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TMI Blog2021 (9) TMI 1070X X X X Extracts X X X X X X X X Extracts X X X X ..... wing the decisions of Pr.CIT vs. State Bank of Patiala,[ 2018 (11) TMI 1565 - SC ORDER] And Marg Ltd., [ 2020 (10) TMI 102 - MADRAS HIGH COURT] directed the AO to restrict disallowances u/s.14A of the Act, to the extent of exempt income earned for the impugned assessment year - Thus we direct the AO to restrict disallowance u/s.14A to the extent of exempt income earned for the impugned assessment year. Disallowance of depreciation on capital subsidy - assessee has treated subsidy received from SIPCOT as capital receipt and did not reduce the same from cost of assets, as it was not directly or indirectly used to purchase any asset - As per AO subsidy was directly or indirectly used to purchase of asset and as per explanation (10) to section 43 the same needs to be deducted from cost of assets and consequently, reworked depreciation by reducing amount of subsidiary and disallowed a sum - HELD THAT:- As decided in own case [ 2021 (9) TMI 1013 - ITAT CHENNAI] considering nature of subsidy has allowed claim of the assessee by observing that for earlier years, the CIT(A) has allowed claim of the assessee and the AO has accepted decision of the CIT(A) and deleted additions, while ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re-examine the issue as per the directions given by the Tribunal for the assessment year 2013-14 and also direct him to follow the ratio laid down in the case of CIT vs. Sesa Goa Ltd. [ 2020 (3) TMI 347 - BOMBAY HIGH COURT] . Characterization of Income - revenue or capital reciept - amount received from Focus Market Scheme to be treated as capital in nature and exclude from total income - HELD THAT:- Tribunal in assessee s own case for assessment year 2013-14 [ 2021 (9) TMI 1013 - ITAT CHENNAI] wherein the Tribunal held that duty credit scrips received from Govt. of India under Focus Market Scheme is revenue in nature - we are of the considered view that subsidy received from Govt. of India under Focus Market scheme cannot be considered as capital in nature and hence, we reject ground taken by the assessee. - I.T.(TP).A.No. 10/CHNY/2020 - - - Dated:- 17-9-2021 - Shri Duvvuru RL Reddy, Judicial Member And Shri G. Manjunatha, Accountant Member For the Appellant : Shri K.R. Sekar, CA And Shri S.P. Chidambaram, Advocate For the Respondent : Shri B. Jayaragavan, CIT, Smt. R. Anita,Addl.CIT ORDER PER G. MANJUNATHA, AM: This appeal filed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,60,000/- to the Appellant as income for deemed brand building activity and compensation for depriving the Appellant from developing its own brand. 2.5 The AO/TPO erred in facts and circumstances of the case and in law by stating that the Appellant failed to report the Advertisement Marketing and Promotion ( AMP ) expenses in the Form 3CEB when the same is not per se an international transaction as per Section 92B of the Income Tax Act, 1961 ( the Act ). 2.6 The AO/TPO erred in facts and circumstances of the case and in law in making an adjustment for AMP expenses, without appreciating that such adjustment cannot be made to a full-fledged manufacturer. 2.7 The AO/TPO erred in facts and circumstances of the case and in law by not considering the fact that the Honourable Chennai Bench of the Income Tax Appellate Tribunal ( ITAT ), in the Appellant s own case, for AYs 2009-10 to 2011-12 held that there is no International transaction between the Appellant and the AE, for AYs 2007-08 to 2011-12, the adjustment on Brand building/AMP expenses has been consistently deleted, while the facts and circumstances of the case being similar in all the previous years. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8 The AO/TPO erred in facts and circumstances of the case and in law in not appreciating that the Appellant is the economic owner of the brand name and uses the brand for its own benefit. 2.19 Without prejudice to the above and assuming without admitting that the Appellant has been providing brand building service, the AO/TPO failed to appreciate that the income, if any, can be attributed only when brand is alienated at a future date and as such the question of attributing a notional income for the deemed brand building service does not arise for AY 2015-16. 2.20 The AO/TPO erred in facts and circumstances of the case and in law in holding that, the Appellant has developed marketing intangibles for the holding company in India. 2.21 The AO/TPO failed to appreciate that he is precluded from dictating/ questioning the business strategies of the Appellant. 2.22 The AO/TPO erred in facts and circumstances of the case and in law by not providing any cogent reasons/basis of allocating 50% of the AMP expenses incurred by the Appellant to be recovered from the AE towards brand promotion. 2.23 Without prejudice to the above, the AO/TPO failed to appreciate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct by applying the provisions of Rule 8D of the Rules. 3.2 The AO / DRP ought not to have made disallowance under section 14A of the Act when the Appellant has not claimed any exempt income during the year. 3.3 The DRP erred in holding that mere earning of dividend income would suffice to attract disallowance under Section 14A of the Act. 3.4 Without prejudice to the above, the DRP having held that dividend income earned during the subject AY however it did not issue direction to the AO to grant exemption but independently sought to make disallowance under Section 14A r.w.r 8D, which is erroneous and unsustainable as the total income does not contain any exempt income. 3.5 The AO / DRP ought to have appreciated that the Assessee has not incurred any expenditure which may be attributable towards earning of exempt income. 3.6 The AO, having acknowledged the fact that the Assessee had sufficient surplus funds in earlier AY s to make the investments, ought not to have resorted to making ad hoc disallowance under section 14A r.w.r 8D of the Rules. 3.7 The AO / DRP ought to have appreciated that merely because there are investments (for strategic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of meeting any liability towards acquisition of assets and as such the subsidy is a capital receipt, which cannot be adjusted against the cost of the asset. 4.3 The AO / DRP ought to have appreciated that utilization of the subsidy cannot be the basis for deciding the tax treatment of its receipt. 4.4 The AO / DRP failed to appreciate that in the year of receipt of subsidy, i.e. AY 2003-04 the AO has verified the claim and deleted the disallowance on depreciation by passing the order giving effect to the CIT(A) order and for AY 2006-07 the same issue was deleted by the Honorable ITAT and therefore the question of disallowance of depreciation on subsidy in subsequent AY s does not arise. 5 Disallowance of performance reward under section 43B of the Act 5.1 The AO / DRP erred in disallowing performance reward amounting to ₹ 13,63,08,261 under section 43B of the Act. 5.2 The AO / DRP ought to have appreciated that the expenditure incurred towards performance reward is not in the nature of bonus and therefore the provisions of section 43B(c) of the Act is not applicable. 5.3 The AO / DRP failed to appreciate that the performance rewar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on cess is allowable as revenue expenditure 2.1 The AO ought to have appreciated that education cess and secondary higher education cess amounting to ₹ 13,03,01,954 is an allowable expenditure under section 37(1) of the Act. 2.2 The AO ought to have appreciated that the education cess and secondary higher education cess paid by the Appellant is not covered within the provisions of section 40(a)(ii) of the Act and as such allowable under section 37(1) of the Act. 2.3 The AO ought to have appreciated that the CBDT vide Circular No.91/58/66 ITJ (19) has clarified that omission of the word cess is to disallow only taxes section 40(a)(ii) of the Act and not education cess. 2.4 The AO ought to have appreciated that education cess and secondary higher education cess is not in the nature of tax as envisaged in section 40(a)(ii) of the Act and cannot be disallowed. 2.5 The AO outlet to ma e appreciated that taxes are levied on profits whereas cess is levied only on taxes and not profits and as such cess is not covered within the meaning of taxes under section 40d a)(ii) of the Act. 2.6 The AO ought to have appreciated that c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act at ₹ 1496,25,75,490/-. The assessee had entered into various international transactions with its AEs and international transactions were duly reported in Form 3CEB filed in accordance with provisions of Indian Transfer Pricing Regulations contained in section 92, 92A to 92F of the Income Tax Act, 1961. The case was taken up for scrutiny and during the course of assessment proceedings; a reference was made to JCIT (Transfer Pricing) for determination of arm s length price of international transactions of the assessee with its AEs. The learned TPO vide its order dated 31.10.2018 has suggested upward adjustment for brand development services. 5. The Assessing Officer, in pursuant to TPO order, has passed draft assessment order u/s.143(3) r.w.s 144C(1) of the Income Tax Act, 1961 on 21.12.2018 and made transfer price adjustments as suggested by the TPO at ₹ 212,26,60,000/-. The Assessing Officer had also proposed certain corporate tax adjustments including disallowances u/s.14A, r.w.r 8D of IT Rules, 1962, disallowance of subsidy received towards capital expenditure, disallowance of focus marketing scheme expenses, disallowance of additional depreciation claimed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erred in making transfer pricing adjustments towards brand services by adopting Spearman s Rank Correlation method and concluded that there is positive accretion between brand value and market capitalization of HMC Korea and hence, directed the AO/TPO to delete transfer pricing adjustment made towards brand development services. The relevant findings of the Tribunal are as under:- 28. We have heard both the parties, perused material available on record and gone through orders of the authorities below. Admittedly, additions made by the TPO towards brand development services is recurring issue, which was subject matter of deliberations from the Tribunal right from assessment year 2009- 10 to assessment year 2011-12. The Tribunal in the assessee s own case for assessment year 2009-10 to 2011-12 had considered an identical issue and held that in absence of mutual agreement or arrangement between two or more AEs for allocation, apportionment or contribution to any cost or expenses for a benefit, service or facility, it cannot be held that there is an international transaction for brand development. The Tribunal further held that increase in brand value due to use of foreign AEs br ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he ld.AR for the assessee, at the time of hearing submitted that this issue is also covered in favour of the assessee by the decision of ITAT., Chennai in assessee s own case for the assessment year 2013-14 in ITA No.3192/Chny/2017, wherein it was held that disallowance u/s.14A should be restricted to the extent of exempt income earned for the impugned assessment year. 8.2 The ld.DR on the other hand, fairly agreed that this issue is covered in favour of the assessee. 8.3 We have heard both the parties, perused materials available on record and gone through orders of the authorities below. An identical issue has been considered by Tribunal in assessee s own case for the assessment year 2013-14 in ITA No.3192/Chny/2017, dated 01.09.2021, wherein the Tribunal by following the decisions of Hon ble Supreme Court in the case of Pr.CIT vs. State Bank of Patiala, 99 taxmann.com 286 and Hon ble Madras High Court in the case of Marg Ltd., vs. CIT, (2020) 120 Taxmann.com 84, directed the AO to restrict disallowances u/s.14A of the Act, to the extent of exempt income earned for the impugned assessment year. The relevant findings of the Tribunal are as under:- 10. We have heard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of asset and as per explanation (10) to section 43 the same needs to be deducted from cost of assets and consequently, reworked depreciation by reducing amount of subsidiary and disallowed a sum of ₹ 1,46,570/-. 9.1 The learned AR for the assessee submitted that this issue is covered in favour of the assessee by the decision of ITAT., Chennai, in assessee s own case for assessment years 2006-07 2013-14 in IT(TP)A.No.14/Chny/2018 ITA No.3192/Chny/2017, where it was held that subsidiary received from SIPCOT is capital receipt not liable for tax. 9.2 The learned DR, on the other hand, fairly agreed that this issue is covered in favour of the assessee, however strongly supported AO/DRP orders. 9.3 We have heard both the parties, perused materials available on record and gone through orders of the authorities below. An identical issue has been considered by Tribunal in assessee s own case for the assessment year 2013-14 in ITA No.3192/Chny/2017, dated 01.09.2021, wherein the Tribunal following the decision of the Tribunal in assessee s own case for assessment year 2006-07 in IT(TP)A No.14/Chny/2018 and after considering nature of subsidy has allowed claim of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8.1 Ground of objection 7 7.1 The learned AO erred in disallowing Performance reward amounting to ₹ 13,63,08,261 /- under section 43B of the Income-tax Act, 1961 ( Act ). 7.2 The Assessing Officer ought to have appreciated that the expenditure incurred towards performance reward is not in the nature of bonus and therefore the provisions of Section 43B(c) of the Act is not applicable. 7.3 Without prejudice to the above, the Assessing Officer ought to have appreciated that the Assessee is not covered by the provisions of Payment of Bonus Act, 1965 and as such the said expenditure cannot be disallowed under Section 43B r.w.s. 36(1) (ii) of the Act. 7.4 Without prejudice, the Hon ble DRP may issue suitable directions to allow the claim in the year in which the amounts are paid. 8.1 Panel: The AO found that the amount of ₹ 13,63,08,261/- has been debited in P L account as performance reward/bonus. But it is certified in audit report in form 3CD that the amount remained unpaid. The AO disallowed this amount holding that since the amount has not been paid till the due date of filing return of income, the same cannot be allowed a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for AY 2011-12,2012-13, 2013-14 and 2014- 15 has not been accepted by the DRP. In view of above the objection of the assessee is rejected. 10.2 The learned A.R for the assessee submitted that the learned DRP erred in sustaining additions made by the AO towards disallowance of performance incentive paid to employees u/s.43B(c) of the Act, without appreciating fact that said payment is neither bonus nor commission and thus, same cannot be brought within the ambit of provisions of section 36(1)(ii) r.w.s.43B(c) of the Income Tax Act, 1961. 10.3 The ld.DR on the other hand strongly supporting order of the ld.DRP submitted that this issue is covered against the assessee by the decision of ITAT., Chennai in assessee s own case for assessment year 2013-14 in ITA No.3192/Chny/2017, where the issue has been decided against the assessee. 10.4 We have heard both the parties, perused materials available on record and gone through orders of the authorities below. We find that an identical issue has been considered by the Tribunal in assessee s own case for assessment year 2013-14, where under identical circumstances, the Tribunal has held that payment made to an employee which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment and purpose of payment. In this case, it is in the nature of bonus or commission and such payment is for services rendered by employees. Just because nomenclature was changed to some other name, a particular expenditure would not change its original character. In this case, sum was paid to employees for services rendered and further, this sum would not have been paid as profits or dividend had it not been paid as commission or performance reward. Therefore, we are of the considered view that provisions of section 36(1)(ii) of the Act is squarely applicable and consequently, mischief of section 43B(c) would come into play, if such payment is not made on or before due date of furnishing of return of income. In this case, admittedly, the assessee has paid performance incentive only after due date of filing of income-tax return. Insofar as case laws relied upon by the assessee, we find that facts those case laws are different from facts of present case and has no application to case of the assessee. Therefore, we are of the considered view that there is no error in the reasons given by the Assessing Officer as well as learned DRP to disallow performance reward u/s.43B(c) of the Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion from additional ground no.2 of the assessee appeal is deduction towards education and secondary education cess u/s.37(1) of the Act. 12.1 The ld.AR for the assessee submitted that this issue is squarely covered in favour of the assessee by the decision of the Hon ble Bombay High Court in the case of Sesa Goa Ltd. Vs JCIT (2020) 423 ITR 426, where the Hon ble Bombay High Court after considering various facts including Select Committee of Parliament report on exclusion of word cess from the word tax has held that education cess and secondary education cess is an expenditure deductible u/s.37(1) of the Act. He further submitted that an identical issue has been considered by the Tribunal in assessee s own case for assessment year 2013-14 and had set aside the issue to the file of the AO. 12.2 The learned DR, on the other hand, strongly opposing additional ground filed by the assessee submitted that the assessee has not made any claim by debiting cess into profit loss account and hence, claim of the assessee by filing additional ground on the basis of subsequent decision of the court cannot be entertained. 12.3 We have heard both the parties, perused material av ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the AO to re-examine the issue as per the directions given by the Tribunal for the assessment year 2013-14 and also direct him to follow the ratio laid down by Hon ble Bombay High Court decision in the case of CIT vs. Sesa Goa Ltd(supra). 13. The next issue that came up for our consideration from additional ground no.3 of assessee appeal is amount received from Focus Market Scheme to be treated as capital in nature and exclude from total income. Facts with regard to impugned dispute are that Government of India with an intention to promote exports to certain regions / countries introduced Focus Market Scheme which provides incentive of 2.5% of FOB value for each licensing year commencing from 1st April, 2006. The export of products to those countries which are covered under list of countries in Schedule 37C would be entitled for duty credit scrip equivalent to 2.5% of FOB value of exports. During the year under consideration, the assessee was eligible for above scheme, as it makes export to specified markets. Accordingly, the assessee has received an amount of ₹ 177,83,10,104/- as incentive from Govt. of India. The license under the scheme was given only for exports t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for duty credit scrip equivalent to 2.5% of FOB value of exports. The assessee being eligible exporter had received licenses/duty credit scrip/ market linked focus scrips amounting to ₹ 150.57 crores for the year under consideration. The assessee has considered amount received under focus market scheme as revenue receipt and offered to tax. However, based on some subsequent decisions of appellate authorities has filed an additional claim seeking exclusion of said receipt from taxation on the ground that it is in the nature of capital receipt and not exigible for tax. Therefore, in order to understand whether amount received from Focus Market Scheme is revenue in nature or capital receipt, which is exempt from tax, one has to understand objectives of Focus Market Scheme announced by Govt. of India. As per Foreign Trade Policy document, the objective of the scheme is to offset high freight cost and other disabilities to select international market with a view to enhance our competitiveness to these countries. On the basis of objectives of the scheme alone, it can be easily concluded that amounts received under the scheme is revenue in nature, because it is primarily focusing t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w industry, as per industrial policy of various State Governments or Govt. of India is considered as part of capital contribution and capital in nature, whereas subsidy given after commencement of production of products and further for enhancing profitability of the assessee is certainly in the nature of assistance given for running of business of the assessee more profitable and hence, it is definitely revenue in nature. 34. In this case, on perusal of facts available on record including foreign trade policy of Government of India, it is very clear from documents that main objective of Focus Market Scheme is to offset high freight cost and other disabilities of exporter to select international market with a view to enhance our export competitiveness to these countries. The expenditure incurred by the assessee under this scheme for exploring new market across the globe is mainly freight cost and other recurring expenses like sales promotion expenses, including manpower cost of staff employed in marketing department. Those expenses are generally in the nature of revenue expenditure and thus, can be considered as revenue expenditure. Since, the assessee got duty credit scrip ben ..... X X X X Extracts X X X X X X X X Extracts X X X X
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