Bridgestone India Pvt. Ltd. Vs ACIT (ITAT Indore)
Introduction: The case of Bridgestone India Pvt. Ltd. vs. ACIT before the Income Tax Appellate Tribunal (ITAT) Indore involved the classification of subsidies received from the Government of Maharashtra and Madhya Pradesh. The central issue revolved around whether these subsidies were capital receipts or revenue receipts.
Analysis: The appellant, Bridgestone India Pvt. Ltd., contested additions made by the Assessing Officer (AO) and Dispute Resolution Panel (DRP) regarding subsidies received. The AO treated the subsidies as revenue receipts, while the appellant argued they were capital receipts based on the respective subsidy schemes. The ITAT examined precedents and scheme details.
In the case of Maharashtra subsidy, the ITAT referred to prior years’ decisions and held that the subsidy was capital in nature, reducing the cost of acquisition of assets. The ITAT referred to the Supreme Court’s judgment in the case of Ponni Sugars & Chemicals Ltd. and determined the subsidy to be capital in line with the explanation under Section 43(1) of the Income Tax Act.
However, concerning the Madhya Pradesh subsidy, the ITAT relied on binding precedents from the jurisdictional High Court and the Supreme Court, stating that the subsidy was revenue in nature. These judgments followed the Sahney Steel & Press Works Ltd. case, confirming the revenue nature of such subsidies.
Conclusion: The ITAT Indore ruled in favor of Bridgestone India Pvt. Ltd. regarding the Maharashtra subsidy, classifying it as a capital receipt. Conversely, the Madhya Pradesh subsidy was considered a revenue receipt based on established legal precedents. This case highlights the critical distinction between capital and revenue receipts concerning government subsidies, guiding future tax assessments and treatments.
FULL TEXT OF THE ORDER OF ITAT INDORE
This appeal by the assessee is directed against the assessment order dated 28.02.2022 passed u/s 143(3) r.w. section 144C(13) in pursuant to the directions of DRP dated 25th August 2021 passed u/s 144C(5) of the Act for Assessment Year 2017-18. The assessee has raised following grounds of appeal:
“1.On the facts and in the circumstances of the case and in law: The Ld. AO and Hon’ble DRP erred in making an addition of INR 35.99.09,783 (gross subsidy of INR 40,67,75,588, reduced by depreciation of INR 4,68,65,805) in respect of the subsidies received from Government of Maharashtra under the Packaged Scheme of Incentives, 2007 by treating the same as revenue receipt.
Prayer:
The Appellant prays that the addition made by Ld. AO and Hon’ble DRP be deleted and the Ld. AO be directed to treat the amount of INR 35,99,09,783 as a capital receipt and being covered by Explanation 10 to section 43(1) of the Act..
2. The Ld. AO and Hon’ble DRP erred in making an addition of INR 4,49,15,331 (gross subsidy of INR 5,07,64,000, reduced by depreciation of INR 58,48,669) in respect of the subsidies received from Government of Madhya Pradesh under the Industrial Promotion Policy, 2004 by treating the same as revenue receipt.
Prayer:
The Appellant prays that the addition made by Ld. AO and Hon’ble DRP be deleted and the Ld. AO be directed to treat the amount of INR 4,49,15,331 as a capital receipt and being covered by Explanation 10 to section 43(1) of the Act. Total tax effect.”
2. Ground no.1 is regarding addition made by the AO in respect of the subsidies received from the Government of Maharashtra under Package Scheme Incentive, 2007 by treated the same as revenue receipt. During the assessment proceedings the AO noted that the assesse has credited a sum of Rs.43,90,16,000/- on account of Maharashtra Industrial Promotion Subsidy and Rs.5,07,64,000/- on account of Madhya Pradesh Industrial Investment Promotion Assistance receivable but in computation of income the assesse has reduced its total income by Rs.45,75,39,588/-. The assesse contended before the AO that it has received the said amount against capital investment and hence the same is reduced from block of assets. The AO further noted that in the noted of accounts the said subsidy amount is shown in the form of exemption of entry tax, electricity duty exemption, exemption from tax payable to State Government, exemption from payment of stamp duty for various durations. The AO was of the view that the nature of exemption provided by State Government to the assesse it is clear that the said amount of subsidy is revenue in nature. Accordingly the AO issued a draft assessment order on 01.04.2021 and proposed to make the addition of the entire amount of subsidy received by the assesse as revenue receipt.
3. The AO after analyzing Maharashtra Industrial Promotion subsidy Scheme has come to the conclusion that the eligibility for receding incentive subject to the eligibility certificate issued under 2007 scheme and the said eligibility certificate to be issued after ascertaining that the unit has complied with the provisions of scheme and has commenced its commercial production. The benefit of incentive is not given on the investment made by the assesse but only after commencement of the production. Accordingly the AO supported its view by the judgment of Hon’ble Supreme Court in case of Sahney Steel & Press Works Ltd. vs. CIT 228 ITR 253 (SC) as well as CIT vs. Ponni Sugars & Chemicals Ltd. 306 ITR 392 (SC). The assesse filed objectionS against the draft assessment order before the DRP. The DRP has confirmed the draft assessment order and rejected objections filed by the assesse while passing direction u/s 144C(13) of the Act. The DRP has considered and followed the direction of DRP for assessment year 2016-17 wherein various case laws were referred and relied upon including the judgment of Hon’ble Supreme Court in the case of Sahney Steel & Press Works Ltd. vs. CIT (supra).
4. Before the Tribunal ld. AR of the assesse has submitted that DRP has relied upon the earlier directions of the DRP for A.Y.2016-17 which were reversed by the Mumbai Bench of Tribunal in assesse’s own case vide order dated 21st April 2023 in ITANo. 1081/Mum/2021. He has pointed out that the AO and DRP has made the addition by discussing the subsidy scheme of 2007 of State of Maharashtra and then observed that the scheme of Madhya Pradesh is similar and accordingly the subsidy received by the assessee under both the schemes i.e. of Maharashtra and Madhya Pradesh was treated as revenue in nature.
5. On the other hand, Ld. DR has submitted that the capital investment made under the scheme is only eligibility criteria but not the sole basis for the subsidy. The subsidy is given in the shape of refund of commercial tax/sales tax, incentive amount of commercial tax on purchase of raw material only therefore, the subsidy is payable under the scheme only after the commencement of production and equivalent to 50% to 75% of the amount of commercial tax and central sales tax. The subsidy has no connection with the capital investment made by the assesse. It is only eligibility criteria that if the investment of Rs. 1 to 10 crore is made then it would be given industrial investment promotion assistance equivalent to 50% of the amount of commercial tax as well as central sales tax and if capital investment is more than Rs.10 crore then the promotion assistance amount would be equivalent 75% of the commercial tax and sales tax paid by the assessee. There is no condition in the subsidy scheme that this promotion assistance is to be utilized only for reduction of capital investment. Further the assesse in the books of account has treated the subsidy as other operating revenue and credit to the profit & loss account which shows that the Industrial Investment Promotion received by the assesse is in the nature of revenue. Only for the purpose of tax the assesse has given a different treatment to the subsidy by reducing it from the written down value of fixed assets.
6. DR has referred to the directions of the DRP and submitted that decision of the Hon’ble Supreme Court in case of Sahney Steel & Press Works Ltd. vs. CIT (supra) squarely covers the issue that the subsidy paid to the assesse in the shape of refund of commercial tax and sales tax after the commandment of production and sales made by the assesse from year to year up to period of 10 years is nothing but revenue receipts. He has relied upon directions of the DRP.
7. We have considered the rival submissions as well as relevant material on record. So far as the subsidy received by the assessee under Maharashtra Industrial Promotion Subsidy, IPS-2004 is concerned the said issue has been considered by the Coordinate Bench of the Tribunal in assessee’s own case for A.Y.2015-16 as well as for A.Y.2016-17. The Mumbai Bench of the Tribunal vide order dated 21.04.2023 ITANo. 1081/Mum/2021 has considered and decided this issue as under:
“011. We have carefully considered the rival contentions and perused the orders of the lower authorities. We find that the identical issue arose in the case of the assessee for assessment year 2015 – 16, which travelled before the coordinate bench in ITA number 45/IND/2021 in assessee’s own case wherein by order dated 8/12/2022, the coordinate bench held as under:-
“5. The assessee is engaged in the business of Tyre and Allied Products manufacturing. The assessee has taken Radial Tyre Manufacturing Technology and use of Bridgestone brand of manufactured products for its entrepreneurial venture in India. The assessee filed original return of income on 27.11.2015 declaring total income at Rs. NIL. On perusal of Form 3CEB filed by the assessee the Assessing Officer observed that during the assessment year under consideration, the assessee had entered into international transactions with its various Associates Enterprises (AEs). Accordingly, after seeking the prior approval of the Pr. Commissioner of Income Tax-1, the case was referred to the Transfer Pricing Officer (TPO) under Section 92CA of the Act vide letter dated 18.10.2017. The Transfer Pricing Officer (TPO) after examining assessee’s transfer pricing documentation and economic analysis has passed an order dated 30.10.2018 under Section 92CA(3) of the Act determining the “Arm’s Length Price” difference of Rs. 41,57,14,9471- in respect of royalty payment of its AE and Rs. 39,63,921/- in respect of international transactions relating to trading activities of the assessee. Thus, total upward adjustment of Rs. 41,96,78,868/- was made to the total income of the assessee in the said order passed by the TPO. The draft assessment order under Section 14393) r.w.s. 144C of the Income Tax Act, 1961 was passed on 18.12.2018. Thereafter, the assessee objected to the draft assessment order before Dispute Resolution Panel (DRP) under Section 144C of the Act. The DRP issued direction vide order dated 27.09.2019. After taking cognizance of the TPO and DRP’s direction the Assessing Officer made addition of Rs. 29,49,00,133/- as addition of subsidies received from Government of Maharashtra under PSI, 2007.
6. Being aggrieved by the assessment order the assesse filed appeal before us.
7. The Ld. A.R. submitted that assessee entered into Memorandum of Understanding (MOU) with Government of Maharashtra on 24.06.2010 to set up a manufacturing unit at Chakan for manufacturing of steel belt radial tyre for PSR and TBR, inner tubes and flaps and accordingly the said manufacturing unit at Chakan was designated as Mega Project under PSI, 2007. The assessee submitted following details as to the subsidy under Package Scheme of Incentives (PSI), 2007 of Government of Maharashtra:
Industrial Promotion Subsidy Financial Year 2014-15 Nature Amount Treatment in books of accounts Electricity Subsidy Reduced from electricity expenses Subsidy by way of refund Rs.33,37,15,833/-Charged to P&L of VAT and CST paid to GOM (Government of Maharashtra) The Ld. A.R. submitted that subsidy received by assessee under PSI, 2007 is a capital receipt and thus non-taxable. The assessee vide written submitted dated 12.12.2018 filed by the opinion of Senior Advocate, has opined that subsidy received by assessee under PSI, 2007 is of capital nature and hence non-taxable. The Ld. A.R. relied upon following decision:
(i) CIT vs. Ponny Sugars & Chemicals Ltd. (2008) 174Taxmann 87 (SC)
(ii) Kedarnath Jute Manufacturing Co. Ltd. 82 ITR 363
(iii) ACIT VS. Mahindra 6919&6920/Mum/2016) Vehicles Manufactures ltd.
(iv) Innoventive Industries Ltd. vs. DCIT (ITA No. 215/PN/2014)
(v) Bhagyalaxmi Rolling Mills Pvt. Ltd. vs. DCIT (ITAT No. 3428/Mum/2016)
The Ld. A.R. also filed PSI, 2007 of Government of Maharashtra, MOU it entered with Government of Maharashtra & Eligibility Certificate (EC) for Mega Project under PSI, 2007. The assessee also referred to Explanation 10 Section 43(1) of the Act in support of the arguments. The Assessing Officer observed that the subsidies received as per MOU was related to electricity duty payment exemption, 100% exemption from payment of stamp duty, ITA No.45/Ind/2021 Bridgestone India Pvt. Ltd. vs. ACIT Asst. Year 2015-16 industrial promotion subsidy, less the amount of benefits availed in form of exemption of payment of Electricity Duty & Stamp Duty, but limited to 100% eligible investments or to the extent of taxes payable to the Government of Maharashtra, whichever is lower. All form of subsidies are subject to different type frames, beginning from the date of commencement of commercial production in the Eligible Unit. The Ld. A.R. also relied upon the decision of the Mumbai Tribunal in case of ACIT vs. Mahindra Vehicles Manufactures Ltd. (ITA Nos. 6919 & 6920/Mum/2016) and the decision of Hon’ble Supreme Court in case of Sahany Steel (supra), Ponni Sugars (supra) and Bhushan Steels & Stripes Ltd. (2017) 83 taxmann.com 204 (Delhi) subsidies received under PSI, 2007 are not capital in nature and thus the assessee’s contention were rejected. The Assessing Officer made addition of Rs. 29,49,00,133/- thereby allowing set up of Rs. 3,88,15,700/- under Industrial Promotion Subsidy of Rs. 33,37,15,833/-. The Ld. A.R. further submitted that the addition made by the Assessing Officer is not just and proper.
8. The Ld. D.R. submitted that the assessee himself has made contradictory claim when the receivables are declared. In fact, in Profit & Loss the assessee has declared the said subsidy as revenue and therefore, it is the assessee’s contradictory claim which should not be entertained and disturbed the 20 years of assessee’s own system of accounting. The Ld. D.R. relied upon the assessment order and the order of the DRP.
9. We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that the assessee is receiving subsidies related to electricity duty payment exemption, 100% exemption from payment of stamp duty and industrial promotion subsidy comprising of tax payable to the State Government during the period of 20 years starting from the date of commencement of commercial production. It is not the case of the Revenue that the assessee is not eligible for Mega Project under the Package Scheme of Incentives 2007 notified by the Government of Maharashtra from 30.03.2007 till 29.08.2009. Ld. AR at the time of hearing has produced the eligibility certificate for Mega Project new unit issued by Government of Maharashtra, Directorate of Industries dated 26.12.2013. The MOU between the Government of Maharashtra and the assessee company was signed on 26.04.2010 in respect of the proposed project of BSID on the basis of the level of proposed incentives. The said MOU is in respect of manufacturing of Steel Belt Radial Tyre for PSR and TBR, inner tubes and flaps. The disbursement of ITAs for the period 01.04.2014 to 31.03.2015 was issued by Government of Maharashtra to the assessee company on 25.05.2016. The letter dated 11.12.2018 addressed by the assessee to the Assessing Officer mentioned that based on the PSI Scheme, MOU, EC, facts and judicial precedents, the amount of IPS subsidy being of a capital nature has correctly been reduced from the costs as per Explanation 10 of Section 43(1) of the Act. The contention of the Ld. DR that the assessee consistently has treated the subsidies as Revenue in its recorded accounting system, do not nullify the actual intention of the Package Scheme of Incentives 2007 which is in capital nature. The assessee was eligible to claim subsidy and accordingly has taken benefit thereby deducting the same required to obtain eligibility certificate and in the present case the eligibility certificate was issued w.e.f. the date of commencement of commercial production by the assessee. Thus, the ITA assessee was eligible to claim the benefit of Package Scheme of Incentives for the period of 20 years. The decision of Hon’ble Supreme Court in the case of Ponni Sugars & Chemicals Limited (supra) has categorically mentioned that if the test laid down in the judgement of Sahney Steel & Press Works Limited, the assessee was free to use the money in its business entirely as it liked but in the present case the receipt of the subsidies/incentives are in respect of electricity duty exemption for the period of 15 years, 100% exemption from payment of stamp duty and industrial promotion subsidy. Therefore, the said subsidies are capital in nature as the assessee has utilised the said subsidy for setting up new unit/expansion of existing business. Thus, the decision of Hon’ble Supreme Court is squarely applicable in the present case and hence the appeal of the assessee is allowed.
10. In result, the appeal of the assessee is allowed.”
012. We find that coordinate bench in assessee’s own case for assessment year 2015 16 after examining the scheme has held that the object of the scheme is for industrial development of the state, therefore, applying the decision of the honourable Supreme Court in case of Ponny sugar (supra) held that the subsidy received by the assessee is a capital receipt and should go to reduce the cost of acquisition of the asset. The learned departmental representative could not show us any reason to deviate from the above decision on identical facts and circumstances. Therefore respectfully following the decision of the coordinate bench in assessee’s own case for assessment year 2015-16, which is the initial year in which the revenue raised this issue for the first time and the learned DRP also relied on direction for that year, we also hold that the subsidy received by the assessee is capital receipt. Further the assessee has applied explanation 10 to section 43 (1) of the act, considering subsidy as the cost of an asset met by the government and thus reduced from the total cost of the asset by the amount of subsidy for the purpose of claiming the depreciation by producing the chart where the above sum of subsidy was reduced from the actual cost of the asset eligible for depreciation. Accordingly, both grounds of appeal are allowed.
8. To maintain the rule of consistency we follow the earlier order of this Tribunal and decide this issue in favour of the assessee so far as the subsidy received by the assesse under Maharashtra Industrial Promotion Scheme.
9. Ground no.2 is regarding the addition made by the AO and DRP in respect of the subsidy received from Government of Madhya Pradesh Under Industrial Promotion Scheme 2004 by treating the same as revenue receipt. The arguments of both parties on this ground are identical as it was put forth for the ground no.1 by both parties. Therefore for the sake of brevity we are not repeating contentions of the parties. Since this issue was first time arising from the assessment order for the year under consideration, therefore, we have to examine the same independently based on the facts available on record as well as the legal precedence on this point. The relevant clauses of the Madhya Pradesh Industrial Promotion Scheme 2004 are as under:
“4.2.15 Industrial Investment Promotion Assistance The industries having fixed capital investment of Rs.1 to 10 crore would be given industrial investment promotion assistance, equivalent to 50 percent of the amount of commercial tax and central sales tax (excluding the amount of commercial tax on purchase of raw materials), deposited by them. A provision would accordingly be made in the Industry Department’s budget. This would be given for three years in advance districts and for five years in backward districts. The amount of assistance would not exceed more than the fixed capital investment.
The industries having fixed capital investment of more than Rs. 10 crore would be given industrial investment promotion assistance; equivalent to 75 percent of the amount of commercial tax and central sales tax (excluding the amount of commercial tax on purchase of raw materials), deposited by them. A provision would be made in the Industry Department’s budget for this assistance.
