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TMI Blog2016 (4) TMI 1163X X X X Extracts X X X X X X X X Extracts X X X X ..... sment year under consideration, assessee filed its return of income on 26th September 2009, declaring total income of Rs. 41,86,81,920, under the normal provisions and book profit of Rs. 186,80,48,734 under section 115JB. In the course of assessment proceedings, the Assessing Officer while verifying the return of income filed by the assessee, noticed that assessee had claimed deduction of Rs. 137.08 lakh under section 80IC of the Act. Though, the Assessing Officer called upon the assessee to justify its claim under section 80IC raising various issues, however, for the purpose of present appeal, we will only discuss the facts which are relevant to the issue raised by the assessee in the ground. 4. As stated earlier, the Assessing Officer while examining assessee's claim of deduction under section 80IC found that the profit of eligible unit as shown in the Profit & Loss account also includes other income. He, therefore, called upon the assessee to furnish details of such income. On verifying the details furnished by the assessee, he found that other income consist of scrap sales, subsidies received and other expenses recoveries. Though, the Assessing Officer accept ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Commissioner (Appeals), after considering the submission of the assessee, however, did not find merit in the same. He was of the view that transport and power subsidy received by the assessee cannot be treated as profit derived from the eligible business as they do not come under the first degree of source of profit derived from the industrial undertaking. For such conclusion, he relied upon the decision of the Hon'ble Supreme Court in Liberty India Ltd. v/s CIT, [2009] 317 ITR 218 (SC). Further, learned Commissioner (Appeals) observed, the subsidies received by the assessee during the impugned year actually pertain to the financial year 2004-05 and 2005-06. He observed, as the assessee follows mercantile system of accounting, such receipts of subsidies cannot be considered to be the income of the undertaking for the impugned assessment year. Accordingly, he dismissed the grounds raised by the assessee. 7. Learned Authorised Representative reiterating the stand taken before the Departmental Authorities submitted, the subsidies received by the assessee is actually reimbursement of expenditure incurred on transport and power. The learned Authorised Representative referring to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has to be applied for ascertaining the purpose of grant of subsidy. The learned Departmental Representative submitted, though, the power and transport SUBSIDY is in the revenue field but there is nothing in the scheme to show that it reduced the cost. Learned Departmental Representative submitted, the accounting treatment given by assessee also indicates subsidies have not reduced the cost. The assessee has credited the subsidy as other income without reducing the cost of power or transport. Learned Departmental Representative submitted, referring to decision of the Hon'ble Supreme Court in Liberty India Ltd. (supra) submitted, the ratio laid down therein squarely applies to the facts of the present case. He submitted, in case of Meghalaya Steels Ltd. (supra), Hon'ble Gauwahati High Court has not properly appreciated the reasoning of Liberty India Ltd. (supra), hence, the said decision cannot be applied to the facts of the present case. Learned Departmental Representative also relied upon the decision of the Hon'ble Delhi High Court in Pine Packaging (P) Ltd. v/s CIT, [2012] 23 Taxmann.com 369 (Del.), to argue that the receipt towards subsidy cannot be considered to be inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Himachal Pradesh units should be reduced from the profit of the business for computing deduction under section 80IC. It is the claim of the assessee that as the power and transport subsidy under the subsidy scheme framed under the respective industrial policy of the concerned State Governments is for reimbursing the actual cost of power and transportation the same is operational subsidy, in other words, it enhanced the business profit of the assessee, therefore, assessee would be eligible to claim deduction under section 80IC on such subsidy. On a perusal of the industrial policy of Assam 2008, notified by the Government of Assam, it is observed that as per the fiscal incentives declared under the said policy, power subsidy will be provided to eligible unit on power tariff paid by the units on the actual units consumed for a period of five years from the date of commercial production subject to the following ceiling:- Connected Loan Rate of Subsidy Ceiling & Subsidy per annum Up to 1.0 MW 30% Rs. 10 lakh Above 1.0 MW 25% Rs. 25 lakh 12. Similarly, clause 3 of the Industrial Policy provides for incentive on transpiration of raw material as well as finished ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it concerned inasmuch as subsidy on transportation of finished goods was to be given on finished goods actually produced by the industrial unit in accordance with the manufacturing program approved by the Government concerned. The Court observed, when the transport subsidy so received both on the transportation of raw material as well as finished goods goes to reduce the cost of production of industrial undertaking, resultant effect of such a reduction on the cost of production will obviously help in generating profit. Therefore, it was observed by the Court, there is a direct nexus between the transport subsidy and the profit earned by the industrial undertaking unit and such a direct nexus cannot but to be termed as first degree nexus between the two namely transport subsidy on the one hand and resultant profit and gains on the other. The Court observed, unless the Revenue succeeds in showing that the transport subsidy has no bearing on the cost of production of industrial undertaking, the claim for deduction under section 80IC cannot be denied. The Hon'ble High Court referring to the decision of the Hon'ble Supreme Court in Jai Bhagwan Oil and Flower Mills v/s Union of I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raw material or finished goods, then it will result in profit, hence, the assessee would be entitled to deduction under section 80IB/80IC. The Court, while examining the ratio laid down by the Hon'ble Supreme Court in Liberty India Ltd. (supra) observed, the issue raised before the Hon'ble Supreme Court was not relating to subsidy but the issue was whether profit from duty entitlement pass book scheme would be said to be profit derived from the industrial undertaking. The Court observed, while answering the question framed, the Hon'ble Supreme Court pointed out that DEPB is an incentive given under the duty exemption remission scheme and essentially is an export incentive, hence, not related to business operation of industrial undertaking per se for its manufacturing or production. According to the Hon'ble Supreme Court DEPB's entitlement arise when the undertaking goes on to export after manufacturing or production and is restricted to its export product. Therefore, according to the Hon'ble Supreme Court, the position is if there is no export there is no DEPB entitlement, hence, its relation to the manufacturing / production is neither proximate nor direct. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the assessee, it is in the nature of operational subsidy as it enhances the profit derived by the assessee from manufacturing of goods. In other words, subsidy is directly related to profit derived from manufacturing activities. Hence, subsidy being part of profit derived from industrial undertaking would be eligible for deduction under section 80IC. Having held so, it is necessary to examine the facts of the present case. As could be seen, the Assessing Officer while disallowing assessee's claim of deduction under section 80IC has not made any discussion about the nature of subsidy granted to the assessee, whether operational or non-operational. As it appears, the Assessing Officer has not at all examined the relevant industrial policy and subsidy schemes under which the assessee was granted transport and power subsidy. Similarly, though, before the first appellate authority, as per the learned Commissioner (Appeals)'s own version, the assessee did produce the industrial policy of the concerned State Governments but, he has not at all examined such industrial policies to find out the true nature of subsidy granted under the respective subsidy schemes. Therefore, in our view, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration, company pre-paid the sales tax loans and availed remission of loan liability amounting to Rs. 1,49,074. It was submitted, the said amount was reflected as other income under Schedule-10, though, it should have been reduced while computing the total income. Therefore, the assessee claimed that the remission of liability of Rs. 1,49,074, should be reduced from the total income. The Assessing Officer, however, did not accept the claim of the assessee. The Assessing Officer observed, as per section 41(1) of the Act, any remission and cessation of the liability shall be deemed to be the profit of business, hence, chargeable to tax. He further observed, as the assessee has not made the claim by way of revised return of income even otherwise also assessee's claim is not acceptable. Being aggrieved with such decision of the Assessing Officer, assessee challenged the same in appeal before the learned Commissioner (Appeals). 19. The learned Commissioner (Appeals), though, accepted assessee's contention that there is no cessation or remission of liability under section 41(1), however, he held that the gain derived by the assessee on premature repayment would be tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lected by the assessee, which is not paid into the Government Treasury yet deemed to have been paid is nothing but the loan granted by the Government to the assessee. Therefore, such a loan cannot be treated as a trading liability. Facts on record show that during the year under consideration the Government of Maharashtra introduced the Net Present Value (NPV) under Maharashtra Act No.XX of 2002 & Rule 31D of BST Rules 1959 notified vide Govt. Notification No.STR-12.02/CR-002/Taxation-1, dated 16.11.2002, where under the eligible undertaking was permitted to prepay the loan amount. Under the said scheme, the prepayment was allowed at the NPV of the loan repayable at the end of the loan period. The assessee availed the benefits of this scheme and got a remission in the aggregate loan liability amounting to Rs. 9,92,92,718/-. It is further seen that on 12.12.2002 the Government of Maharashtra announced a scheme of "Premature Repayment of the amount of deferred tax by the eligible units at NPV". The industries who had availed the incentives of the sales tax scheme were permitted to prematurely repay the deferred sales tax liability by arriving at NPV by applying a specific discount. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to be held that the deferred sales tax liability being the difference between the payment of net present value against the future liability credited by the assessee under the capital reserve account in its books of account was a capital receipt and could not be termed as remission/cessation of liability and, consequently, no benefit would arise to the assessee in terms of section 41(1)(a) [Para 109] The appeal filed by the Revenue is accordingly dismissed." 6. The ld. A.R. has further brought our attention to the fact that even in the own case of the assessee for the earlier assessment year i.e. A.Y. 2005-06, this issue was again under consideration before the co-ordinate bench of the Tribunal and the Tribunal again relying upon the Special Bench decision in the case of "Sulzer India Ltd." (supra) has decided the issue in favour of the assessee observing as under: "14. In our opinion, the issue before us squarely stands covered in favour of the assessee by the decision of the Sulzer India Ltd. (supra). The only objection of the ld. D.R. is that in the case of Sulzer India Ltd. (supra), the said assessee has treated the difference as a capital receipt but in the present case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owed funds were utilised. It was submitted, surplus funds were invested in mutual fund for short periods to ensure optimum possible return. It was submitted, as far as borrowed funds are concerned, the assessee has availed secured loan in the form of sales tax deferment loan which has no interest cost. It was submitted, company has also availed temporary cash credit facility which was exclusively utilised for the purpose of carrying out the manufacturing activities and not for investment. Thus, it was submitted, no disallowance under section 14A can be made of interest expenditure. As far as administrative and other indirect expenses are concerned, it was submitted by the assessee, no such disallowance can be made notionally as the assessee has not incurred any expenditure for earning dividend income. Without prejudice to the aforesaid claim, it was submitted by the assessee if, at all, any indirect expenditure is required to be disallowed, then such expenditure relating to a part of cost of one employee can be disallowed under rule 8D and the assessee worked out such disallowance at Rs. 1,36,785. The Assessing Officer, however, did not find merit in the submissions of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e learned Authorised Representative. In case of Cheminvest Ltd. v/s CIT, [2015] 61 Taxmann.com 118 (Del.), the Hon'ble Delhi High Court, after taking into consideration the ratio laid down by the Hon'ble Supreme Court in Rajendra Prasad Moody (supra) and Maxopp Investment Ltd. (supra), held that if in a particular assessment year, the assessee has not earned any exempt income, no disallowance under section 14A can be made. The ratio laid down as aforesaid squarely applies to the facts of the present case. Though, the learned Departmental Representative has tried to distinguish the aforesaid decision of the Hon'ble Delhi High Court with the submission that it relates to an assessment year prior to introduction of rule 8D. However, in our view, the ratio laid down equally applies to an assessment year even after the introduction of rule 8D. Therefore, we direct the Assessing Officer to verify whether assessee has earned any exempt income during the relevant previous year. If on such verification, it is found that assessee has not earned any exempt income during the relevant previous year, no disallowance under section 14A should be made. As far as interest expenditure is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was submitted by the assessee, during the year under consideration assessee has capitalised leased assets acquired during the year in the books of account in accordance with the accounting standard issued by the ICAI and written-off the cost of such assets in the books of account by way of depreciation over the period of the lease. It was submitted, in the computation of total income, the depreciation of such leased asset has been disallowed and added back to the total income. Such leased assets have not been considered as an addition to the block of assets and no depreciation has been claimed thereon. Consequently, the entire lease rental paid during the year was claimed as deduction under section 37(1). The Assessing Officer, however, did not accept the claim of the assessee. Referring to the decision of the Hon'ble Supreme Court in Asea Brown Boveri Ltd. v/s Industrial Finance Corp. of India, [2006] 154 Taxman 512 (SC), the Assessing Officer held, the lease rental of Rs. 10,53,374, is a capital expenditure, hence, not allowable. However, he allowed depreciation @ 15% on such amount. Though, assessee challenged the disallowance before the learned Commissioner (Appeals), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by virtue of a number of decisions rendered by different Benches of the Tribunal as under:- i) ACIT v/s Britannia Industries Ltd., ITA no.1789/Kol./2008, order dated 31st August 2010; ii) CIT v/s Selan Exploration Technology Ltd., [2010] 188 Taxmann.com 001 (Del.); iii) Deccan Chronicle Holdings Ltd. v/s DCIT, ITA no.219/Hyd./ 2014 dated 16th September 2014; and iv) John Flower (I) Pvt. Ltd. v/s ITO, ITA no.4691/Mum./2005 dated 8th December 2010. 38. Learned Departmental Representative, however submitted, the expenditure incurred being capital in nature is not allowable. 39. We have considered the submissions of the parties in the light of the case laws relied upon and perused the material available on record. As could be seen from the assessment order as well as the order of the first appellate authority, assessee's claim was not considered only for the reason that it was not made through a revised return of income. However, as held by the Hon'ble Supreme Court in Goetz India Ltd. (supra), restriction imposed therein for not entertaining a claim otherwise by way of revised return of income is only applicable to the Assessing Officer. That being the case, we restore t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e challenged the same before the learned Commissioner (Appeals). 43. In the course of hearing of appeal, the assessee making elaborate submissions, contested the adoption of 3% rate by the Assessing Officer. It was submitted by the assessee that rate of interest charged by bank to the assessee for loan is only 3.50%, therefore, the guarantee charged by the Assessing Officer @ 3% is not justifiable. It was further submitted by the assessee that rate charged by the Assessing Officer is based on rates applied in the year ending 31st March 2008 and the Assessing Officer has not listed out the arm's length cases which she has relied upon for bench marking. The learned Commissioner (Appeals), after considering the submissions of the assessee observed, where no cash margin is provided interest rate is charged at 2.75% per annum of bank guarantee amount. Ultimately, the learned Commissioner (Appeals) held that the arm's length rate of interest on corporate guarantee has been appropriately fixed at 3% by the Assessing Officer. 44. Learned Authorised Representative, while initiating his argument submitted, transaction relating to corporate guarantee will not fall within the definit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t also it involves considerable risk as the credit rating of the A.E. is not high. The learned Authorised Representative referring to the letter received by the assessee from HSBC, a copy of which is at Page-59 to 64 of the paper book submitted, the commission charged in respect of some of the guarantee is @ 1%. The learned Departmental Representative submitted, assessee's claim that the bench marking at 0.25% should be accepted is not tenable. 46. We have considered the submissions of the parties in the light of the relevant case laws cited before us and perused the material available on record. Undisputedly, the assessee has provided corporate guarantee to its overseas A.E. It is also not disputed that the assessee suo-motu bench marked the commission chargeable on such bank guarantee @ 0.25%. The issue before us is restricted to whether the arm's length price of corporate guarantee is to be fixed at 0.25% as claimed by the assessee or at 3% as held by the Department. In the aforesaid context, it is relevant to refer to the letter dated 3rd February 2008 of HSBC, a copy of which is placed at Page-59 to 64 of the paper book. On a perusal of the aforesaid letter of HSBC, it is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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