Nalco Water India Limited Vs ACIT (ITAT Pune)
The appeal arose from the assessment order passed under Section 143(3) read with Section 144C(13) for AY 2012-13. The assessee, engaged in manufacturing and trading water treatment chemicals, oilfield chemicals, industrial additives, and equipment, challenged transfer pricing adjustments of ₹7.95 crore, taxation of subvention received from its parent company, disallowance of depreciation on assets installed at customers’ premises, and several transfer pricing issues.
The principal issue concerned ₹65.19 crore received from the parent company, Nalco USA, as subvention/promotional allowance to prevent the assessee from becoming a sick company. The Assessing Officer, TPO, and DRP treated the amount as taxable revenue receipt and non-operating income for transfer pricing purposes. The assessee contended that the amount constituted a capital receipt and, alternatively, should be regarded as operating income while computing the Profit Level Indicator (PLI).
The Tribunal held that, following the Supreme Court decision in Siemens Public Communication Network (P.) Ltd. v. CIT, voluntary payments by a parent company to protect its investment in a loss-making subsidiary constitute capital receipts. Applying that principle, it held that the subvention received from Nalco USA was a capital receipt and therefore not taxable.
On the transfer pricing aspect, the Tribunal separately examined whether the capital receipt should be regarded as operating income for determining the assessee’s PLI. It observed that the payment compensated the assessee’s operational losses and enabled it to continue business. Although the receipt was an exceptional item, it was not an extraordinary item. The Tribunal therefore held that the portion of subvention relatable to the relevant assessment year should be treated as operating income while computing the PLI. Consequently, it rejected the DRP’s direction permitting only a set-off of the taxable subsidy against transfer pricing adjustments, noting that after the Supreme Court ruling the receipt itself was not taxable. The Assessing Officer was directed to recompute the PLI accordingly.
