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Income Tax Appellate Tribunal, ‘A’ BENCH, CHENNAI
Before: HON’BLE SHRI MAHAVIR SINGH & HON’BLE SHRI MANOJ KUMAR AGGARWAL, AM
आदेश / O R D E R Manoj Kumar Aggarwal (Accountant Member)
Aforesaid appeals by assessee for Assessment Years (AYs) 2010-11, 2012-13, 2013-14 & 2014-15 arises out of the common order of learned Commissioner of Income Tax (Appeals)-9, Chennai [CIT(A)] dated 28-06-2019 in the matter of separate assessments framed by Ld. Assessing Officer (AO). The facts as well as issues in AYs 2012-13 to 2014-15 are stated to be pari-materia the same. The sole grievance of the assessee in AY 2010-11 is disallowance u/s 40(a)(i) on certain foreign payments. First, we take up appeal for AY 2010-11.
The Ld. AR advanced arguments assailing the impugned additions and relied on certain judicial decisions. The Ld. AR submitted that even if the payments as made to foreign entities are considered as ‘Fees for Technical Services’ even then the assessee could not be fastened with obligation of tax deduction at source (TDS) by way of retrospective amendment as brought in by Finance Act, 2010. For the same, Ld. AR referred to the decision of this Tribunal in M/s Rane Engine Valves Ltd. V/s DCIT (ITA Nos.1175/Chny/2017 & ors. dated 09.03.2022). The Ld. Sr. DR controverted the arguments of Ld. AR. Having heard rival submissions, our adjudication would be as under. 3.1 The material facts in AY 2010-11 are that the assessee has been assessed u/s 143(3) r.w.s. 144C(3) on 30.06.2014. The assessee being resident corporate assessee is stated to be engaged in manufacturing of cold rolled / CRCA strips, Tubes, Cycles and Metal sections. During assessment proceedings, it transpired that the assessee made certain payment to foreign parties which led Ld. AO to invoke disallowance u/s 40(a)(i) since no tax was deducted at source. These payments are tabulated in para-10 of the assessment order. 3.2 The assessee made payment of Rs.87 Lacs to a law firm M/s Wragge & Co. LLP, UK. The payment was stated to be made for legal due diligence services rendered by the payee. The assessee submitted that the payments were in the nature of independent professional services covered under Article 15 of Double Taxation Avoidance Treaty (DTAA) between India and UK. However, Ld. AO held that Article 15 would cover only individuals. Accordingly, the payment was held to be professional services taxable u/s 9(1)(vii) of the Act irrespective of the fact that whether the payee had a fixed base in India or not. Since the assessee failed to deduct tax at source, the same was disallowed u/s 40(a)(i). 3.3 The assessee made another payment of Rs.62.47 Lacs to M/s Eko Consulting, France towards professional services for environmental audit. The assessee did not deduct tax at source on the ground that the payment was for utilizing the services of the non- resident for the purpose of making or earning income from a source outside India. It was further submitted that the payee did not have any permanent establishment or presence in India. However, invoking explanation to Sec.9(1)(vii), Ld. AO held that the payment would constitute fees for technical services and taxable in India.
Upon further appeal, Ld. CIT(A) merely concurred with the submissions of Ld. AO and upheld the disallowances. Aggrieved, the assessee is in further appeal before us.
We find that this issue is covered in assessee’s favor by the cited decision of Tribunal wherein it was held as under: - 4. The Ld.AR for the assessee submitted that the issue involved in the appeal regarding payment made to non-residents without deduction of TDS u/s.195 of the Act and consequent disallowance of payment u/s.40(a)(i) of the Act, is covered in favour of the assessee by the decision of ITAT Chennai Benches in the case of M/s. TVS Electronics Ltd. v. ACIT in for the AY 2005-06 dated 24.09.2021, wherein, the Tribunal under identical facts held that the assessee cannot be fastened liability on the basis of subsequent amendment to the law with retrospective effect, because the assessee cannot be expected to do impossibility of performance and thus, for non-deduction of TDS u/s.195 of the Act, payment made to non-residents, cannot be disallowed u/s.40(a)(i) of the Act.
5. The Ld.DR, on the other hand, supporting the order of the Ld.CIT(A) submitted that, if at all, the assessee claims that it was not required to deduct TDS u/s.195 of the Act, then the proper course of action is to obtain a Certificate u/s.195(2) of the Act from the AO and unless, the assessee obtained a Certificate, it cannot be argued that payment made to non-residents are not liable to tax in India and consequently, no disallowances can be made u/s.40(a)(i) of the Act. Therefore, the Ld. DR further submitted that there is no error in the reasons given by the Ld.CIT(A) to sustain the additions made by the AO and his order should be upheld.
6. We have heard both the parties, perused the 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 the case of M/s. TVS Electronics Ltd. v. ACIT in for the AY 2005-06 dated 24.09.2021, wherein, on identical circumstances held that liability towards TDS cannot be fastened on the assessee on the basis of subsequent amendment to law with retrospective effect, because which was impossible on the part of the assessee to do the impossible things and deduct TDS on payment made to non-residents, because, the assessee cannot foresee the amendment and deduct TDS on said payment and consequently, payment made to non-residents, cannot be disallowed u/s.40(a)(i) of the Act, for failure to deduct TDS u/s.195 of the Act. The relevant findings of the Tribunal are as under: 8. Be that as it may. The issue before us is not taxability of payment made by the assessee to non-resident entity for services rendered outside India as fees for technical services or not in terms of section 9(1)(vii) of the Act. The issue before us is disallowance of sum paid to non-resident without TDS u/s 40(a)(i) of the Act. Admittedly, the AO has brought amended explanation 9(2) with retrospective effect from 1-4- 1976 by the Finance Act, 2010 and held payment made by the assessee as FTS u/s 9(1)(vii) of the Act and further, for non TDS disallowed the same u/s 40(a)(i) of the Act. Therefore, to decide the issue, one has to understand the judgment of Hon’ble Supreme Court in the case of Ishikawajma-Harima Heavy Industries Ltd., vs. DIT, (supra. The Hon’ble Supreme court while deciding the issue of FTS has considered pre amended provisions of section 9(1)(vii) and held that if any payment in the nature of FTS to be taxed in India, as per provisions of section 9(1)(vii) of the Act, then, both services rendered and services received to be in India. If services are rendered outside India, even such services are received in India then same cannot be brought to tax under Indian Income-Tax laws as per the judgment of Hon’ble Supreme Court in the case of Ishikawajma-Harima Heavy Industries Ltd., vs. DIT. Although, definition of FTS was amended by the Finance Act, 2010 with retrospective effect from 01.06.1976 but, the law prevailing at the time of making payment by the assessee to the non-resident was on the basis of judgment of Hon’ble Supreme Court which clearly held that payment made to a non-resident for services rendered outside India cannot be brought to tax in India as fees for technical services in absence of place of business / permanent establishment in India. Since, there was clear law by the decision of Hon’ble Supreme Court, the assessee has made payment without deducting tax at source. Therefore, liability towards TDS cannot be fastened on the assessee on the basis of subsequent amendment to law with retrospective effect, because it was impossible on the part of assessee to deduct tax on income of nonresident because the assessee cannot foresee the amendment and deduct TDS on said payments. This view is supported by various decisions of Tribunal including decision of ITAT, Mumbai Bench in the case of Channel Guide India Ltd., vs. ACIT and the Ahmadabad Tribunal in the case of Sterling Abrasive Ltd., vs. ACIT and Agra Bench in the case of Metro & Metro vs. Addl.CIT, where the Tribunal by following the decision of Hon’ble Supreme Court in the case of Ishikawajma-Harima Heavy Industries Ltd., vs. DIT, held that at the relevant point of time, it was impossible on the part of the assessee to deduct tax at source on income of non-resident and thus, on that basis no disallowance can be made towards payment made to a nonresident u/s.40(a)(i) of the Act.
7. In this view of the matter and by respectfully following the decision of the co- ordinate Bench of ITAT, Chennai, in the case of M/s. TVS Electronics Ltd. v. ACIT, we are of the considered view that the assessee cannot be expected to deduct TDS on payment made to non-residents on the basis of subsequent amendment to the law with retrospective effect from earlier date, because the assessee cannot foresee the amendment and deduct TDS and hence, we are of the considered view that the AO was erred in disallowing the payment made to non-residents u/s.40(a)(i) of the Act, for failure to deduct TDS u/s.195 of the Act. The Ld.CIT(A) without considering the relevant facts, simply sustained the additions made by the AO. Hence, we are reversed the findings of the Ld.CIT(A) and direct the AO to delete the additions made towards disallowance of payment made to non-residents u/s.40(a)(i) of the Act. The bench held that the assessee could not be expected to deduct Tax at source on payment made to non-residents on the basis of subsequent amendment to the law with retrospective effect from earlier date because the assessee cannot foresee the amendment and deduct TDS. Therefore, the disallowance made u/s 40(a)(i) would be unwarranted. Similar is the situation before us. No contrary decision is on record. Therefore, following this decision, we direct Ld. AO to delete both the disallowances. The appeal of the assessee stands allowed. Assessment Years 2012-13 to 2014-15 6. The sole issue in these appeals is nature of Industrial Promotion Subsidy granted by Maharashtra Govt. under the packaged scheme of incentive (PSI). The assessee treated the same as capital receipt not taxable whereas Ld. AO has held that the same is revenue in nature and hence taxable. It is the submissions of Ld. AR that the subsidy is an industrial promotion subsidy and capital in nature. For the same, reliance has been placed on the decision of Pune Tribunal in DCIT V/s Bhagyalakshmi Rolling Mills [IT(SS)No.7 to 10/Pune/2019 dated 06.05.2022]. The Ld. Sr. DR, on the other hand, relied on the decision of Hon’ble High Court of Madras in the case of Brakes India Ltd. V/s JCIT (44 Taxmann.com 126) to submit that the subsidy is revenue in nature.
7. The relevant facts as noted in assessment order dated 28.03.2016 for AY 2012-13 are that the assessee received subsidy of Rs.40.20 Lacs from Government of Maharashtra which was treated as capital receipts. It was submitted that the assessee setup a metal forging unit in Pune District and received subsidy as approved by Government of Maharashtra. The assessee also submitted copy of package scheme of incentive issued by the Govt. of Maharashtra. The assessee submitted that the objective of the scheme was to encourage the dispersal of industries to the less developed areas of the state. The objective of the scheme was to ensure sustained industrial growth through innovative initiatives for development of key potential sectors and further improving the conducive industrial climate and for providing competitive edge. The policy envisages grant of fiscal incentives to achieve higher and sustainable economic growth with emphasis on balanced regional development and employment generation through greater private and public investment in industrial development. The assessee also submitted that the payment was received towards a scheme that was devised to encourage establishment of industries in backward areas so as to promote employment in those backward areas. Accordingly, the receipts were capital receipts and directly credited to ‘reserves and surplus’. It was further submitted that the subsidy was not to support acquisition of any fixed assets and therefore, explanation 10 to Sec. 43(1) would not be applicable. Further, the object of the subsidy was not to run the business more profitably and therefore, the same was not revenue receipt. Reliance was placed on the decision of Hon’ble Supreme Court in the case of CIT vs. Ponni Sugars and Chemicals Ltd. 306 ITR 392 (SC) which upheld the application of purpose test in the matter of subsidy.
However, Ld. AO noted that the subsidy was received after setting up of the business and it was meant only for running of the business and therefore, the same would be revenue in nature. Further, the subsidy provides concession of 25% of relevant taxes paid by the eligible unit of the state. But for the subsidy, the assessee would have to pay the full amount of sales tax collected by it from the customers. Therefore, the same would be a revenue receipt as held by jurisdictional High Court in the case of Brakes India Ltd. V/s JCIT (supra).
During appellate proceedings, the assessee, inter-alia, submitted that amount of subsidy was restricted to the prescribed percentage of the value of fixed assets invested in the eligible unit and the amount of subsidy to be paid for each year would be restricted to 25% of relevant taxes paid by the eligible unit. The Ld. CIT(A) noted that based on assessment proceedings of AY 2012-13 to 2014-15, the assessment for AY 2011-12 was reopened and similar addition was made. This issue was decided in assessee’s favor in first appellate order for AY 2011-12. However, the facts in AY 2011-12 and AYs 2012-13 to 2014- 15 were different since in AY 2011-12, the assessee complied with Explanation-10 of Sec.43(1) in that year by reducing the subsidy amount from cost of fixed assets whereas no such compliance was made in AYs 2012-13 to 2014-15. Therefore, there was double benefit to the assessee. The assessee submitted that the subsidy was not received for a specific asset and therefore, the explanation would not apply. Rejecting the same, Ld. CIT(A) upheld the order of Ld. AO in all the years. Aggrieved, the assessee is in further appeal before us.
10. From the facts, it emerges that the subsidy incentive has been given by state government with a view to develop the backward states in the area. The objective of the scheme is to ensure sustained industrial growth through development of key potential sectors, to provide conducive industrial climate in the state and to provide competitive edge to the industry. The policy envisages grant of fiscal incentives to achieve higher and sustainable economic growth with emphasis on balanced regional development and employment generation through greater private and public investment in industrial development. In other words, the Scheme is primarily meant to correct regional imbalance in the industrial development of the State and also achieve higher and sustainable economic growth. The aim of the scheme is to generate the employment also. Thus, the scheme has much larger purpose of industrial growth and considering the purpose of the scheme, any incentive received in this regard is to be viewed as capital receipt. The object was not to ensure smooth running of day-to-day business but to ensure sustainable economic growth with emphasis on balanced regional development and employment generation. The tax incentive is only a measure or yardstick to determine the quantum of incentive.
The case law of Hon’ble High Court of Madras in the case of Brakes India Ltd. V/s JCIT (supra) deal with a situation wherein the assessee has received industrial power tariff concession which was contingent upon commencement of production and the objective of the scheme was to enable the assessee to run business more profitably. The same is not the case here and therefore, this case law is not applicable.
We find that Pune Tribunal in DCIT V/s Bhagyalakshmi Rolling Mills (supra), dealing with the same scheme, held as under: - 8. Even in the case of Shree Balaji Alloys & Oss. (2016) 287 CTR 459 (SC) the Hon’ble Supreme Court held that the object of subsidy is industrialization and eradicating unemployment then the subsidy is capital receipt merely notwithstanding the fact that it is available in installment only after the commencement of production. 9. We also find that Pune Tribunal in for A.Y. 2014-15 in the case of Hyundai Construction Equipment India Pvt. Ltd. Vs. ACIT dealt with this issue on an absolutely identical facts and circumstances where the assessee has received subsidy from Government of Maharashtra under PSI 2007. In this decision, the Tribunal relied on the decision of Hon’ble Supreme Court in the case of CIT Vs. Ponni Sugars and Chemicals Ltd (2008) 326 ITR 392 (SC) where the “purpose test” has been reiterated by the Hon’ble Apex Court holding that the relevant consideration should be the purpose of subsidy and not its source or mode of payment. When this test was applied it emerged that the purpose of subsidy is industrial growth; it is linked with the setting of industrial units and the amount of subsidy is linked with the amount of investment made in the eligible unit. Another observation by the Tribunal in this decision was that in the Finance Act 2015 clause (xviii) to sec. 2(24) w.e.f. 1-4-2016 relevant from A.Y. 2017-18 onwards was introduced providing that the assistance in the form of subsidy or grant of cash incentive 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 sec. 43(1) shall be considered as an item of income chargeable to tax. Since the relevant assessment year with which the Tribunal was concerned was A.Y. 2014-15 the said amended provision of sec. 2(24) sub-clause (xviii) was not applicable to the year under consideration and therefore it was held that the subsidy received by the assessee would not form part of its total income. The relevant paragraphs of this judgment are extracted as follows: “5. We have verified the financial statements of the assessee from which it is apparent that the subsidy has been clubbed with other operating revenues included in the Statement of Profit and loss account. The resultant figure of loss has been taken as the opening point for the computation of total income, which means that the subsidy has been offered for taxation. The assessee also treated it as an item of operating revenue for the purposes of computing the PLI under the Manufacturing segment. Though the treatment of the subsidy as a revenue item was left intact by the AO, the TPO opined that the subsidy was an extraordinary item of income and hence liable to be excluded from the ambit of operating revenue. The contention of the assessee before the DRP that the subsidy should be considered as a capital receipt also came to be jettisoned which upheld its inclusion in the operating revenue. The net effect of these proceedings is that the subsidy received by the assessee amounting to Rs.89.73 crore has been taxed as a revenue receipt and has also been removed from the operating revenues in the computation of PLI from the Manufacturing segment.
The primary contention of the assessee is that the subsidy is in the nature of capital receipt and hence, should be excluded. We have gone through the nature of subsidy granted to the assessee by the Govt. of Maharashtra under Package Scheme of Incentives, 2007. A copy of the Scheme has been placed at page 753 of the paper book. The Preamble of the Scheme states that: “… The State has declared the new Industrial, Investment, Infrastructure Policy 2006 to ensure sustained Industrial growth through innovative initiatives for development of key potential sectors and further improving the conducive industrial climate in the State, for providing the global competitive edge to the State‟s industry. The policy envisages grant of fiscal incentives to achieve higher and sustainable economic growth with emphasis on balanced Regional Development and Employment generation through greater Private and Public Investment in industrial development.” The Scheme talks of granting incentives subject to Eligibility Criteria in favour of the Eligible Units. The definition clause in the Scheme provides that “An Eligibility Certificate under the 2007 Scheme will be issued by the Implementing Agency after ascertaining that the eligible unit has complied with the provisions of the Scheme and has commenced its commercial production.” Clause 5 of the Scheme states that “New projects, which are set up in these categories in different parts of the State, will be eligible for Industrial Promotion Subsidy. The quantum of subsidy will be linked to the Fixed Capital Investment. Payment of IPS every year will be equal to 25% of any Relevant Taxes paid by the eligible unit to the State or to the any of its departments or agencies.” Modalities for sanction and disbursement of IPS 2007 have been given by the Govt. of Maharashtra which state that the Industrial Promotion Subsidy in respect of Mega projects under PSI 2001 and 2007 means an amount equal to the percentage of “Eligible Investments” which has been agreed to as a part of the customised Package, or the amount of tax payable under Maharashtra VAT 2002 and CST Act 1956 by the eligible Mega Projects in respect of sale of finished products eligible for incentives before adjusting of set off or other credit available for such period as may be sanctioned by the State Government, less the amount of benefits by way of Electricity Duty exemption, exemption from payment of Stamp Duty, refund of royalty and any other benefits availed by the eligible Mega Projects under PSI 2001/2007, whichever is lower. A careful perusal of the PSI, 2007 emphatically manifests that the subsidy has been granted to encourage industrial growth in less developed areas of the State. The quantification of subsidy is linked with the amount of investment made in setting up of the eligible units. However, the disbursal of the subsidy is in the form of refund of VAT and CST paid on sale of excavators. Taking assistance from the Note given in the Financial statements, the assessee claimed before the DRP that the subsidy was a capital receipt and hence not chargeable to tax. The DRP rejected the contention of the assessee on the ground that it was received after setting up of the unit and was in the form of refund of VAT and CST. In our considered opinion, the decisive factor for considering the nature of subsidy as a capital or revenue receipt is the „purpose‟ for which the subsidy has been granted and not the manner of its disbursal. The Hon’ble Supreme Court in Sahney Steels and Press Works vs. CIT (1997) 228 ITR 253(SC) has held in the facts of that case that the operational subsidy received after the commencement of business was a revenue receipt but simultaneously laid down the ratio decidendi of applying the ‘purpose test’ for ascertaining the true nature of subsidy. The purpose test has been reiterated by the Hon‟ble Supreme Court in CIT Vs. Ponni Sugars and Chemicals Ltd. (2008) 326 ITR 392 (SC) by holding that the relevant consideration should be the purpose of subsidy and not its source or mode or payment. 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.
At this stage, 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.”
Reverting to the facts of the present case, we find that in view of the above referred judgment, the whole purpose and the grant of subsidy under PSI 2007 by Government of Maharashtra was to promote industrial growth in the less developed areas of the State and also to provide employment in the area. Once this purpose is established the subsidy has to be a capital receipt. However, the position has changed w.e.f. 01.04.2016 relevant to A.Y. 2017-18 onwards with the amended provision of sub-clause (xviii) to sec. 2(24) of the Act. However, at present, we are concerned with A.Y. 2011-12 to 2015-16. Therefore, the amended provision of sec. 2(24) sub-clause (xviii) is not applicable to the years under consideration and thus as a natural consequence the subsidy received by the assessee would therefore, not form part of its total income. In view of the aforestated facts and circumstances and the judicial pronouncements, we do not find any reason to interfere with the findings of the ld. CIT(A) and the reliefs provided to the assessee is sustained. Therefore, the appeal of the Revenue in IT(SS) A No. 07/PUN/2021 for A.Y. 2011-12 is dismissed.
Therefore, considering the same, we would hold that the receipts would be capital in nature.
Having said so, we find that the assessee in AY 2011-12 has complied with the requirement of Explanation-10 of Sec.43(1) in that year by reducing the subsidy amount from cost of fixed assets whereas no such compliance was made in AYs 2012-13 to 2014-15. We are of the opinion that part of cost of capital investment has been met by the state government and this explanation would be applicable to the case of the assessee. Therefore, while holding that the receipts would be capital receipts, we direct Ld. AO to reduce the cost of fixed assets and reverse consequential depreciation as per explanation-10 to Sec.43(1). The assessee is directed to provide requisite details. The appeals for all the years stand partly allowed. Conclusion 14. The appeal for AY 2010-11 stand allowed whereas all the other appeals stand partly allowed. Order pronounced on 19th October, 2022.