.

d) The manufacturer is first required to pay excise duty with the Central Excise department and thereafter claim refund of the said amount from the department.

e) The exemption shall apply for a period not exceeding 5 years from the date of commencement of commercial production by the unit.

f) The date of setting up of the new industrial unit was extended from 31.7.2003 to 31.7.2004 vide Notification No. 45/2002 dated 2.9.2002 and thereafter, vide Notification No. 9/2004 dated 21.1.2004 and vide Notification No. 55/2004 dated 9.11.2004, the last date of setting up of the new unit was further extended to 31.12.2004 and 31.12.2005 respectively.

4.2. The assessee in the year 2003 had set up pipe coating unit namely, Anti Corrosion and Concrete Weight Coating at Mundra, Gujarat. Thereafter, in the year 2005, the assessee also set up another unit for pipe manufacturing namely, Integrated Pipe Unit at Mundra, Gujarat. The said new units had been set up by the assessee in compliance with the aforesaid Notifications within the stipulated time limits thereon and the Certificate issued by the Customs and Central Excise, Ahmedabad certifying that the said new units have been established during the period prescribed in the said Notifications. These certificates are enclosed in Pages 85 and 86 of the Paper Book.

4.3. The assessee during the year under consideration, received excise duty refund of Rs 163,15,661/- which was offered to tax as revenue receipt in the return of income and assessed as such by the ld. AO. Before the ld. CIT(A), the assessee raised an additional ground claiming the said receipt to be capital receipt not chargeable to tax. The ld. CIT(A) after calling for a remand report from the ld. AO admitted the said additional ground, being legal in nature and by applying the ‘purpose test’ of the Incentive Scheme 2001 held that the excise duty refund received by the assessee is not liable to tax as it is in the nature of capital receipt.

4.4. We find that the appellate authorities are duly entitled to admit the additional ground if it is legal in nature and goes to the root of the matter and not requiring verification of fresh facts. All the facts relevant for adjudication of the said additional ground was already available on record before the ld. CIT(A). Since the same being legal ground, there was nothing wrong in the action of the ld. CIT(A) admitting the said additional ground, eventhough the same was offered to tax by the assessee voluntarily in the return of income. It is trite law that there is no estoppel against the statute . Reliance in this regard is placed on the decision of Hon’ble Supreme Court in the case of Taparia Tools Ltd vs JCIT reported in 372 ITR 605 (SC). Hence the objection raised by the revenue before us in this regard is hereby dismissed.

4.5. The Incentive scheme 2001 for Economic Development of Kutch District dated 9.11.2001 issued by Government of Gujarat is enclosed in Pages 71 to 81 of the Paper Book. The Central Excise Notification No/. 39/2001 dated 31.7.2001 is enclosed in Pages 82 to 84 of the Paper Book. The Certificates issued by Chief Commissioner of Central Excise & Customs, Ahmedabad and Principal Secretary of Industries & Mines Department to Government of Gujarat are enclosed in Pages 85 to 86 of the Paper Book. The workings for claim of excise duty refund made by the assessee are enclosed in Page 87 of the Paper Book. It is trite law that the taxation of excise duty refund pursuant to incentive scheme is to be determined by the purpose for which the same is granted and not the form / mode / manner in which it is determined or disbursed. ‘Purpose Test’ qua the incentive scheme is the relevant consideration and not the manner of determining the incentive. Reliance in this regard is placed on the decision of Hon’ble Supreme Court in the case of CIT vs Ponni Sugars and Chemicals Ltd reported in 306 ITR 392 (SC). We find that the ld AR before us relied on the decision of Hon’ble Gujarat High Court in the case of SAL Steel Limited vs Union of India reported in Special Civil Application No. 6299 of 2008 and 5909,6300,6298,5907,8468,6334 and 6562 of 2008 dated 18.3.2010. In our considered opinion, this decision relied by the ld. AR clearly brings out the purpose behind the excise duty exemption issued by the Government to achieve a larger public interest of incentivizing setting up of industries in the Kutch District of Gujarat in the wake of massive earthquake in the said region so as to generate employment and achieve industrial development with the larger public interest of rehabilitating the people and economic activity in the affected region. Infact in the said decision, the petitioners had challenged the validity of the subsequent notifications issued in the year 2008 substantially diluting excise incentives granted by the original notification issued in the year 2001 in the form of excise duty refund. Hence the Hon’ble Gujarat High Court was required to examine whether the subsequent notifications issued by the Government in the year 2008 were legally valid or not. The Hon’ble Gujarat High Court after going through the incentive scheme 2001 observed that exemption from excise duty was granted by the original notification in the year 2001 in order to incentivize setting up of industries in the Kutch region of Gujarat in the wake of massive earthquake. The intention behind the exemption scheme was to attract fresh investment so as to generate employment and for industrial development of the region. The subsequent notifications issued in the year 2008 substantially diluted the benefit granted by the original notification on the ground that there was substantial revenue loss to the Government. The Hon’ble High Court held tghat the notifications issued in the year 2008 to be invalid to the extent they were sought to be applied to the new unit set up in the Kutch District of Gujarat in compliance of the original notification in the year 2001 on the ground that it was contrary to the principles of promissory estoppel. Further it was clearly held by the Hon’ble Gujarat High Court that the purpose of the original notification issued in the year 2001 was to incentivize and promote setting up of industries in the Kutch Region of Gujarat thereby clearly satisfying the ‘purpose test’ thereon. Hence it could be safely concluded that the excise duty refund received is clearly in the nature of capital receipt not chargeable to income tax. We find that the ld. CIT(A) had rightly decided the issue in favour of the assessee and we do not find any infirmity in the said order granting relief to the assessee. Accordingly, the Ground No. 2 raised by the revenue is dismissed.

5. The Ground Nos. 3, 4 & 5 raised by the revenue are general in nature and does not require any specific adjudication.

6. In the result, the appeal of the revenue in ITA No. 3437/Del/2014 for Asst Year 2005-06 is dismissed.

ITA No. 3848/Del/2014 – Asst Year 2006-07 – Assessee Appeal

7. The Ground Nos. 1 & 3 raised by the assessee were stated to be not pressed by the ld. AR at the time of hearing. The same is reckoned as a statement made from the Bar and accordingly dismissed as not pressed.

8. In view of our decision in Ground No.1 of Revenue’s appeal in Asst Year 2005-06, the adjudication of Ground No. 2 of Assessee’s appeal in Asst Year 2006-07, becomes infructuous. The translation loss of conversion of US Branch financials from USD to INR on capital items, need to be ignored, as it is notional in nature. Accordingly, Ground No. 2 of assessee’s appeal in Assessment Year 2006-07 is dismissed as infructuous.

9. The Ground No. 4 raised by the assessee is general in nature and does not require any specific adjudication.

10. In the result, the appeal of the assessee for Asst Year 2006-07 is dismissed.

ITA No. 3934/Del/2014 – Asst Year 2006-07 – Revenue Appeal

11. The Ground No. 1 raised by the revenue in Asst Year 2006-07 is identical to Ground No. 2 raised by the revenue in Asst Year 2005-06. Hence the decision rendered by us hereinabove for Asst Year 2005-06 in Revenue’s Appeal shall apply mutatis mutandis for this year also, except with variance in figures.

12. The Ground Nos. 2, 3 & 4 raised by the revenue are general in nature and does not require any specific adjudication.

13. In the result, the appeal of the revenue for Asst Year 2006-07 is dismissed.

14. To sum up,

Order pronounced in the open court on 24/09/2024.