Subsidy based on reimbursement of sales tax – revenue or capital receipt?

Advocate Akhilesh Kumar Sah

Quantification of subsidy based on reimbursement of sales tax does not mean that it is a revenue receipt

Recently, in PepsiCo India Holdings Pvt. Ltd, (erstwhile Pepsi Foods Pvt. Ltd.) vs. Addl. CIT [I.T.As. No. 1334/CHANDI/2010, 1203/ CHANDI /2011, 2511/DEL/2013, 1044/DEL/2014 & 4516/DEL/2016 Assessment Years: 2006-07 to 2010-11 and I.T.As. No. 4517/DEL/2016, 4518 DEL/2016, 6537/DEL/2016, 6582/DEL/2017 Assessment Years: 2011-12 to 2013-14, decided on 19.11.2018], these appeals had been filed by the Assessee Company and Pepsi Foods Pvt. Ltd. (PFL), now merged with the PepsiCo India Holdings Pvt. Ltd. (PIH), (hereinafter collectively referred to as the assessee) against separate impugned orders for the AYs 2006-07 to 2013-14. Since the issues involved in all the appeals were by and large common arising out of identical set of facts, therefore, they were heard together and were disposed of by way of the consolidated order.

Pepsi Foods Pvt. Ltd. (PFL) was incorporated in India on 24.02.1989 as a Private Limited Company jointly promoted by PepsiCo Inc. USA, Punjab Agro Industries Corporation and Voltas Limited. Thereafter, in 1993, PepsiCo Inc. bought over the shareholding of Voltas in PFL. In that manner, PepsiCo Inc. held 99.98% of PFL. With effect from April 01, 2010, PFL was merged with PepsiCo India Holdings Pvt. Ltd., the assessee company, which in turn was also set up in India as subsidiary of PepsiCo Inc.

Amongst other issues, in I.T.A. No. 6537/DEL/2016 pertaining to AY 2012-13 and in I.T.A. No. 6582/DEL/2017 pertaining to AY 2013-14, the assessee had challenged the addition made by the Assessing Officer(AO) on account of IPA subsidy received by the assessee under the West Bengal Incentive Scheme, 2004, details of which were as under: –

In the relevant years involved, the assessee received subsidy from Government of Bengal for WBIDC Plant and Government of Maharashtra for Paithan Plant. The said subsidy was credited in the profit and loss account and had accordingly been reduced while computing the taxable income for the years under consideration claiming the same to be in the nature of capital receipt. Subsidy from the Government of West Bengal was received for setting up a new project in West Bengal under the West Bengal Incentive Scheme, 2000 read with West Bengal Incentive Scheme, 2004. The said schemes were introduced by the State Government of West Bengal to promote the establishment of industries in the State. The aforesaid subsidy inter alia consisted of the following:

(i) State Capital Investment Subsidy (SCIS): SCIS was computed at the rate of 15 percent of fixed capital investment, subject to a limit of INR 1.5 crores.

(ii) IPA: this was computed by way of refund of 75 percent of sales tax paid in the previous year on sale of finished goods for a period of 15 years, subject to a maximum of the fixed capital investment made in the new project.

The AO during both the relevant years, allowed the claim of subsidy received from Government of Maharashtra as being capital in nature. Further, he also allowed the claim of the assessee vis-à-vis SCIS, however, he disallowed the claim of the assessee vis-à-vis IPA received from Government of West Bengal. The AO was of the view that IPA received from the Government of West Bengal was given as assistance to the assessee for business promotion and was not specifically related to any capital expenditure. He held that the reliance placed by the assessee on the decision of CIT vs. Rasoi Ltd: [2011] 335 ITR 438 (Calcutta), was misplaced Rasoi Ltd. (supra) pertained to the West Bengal Incentive Scheme of 2000 whereas in the instant case, the scheme of 2004 was involved. The AO held that both the schemes had different objectives and therefore, the decision in the case of Rasoi Ltd (supra) did not, in any which way, support the case of the assessee. In that manner, the AO held the IPA received to be in the nature of revenue receipt and sought to tax the same.

The DRP for both the relevant years, upheld the action of the AO in the following manner:

“The Ld. AR argued at length and placed reliance on various case laws also which have been considered by the Panel. It has been submitted that is the purpose of subsidy and not the time, mode and manner of subsidy which conclusively determines the nature – revenue or capital and accordingly, the Ld AR submitted that the subsidy was capital in nature. It is seen from the material placed before this panel that the subsidy was given to assessee in form of reimbursement of Sales tax @ 75% on operations of the assessee and it is directly relatable to the operations – as more the operations, more would be the subsidy. Ultimately, the state subsidizes the private enterprise to help in expansion of the industrial enterprise to enhance the economy of the area. In the instant matter, the state is doing this by facilitating the assessee growth in terms of increased turnover and volumes. The certificate issued by WBIDC for incentives under WBIS 2004, the assessee was declared eligible for the following incentives:

– State Capital Investment Subsidy

– Industrial Promotion Assistance (‘IPA’)

The AO has allowed certain components of the subsidy to the assessee as capital in nature and upon examination of the details has treated only one part of such subsidy as revenue in nature.

The assessee has placed reliance on the judgment of the jurisdictional High Court in case of the Rasoi Ltd (2011) 335 ITR 438 (Cal HC) in support of its contention that subsidy received on account of Sales tax deferment/ remission and Industrial Promotion Assistance’ are capital receipts not chargeable to tax. The judgment is not applicable in case of the assessee as the facts in case of the assessee are quite different from the case cited. The ratio of this citation outlines different factual matrix in case of the assessee and does not help the case of the assessee. Similar issue was also examined by the Hon’ble Delhi ITAT in case of Jindal Power & Steel [reported in [2013] 38 taxmann.com (DelhiTrib.)] wherein the case of Rasoi Limited, apart from other relevant judgment was also considered. The ITAT Delhi has, in their detailed order in this case held such subsidy to be revenue in nature. The present case is also squarely covered by the ratio of decision of Hon’ble Supreme Court in the case of Sahney Steel & Press Works Ltd. reported in [1997] 228 ITR 253/94 Taxman 368 (SC). The nature of subsidy has to be based on case specific facts. Therefore, in each case one has to examine the nature of subsidy. Hon’ble Supreme Court in the case of Sahney Steel & Press Works Ltd. had observed that these subsidies were given to encourage the setting up of Industry in the State of Andhra Pradesh by making the business of production and sales of goods in the State more profitable. This judgment has laid down the basic tests to be applied for judging the character of subsidy and that test is that the character of receipt in the hands of the assessee has to be determined with respect to the purpose for which the subsidy is given. The assessee was free to use the amount of subsidy in its business as per its discretion. In Ponni sugars & Chemicals Ltd. [2008] 306 ITR 392/ 17 Taxman 87 (SC) (para 21), the Hon’ble Supreme Court had held that the amount of subsidy is of capital nature only because (when) the subsidy was mean for repayment of term loans which were taken by the assessee for setting up of new unit and such repayment of term loans was on capital account whereas in the present case the subsidy is in the form of sales tax exemption, electricity duty exemption etc. which were revenue in nature. Hon’ble Supreme Court after noting similar scheme where the Hon’ble High Court of Madhya Pradesh had held that the subsidy to be of capital nature in the case of Dusad Industries (supra) had held as under:-

“The Madhya Pradesh High Court, however, failed to notice the significance fact that under the scheme framed by the Govt. no subsidy was given until the time production was actually commenced. Mere setting up of the industry did not qualify for industrialization for getting any subsidy. The subsidy was given as help not for setting up of the industry which was already there but is an assistance after the industry commenced its production. The view taken by the Hon’ble Madhya Pradesh High Court is erroneous.”

The above observations of Hon’ble Supreme Court put the whole gamut of grant of subsidy for setting up of the enterprises in proper perspective. The contextual clarification here above helps us see the matter in correct perspective to determine income taxable as per provisions of the Income Tax Act 1961. It would also be important to observe here that the assessee has never made similar claim in the earlier assessment cycles for the prior periods – indicating clearly that the assessee itself was not seeking the subsidy as capital receipt with the best legal help available to it. Considering the facts and submissions of the assessee and in light of the above jurisprudence, the receipts on account of subsidy by the assessee are clearly Revenue in nature. The action of the AO is, accordingly upheld by the panel.”

The directions of the DRP culminated in the final assessment order of the AO for AY 2012 13 and 2013-14. Aggrieved by the said directions, the assessee filed appeal before ITAT, Delhi.

The learned counsel for the assessee placed before ITAT, Delhi, the text of the West Bengal Incentive Scheme, 2004 and referred to the following passage from the scheme to contend that the object of the said scheme was to promote setting up/ expansion of projects in the concerned area:

“4. Applicability of the 2004 scheme:

4.1 the 2004 scheme shall generally be applicable to all large / small scale projects and tourism units in large / small scale sector to be set up and also expansion project of existing units on or after 1st April, 2004, the units may be in the private sector, co-operative sector, joint sector as also companies / undertakings owned or managed by the State Government.”

Thereafter, he submitted that it was clear that the intent and object behind the introduction of the West Bengal Incentive Scheme of 2004 was to promote setting up and expansion of industries and hence, the subsidy was not made available to the existing industries unless they undertook substantial expansion. This fact, alone showed that the subsidy was not advanced for sustaining the business of the assessee as alleged by the AO and the DRP, but was for the purposes of incentivizing expansion of industries. Thus, the subsidy was clearly capital in nature. He further submitted that the “Mega Projects” eligible under the scheme of 2004 were not eligible for the interest subsidy and in lieu thereof, IPA was made available to them at the rate of 75% of the sales tax in the year previous to the year for which the claim was to be made. As per the scheme the unit was to be eligible for IPA and other subsidies only after:

(i) Total investment crossed the limit of INR 25 crores; and

(ii) On commencement of commercial production.

He submitted that he in the said scheme, it was stated that the total value of incentive was to not exceed 100% of the Fixed Capital Investment in any case. Therefore, it was patently clear that the subsidy was based upon the fixed capital investment made by an enterprise and only the mode of disbursement was in the form of repayment of sales tax paid. It is a settled law that the objective of the scheme had to be considered for the purposes of determining the nature of subsidy given and not the mode and manner of payment. He also drew our attention towards various decisions, wherein, Courts have held that the character of subsidy in the hands of the recipient, whether capital or revenue, was to be determined after having regard to the purpose for which the subsidy was given. He placed reliance on the decision of the Hon’ble Supreme Court in Sawhney Steel and Press Works Ltd vs. CIT [1997] 228 ITR 253 (SC) wherein it was observed that the it was not the source from which the amount was paid to the assessee which was determinative of the question whether the subsidy payments were of revenue or capital nature. The Court further observed that if payments in the nature of subsidy from public funds were made to the assessee to assist him in carrying on his trade or business, they were to be treated as trade receipts. The Hon’ble Supreme Court had also observed that the sales tax upon collection formed part of the public funds of the State and if the assessee as per the scheme was to be given refund of sales tax on purchase of machinery as well as on raw materials to enable the assessee to acquire new plants and machinery for further expansion of its manufacturing capacity in backward area, the entire subsidy was to treated as a capital receipt in the hands of the assessee. He placed reliance on the Hon’ble Supreme Court’s decision in CIT vs. Chaphalkar Brothers [2017] 88 taxmann.com 178 (SC) wherein it was observed that where object of respective subsidy schemes of State Governments was to encourage development of Multiple Theatre Complexes, incentives was to be held to be capital in nature and not revenue receipts even though the incentive was in form of exemption from payment of entertainment duty for a period of 3 years from the date of commencement of commercial operations. He also placed heavy reliance on the decision of the Hon’ble Supreme Court in CIT vs. Ponni Sugars and Chemicals Ltd [2008] 306 ITR 392 (SC) and submitted that the Hon’ble Court had observed that the character of the receipt in the hands of the assessee had to be determined with respect to the purpose for which the subsidy was given. The said test was the called the ‘purpose test’ and that the point of time when the subsidy was paid was not relevant and so was so source of subsidy. Reliance was also placed on the decision of the Hon’ble High Court of Punjab & Haryana in CIT vs. Talbros Engineering Ltd. [2016] 386 ITR 154 (P&H) wherein it was held that sales tax subsidy given by the State Government for encouraging industries for setting up units in remote or rural areas was to be treated as capital receipt. Further in the decision of the Hon’ble High Court of Delhi in CIT vs. Bougainvillea Multiplex Entertainment Centre (P) Ltd: [2015] 55 taxmann.com26 (Del HC).

Thereafter, the learned counsel submitted that in the instant case also the subsidy was given by the Government of West Bengal for the purpose of industrialization of the state and hence, the subsidy was available only to new units or to existing units who were undertaking expansion. Merely the quantification of subsidy was based upon reimbursement of sales tax. In view of the said object of the scheme of 2004, the assessee treated the IPA receipt as a “capital receipt”. He submitted that the AO and DRP erroneously treated the subsidy as a revenue receipt by looking at the mode of payment, which was by way of reimbursement of sales tax, and that the benefit was to be given only after the commencement of commercial production. He thereafter submitted various decisions wherein on the basis of similar facts that is

(a) where subsidy was given in form of reimbursement of taxes paid on production / sales; and

(b) subsidy was available only after the commencement of production / commercial operations; and

(c) subsidy was not linked to any specific fixed assets; and

(d) there was no stipulation in the scheme of subsidy regarding the manner in which the subsidy amount was to be utilized by the assessee, still, solely on the basis of object of the scheme, subsidy was held to be capital in nature. Explaining the decision of the Hon’ble High Court of Calcutta in CIT vs. Rasoi Ltd. [2011] 335 ITR 438 (Calcutta), he submitted that therein, the scheme in question was given effect to from 1-4-1994 and initially, was in force only for one year from that date and, thus, the benefit was then available to the assessee only for that year which was the relevant assessment year. From the objects and reasons of the aforesaid scheme, it was clear that the Government had decided to grant the subsidy by way of financial assistance to tide over the period of crisis for promotion of the industries mentioned in the scheme which had the manufacturing units in West Bengal and which were in need of financial assistance for expansion of their capacities, modernization and improving their marketing capabilities and thus, the subsidy was held to be capital in nature. The Hon’ble Court had observed therein that merely because the amount of subsidy was equivalent to 90 per cent of the sales tax paid by the beneficiary did not imply that the same was for operational purposes Lastly, he placed reliance on the decision of the Hon’ble High Court of Jammu and Kashmir in Shree Balaji Alloys vs. CIT [2011] 333 ITR 335 (J&K) and pointed out that the same had now been affirmed by the Hon’ble Supreme Court. He placed reliance on the following passage from the decision of the Hon’ble High Court:

“Mere making of additional provision in the Scheme that incentives would become available to the industrial units from the date of commencement of the commercial production, and that these were not required for creation of New Assets cannot be viewed in isolation, to treat the incentives as production incentives, as held by the Tribunal, for the measure so taken, appears to have been intended to ensure that the incentives were made available only to the bona fide Industrial Units so that larger Public Interest of dealing with unemployment in the State, as intended, in terms of the Office Memorandum, was achieved. The other factors, which had weighed with the Tribunal in determining the incentives as Production Incentives may not be decisive to determine the character of the incentive subsidies, when it is found, as demonstrated in the Office Memorandum, amendment introduced thereto and the statutory notification too that the incentives were provided with the object of creating avenues for Perpetual Employment, to eradicate the social problem of unemployment in the State by accelerated industrial development.”

On the other hand, the learned DR relied upon the order of the AO and the DRP.

The learned Members of the ITAT, Delhi heard the rival submissions and also perused the relevant findings given in the captioned orders. It was observed that the assessee had received subsidy from Government of West Bengal for WBIDC plant and Government of Maharashtra for Paithon plant. The subsidy from the Government of West Bengal was received for setting up for a new project in West Bengal under the West Bengal incentive scheme 2000 and 2004 which was to promote the establishment of the industries in the state. The nature of subsidy has already been described above. The AO had allowed the claim of subsidy from Government of Maharashtra and also the State Capital Investment Subsidy by the West Bengal Govt. as it was computed on 15% of fixed capital investment which had been treated as capital in nature and allowed the claim of assessee. However, AO had disallowed the claim of the assessee on the IPA subsidy received from Government of West Bengal on the ground that the subsidy received from Government of West Bengal was given to the assessee for business promotion and not specifically related to any capital expenditure. The Object of the West Bengal Incentive Scheme, 2004 was to promote setting up and expansion of projects/industries and was not available to the existing industries unless they undertook substantial expansion. The Hon’ble Supreme Court in the case of CIT vs. Ponni Sugar and Commercial Ltd. (supra) observed that character of the receivables in the hands of the assessee had to be determined with respect to the purpose for which subsidy was given. The purpose for which subsidy is given assumes more significance rather than the manner in which it has been given. Here in this case also the subsidy was given by the Government of West Bengal for the purpose of industrialization of the State which was available only to new units or to existing units which were initiating substantial expansion. Under the Scheme IPA was made available @75% of the sales tax in the previous year for which the claim was made and the total value of incentive was not to exceed the fixed capital investment. Thus, Subsidy was based upon fixed capital investment made and only the mode of disbursement was in the form of re-payment of sales tax paid. The Hon’ble Supreme Court in the case of CIT vs. Chaphalkar Brothers (supra) held that subsidy scheme of the State Government to encourage development of multiple theatre complexes is capital in nature and not revenue’s receipts there also subsidy was in the form of exemption from payment of entertainment due for the period of three years. Merely because here in this case the quantification of subsidy was based on reimbursement of sales tax, it does not meant that it is a revenue receipt. This view now is well supported by the various decisions as noted above that character of subsidy in the hands of the assessee is the determinative factor having regard to the purpose for which subsidy was given. Accordingly, the learned Members of the ITAT, Delhi held that the subsidy received by the assessee from the subsidy received under the West Bengal Incentive Scheme of 2004 was capital in nature and could not be taxed as revenue receipts. The issue was decided in favour of the assessee.