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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 ..... rned Commissioner (Appeals) to suggest that assessee was given opportunity to explain its stand on the issue. Be that as it may, whether the subsidy has accrued as income in the impugned assessment year has to be decided on the basis of the fact when it was approved / accepted by the concerned authorities. Only when the concerned Government authorities verify the quantum and approve, the subsidy crystallizes as income. The decisions relied upon by the learned Authorised Representative support this view. The Assessing Officer is directed to verify this aspect also. It must be mentioned the Assessing Officer not only should give adequate opportunity of being heard to the assessee but must pass a well reasoned order after considering the submissions of the assessee as well as judicial pronouncements relied upon. Treatment to remission of deferred sales tax loan liability as income of the assessee - Held that:- Respectfully following the decision of the Tribunal in assessee’s own case, we hold that the amount being capital in receipt cannot be treated as income of the assessee. Disallowance of interest expenditure and administrative and other expenses under section 14A r/w rule ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elevant to note, in case of Everest Kento Cylinders Ltd. (2015 (5) TMI 395 - BOMBAY HIGH COURT ), the Hon'ble Jurisdictional High Court while accepting the commission rate of 0.5% on corporate guarantee provided by the assessee to its A.E. observed that corporate guarantee cannot be equated to bank guarantee. Following the aforesaid decision the Tribunal, Mumbai Bench, in Godrej Household Products Ltd. [2014 (4) TMI 520 - ITAT MUMBAI ] held the rate of guarantee commission of 0.5% as the arm's length price of the corporate guarantee provided by the assessee to its A.E. In the present case also, there is no dispute that the internal CUP by way of letter received from HSBC indicates that the commission charged for financial guarantee is 0.5%. Further, it is relevant to note that the Department in assessee’s own case has accepted the arm's length price of corporate guarantee @ 0.5% in the assessment year 2006–07 and 2007–08. Thus, on consideration of overall facts and circumstances in the light of judicial pronouncements referred to above, we are of the considered opinion that the arm's length price of the corporate guarantee should be fixed at 0.5%. The Assessing Officer / Transfer P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , as far as income by way of subsidy received and expenses recoveries are concerned, the Assessing Officer observed, they are not part of manufacturing process, hence, not eligible for deduction under section 80IC. Accordingly, he reduced these amounts from the profit of the eligible unit while computing deduction under section 80IC. Being aggrieved of such decision of the Assessing Officer, assessee preferred appeal before the learned Commissioner (Appeals). 5. Before the learned Commissioner (Appeals), it was contended by the assessee, eligible units have received transport subsidy and power subsidy from the respective Government authorities in terms of industrial policies of the concerned States i.e., Himachal Pradesh and Assam. Referring to the relevant industrial policies of the concerned State Governments, it was submitted that such subsidy was received as reimbursement of transport and power costs incurred by the eligible unit. It was submitted, the expenditure incurred towards transport and power costs have been debited to the eligible units and the recovery of such costs have been credited as part of other income of eligible unit. It was submitted, the expenditure has b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted, the assessee has to incur certain costs towards transport and power. After incurring such costs, the assessee has to raise claim for transport and power subsidy in terms of the industrial policy before the concerned Government Departments. He submitted, as the subsidy is an operational subsidy and not for reducing the cost of any asset, it is in the revenue field, hence, has to be treated as part of the profit of the undertaking. For such proposition, Learned Authorised Representative relied upon the decision of Hon'ble Guwahati High Court in CIT v/s Meghalaya Steel Ltd. [2013] 356 ITR 235 (Guwa.). Learned Authorised Representative also referred to the decision of the Hon ble Guwahati High Court in Patkai Coal Products v/s CIT, [2013] 356 ITR 528 (Guwa.) and the decision of the Tribunal, Guwahati Bench, in ACIT v/s Manas Salt Iodized Pvt. Ltd., 38 ITR (Trib.) 502. 8. As far as the allegation of the learned Commissioner (Appeals) that subsidy pertains to financial year 2004 05 and 2005 06, learned Authorised Representative submitted, until a claim is accepted, the assessee cannot account for it. Therefore, when the Government authorities accepted assessee s claim, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le. Learned Departmental Representative also referred to the following decision of the Hon'ble Himachal Pradesh High Court and submitted, the Hon'ble High Court after considering similar subsidy granted by the Government of Himachal Pradesh has held that deduction under section 80IB / 80IC is not available. i) CIT v/s Gheria Oil Gramudhyog Workers Welfare Association,, [2010] 228 CTR 94 (HP); ii) Ms. Supriya Gill v/s CIT, [2010] 193 Taxman 23 (HP); iii) Alpine Industries v/s ITO, [2014] 45 Taxmann.com 93 (HP); iv) CIT v/s Kiran Enterprises, [2010] 228 CTR 10 (HP); v) Janak Raj Bansal v/s CIT, [2010] 2010] 228 CTR 167 (HP); and vi) CIT v/s Maharani Packaging Pvt. Ltd., [2012] 24 Taxmann.com 204 (HP). 10. In the rejoinder, learned Authorised Representative submitted, in the decisions referred to by the learned Departmental Representative, the Hon'ble High Court has followed the decision of the Hon'ble Calcutta High Court in CIT v/s Andaman Timber Ltd., 242 ITR 204 (Cal.), which subsequently, the Hon'ble Calcutta High Court in CIT v/s Cement Manufacturing Co. Ltd., ITA no.130 of 2014, did not approve on the reasoning that the Court in Andaman T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for incentive on transpiration of raw material as well as finished products. It is also claimed by the assessee that similar incentives are also provided under the industrial policy of Himachal Pradesh. It is the claim of the assessee that the transportation and power subsidy provided under the Industrial Policy of Assam and Himachal Pradesh are actually the reimbursement of actual cost incurred by the assessee, therefore, it is an operational subsidy which goes to reduce the cost of manufacture resulting in enhancement of the profit of the assessee. It is the contention of the assessee that as the power and transport subsidy granted to the assessee has a direct nexus to the earning of profit it is a part of the business income, hence, eligible for deduction under section 80IC. It is noticed, in case of CIT v/s Meghalaya Steels Ltd. (supra), the Hon'ble Guwahati High Court while examining assessee s claim of deduction under section 80IB / 80IC, analysed the industrial policy of the year 1971 of the Assam Government and found that the transportation and power subsidy given by the Government under the scheme is towards actual reimbursement of cost incurred by the industry in res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;ble Supreme Court in Jai Bhagwan Oil and Flower Mills v/s Union of India, [2009] 14 SCC 63, observed, the transport subsidy as per industrial policy was aimed to reduce the cost of production of industrial undertaking, therefore, there was a first degree nexus between the transport subsidy and cost of production. When cost is reduced, it naturally helps in earning of profit. Therefore, such profits have to be treated as profit and gains derived from the industrial undertaking. 14. As far as power subsidy is concerned, the High Court referring to the industrial policy of the year 1997, as extended by the Industrial Policy of Assam 2003, noticed that it provides for power subsidy to be given to eligible industrial units for a period of five years from the date of commercial production. It was further noticed, the power subsidy is available in the form of reimbursement of fully paid power bills with certain ceilings. The Court observed, reimbursement of fully paid power bills will obviously reduce the cost of production of an industrial undertaking contributing thereby to the profit and gains derived by the industrial undertaking and augmenting the income of the industrial underta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the manufacturing / production is neither proximate nor direct. The High Court after analyzing the ratio laid down in the case of Liberty India (supra), ultimately concluded that the DEPB and duty drawback are not provided by the Government as a means to reduce the cost of production of the industrial undertaking. Therefore, the ratio laid down would not apply to the power and transport subsidy which directly reduces the cost of production. The Court observed, the DEPB considered by the Hon'ble Supreme Court in Liberty India Ltd. (supra) is a case of non operational subsidy as much as it does not relate to production, whereas the transport and power subsidy provided under the industrial policy are operational in nature, inasmuch as, they are related to production of industrial undertaking. Thus, it was held by the Court that the income received on account of power and transport subsidy would form part of the profit derived from the industrial undertaking, hence, eligible for deduction under section 80IC. 15. Though, it may be a fact that the Hon'ble Himachal Pradesh High Court in the decisions referred to by the learned Departmental Representative has taken a contrar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidy granted under the respective subsidy schemes. Therefore, in our view, for coming to a definite conclusion as far as nature of subsidy is concerned, the relevant subsidy schemes have to be examined to find out whether such subsidy are for reimbursement of actual costs incurred by the assessee towards transport and power. As the Departmental Authorities have not examined the nature of subsidy with reference to the relevant industrial policy resolution and subsidy schemes, we are inclined to restore the matter back to the file of the Assessing Officer for deciding afresh keeping in view the ratio laid down in the decisions referred to above as well as the observations made by us. As far as the issue of particular assessment year in which the subsidy deemed to have accrued, we may observe, the Assessing Officer did not raise this issue in course of assessment proceedings. It is only the learned Commissioner (Appeals) who has raised this issue. However, there is nothing in the order of the learned Commissioner (Appeals) to suggest that assessee was given opportunity to explain its stand on the issue. Be that as it may, whether the subsidy has accrued as income in the impugned asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the gain derived by the assessee on premature repayment would be taxable under section 28(iv) of the Act. 20. Learned Authorised Representative submitted, the issue is covered by the decision of the Tribunal in assessee s own case for the assessment years 2006 07 to 2008 09. 21. Learned Departmental Representative on the other hand, though, agreed that the issue is decided by the Tribunal in assessee s own case for the preceding assessment year, but he nevertheless relied upon the reasoning of the learned Commissioner (Appeals). 22. We have considered the submissions of the parties and perused the material available on record. As could be seen, identical issue arose before the Tribunal in assessee s own case in ITA no.4103/Mum. /2010 and others, for assessment years 2006 07 to 2008 09 in order dated 20th November 2013, the Tribunal held as under: 5. Before us, at the outset, the ld. A.R. has brought our attention to the fact that this issue raised by the assessee in ground No.1 of its appeal and the Revenue in its cross objections is squarely covered in favour of the assessee vide judgment of the co-ordinate bench of the Tribunal passed in Godrej Boyce Mfg. Co. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the deferred sales tax liability by arriving at NPV by applying a specific discount. The assessee availed the benefit of the scheme announced on 12.12.2002 as under: Sales tax liability ₹ 18,79,58,925/- Less: Premature repayment ₹ 8,86,66,207/- Surplus accrued on the above ₹ 9,92,92,718/- This surplus has been treated as capital receipt, which has been taxed by the Assessing Officer u/s 41(1) of the Act. Considering these facts, we find force in the contention of the counsel that the issues are squarely covered by the decision of the Special Bench of the Tribunal in the case of Sulzer India Ltd. (supra). The Tribunal has held as under: The assessee was liable to pay sales tax amounts collected from 1-11-1989 to 31.10.1996, payments of which were deferred under the scheme, and the amounts were payable after twelve years in six equal annual installments commencing from 1-5-2003, which meant that the liability was payable in future. Later on, the State Government came out with a scheme by which it was provided that if some dealers opted, then they could pay the future liability at a discounted value or what one may call net present value ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of Sulzer India Ltd. (supra), the said assessee has treated the difference as a capital receipt but in the present case the assessee has treated the difference as its profit. In our opinion, the treatment given by the assessee does not make any difference so far as application of the legal principles. Admittedly, the assessee excluded the said amount while computing the total income. We, therefore, reject the object of the ld. D.R. and respectfully following the principles laid down in the case of Sulzer India Ltd. (supra) allow ground no.2 taken by the assessee and direct the AO to delete the addition. A perusal of the above reproduced findings of the co-ordinate benches of the Tribunal reveals that the different benches of the Tribunal have been unanimous in holding that the concession received by the assessee from the state government for repaying the loan amount on an early date, which was liable to be paid on a future date as per the scheme of the government, cannot said to be a case of remission or cessation of liability so as to attract the relevant provisions of the Income Tax Act for taxing the said amount and the same has been held to be a capital receipt. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such disallowance at Rs. 1,36,785. The Assessing Officer, however, did not find merit in the submissions of the assessee and ultimately disallowed an amount of Rs. 21.02 lakh under section 14A r/w rule 8D. Though, the assessee challenged disallowance before the learned Commissioner (Appeals), he also sustained the disallowance. 26. Learned Authorised Representative contesting the findings of the Departmental Authorities submitted, as during the relevant previous year the assessee has not earned any exempt income, no disallowance under section 14A r/w rule 8D can be made. Further, learned Authorised Representative submitted, it was factually proved before the Assessing Officer that the assessee had own surplus funds available to make the investment, hence, no disallowance of direct expenditure could be made. The third proposition of the learned Authorised Representative was the investment consists solely of one strategic investment which has been made for business purpose, hence, to be excluded for computing average value of investment under rule 8D. Further explaining, the learned Authorised Representative submitted, the assessee has made investment in fully paid equity share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the relevant previous year, no disallowance under section 14A should be made. As far as interest expenditure is concerned, it can also be looked into from another angle. It is the contention of the assessee that it had enough interest free surplus funds available to make the investment, hence, no disallowance of interest expenditure under section 14A r/w rule 8D can be made. On a perusal of the material on record, it is noticed that before the Assessing Officer itself the assessee has submitted necessary facts which revealed that at the beginning of the year, the assessee had reserves and surplus amounting to Rs. 51122.41 lakh and share capital amounting to Rs. 2569.54 lakh. Thus, own surplus funds available with the company were to the extent of Rs. 53691.95 lakh. As against the aforesaid surplus fund, the investments held by the assessee at the year end aggregated to Rs. 9788.59 lakh which consists mainly of shares in foreign subsidiary amounting to Rs. 7438.59 lakh the dividend income from which is not exempt. Therefore, when enough interest free surplus fund is available with the assessee to take care of the investment, no disallowance under section 14A r/w rule 8D, as far ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , assessee challenged the disallowance before the learned Commissioner (Appeals), he confirmed the same. 31. Learned Authorised Representative submitted, the issue has been decided in favour of the assessee by the Tribunal in assessment years 2006 07, 2007 08 and 2008 09. 32. Learned Departmental Representative, though, agreed that the Tribunal has decided the issue in favour of the assessee, however, he relied upon the reasoning of the Assessing Officer and the learned Commissioner (Appeals). 33. We have considered the submissions of the parties and perused the material available on record. It is observed, similar issue arose in assessee s own case for assessment year 2006 07, 2007 08 and 2008 09, in appeal before the Tribunal in ITA no.4103/Mum./2010 and others dated 20th November 2013. The Tribunal, after considering the submissions of both the parties and relying upon the decision of the Hon'ble Supreme Court in ICDS Ltd. v/s CIT, Civil Appeal no.3282 of 2008, decided on 14th January 2013, allowed assessee s claim of expenditure on account of lease rental. There being no material difference in facts pointed out by the learned Departmental Representative, respectful ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of revised return of income is only applicable to the Assessing Officer. That being the case, we restore the matter back to the file of the Assessing Officer for considering afresh in the light of the decision relied upon by the assessee. Ground no.10, is allowed for statistical purposes. 40. Grounds no.11 and 12, relate to transfer pricing adjustment made on the corporate guarantee provided by the assessee to its A.E. 41. Brief facts are, the Assessing Officer in the course of assessment proceedings while verifying the audit report in Form no.3CEB, noticed that the assessee has extended corporate guarantee on behalf of its overseas A.E. as under: Name of Associated Enterprises Amount of Guarantee Godrej Netherlands B.V. GBP 30,00,000 Godrej Consumer Products Mauritius Ltd. USD 4,00,00,000 Godrej Blobal Middle East FZE AED 14,00,000 42. He also noticed that the assessee on its own has made transfer pricing adjustment on account of corporate guarantee provided to A.E. at Rs. 48,75,813, in the return of income fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 definition of international transaction as provided under section 92B. However, when the bench pointed out that the assessee itself has treated the transaction as international transaction and has bench marked it, the learned Authorised Representative fairly accepting such factual position proceeded to confine his argument only to the rate applied by the Department. Learned Authorised Representative submitted, this is not the first year where the assessee has given such corporate guarantee to its overseas A.E. He submitted, in the preceding assessment year also i.e., assessment year 2006 07, 2007 08 and 2008 09, the assessee has given such facility of corporate guarantee to the A.E. and is bench marked it at 0.5% in assessment years 2006 07 and 2007 08 and 0.25% in assessment year 2008 09, which the Department has accepted. The learned Authorised Representative submitted, corporate guarantee would not stand in the same footing as ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 evident that for financial guarantee, the commission charged by the bank is @ 0.50% per annum. It is further relevant to note, in case of Everest Kento Cylinders Ltd. (supra), the Hon'ble Jurisdictional High Court while accepting the commission rate of 0.5% on corporate guarantee provided by the assessee to its A.E. observed that corporate guarantee cannot be equated to bank guarantee. Following the aforesaid decision the Tribunal, Mumbai Bench, in Godrej Household Products Ltd., ITA no.7369/Mum./2010, dated 22nd November 2013, held the rate of guarantee commission of 0.5% as the arm's length price of the corporate guarantee provided by the assessee to its A.E. In the present case also, there is no dispute that the internal CUP by way of letter received from HSBC indicates that the commission charged for financial guarantee is 0.5%. Further, it is relevant to note that the Department in assessee s own case has ac ..... X X X X Extracts X X X X X X X X Extracts X X X X
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