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2021 (12) TMI 1352 - AT - Income TaxTP adjustment pertaining to the Manufacturing segment - Treating subsidy received by the assessee as a revenue receipt or capital receipt - operating revenue for determining the ALP of the Manufacturing segment - Manufacturing segment which comprises of Import of raw material, Sale of manufactured goods, Payment of technical license fees/Royalty and Payment of one time technology transfer fees - HELD THAT - The assessee received subsidy under Package Scheme of Incentives (PSI) given by the Government of Maharashtra which was treated as an item of revenue receipt and at the same time, it was also included in the operating revenues for determining the ALP of the Manufacturing segment. In a note given to its balance sheet. Primary contention of the assessee is that the subsidy is in the nature of capital receipt and hence, should be excluded - When we apply such a test on the facts and circumstances of the case, it demonstrably emerges that the purpose of subsidy is industrial growth; it is linked with the setting up of industrial units; and the amount of subsidy is linked with the amount of investment made in the eligible unit. Simply because the subsidy has been disbursed in the form of refund of VAT and CST, it will not alter the purpose of granting the subsidy, which is nothing but establishment of new industrial units in less developed areas of the State. The authorities below have been swayed by the fact that the subsidy was granted post commencement and is in the nature of refund of VAT and CST and overlooked the purpose of its granting, which is nothing but momentum in industrial pace in less developed parts of the State. Testing the factual panorama on the touchstone of the ratio laid down by the Hon ble Supreme Court in the above referred cases, we are of the considered opinion that the subsidy of Rs.89.73 crore is a capital receipt and not chargeable to tax. It is relevant to mention that we are concerned with the A.Y. 2014-15. The Finance Act, 2015 has inserted clause (xviii) to section 2(24) w.e.f. 01-04-2016 providing that the assistance in the form of subsidy or grant of cash incentives etc., other than the subsidy which has been taken into consideration in determining the actual cost of the asset in terms of Explanation 10 to section 43(1), shall be considered as an item of income chargeable to tax. Since the amended provision of section 2(24)(xviii) is not applicable to the year under consideration, the sequitur is that the subsidy received by the assessee would not form part of its total income. We, therefore, overturn the impugned order and direct to treat the subsidy as an item of capital receipt not chargeable to tax. In view of the fact that the subsidy has been held to be a capital receipt, obviously, it cannot form part of operating revenue of the Manufacturing segment of the assessee company for the purpose of determining the ALP under the TNMM. AR contended that in the hue of the amendment to section 2(24) of the Act, the assessee offered the subsidy as a revenue receipt chargeable to tax for the A.Y. 2016-17 and also claimed it as operating revenue for the purpose of the ALP determination, which issue is sub judice before the Tribunal. We desist from commenting on the treatment of subsidy as an item of operating revenue or otherwise because it is not required for the disposal of the present appeal, for which the subsidy has been held to be a non-operating revenue on the ground that it is a capital receipt and does not form part of the total income of the assessee. To sum up, the subsidy is capital receipt not chargeable to tax and at the same time it will not be included in the operating revenue for determining the ALP of the Manufacturing segment - we hold that the profit margins of the comparables cannot be reduced by the difference in the amount of Custom Duty because there is no evidence of any difference in the Custom Duty rates paid by the assessee as well as the comparables. Respectfully following the precedent, we uphold the impugned order on this score. This ground fails. Comparable selection - Inclusion of Bharat Earth Movers Limited and JCB India Limited in the list of comparables - TPO included Bharat Earth Movers Limited in the list of comparables despite the assessee s objections - AR submitted that the comparable was there in the immediately preceding assessment year and the Tribunal has directed to exclude the same from the list of comparables. Relevant discussion has been made in para 7 of the Tribunal order. After considering the relevant material, the Tribunal has directed to exclude Bharat Earth Movers Limited. The ld. DR could not controvert the argument of the assessee. Respectfully following the precedent, we order to exclude this company from the list of comparables. This part of the ground is, therefore, allowed. Next comparable assailed by the assessee is JCB India Limited, which was included by the TPO in the list of comparables - No relief was allowed by the DRP. The ld. AR fairly submitted that the inclusion of JCB India Limited in the list of comparables was challenged by the assessee for the immediately preceding assessment year as well but the Tribunal has upheld the decision of the authorities below in this regard. We have perused the order passed by the Tribunal on this issue for the immediately preceding assessment year. Relevant discussion has been made in para 8 of the order. After elaborate analysis of the factual and legal position, the Tribunal has finally held that JCB India Limited was rightly included in the list of comparables. Following the same view, we countenance the inclusion of this company in the list of comparables. This part of the ground is, therefore, dismissed. Transfer pricing adjustment on entity level as against the proportionate adjustment - AR submitted that similar issue was raised in the assessee s appeal for the immediately preceding assessment year and the Tribunal was pleased to direct the AO/TPO to restrict the transfer pricing adjustment to the extent of international transactions under the Manufacturing segment. The ld. DR also fairly admitted the position. Respectfully following the precedent, we direct the AO/TPO to restrict the transfer pricing adjustment to the extent of international transactions under the Manufacturing segment.
Issues Involved:
1. Transfer pricing adjustment in the Manufacturing segment. 2. Treatment of subsidy received as a revenue receipt. 3. Impact of excess Custom Duty on operating margin. 4. Inclusion of Bharat Earth Movers Limited and JCB India Limited in the list of comparables. 5. Transfer pricing adjustment on an entity level vs. proportionate adjustment. Detailed Analysis: Transfer Pricing Adjustment in the Manufacturing Segment: The primary issue revolves around the transfer pricing adjustment of Rs. 37,42,31,420/- in the Manufacturing segment. The assessee, a wholly-owned subsidiary of Hyundai Korea, engaged in manufacturing and trading of excavators, reported various international transactions. The Transfer Pricing Officer (TPO) excluded a subsidy of Rs. 89.73 crore from operating revenue, considering it an extraordinary item, which led to the adjustment. The Dispute Resolution Panel (DRP) upheld this exclusion and treated the subsidy as a revenue receipt. The Tribunal, however, determined the subsidy to be a capital receipt, not chargeable to tax, and thus, should not be included in the operating revenue for determining the Arm's Length Price (ALP). Treatment of Subsidy Received as a Revenue Receipt: The subsidy under the Package Scheme of Incentives (PSI) from the Government of Maharashtra was treated by the assessee as part of operating revenue and offered for taxation. The Tribunal analyzed the nature of the subsidy, considering it as a capital grant aimed at industrial growth in less developed areas. The Tribunal concluded that the subsidy was a capital receipt, not chargeable to tax, and thus, should not form part of the operating revenue for ALP determination. Impact of Excess Custom Duty on Operating Margin: The assessee argued for considering the impact of excess Custom Duty on imports while computing the operating margin from Manufacturing operations. The Tribunal noted a similar issue had been decided against the assessee in a previous assessment year, holding that profit margins of comparables cannot be reduced by differences in Custom Duty rates, as there was no evidence of such differences. Thus, this ground was dismissed. Inclusion of Bharat Earth Movers Limited and JCB India Limited in the List of Comparables: The TPO included Bharat Earth Movers Limited and JCB India Limited in the list of comparables. The Tribunal, following its previous decision, directed the exclusion of Bharat Earth Movers Limited from the list of comparables. However, it upheld the inclusion of JCB India Limited, consistent with the prior year's decision, dismissing the assessee's objection. Transfer Pricing Adjustment on Entity Level vs. Proportionate Adjustment: The assessee contested the transfer pricing adjustment on an entity level, advocating for a proportionate adjustment. The Tribunal, aligning with its earlier decision, directed the AO/TPO to restrict the transfer pricing adjustment to the extent of international transactions under the Manufacturing segment. Conclusion: The appeal was partly allowed, with the Tribunal ruling that the subsidy should be treated as a capital receipt, not chargeable to tax, and excluded from operating revenue for ALP determination. The Tribunal upheld the exclusion of Bharat Earth Movers Limited from comparables but retained JCB India Limited. The transfer pricing adjustment was directed to be restricted to international transactions under the Manufacturing segment. Other grounds were deemed either consequential or premature.
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