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2017 (5) TMI 1513 - AT - Income TaxTreatment of sales tax/purchase tax subsidy received from SICOM - whether capital receipt or revenue receipt - Held that - The facts and issue arising in the present appeal are identical to the issue before the Tribunal in assessee s own case and hence to avoid repetition, we adopt our reasoning given in assessment year 2006-07 for holding that the sales tax/purchase tax subsidy received by the assessee is capital receipt. We find that the said scheme of Government of Maharashtra was considered by the Hon ble Bombay High Court in CIT v. Kirloskar Oil Engines Ltd. (2014 (5) TMI 586 - BOMBAY HIGH COURT ) and it has been held that the object of assistance under subsidy scheme to enable assessee to set up new unit, was a capital receipt. Following the same parity of reasoning, we hold that the subsidy received by the assessee was capital in nature. Ad hoc disallowance of royalty paid by the assessee company to its associated enterprises - Held that - Pune Bench of Tribunal in M/s. Spicer India Limited v. ACIT (2017 (4) TMI 908 - ITAT PUNE), wherein there was similar case of payment of royalty where the TPO has violated the provisions of the Act and proposed the TP adjustment, but no separate adjustment was made on account of another adjustment and the same was subsumed in that; wherein the other TP adjustment was deleted by the DRP and the Assessing Officer in the final assessment order proposed the TP adjustment on account of royalty. Such procedure has not been followed by the TPO/Assessing Officer in the present facts and accordingly, we hold that there is no merit in the ad hoc disallowance of ₹ 7.50 crores. Coming to the merits of the case, where the royalty has been paid by the assessee at a rate lesser than 3% as against which the RBI has approved the rate at 3% for payment of royalty, then the same is at arm s length and this issue also considered by the Pune Bench of Tribunal in M/s. Spicer India Limited v. ACIT (supra). The Hon ble Bombay High Court in CIT v. SGS India Pvt. Ltd. 2015 (11) TMI 1619 - BOMBAY HIGH COURT had held the rate of royalty approved by SIA/RBI would constitute cup data and the transaction would be at arm s length price. Accordingly, we hold that where the payment of royalty by the assessee to its associated enterprises is at rate less than 3%, then the same is liable to be considered at arm s length rate and no addition is warranted on this account. Accordingly, we hold so.
Issues Involved:
1. Treatment of sales tax/purchase tax subsidy. 2. Ad hoc disallowance of royalty payment to associated enterprises. Issue 1: Treatment of Sales Tax/Purchase Tax Subsidy The primary issue raised by the assessee concerns the treatment of sales tax/purchase tax subsidy amounting to ?14,69,36,189 received from SICOM. The assessee argued that the subsidy should be considered a capital receipt, not chargeable to tax, as it was granted for setting up a unit in a backward area under the Government of Maharashtra's 1993 Package Scheme of Incentives. The assessee relied on the Supreme Court's decision in Ponni Sugar & Chemicals Ltd. and the Special Bench decision in Reliance Industries Ltd. to support their claim. The Tribunal noted that this issue had previously arisen in the assessee's own cases for assessment years 2006-07 to 2008-09, where it was held that the subsidy received under the 1993 Package Scheme of Incentives was a capital receipt. The Tribunal also referred to the Mumbai Bench's decision in DCIT v. Reliance Industries Ltd., which was upheld by the Bombay High Court, and the Bombay High Court's decision in CIT v. Kirloskar Oil Engines Ltd., which held that subsidies for setting up units in backward areas were capital receipts. The Tribunal concluded that the facts and issues in the present appeal were identical to those in the previous years and thus adopted the same reasoning. It held that the sales tax/purchase tax subsidy received by the assessee was a capital receipt and not chargeable to tax. Consequently, grounds of appeal No. 1 and 1.1 were allowed. Issue 2: Ad Hoc Disallowance of Royalty Payment The second issue involved the ad hoc disallowance of ?7,50,00,000 out of the royalty payment made by the assessee to its associated enterprises. The assessee contended that the royalty payment was at arm's length and had been accepted in previous and subsequent years without any adjustment. The TPO had initially proposed an adjustment, questioning the justification of royalty payments on old products, but ultimately did not make any adjustment in the final order. However, the Assessing Officer later disallowed ?7.50 crores on an ad hoc basis. The Tribunal observed that the TPO had not followed the prescribed procedures for determining the arm's length price of the royalty payment and had instead proposed an ad hoc adjustment. The Tribunal emphasized that the TPO must determine the arm's length price by applying the methods prescribed under the Income Tax Act and cannot make adjustments on an ad hoc basis. Since the TPO did not propose any adjustment in the final order, there was no occasion for the assessee to raise objections before the DRP, and the DRP's order was silent on this issue. The Tribunal further noted that the royalty payment had been accepted as at arm's length in the subsequent assessment year 2010-11, and the Revenue had not pointed out any differences in the factual aspects of the royalty payment between the current and subsequent years. The Tribunal also referred to the decision in M/s. Spicer India Limited v. ACIT, where a similar issue was decided in favor of the assessee. The Tribunal concluded that the ad hoc disallowance of ?7.50 crores was not warranted and allowed the grounds of appeal No. 2.4 and 2.5. It also held that the royalty payment at a rate less than 3%, approved by the RBI, was at arm's length and no addition was warranted. Consequently, grounds of appeal No. 2.6 to 2.9 were also allowed. The appeal of the assessee was partly allowed.
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